[Senate Hearing 107-156]
[From the U.S. Government Publishing Office]
S. Hrg. 107-156
RESTRUCTURING OF ENERGY INDUSTRIES
=======================================================================
HEARINGS
before the
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
JUNE 13, 2001
ECONOMIC ISSUES ASSOCIATED WITH THE RESTRUCTURING OF ENERGY INDUSTRIES
JUNE 20, 2001
THE ROLE OF THE FEDERAL ENERGY REGULATORY COMMISSION ASSOCIATED WITH
THE RESTRUCTURING OF ENERGY INDUSTRIES
JUNE 28, 2001
THE IMPACT OF ELECTRIC INDUSTRY RESTRUCTURING ON SYSTEM RELIABILITY
__________
Printed for the use of the Committee on Governmental Affairs
75-477 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan FRED THOMPSON, Tennessee
DANIEL K. AKAKA, Hawaii TED STEVENS, Alaska
RICHARD J. DURBIN, Illinois SUSAN M. COLLINS, Maine
ROBERT G. TORRICELLI, New Jersey GEORGE V. VOINOVICH, Ohio
MAX CLELAND, Georgia PETE V. DOMENICI, New Mexico
THOMAS R. CARPER, Delaware THAD COCHRAN, Mississippi
JEAN CARNAHAN, Missouri ROBERT F. BENNETT, Utah
MARK DAYTON, Minnesota JIM BUNNING, Kentucky
Joyce A. Rechtschaffen, Staff Director and Counsel
David M. Berick, Professional Staff Member
Hannah S. Sistare, Minority Staff Director and Counsel
Paul R. Noe, Minority Senior Counsel
William M. Outhier, Minority Investigative Counsel
Darla D. Cassell, Chief Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Lieberman...................................... 1, 61, 163
Senator Thompson....................................... 3, 63, 165
Senator Carnahan........................................... 35, 96
Senator Collins............................................ 38, 85
Senator Voinovich.......................................... 42, 94
Senator Carper............................................. 46, 92
Senator Durbin............................................... 83
Senator Torricelli........................................... 87
Senator Bennett.............................................. 89
Senator Domenici............................................. 99
WITNESSES
Wednesday, June 13, 2001
Hon. Barbara Boxer, a U.S. Senator from the State of California.. 5
Hon. Larry E. Craig, a U.S. Senator from the State of Idaho...... 7
Hon. Dianne Feinstein, a U.S. Senator from the State of
California..................................................... 10
Alfred E. Kahn, Ph.D., Robert Julius Thorne Professor of
Political Economy, Emeritus, Cornell University................ 13
Severin Borenstein, Ph.D., Director, University of California
Energy Institute and E.T. Grether Professor of Business
Administration and Public Policy, Berkeley's Haas School of
Business, University of California............................. 16
William W. Hogan, Ph.D., Professor of Public Policy and
Administration, Center for Business and Government, John F.
Kennedy School of Government, Harvard University............... 18
Paul L. Joskow, Ph.D., Director, Center for Energy and
Environmental Policy Research, Massachusetts Institute of
Technology..................................................... 21
Lawrence J. Makovich, Ph.D., Senior Director and Cohead, North
American Energy Group, Cambridge Energy Research Associates.... 23
Frank A. Wolak, Ph.D., Professor, Department of Economics,
Stanford University............................................ 25
Wednesday, June 20, 2001
Hon. Frank H. Murkowski, a U.S. Senator from the State of Alaska. 66
Hon. Patty Murray, a U.S. Senator from the State of Washington... 69
Hon. Maria Cantwell, a U.S. Senator from the State of Washington. 71
Hon. Barbara Boxer, a U.S. Senator from the State of California.. 74
Hon. Gray Davis, Governor, State of California................... 75
Hon. Judy Martz, Governor, State of Montana...................... 106
Hon. John Hoeven, Governor, State of North Dakota................ 110
Hon. Christine O. Gregoire, Attorney General, State of Washington 117
Roy Hemmingway, Chairman, Oregon Public Utility Commission....... 120
Hon. Curt L. Hebert, Jr., Chairman, Federal Energy Regulatory
Commission (FERC).............................................. 127
Hon. Linda K. Breathitt, Commissioner, Federal Energy Regulatory
Commission (FERC).............................................. 132
Hon. Nora Mead Brownell, Commissioner, Federal Energy Regulatory
Commission (FERC).............................................. 134
Hon. William L. Massey, Commissioner, Federal Energy Regulatory
Commission (FERC).............................................. 135
Hon. Patrick H. Wood, III, Commissioner, Federal Energy
Regulatory Commission (FERC)................................... 138
Thursday, June 28, 2001
David N. Cook, General Counsel, North American Electric
Reliability Council............................................ 167
Phillip G. Harris, President and CEO, PJM Interconnection, L.L.C. 169
Kevin A. Kelly, Director, Division of Policy Innovation and
Communication, Federal Energy Regulatory Commission............ 171
Irwin ``Sonny'' A. Popowsky, Consumer Advocate of Pennsylvania,
on behalf of the National Association of State Utility Consumer
Advocates (NASUCA)............................................. 173
Alphabetical List of Witnesses
Borenstein, Severin, Ph.D.:
Testimony.................................................... 16
Prepared statement........................................... 194
Boxer, Hon. Barbara:
Testimony.................................................... 5, 74
Breathitt, Hon. Linda K.:
Testimony.................................................... 132
Prepared statement with an attachment........................ 462
Brownell, Hon. Nora Mead:
Testimony.................................................... 134
Prepared statement........................................... 484
Cantwell, Hon. Maria:
Testimony.................................................... 71
Cook, David N.:
Testimony.................................................... 167
Prepared statement with attachments.......................... 509
Craig, Hon. Larry E.:
Testimony.................................................... 7
Davis, Hon. Gray:
Testimony.................................................... 75
Prepared statement........................................... 391
Feinstein, Hon. Dianne:
Testimony.................................................... 10
Gregorie, Hon. Christine O.:
Testimony.................................................... 117
Prepared statement........................................... 415
Harris, Phillip G.:
Testimony.................................................... 169
Prepared statement with attachments.......................... 526
Hebert, Hon. Curt L., Jr.:
Testimony.................................................... 127
Prepared statement with an attachment........................ 430
Hemmingway, Roy:
Testimony.................................................... 120
Prepared statement with an attachment........................ 423
Hoeven, Hon. John:
Testimony.................................................... 110
Prepared statement........................................... 825
Hogan, William W., Ph.D.:
Testimony.................................................... 18
Prepared statement with attachments.......................... 200
Joskow, Paul L., Ph.D.:
Testimony.................................................... 21
Prepared statement with an attachment........................ 351
Kahn, Alfred E., Ph.D.:
Testimony.................................................... 13
Prepared statement........................................... 191
Kelly, Kevin A.:
Testimony.................................................... 171
Prepared statement........................................... 533
Makovich, Lawrence J., Ph.D.:
Testimony.................................................... 23
Prepared statement........................................... 365
Martz, Hon. Judy:
Testimony.................................................... 106
Prepared statement........................................... 821
Massey, Hon. William L.:
Testimony.................................................... 135
Prepared statement with an attachment........................ 494
Murkowski, Hon. Frank H.:
Testimony.................................................... 66
Murray, Hon. Patty:
Testimony.................................................... 69
Popowsky, Irwin ``Sonny'' A.:
Testimony.................................................... 173
Prepared statement........................................... 545
Wolak, Frank A., Ph.D.:
Testimony.................................................... 25
Prepared statement........................................... 371
Wood, Hon. Patrick H., III:
Testimony.................................................... 138
Prepared statement........................................... 504
APPENDIX
June 13, 2001
Chart entitled ``California Day-Ahead Power Prices'' (submitted
by Senator Thompson)........................................... 551
Chart entitled ``The Big 5 Energy Generator's Profits''
(submitted by Senator Boxer)................................... 552
Chart entitled ``Closed for Maintenance?'' (submitted by Senator
Boxer)......................................................... 553
Article by Robert J. Samelson, Washington Post, dated June 13,
2001, entitled ``Short-Circuiting Supply and Demand''
(submitted by Senator Craig)................................... 554
Letter from Wayne D. Angell, Senior Managing Director and Chief
Economist, Bear, Stearns and Co., Inc., dated June 11, 2001
(submitted by Senator Thompson)................................ 556
William C. Dudley, Chief U.S. Economist, Goldman, Sachs and Co.,
prepared statement............................................. 558
Marcia Baker and John Hoefle, EIR News Service, prepared
statement...................................................... 561
June 20, 2001
Report entitled ``Meeting the Energy Challenge: How the State of
California is Taking Charge of the Energy Future'' (submitted
by Governor Davis)............................................. 569
Chart entitled ``Total Wholesale Cost of Electricity in
California'' (submitted by Governor Davis)..................... 742
Chart entitled ``1999 Per Capita Electricity Consumption''
(submitted by Governor Davis).................................. 743
Chart entitled ``Table 1: Average Monthly Bill By Sector, Census
Division and State, 1999'' (submitted by Senator Collins)...... 744
Prepared statements for the record:
Hon. John A. Kitzhaber, M.D. Governor, State of Oregon....... 746
Jerry Ellig, Ph.D., Senior Research Fellow, Mercatus Center
at George Mason University, with an attachment............. 749
Vernon L. Smith, Ph.D., Economic Science Laboratory,
University of Arizona...................................... 774
John M. Quain, Chairman, Pennsylvania Public Utility
Commission................................................. 786
Question for the record and responses from:
Governor Davis............................................... 788
S. David Freeman, Sr. Energy Advisor to Governor Davis....... 800
Chairman Curt L. Hebert, Jr.................................. 802
Commissioner Linda K. Breathitt.............................. 810
Commissioner William L. Massey............................... 812
Commissioner Patrick H. Wood, III............................ 815
June 28, 2001
Chart entitled ``Bundled'' (submitted by Senator Lieberman)...... 819
Chart entitled ``A Fully Unbundled Electric Industry Model''
(submitted by Senator Lieberman)............................... 820
ECONOMIC ISSUES ASSOCIATED WITH THE RESTRUCTURING OF ENERGY INDUSTRIES
----------
WEDNESDAY, JUNE 13, 2001
U.S. Senate,
Committee on Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 9:33 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Joseph I.
Lieberman, Chairman of the Committee, presiding.
Present: Senators Lieberman, Durbin, Cleland, Carper,
Carnahan, Thompson, Stevens, Collins, and Voinovich.
OPENING STATEMENT OF CHAIRMAN LIEBERMAN
Chairman Lieberman. Good morning and thank you all very
much for coming.
Since this is our first hearing since the transition within
the Senate, I wanted to begin by just saying what a great honor
it is for me to become Chairman of the Senate Governmental
Affairs Committee. This is a Committee with a proud history,
and I hope and believe on a bipartisan basis we can make its
future as proud.
It is an honor for many reasons for me to become the
Chairman, but perhaps the most meaningful is that one of my
childhood heroes and later one of my mentors, Senator Abe
Ribicoff of Connecticut, served as Chairman of this Committee
back in the 1970's. Under his leadership the Committee did what
was right to protect the interests of the American taxpayer,
and that is a legacy that I hope all of us will carry on.
I want to particularly thank my friend and colleague,
Senator Fred Thompson of Tennessee, for the distinguished and
thoughtful leadership he has given this Committee over the past
several years. Though we are switching seats today, I know that
Fred and I will continue our very strong working partnership in
pursuit of the fulfillment of the responsibilities of this
Committee, which, as I see them, are to make sure that the
people that we represent have the most responsive, efficient,
ethical, and economical government that we can provide them.
Sometimes fulfilling this responsibility will lead to producing
legislation, but I think uniquely within the Senate
Governmental Affairs Committee more often it will involve
oversight.
Over the course of the next 2 weeks, we will be paying
particular attention to the economic interest of the taxpayers
as consumers of electricity and natural gas. As a Committee
charged with oversight, it is our job to make sure that Federal
agencies are doing their job to fairly and appropriately
protect the interests of the American people.
America now faces an array of serious energy problems.
Whether it is the price of gasoline in the Midwest, shortages
of heating oil in the Northeast, consumers and businesses
struggling to pay their natural gas bills, or electricity
blackouts and price spikes in California, energy price and
supply problems are becoming regular events from one end of the
Nation to the other. I think that if we ignore these problems,
we put our economy at risk. California accounts for 15 percent
of the U.S. economy. If you add its Western neighbors Oregon
and Washington, which are also part of this most recent crisis,
we are talking about the health of roughly one-fifth of the
American economy. And earlier this spring, the North American
Electric Reliability Council issued warnings not only about
California and the Pacific Northwest but New England and New
York City as well. So none of us should say of the West's
problems today that we will not face them in our part of the
country tomorrow.
What the Federal Government does in this situation out
West, I think, will set a precedent for what it will do in the
next energy crisis elsewhere in America. So today and again
next Wednesday, when we will hear from the members of the
Federal Energy Regulatory Commission, Governor Davis of
California, and another witness that Senator Thompson will
call, we will be looking at the role of the Federal Government
in addressing the issues of energy price and supply. In
particular, we are going to be looking at the effects of
deregulation on the energy market and how FERC has carried out
its responsibility to oversee these changes.
FERC was created in 1977 under the Department of Energy
Organization Act and charged with the same responsibility as
its predecessor, the Federal Power Commission, to set just and
reasonable wholesale energy rates. But I doubt that there is
any among us today that would say that California's energy
costs are now just and reasonable.
In 1999, the State spent $7 billion--that is all of the
consumption of electricity energy, $7 billion on energy. Last
year the number multiplied to $27 billion, and estimates for
this year go as high as $70 billion, even though Californians
are conserving and using 11 percent less energy today than last
year.
In fact, last fall FERC itself said that electricity prices
in California were not just and reasonable. Like most of our
expert witnesses today, in fact, I think maybe all of them, I
am a fan of free markets. I do not believe in price controls or
price caps or other economic contrivances that inhibit the free
marketplace, but the energy market in California and the West
is not free today. It may not even be functional. So we need to
examine, I think, the appropriate role for regulators when the
market does not work.
This is a matter about which we may differ, but the
differences should not be, and I do not believe are, partisan
or personal. In fact, the primary legislative response to the
crisis in the West that has been proposed is bipartisan, the
legislation authored by Senators Feinstein and Gordon Smith,
and I hope that our deliberations in this Committee will focus
on finding a solution rather than on finding a scapegoat.
We are fortunate to have a distinguished panel of
nationally renowned economists to help us understand the
changing nature of the energy markets and how consumers have
been affected by the transition from the regulation of
electricity and natural gas at the State and Federal levels to
an unregulated, more market-oriented system. The fact is that
25 States and the District of Columbia have moved to deregulate
their electric utility systems, but the recent experience of
California in both electricity and natural gas markets and the
price hikes in the Midwest in 1999 and the Northeast last
spring have very serious doubts about this new world of spot
markets, electricity futures, and open access to natural gas
and electricity transmission systems.
Several States on the verge of regulation, including two of
California's Western neighbors, New Mexico and Nevada, have
blinked and put the brakes on deregulation, and that is
understandable considering what has been happening in
California. So I think that if the Federal Government doesn't
find a way to provide temporary price relief out West now, the
natural and, I think, desirable trend toward deregulation
across the country will come to a halt.
So I look forward to the testimony of our witnesses. I hope
they will help us learn the lessons we need to learn from what
is happening in California and in the Western grid and outline
for us the role they think the Federal Government needs to play
in these new markets. I hope they will tell us what we can do
when, as in the case of California, good intentions go
painfully off course.
I am now going to call on Senator Thompson. I do want to
say in this first hearing that I have the privilege to Chair
that I am going to borrow some of the procedures that I have
learned on the Armed Services Committee, with the indulgence of
my colleagues, and just have Senator Thompson and myself give
opening statements but extend the time for questioning in each
round by the Members of the Committee to 10 minutes, so that if
they wish to make an opening statement they can do so during
that 10-minute time. And we will call on Senators in order of
arrival, switching parties as we go along.
Senator Thompson.
OPENING STATEMENT OF SENATOR THOMPSON
Senator Thompson. Thank you very much, Mr. Chairman, and
you know, as the old saying goes, if it had to happen, it
couldn't have happened to a nicer guy. I look forward to
working with you as we have in the past. We went through some
interesting and trying times a couple of years ago, and
throughout all of that and up until now, we have had a good
working relationship. You have been very cooperative with me in
every respect, and I intend to be the same with you. So I am
looking forward to it.
The energy troubles that have plagued the State of
California and the West over the past year are well known to
all Americans. Most are probably as aware of the problem from
stories about blackouts as they are from stories about
fingerpointing and placing blame.
I think it is important to know that California's problems
did not begin on January 21, 2001. Efforts to place blame on
the current administration, to hire consultants at $30,000 a
month to spin the issue, or to pit one State against another
are not only misplaced, but do not help arrive at a solution.
In truth, there appear to be many causes of the problems
now faced in the West. The restructured energy system in
California had flaws. There was evidence of mounting problems a
couple of years ago, but the State was reluctant to address
them. The State was slow to react when prices rose sharply last
summer. It has shied away from passing rate increases along to
consumers sufficiently to affect demand, and it resisted the
kind of long-term contracts that could have mitigated the
current crisis.
In addition, natural gas prices have risen sharply,
increasing the cost of producing energy. A lack of rainfall in
the Northwest has decreased the available hydro power in the
region, and the best way to head off this problem, building new
generations, has been difficult given the State's burdensome
requirement for building new plants. In sum, California has not
provided an energy supply that could meet the demand of its
growing economy.
The question we face now is what should be done to address
the short-term problem of power shortages and certain blackouts
this summer and the long-term problem of ensuring sufficient
supply to the West in the future. The long-term answer appears
more clear: More supply. New generation is being built, and
some estimate a sufficient amount will be online within 18
months.
In addition, signing long-term contracts could help provide
stability to the region. The short-term solution is more
difficult, particularly because it is so late in the game.
Prices exploded last summer and stayed high all winter. Now
Governor Davis has asked the Federal Government to step in and
fix the problem now that it is too late for anyone to prevent
rolling blackouts.
Some suggest temporary price controls through early 2003.
While that may get us through the next election, temporary
price controls have rarely stayed temporary, nor have they
worked. President Nixon's wage and price controls, oil price
controls in the 1970's, and rent control in New York City are
just a few examples of temporary fixes that lasted far longer
than intended and actually did more harm than good. And
governments do not have very much credibility with investors
when it comes to talk about temporary price controls.
Many economists, including two that we will hear from here
today, believe that introducing price controls into the current
situation would do more harm than good. Setting price controls
could provide a disincentive to new generation and drive
suppliers to other markets, creating more shortages and
blackouts over the summer.
In addition, it is difficult to know how workable these
solutions are. One option which will be discussed today is a
cost-based price control. Under this scheme, government
officials would set plant-by-plant price rates which are
unrelated to the marketplace. This raises a host of practical
implementation problems given that there are hundreds if not
thousands of operators providing power in the Western energy
market.
In addition, if you only impose price controls on investor-
owned power, then half the electricity in the Western market
escapes. That creates market distortions and loopholes for
evasion. And with regard to the possibility that by delaying
FERC action we are in some way delaying reform in other States,
my concern is we may set back the case for real reform if we
lead other States to believe they can take the same measures
that California did and FERC will come in and bail them out.
What FERC has done is to institute a market-based price
mechanism on price levels during level one, two, and three
emergencies within the State. Since that order, prices have
dropped below $100 per megawatt hour for the first time since
the crisis began 1 year ago.\1\ FERC has taken action, and that
may be working. However, the State of California has a
responsibility, too. If the governor truly believes that price
controls are the answer, he has the authority to set the price
that the State will pay. He can also take steps to fix the
broken system in his State to prevent these types of problem in
the long run.
---------------------------------------------------------------------------
\1\ Chart entitled ``California Day-Ahead Power Prices,'' appears
in the Appendix on page 551.
---------------------------------------------------------------------------
I look forward to hearing from our witnesses today as to
what possible solutions there are for the problems in the West
and what the Federal Government could and should do.
Thank you Mr. Chairman.
Chairman Lieberman. Thank you, Senator Thompson.
When we put out a notice that we were going to convene this
hearing, we had a request from three of our Senate colleagues
to testify, Senators Boxer, Craig, and Feinstein, and two of
them are here and I would like to call on them and ask them to
begin their testimony. And I believe Senator Feinstein may be
on the way. Why don't you come to the table?
Let me also note the presence here in the room of
Congresswomen Jane Harman and Anna Eshoo. These members of the
House serve on the House Energy and Commerce Committee and have
been very involved in fashioning a response to the crisis in
their State. Obviously, this is a topic of enormous importance
to the people of California, and the presence of these two
distinguished colleagues from the House testifies to their very
deep and active interest, and I thank them for being here.
Senator Boxer.
TESTIMONY OF HON. BARBARA BOXER, A U.S. SENATOR FROM THE STATE
OF CALIFORNIA
Senator Boxer. Thank you Mr. Chairman. I want to give the
largest thank you to all of you, Republicans and Democrats
alike, from my constituents, 34 million of them in California.
This is really the first hearing we have had on our emergency
situation. We have had emergencies before. We have had
earthquakes, floods, fire, and everything else, and you have
always been there for us. This one took a little longer because
it is not as obvious an emergency. But trust me, it is an
emergency. So thank you very, very much.
Today you are going to hear from economists about the cost-
based pricing. I give it another name, Senators. I call it
anti-gouging pricing, and I hope you will think of it in that
light. And I called for such pricing by FERC last August, and
last September I introduced a bill with Representative Filner
of San Diego. Those are the people that felt this first. We
called for such pricing.
California is facing price gouging by the electric
generators. The generators' profits increased on average by 508
percent.\1\ I have a chart here. We go through the various
large generating companies. We average them out at 508-percent
increase, and at that time that they were making the 508-
percent average increase, demand was going up by 5 percent. So,
Senators, I have to tell you, when you see this, it makes your
stomach turn.
---------------------------------------------------------------------------
\1\ Chart entitled ``The Big 5 Energy Generator's Profits,''
appears in the Appendix on page 552.
---------------------------------------------------------------------------
I have to also tell you one of these companies, who was
just advertising in Roll Call and all the other--the New York
Times--I have a copy of the advertisement here. I want to just
hold it up. It is bragging about keeping the lights on in
California, reliant energy. Their profits went up, Mr.
Chairman, 1,685 percent during that period.
This is the ad. It says, ``Helping California keep the
lights on, reliant energy.'' What they did not say is ``and
gouging California consumers at the same time.'' They left out
that part. It is very, very disheartening and discouraging.
One of the primary causes of price gouging in my opinion--
and I leave this to you to ponder--is the generators' holding
back supply. So when you talk about a free market, I say to my
friends, you cannot hold back supply if it is really a market
that is working.
We will show you this amazing chart.\2\ The blue shows you
how much power was taken off-line for maintenance last year.
And this is how much power was taken off for maintenance this
last year, current year, in the yellow. It is hard to imagine
that suddenly you would have this great disparity in how much
power has to be pulled off-line.
---------------------------------------------------------------------------
\2\ Chart entitled ``Closed for Maintenance?'' appears in the
Appendix on page 553.
---------------------------------------------------------------------------
I am going to be quick--because I know you have so many
folks--and make a couple more points. If the average price of
milk went up the way the average price of electricity went up,
we would be paying $190 a gallon for milk from $3. I want you
to think about that. It is just stunning. And I want to leave
with you this point, Mr. Chairman, and your Ranking Member and
all of you good Members who care a lot about people.
We are getting letters from businesses. I have a letter
from John Odaman of San Marcos, California. He wrote to
President Bush and sent me a copy. He said, ``I am a father and
a husband in a single-income family. My wife and I very
carefully planned our family economics in order to give our
daughter the benefit of having a full-time parent at home. We
are currently spending money on electricity bills that should
be going into family investments for college and retirement
planning.''
Mr. Odaman and other Californians have less disposable
income. I have other letters.
I have another letter from a California farmer, Ann Zack.
Ms. Zack wrote to me asking for help.
She writes, ``Our family has owned and operated an alfalfa
ranch since 1965. Our crop is irrigated in the summer with
water pumped from wells by electric pumps. We have been
informed by Edison that our power rate will double this summer,
will possibly be raised beyond that in the future. Since we
have narrow profit margin''--their profit margin is not 508
percent, Mr. Chairman--``this will effectively put us out of
business.''
So my question to you is: How can these electric generator
executives go to sleep at night? I honestly to God do not know.
They are hurting real people. This is not right. We all want
our businesses to operate at fair profits. God knows that is
the essence of our system. But gouging is something that must
be stopped.
I met with the Vice President yesterday. It was a cordial
meeting, Mr. Chairman. We did not make too much headway on this
issue of caps, but I hope he will rethink it, and I hope that
you will help us by getting FERC to understand that their job
is to protect us from unfair and unjust and unreasonable prices
and to stop the gouging now.
Thank you, Mr. Chairman, for your concern about California.
Chairman Lieberman. Thank you, Senator Boxer, for your
concern and for your testimony this morning.
Chairman Lieberman. Senator Craig, we just had the second
run of bells goes off, but we have got a good 8 to 10 minutes
left. Thanks for being here this morning.
TESTIMONY OF HON. LARRY E. CRAIG, A U.S. SENATOR FROM THE STATE
OF IDAHO
Senator Craig. Mr. Chairman and Members of the full
Committee, thank you very much for an opportunity to come and
visit.
This is the fifth hearing on the California energy crisis I
have participated in since it began well over 6 months ago. I
also asked for and convened a hearing of FERC in Boise of the
11 Western States to examine what is truly a broken energy
system in the West. So it is not the first time that the
Congress has focused on--and I am guessing it will not be the
last time that we will focus on this issue.
But my message today, Mr. Chairman, is that with the energy
crisis in the West, we pay closer attention to the facts and
move away from a great deal of the political myths involved.
There has been much too much distortion and rhetoric in this
debate. In part, I guess it is understandable.
Like other serious and complicated problems we face, the
Western energy crisis is laced with both emotion and I believe
now some partisanship. This is clearly evident in the
statements on the crisis of high prices that have been charged
for the wholesale electricity in California.
In this debate, Mr. Chairman, there have been many for
their own purposes engaged in what I believe is an intentional
distortion and misstatement of the facts. They say that there
is no lack of supply in the West. They say that there are
plenty of power plants and transmission lines to meet all of
the demands for electricity. And they say that small groups of
companies, based primarily in Texas, have conspired to withhold
electricity from the market in order to drive prices up to an
unreasonable, indeed unconscionable level.
It is they who are, I think, the unconscionable crowd in
this rhetoric. They are either unconscionably ignorant because
they have not looked at the reality of what is going on out
there, or they are unconscionably and deliberately distorting
facts.
Now, Mr. Chairman, in all of these kinds of situations, I
think we have some who are always in search of a conspiracy.
And as you know, Mr. Chairman, conspiracy theorists are always
around at the right time, despoiling and oftentimes using
public discourse in a variety of critical ways. Conspiracy
theorists reject what most of the rest of us view as plain and
real. Instead, they search and usually find villains and
conspirators. Some of these conspiracy theorists engage in the
craft full-time. I must tell you that, as I have listened to
the rhetoric of the Governor from California, I am frustrated
in trying to understand where he is.
Since 1990, there has been a 26-percent increase in the
demand for electricity in the State of California. During that
time, not one major new power plant was constructed. I repeat,
not one. Even Governor Davis, who has led in what I believe is
misdirected and politically inspired assaults on independent
generators in his own State, has repeatedly alluded to the fact
that California has been derelict in new generation. In other
words, it appears that he is working full-time to be on both
sides of this issue.
Governor Davis in a prime-time speech delivered last spring
said that the major problem facing the State in this crisis was
a lack of available generating capacity. Despite a chronic
shortfall in electrical capacity to meet peak demands,
Californians have until recently been able to get bailed out of
their blackouts and their price spikes, and here is why. They
have relied on the hydro power of the Pacific Northwest, but
now, as you mentioned, and as I think Senator Thompson
mentioned, the Pacific Northwest is suffering from what is
probably the worst drought since 1930. Our reservoir levels are
the lowest since the 1930's.
In addition, the economic growth in the Pacific Northwest,
in Arizona, and in Nevada have caused power plants in these
areas to dedicate more of their output to their own localities
and less to California.
To be specific, peak summer demand in the West has
increased at an annual rate of 8 percent in Arizona, New
Mexico, and Nevada, 3.2 percent in California, 2.8 percent in
the Rockies, 2.4 percent in the Pacific Northwest. Yet, from
1991 to 1998, the growth rate of new generation capacity
additions in that whole region was less than 1 percent.
All of these factors have resulted in a stark exposure of
the electrical supply deficiency within California. California
has been subsisting off the surplus of its neighbors, and now
those neighbors have no surplus, and they have to take care of
their own.
Another important part of the reality in California has
been the high prices of natural gas and of securing necessary
emissions credits. The cost of both have soared through the
roof. The reality of the charts that have just been shown in
many instances are real. This has created enormous upward
pressure on the price of electricity and generating capacity of
old gas-fired plants. A shortage of electrical generating
capacity, a regionwide drought causing reduction in imported
power and high natural gas and emission credits, these are all
fundamental causes of the electricity crisis. Any of these
factors could cause or would have caused the problem. All of
them combined have probably crippled the market.
Now, I believe that is the big picture, Mr. Chairman, and
frankly I believe that is the true picture. How do we deal with
it? And that is, of course, part of what you are looking at
today. And how do we deal fundamentally with our electric and
gas utilities?
I know now that the spot market in California is lower than
the long-term contract prices that Governor Davis negotiated.
Why? Because California recently began to expose the consumer
in California to the real market price and the consumer in
California began to make real choices.
It is also happening across the West as our power rates go
up. Is conservation the only solution to our problem?
Absolutely not. But there are no blackouts in California at
this moment, and one of the reasons why is that there is an 11
percent conservation that has now taken hold in the State of
California. The major utilities of California have stated that
during deregulation, conservation almost stopped altogether
because the consumer knew the price was fixed. Those were the
realities of the situation.
Chairman Lieberman. Senator Craig, forgive me. We are down
to about 2 minutes left on the vote.
Senator Craig. Then I will conclude. I must tell you that
Governor Davis has moved swiftly. While I criticize him, I must
also recognize the fact that 5,000 new megawatts of power are
going to come online next spring in California and 5,000 within
a year, and that is an effort at reducing and changing
regulation and process, and the governor ought to be applauded
for that.
Let me quickly refer to FERC and what I think FERC is doing
now in a very responsible fashion. Out of the Boise hearing
came the new order, and that new order largely says all of
those in the market have to supply capacity to that market on a
full-time basis. That has helped bring those prices down.
Satisfying political preserve by choosing price caps, is
not a way to fix the market. Investment is rushing to
California at this moment to supply a need. They are rushing
there because they believe the market is becoming more free and
will be allowed to operate in a more unfettered fashion.
Let me ask that you allow to be part of the record an op-ed
by Robert Samuelson this morning in The Washington Post. I
would recommend it for your reading. It is called ``Short-
Circuiting Supply and Demand.'' \1\
---------------------------------------------------------------------------
\1\ The article referred to by Senator Craig appears in the
Appendix on page 554.
---------------------------------------------------------------------------
Chairman Lieberman. Without objection.
I have noticed that the Ranking Member has been reading
that op-ed here at my side this morning. I thank you Senator
Craig and Senator Boxer. I think the two of you in some ways
have framed the discussion that will go on here in the coming
weeks.
We are going to recess now. We will come back and hear
Senator Feinstein and then proceed with the witnesses. Thank
you.
[Recess.]
Chairman Lieberman. The hearing will reconvene. I apologize
to our witnesses and others here for the interruption which was
necessitated by two votes on the floor of the Senate.
We are privileged now to have the third of our colleagues
who asked to testify before this hearing and lead co-sponsor of
the legislative proposal responding to the price crisis in
California and the West, Senator Dianne Feinstein. Thank you
for being here.
TESTIMONY OF HON. DIANNE FEINSTEIN, A U.S. SENATOR FROM THE
STATE OF CALIFORNIA
Senator Feinstein. Thank you very much, Senator Lieberman,
and Senator Collins, and I saw Senator Carper. He is over here.
I want to thank you for this opportunity.
I have been carefully watching as a member of the Energy
Committee now what has been happening with the deregulation in
California, and I have watched the problems spread to seven
other Western States. So California is no longer alone.
I must tell you, Mr. Chairman and Members, that I have
really come to question whether deregulation of electricity and
natural gas can work. You know, when we deregulated airlines,
individuals had a choice of airlines. If they did not like one,
they could go to another. When we deregulated telephones,
individuals had a choice. If they did not like one service,
there was another.
In the area of natural gas and electricity, the consumer
has no choice. You get your bill. You cannot change companies
if you do not like it.
What I have also seen is that it is a broken market, caused
in part by California's not having adequate generation.
However, having said that, I have got to make a point.
Californians have been conserving. In January, the State
consummed 5 percent less energy than the previous year.
In February, the savings was 7 percent. In March it was 9
percent. And in April, Californians saved 7 percent. The energy
savings last month was 11 percent, and the cost of all
electricity for California in 1999 was $7 billion. The cost in
2000 was $28 to $30 billion, and the costs this year are
predicted to be $50 to $65 billion.
In that milieu, you have had two big investor-owned
utilities, the middlemen, buying the power on the wholesale
market, selling it to the consumer, go into bankruptcy. One is
in bankruptcy. Southern California Edison, if it does not work
out an arrangement with the State, will be in bankruptcy. And
you have the State so far this year having spent $8 billion
buying electricity to try to keep the price low. As recently as
2 weeks ago, electricity prices in California were almost 10
times higher than they were a little more than a year ago.
Now, the Federal Power Act clearly states that if FERC, the
Federal Energy Regulatory Commission, finds prices to be unjust
and unreasonable, FERC must regulate and set those rates. They
did find the rates unjust and unreasonable last November. They
have really refused to move aggressively to set those rates,
and I and many other Californians have tried to sound a
consistent drumbeat to move to do that.
In late April, FERC issued a limited--what is called price
mitigation order, which would cap wholesale costs during stage
one, two, and three emergencies. And it now appears that on
Monday, FERC may extend this order to the entire Western energy
market and may ensure that the order stays in place at all
times--in other words, going to 24 hours a day, 7 days a week,
and requiring power generators in the entire Western region to
sell electricity back into the grid. That is another step
forward.
The question I have about it is manipulation. Because this
is tied to the least efficient megawatt, so it is tied to the
dirtiest, most polluting plant.
Now, I ask this question: Is that then an incentive to keep
dirty plants in order to drive up price and produce
profitability for clean plants? And we are going to have to
see.
I called the head of the independent systems operator--
known as the ISO--yesterday, Terry Winters, and he agreed that
this could be manipulated. He agreed that we do not have enough
information yet to know whether, in fact, the acute drop in
prices over the past week or so is a result of the April FERC
order, whether it is a result that the generators now feel that
the heat is on, whether it is a result of the Senate having
changed power, whether it is a result that Senator Smith's and
my bill now has a markup date in June which would set Western
regional caps, we do not really know yet what the case is. But
we do know a couple of things, that just a few days ago one
generator admitted to selling electricity into California at
$3,000 a megawatt hour, 5,000 megawatts at that price, and that
another generator fessed up to $1,900 a megawatt. So what we
still have out there is a ribald, unregulated marketplace.
The natural gas issue has been an interesting one because
natural gas is three times higher in California than anywhere
else in the United States. FERC is looking into this. There is
no transparency when it comes to natural gas. It is very hard
to tell what is going on. But when you have three times the
price, when the transportation cost of natural gas should be
between 50 and 70 cents a decatherm and the gas is selling,
instead at $3 or $4, $12 to $15, you really come to question
what is going on.
Let me give you a couple of examples of what has happened.
We have one sugar refinery in my backyard. It is in Crockett,
California, C&H Sugar. They employ about 1,200 people. Their
normal cost of natural gas to produce steam is $450,000 a
month. It has risen to $2 million a month. They have had to lay
off people. They have had to close down the plant. They have
had to try to get bridge financing. I can tell you about
California steel industries with the costs escalating
literately millions of dollars. Now, that is not restaurants.
That is not others that use electricity as well.
You should know that yesterday the Attorney General of
California announced that he will convene a criminal grand jury
to investigate whether power generators illegally manipulated
energy prices. The investigation will begin shortly after July
1 when a new 19-member Sacramento County grand jury is seated.
As Mr. Lockyer said, this does not indicate we have reached a
conclusion. It is a process to get at the truth. This is the
beginning of the criminal focus.
So the belief is among many of us--and I am one--that the
generating community has made use of the problems in
California, quite simply stated, to manipulate the market and
gouge prices.
John Bryson, CEO of Southern California Edison, testified
before the Energy Committee, in answering a question of mine,
that when they divested of generating facilities and sold those
facilities to out-of-State generators, I asked this question:
What were you selling a megawatt hour power from the facility
when you owned it? The answer was $30. Then the next question
was: When it was divested, what did the company that took over
ownership charge? The answer was $300 a megawatt hour.
So, in other words, power that had been selling at $30,
when the facility was sold, they had to buy that same power
back at 10 times the price. One of the reasons they are close
to bankruptcy today.
I am sure Senator Craig mentioned the concerns in Idaho. I
am sure Senator Burns and others can mention the concerns in
Montana where you have got a mine closing where people are
losing their jobs, and in these seven Western States where it
is anticipated that there will be rate increases from a low of
14 percent to a high of over 100 percent.
So the situation is changing dramatically and I thank you,
Mr. Chairman. I wrote you a letter urging that you take a look
at some of the relationships between the big generating
companies and the regulatory agency that is supposed to be
regulating these very companies. We see no semblance of really
meaningful regulation yet, and particularly in the area of
natural gas, there is very deep concern.
My bill will be marked up, I believe, on June 27. Whether
we can get it to pass the Senate or not, let alone get it to
pass the House, I do not know. I should tell you, when Senator
Smith and I went to see Congressmen Tauzin and Barton, they
were not very sympathetic. I now think that is changing in the
House, and instead of the word ``control,'' the word
``mitigation'' is being substituted. Whatever you call it is
fine with me, as long is it works.
Thank you very much Mr. Chairman.
Chairman Lieberman. Thank you, Senator Feinstein, for very
thoughtful testimony. I want you to know that we are in receipt
of the letter you referred to, and we are looking into the
questions that you have raised.
I am going to call now on the panel of economists who I
think will begin to answer some of the questions that Senator
Feinstein and others have posed. We have a very distinguished
panel of economists who were asked both by myself and Senator
Thompson, and I appreciate the trouble that they took to come
and be with us. I have read the papers they submitted. In my
opinion, though they are more accustomed to grading than I am,
they all deserve high grades. They are very thoughtful and very
thought-provoking.
It had been my intention to call people in alphabetical
order, but since this is the Senate where we follow the
seniority rule, I wonder if his colleagues would mind if I call
Dr. Kahn first.
Mr. Kahn. No one is more senior than I, sir.
Chairman Lieberman. Well, we do have Senator Thurmond here.
But among the witnesses you are definitely the most senior.
Dr. Kahn has certainly been, I guess I would say, if you
will allow me the liberty, the father of the modern
deregulation movement in our country, perhaps best known for
his work as Chair of the Civil Aeronautics Board during the
1970's. He is currently a professor emeritus of political
economy at Cornell University, and I am delighted that he was
able to be with us today.
We are going to run this clock and ask you to try to stay
within 5 minutes for your opening statements, although your
full statements will be entered into the record. And then it
will give each of my colleagues here an opportunity to engage
in discussion for a greater period of time.
Dr. Kahn, thank you for being here.
TESTIMONY OF ALFRED E. KAHN, PH.D.,\1\ ROBERT JULIUS THORNE
PROFESSOR OF POLITICAL ECONOMY, EMERITUS, CORNELL UNIVERSITY
Mr. Kahn. Thank you, sir. It is an honor to be here. I
should begin by recognizing that the only reason I am here is
that I did play an important role in deregulating the airlines,
trucking, railroads, and telecommunications, and I do not offer
myself as an expert on the electric power industry. In point of
fact, I have tried to stay away from the electric one because
it frightened me.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Kahn appears in the Appendix on
page 191.
---------------------------------------------------------------------------
I agreed partly because there are around me people who know
much more about the electric industry generally, and, after
all, one of them is a former student of mine, so he has been
very well trained, and I urge you to listen to him carefully.
Just one other introductory remark. The discussion of the
California situation has become so deplorably simplistic, if
not ideological, and again I am hoping that by my having
decided that I wanted to subscribe to the letter that Professor
Wolak started, that we can de-ideologicize it, if you will, and
I have all sorts of examples that I would be happy to cite, but
I am not going to waste your time because you have encountered
them as well.
I think perhaps I will merely quote that eminent economist
William Safire, who referred to ``the demagogic call for energy
price caps, always politically satisfying, populist
interference with the market's self-correction that would lead
to worse shortages and rationing, to inflation and wage
control.''
I suppose Mr. Safire deserves a good grade for the first 2
weeks of elementary economics, but from there on he flunks.
I hope he, however, and others like him will be satisfied
that all the sybarites in California with their hot tubs and
the politicians and militant consumer advocates who promised
them the benefits of free markets but without the risks of
being exposed to the free market--I hope the opponents of
putting caps on will be satisfied that those parties have been
sufficiently rewarded for their opportunism.
I have in a paper I have written--and, in fact, Paul did
the same--about the opportunistic nature of the move for
deregulation. Nobody was in favor of deregulation of electric
power in the 1950's and 1960's when real rates went down. No
one was in favor of deregulation in the 1970's and 1980's when
it looked clearly as tough regulation was holding rates below
competitive levels. It only became a bonfire movement when in
the middle 1990's, because of mistakes that had been made in
the past, it looked as though prices would go all the way down.
Of course, we should have realized that since the big
errors were made in the past, we should have realized that this
one, too, was based on an unrealistic assessment of the future.
But, in any case, here we are in the situation that has been
described so well by other people, and moving beyond the first
2 weeks of Economics 101, let me just mentioned the factors
that have induced me to sign on to this letter, apart from the
fact that I have great confidence in the other people who
signed.
First, when you have extreme inelasticity of supply and
demand, when prices can go up 5-fold, 10-fold, 15-fold and not
induce a substantial response in demand, very largely because
these prices operate in spikes by particular times of day and
particular days of the year, and consumers do not have meters
that tell them those prices. So demand is highly inelastic.
But, similarly, when you have a highly inelastic supply,
you reach a certain point, if you look at Severin Borenstein's
figures at the end, where supply just suddenly turns vertical,
and you do not get any more supply as the prices double,
treble, and quadruple. Markets do not work very well, to put it
mildly.
And that leads me to the second point that everybody who
talks about wage and price controls in the past or caps in the
past have interfered with supply, and there is a letter by some
very eminent economists who apparently know even less about the
electric power industry than I, who say there are all sorts of
plants, higher-cost plants that will come online as prices go
up. I ask you to pose that question particularly to the people
who know what is going on in California. It is simply not true.
The supply--no matter how inefficient the plants, there is
ample reason for them to be operating if the price gets above
the incremental cost of operating, and yet we have a virtually
totally vertical supply curve. In those circumstances, this
equilibrating character of free markets just doesn't work very
well.
Third, it is true that the elasticity response was
prevented by the ridiculous freezing of retail prices. That was
one of these cases of ``we will give you all the benefits but
you will not have to bear any of the risks.'' And the increases
that have come since have been grudgingly inadequate. But since
the extreme shortages, producing 10-, 20-fold increases in
wholesale prices, have been the spikes and consumers do not
have meters that tell them when those spikes occur, you are not
going to get the demand response. And, therefore, you can say,
well, you would not have blackouts if you let the price go up
to whatever extent necessary, but that extent necessary is
reckoned in terms of not doubling but increasing 10-, 20-, or
50-fold. Then you have to say as against the possible benefit
of a 10-fold increase in prices in getting a better balance of
supply and demand, you have to realize, first of all, the
income distributional consequences of that and, second, the
macroeconomic consequences.
I had the misfortune to be adviser to President Carter on
inflation just when we had the increase in OPEC prices from $10
a barrel to $40 a barrel on the East Coast, and we know that
that extraction of those dollars from the pockets of consumers
had a major role in promoting the stagflation from which we
were all suffering. Well, look at what is happening to the
California economy and the widespread distress that it is
causing to a lot of innocent people, without eliciting
increased supply, without bringing about re-equilibration.
Fourth, the spectacular cases in history where price
controls have done more harm than good cited by all the
opponents, and correctly so, particularly in the 1970's when we
held the price of crude oil below marginal costs--marginal cost
was the cost of imports, and so we held the domestic prices
below that. Of course, that interfered with supply, and the
same thing was true with the case of caps on the price of
natural gas. That clearly did interrupt supply. But the notion
that caps automatically interfere with the increase of supply
in the electric industry is absurd. It ignores the whole
history of regulation. Look at my ``Economics of Regulation.''
There must be 50 pages on the fact that regulation of the
electric industry through this entire history has not
interfered with expansion of capacity. The major criticism has
been that it has led to overexpansions of capacity because it
guaranteed the investors a return on their capital and they
made money by investing more. So it is simply historically
incorrect that regulation, recognizing the full costs of
additional capacity, necessarily interferes with supply.
Moreover, one can make certain of that. The problem is that
we are not going to get any new plants for 2 or 3 years. Make
the caps temporary. Make them automatically sunset in the 2 to
3 years. Make them not apply to new power.
There is no shortage of people interested and willing to
build new power plants, and for that they do not have to have
$1,000 a megawatt or $1,500 or $2,000 a megawatt. That is
Economics 101.1, and I wish Mr. Safire would come back and
learn it.
So we must not interfere with the fundamentally required
correctives. We must press ahead with time-of-day metering or
something like that. We must be willing to let retail prices go
up more than the grudging amount by which they have. But where
the demand and supply response takes years, it is simply
sadistic to insist that elementary economics tells you that
price controls do not make any sense.
Thank you.
Chairman Lieberman. Thanks, Dr. Kahn. You got us off to a
very good beginning, a provocative beginning.
Dr. Severin Borenstein is a professor of public policy and
business administration at the University of California's Haas
School of Business. He has focused on electricity deregulation,
market formation, and competition. In addition, he is the
director of the University of California Energy Institute and a
member of the Governing Board of the California Power Exchange
Corporation. So he is right in the middle of the California
crisis. Thanks for being here, Doctor.
TESTIMONY OF SEVERIN BORENSTEIN, PH.D.,\1\ DIRECTOR, UNIVERSITY
OF CALIFORNIA ENERGY INSTITUTE AND E.T. GRETHER PROFESSOR OF
BUSINESS ADMINISTRATION AND PUBLIC POLICY, BERKELEY'S HAAS
SCHOOL OF BUSINESS, UNIVERSITY OF CALIFORNIA
Mr. Borenstein. Thank you, Senator Lieberman. I just want
to start out by talking for a few seconds about how we got
here, into the crisis that California now faces, and
understanding what the problems are and, more importantly, what
the problems are not.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Borenstein appears in the
Appendix on page 194.
---------------------------------------------------------------------------
There is no question that demand has grown rapidly in the
Western United States and that we are now in a situation where
there is a real tight market in the entire Western grid. There
is also no question that that creates a real supply-demand
mismatch. That has two effects.
One is the effect that you learn in the first 2 weeks of
Economics 101, which is when demand shifts out and supply does
not keep up, the price goes up.
The second effect, which is just as easy to understand if
you sat through the first 6 weeks of Economics 101, is that
when you are a seller and you are in a market where there are
few substitutes for your product on the demand side and the
other sellers are unable to expand their supply because they
are already at capacity, you can raise your price without
losing much in sales. Economists do not call this market
manipulation. They call this exercising market power. This is
not illegal under U.S. antitrust laws, and it is, in fact, what
businesses do.
When Microsoft decides how much to sell its software for,
it is not basing it on its cost. It is trying to figure out how
much money it can make, how many sales it will lose as it
raises its prices. That's what the sellers in the California
electricity market are doing.
The problem is that we have set up a market where they can
raise prices quite a bit without much demand response at all
and, because of the technology of electricity, without other
sellers able to expand their output.
Let me address two myths about how we got into this. The
first myth is that the California crisis is the result of rabid
environmentalism in California that blocked the building of new
power plants. There is a lot of environmental consciousness in
California, and there is no question that the permitting
process in California takes a bit longer than it takes in most
other States, on the order of months. But this is not a case
that California just closed its eyes and refused to build new
power plants when they were necessary.
The reason no new power plants were built or started
between 1995 and 1998 is because nobody applied to build new
power plants during that time. And they did not just apply in
California. They did not apply in Arizona. They did not apply
in Nevada. They did not apply in Montana or Wyoming or the
other parts of the Western grid.
The fact was that the sellers in the Western grid in 1996,
1997, and 1998 believed that the prices in Western United
States were going to be low, that there was not going to be a
shortage, and that there was not going to be a need for this
capacity. They did the economic calculation and they found out
that it did not make sense to build power plants at that time.
By late 1998, they figured out they were wrong. Demand was
growing and we were facing a tighter market. By the way, most
of the demand growth was not in California. It was outside
California, but it was all part of the Western grid. And so the
market tightened up, and at that point there were plenty of
applications. Firms started building power plants. They started
trying to get power plants sited. Unfortunately, the process of
getting from starting to build a power plant to having the
power online is a 4- or 5-year process, and that is why we are
still 1 or 2 years away from solving that problem.
The second myth is that wholesale price caps caused these
problems in California. California has had wholesale price
caps. They were at $250 throughout most of the market. They
were $750 for a period from October 1999 to June 2000. They
were not frequently hit, and during that time, if you look at
the rate of return on owning these power plants, it was
astronomical. These firms have made plenty of money. There was
no period essentially until November 2000 where you could
possibly argue that the price caps actually deterred
production. In November 2000, we actually did see this
happening. In November 2000, the price of natural gas
skyrocketed in California, and there was a period of time where
it cost $400 to buy the gas for which you could then sell the
power for $250.
That is the bad old problem with price caps. That is
exactly what we had in natural gas. That is exactly what we had
in gasoline in the 1970's. That is the danger of price caps. It
can happen.
But prior to that, it did not happen and suggesting that
firms were not building plants or firms were not producing from
those plants is just not supported in the data.
So California now faces two issues, and I think it is
important to keep the two issues clear and separate from one
another. California and the entire Western grid faces a longer-
run problem of building power plants, of getting investment in
the West. The market is solving this problem. I think this
really is not a major issue. This is the problem of power in
summer 2004, and I think the problem of power in summer 2004 is
going to solve itself.
The question we are facing now is the problem for power in
summer 2001, and telling California at this point to build more
power plants is not a solution to that problem. Power plants
are not going to get built for this summer. There are only two
areas where California can help itself or be helped to get
through this summer. One is conservation, and the State has
been way too slow to get its conservation plans going. They are
now moving on them. We have been way too slow to get real-time
pricing in place so that particularly large commercial and
industrial consumers would actually see those high prices on
hot summer afternoons and would have an incentive to scale back
their consumption.
We have not sent price signals and we have not done enough
to encourage voluntary conservation. We are moving. We are
getting some results. We need a whole lot more results to get
through this summer without a major economic crisis.
The other area is the area of price controls. As Professor
Kahn said, price controls can be used in a way that would
prevent a massive transfer of wealth from consumers to
producers without having the adverse effects. The idea of
dismissing price controls because they were used, frankly,
extremely badly and without much analysis in the 1970's is as
silly as the idea of dismissing electricity deregulation
because California electricity deregulation has gone awry.
Price controls can be used well and carefully. It has to be
done extremely carefully. And electricity restructuring can
work successfully. We cannot dismiss it based on California's
bad experience.
However, I have to say, listening to some of the testimony
this morning reminds me of the dangers of price controls. That
is, once we go down this road, we are going to have to be
careful to recognize what price controls do effectively is
control market power. What price controls do in a damaging way
is attempt to just control the transfer of wealth in a regular
competitive market.
In the 1970's, we tried to control that transfer of wealth
in a very competitive market, and we ended up completely
screwing up the market and causing shortages. What we need is
the analytic capability to tell the difference. Unfortunately,
the Federal Energy Regulatory Commission, which came into this
deregulation as a legal-oriented process, has not shown the
policy skills to do that sort of analysis and as a result has
been blindsided by a lot of the economic operation of this
market. I think if they had the policy skills to do it, they
could implement price caps in a way that would be very
carefully done, that would not solve all of the problems--a lot
of the problem is a real shortage and real scarcity--but that
would solve a significant amount of the problem without causing
the sort of damage that price caps did cause in the 1970's.
Thank you.
Chairman Lieberman. Very interesting. Thanks, Dr.
Borenstein.
Dr. William Hogan is a professor of public policy and
administration at Harvard's Kennedy School of Government, also
a research director for the Harvard Electricity Policy Group,
which is exploring the issues involved in the transition to a
more competitive electricity market. Professor Hogan has also
held positions dealing with energy policy analysis in the
Federal Energy Administration. We are delighted to have you
here, and I look forward to your testimony now.
TESTIMONY OF WILLIAM W. HOGAN, PH.D.,\1\ PROFESSOR OF PUBLIC
POLICY AND ADMINISTRATION, JOHN F. KENNEDY SCHOOL OF
GOVERNMENT, HARVARD UNIVERSITY
Mr. Hogan. Thank you very much, Mr. Chairman. I have a
prepared statement which I would like to submit for the record,
but in the few minutes that are available I will summarize the
highlights of the initial points I would like to make.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Hogan appears in the Appendix on
page 200.
---------------------------------------------------------------------------
I would emphasize three ideas. First, echoing the comments
of my colleague, the diagnosis of what the problems are in
California should be the first thing we do in order to
understand the recommended policies, because different
diagnoses lead to different policies.
Second, I would say a few words about the price caps
debate, which I think has motivated much of this hearing and
the discussion, and to re-emphasize the theme that the details
matter. People are talking past each other on this subject.
The third point would be to return to the question of what
should be done about market design, which is the long-term and
continuing problem in California. I have some suggestions that
I will summarize.
The problems in California are quite serious, and they had
been serious well before last summer. It is not apparently
widely known, but the Federal Energy Regulatory Commission
found that the many design features of this market were
fundamentally flawed, in their words, in late 1999. So this is
not a new problem, but it became much more serious when the
prices increased.
Essentially, because of the problems that developed after
the summer and the collapse of the market earlier this year,
things fundamentally changed as people stopped paying their
bills. Market participants were not paying for the power they
were taking. Some of the utilities got in financial trouble.
One of the utilities went bankrupt. I think the diagnosis of
that problem is widely accepted.
This situation was unsustainable and it also tells us what
needs to be done to deal with it. First, California should pay
its bills in order to re-establish the credibility of
transactions. No system can work without creditworthy buyers;
and then, further, to provide incentives for conservation,
retail prices for incremental energy electricity should be
raised to market levels, at least for commercial and industrial
customers. Changing the rules and metering to support demand
responses would help on many fronts, and I agree with my
colleagues on that matter.
Other topics are more controversial, about in particular
whether or not the principal cause of the high prices is
scarcity or the principal cause is strategic withholding by
generators in the exercise of market power. There is a debate
about this issue, and unfortunately, this is one of the areas
where the debate tends to lead to different policies. It is not
so obvious what to do.
Broadly speaking, I think we are talking past each other
when we talk about price caps. I would identify three broad
ideas that have been suggested. One is a uniform price cap,
just setting a cap on the price that will be paid. Second is
traditional cost of service regulation where you have a
different cost for every plant and you pay them according to
those traditional costs. And third comes what are known as bid
caps, where you set limits on what each individual plant can
bid. It may be different for different plants in different
hours, but then everybody gets paid the market-clearing price.
There also is a requirement for people to bid.
I will not go into the details now, but I believe uniform
price caps would be counterproductive for all the usual
reasons. As far as traditional cost of service regulation,
trying to reimpose that on the system, it is far from clear how
this kind of administrative process could facilitate the market
or be implemented in a way that would not exacerbate the
immediate problems in the West.
However, to the extent that the problem of high prices
results from withholding of supply in order to raise prices,
the better solution would be to go to the bid cap approach,
which is already in use in other parts of the country as
authorized by the Federal Energy Regulatory Commission in PJM,
New York, and so on. Under a bid cap generators are required to
bid and they cannot bid more than a certain level, which is
related to their cost. But unlike with the price cap, the
generators would still be paid the market-clearing price. The
requirement to supply works in support of a competitive market
and would counteract the effect of market power. On the other
hand, to the extent that the problem is scarcity, bid caps will
not do much to reduce prices. But if scarcity is the problem,
then administrative action to reduce prices would probably make
conditions worse, not better.
If we are going to intervene, the best of this bad bargain
would be to do so with bid caps. This is basically the
direction that the Federal Energy Regulatory Commission went to
at the end of April with the order that they presented at that
time. And I think that is the right direction. There are some
fixes that you could put that to make it work better but,
nonetheless, I think basically what they are doing is in the
right direction.
The problem that I emphasize in my prepared remarks is not
dealing with the symptoms of prices and rolling blackouts. The
problem that I would emphasize is that the Federal Energy
Regulatory Commission has not gone far enough or fast enough in
dealing with the market design problems, how to change the
basic rules of how the market operates in the West. The details
I summarized in my prepared remarks reduce to a simple
prescription. Namely, the market for the West should be set up
to emulate that which is working so well in the East, in the
PJM system, in New York, and is soon to be adopted in New
England. These systems are not perfect, but they are the best
systems that we know about, and they are much different than
what California adopted.
Market design is not necessarily the cause of the high
prices, but it constitutes another set of problems which are
fundamental and have been ignored or delayed, as everybody is
worried about the symptoms of high prices and blackouts. It is
time to move on, because we are running out of time if we want
to see electricity restructuring work.
Thank you.
Chairman Lieberman. Thanks, Dr. Hogan. I feel like I am
going back to Economics 101. It has been very helpful, and this
brings me logically to Dr. Joskow, who is engaged in teaching
and research at the Massachusetts Institute of Technology in
the areas of industrial organization energy and environmental
economics and government regulation of industry. Dr. Joskow has
been focused on the competitive electricity markets for over 20
years and in that time has published five books and over 100
articles and papers.
Senator Thompson, in the interest of full disclosure, I do
want to reveal that while a graduate student at Yale in 1970,
Dr. Joskow was a very important volunteer in my very first
campaign for the state Senate. [Laughter.]
Is that where you learned your economics?
Chairman Lieberman. That is why I mentioned Economics 101.
Dr. Joskow, nice to see you.
TESTIMONY OF PAUL L. JOSKOW, PH.D.,\1\ DIRECTOR, CENTER FOR
ENERGY AND ENVIRONMENTAL POLICY RESEARCH, MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
Mr. Joskow. Thank you, Senator Lieberman, Senator Thompson.
It is a pleasure to be here. Actually, my job on that campaign
was to be a poll watcher and make sure that people who died in
the past 2 years did not vote.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Joskow with an attachment appears
in the Appendix on page 351.
---------------------------------------------------------------------------
Senator Thompson. We should have had him for our prior
hearing.
Chairman Lieberman. You are a very valuable witness in most
matters this Committee is interested in.
Mr. Joskow. I have a prepared statement that covers a
number of issues related to FERC's responsibilities and
performance across the country. In my oral remarks, however, I
would like to focus on California.
The causes of California's electricity crisis are complex,
reflecting a combination of bad market design, bad regulatory
decisions, unanticipated changes in gas prices and other supply
and demand conditions, credit problems, and, I believe,
supplier behavior which rationally took advantage of
opportunities created by these conditions to further increase
market prices above competitive levels.
I would like to agree with Senator Thompson. These problems
did not start on January 21, 2001. Indeed, they did not start
in 2000. The first problems in California's markets began to
emerge as early as July 1998, and in my view, the events of the
past year were an accident waiting to happen.
Some progress has certainly been made in the last year.
However, I continue to believe that both Federal and State
officials can and should do more to deal with the immediate
problems and to make longer-run reforms in California's
wholesale and retail market institutions. While wholesale
electricity market problems have been most severe in
California, they are not unique to California. I think it is
important for the Committee to understand that. There have been
market performance problems requiring a variety of reforms and
mitigation measures in the new wholesale markets in New York,
New England, and the Pennsylvania-New Jersey-Maryland pool as
well.
And this should not be surprising. Electricity has unusual
physical attributes that make the design of well-functioning
competitive wholesale markets a significant technical
challenge. Spot markets perform especially poorly when supplies
are tight, demand is completely inelastic, and a large fraction
of demand is served out of the spot market.
Midcourse corrections have frequently been necessary after
competitive electricity markets first go into operation. Price
caps, bidding rules, cost-based contracts, and a variety of
other mitigation mechanisms have been used and are being used
in most new wholesale electricity markets in the United States
and other countries. I must say some of the recent discussion
about ``price caps'' is a bit of a mystery to me because we
have been using them for several years.
In this regard, the term ``price caps'' has become so
ideologically loaded and means so many different things to
different people, I think we should just use a different term.
My concern is not that wholesale prices are high per se. My
concern is that prices are significantly above competitive
levels because of a variety of market failures. What I would
like to see is a comprehensive, short-run market failure
mitigation program, not rigid uniform price caps, combined with
a longer-term program to fix market design and regulatory
flaws. You can call it anything you want--price mitigation,
since Fred Kahn is here, let's call it a banana. The issue is
to move forward.
Of course, we need to be sensitive to the possibility that
mitigation measures can make things worse rather than better if
they are poorly designed. Of course, we want to use mitigation
mechanisms that do not discourage new investment in generating
facilities. Of course, the proper long-run strategy is to fix
the market and regulatory institutions that are broken. But we
also must be concerned about the interim cost to consumers and
the economy of unmitigated market failures.
Despite the recent break in wholesale prices in the West--
and I would be happy to answer questions about that if you have
questions--I remain concerned that hot weather plant
breakdowns, reduced hydroelectric supplies, and remaining
market design flaws are likely again to present conditions that
create the incentive and opportunity for suppliers to engage in
behavior that increases prices significantly above competitive
levels this coming summer. It is this potential problem that
should be the focus of immediate mitigation efforts while we
continue to focus on longer-term fixes.
As Senator Thompson observed, the summer is now upon us.
The practical mitigation options for this summer are,
therefore, quite limited. FERC did put in place a supply and
price mitigation protocol in California on May 29, and I will
not call it price caps, price mitigation. Let's see if we can
build on it.
I would like to see FERC extend the number of hours to
which these mitigation rules apply to all summer hours, 7 by
24. I would like to see it identify and close remaining
loopholes available to re-sellers, and I think very importantly
to find ways to integrate suppliers in other Western States
into this mitigation program.
I do not think this is going to be easy. I do not think it
will be successful if FERC follows its usual course in applying
these mechanisms. But I think it can be done if FERC staff and
the control area operators in the West work together to make it
happen.
I also would continue to urge California officials to
continue their efforts to remove unnecessary barriers to the
construction of new generating plants, if any still exist, to
raise retail prices to reflect wholesale market prices, to
implement real-time pricing, to restore credit to the system,
and to continue energy efficiency and conservation efforts.
Thank you. I would be happy to answer any questions you
have.
Chairman Lieberman. Thank you, Dr. Joskow. Thank you very
much. Right on time, too.
Dr. Lawrence Makovich is senior director of Cambridge
Energy Resource Associates, an energy consulting firm started
by Daniel Yergen, who many of us have been pleased to know and
worked with over the years. Dr. Makovich is an expert on
electricity markets regulation, economics, and strategies, the
author of several reports and articles on the future of the
electric power business, and a lecturer on managerial economics
at Northeastern University's Graduate School of Business.
A pleasure to have you here.
Senator Stevens. Mr. Chairman, do we have a copy of his
statement?
Dr. Makovich. I did submit a copy of the statement, yes.
Chairman Lieberman. He did. We can get you one.
Go right ahead, Dr. Makovich.
TESTIMONY OF LAWRENCE J. MAKOVICH, PH.D.,\1\ SENIOR DIRECTOR
AND COHEAD, NORTH AMERICAN ENERGY GROUP, CAMBRIDGE ENERGY
RESEARCH ASSOCIATES
Mr. Makovich. Power prices in California are too high
because the power market has a real shortage caused by serious
structural flaws in the market design and in its
implementation. California did not follow the example of other
power markets that use rules to create a market for capacity.
In addition, California's complex siting and permitting
processes have created formidable barriers to the development
of new generating capacity that the State so badly needs. Quite
simply, California ran out of capacity because it did not set
up a market to pay for it or a process to enable it.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Makovich appears in the Appendix
on page 365.
---------------------------------------------------------------------------
A third flaw in the California market design was the use of
price caps in retail power rates. As scarcity drove up
wholesale power prices in 2000, the majority of customers in
California continued to consume power at price levels frozen at
1996 levels. The retail price caps distorted the market by
increasing demand and driving price spikes higher. Yet
utilities remained obligated to provide all the power people
wanted at capped prices. As a result, price caps had the
unintended consequence of driving Pacific Gas and Electric,
California's largest utility with $22 billion of assets, from
an A credit rating to bankruptcy court in less than 4 months.
Of course, the bankruptcy also distorted the market by
making suppliers reluctant to buy fuel and produce power to
deliver to someone who was not likely to pay for it. Price
caps, although well intentioned, usually distort the market and
create unintended consequences. We have already seen this in
California, and the history of price controls is a record of
distortion and unintended consequences.
Price caps may sound simple in theory, but, in fact, they
are anything but simple. The bureaucracy to administer them
always becomes many more times complicated than originally
expected.
Now, many people want price caps because they believe that
power suppliers are withholding capacity to drive up prices. If
this were true, then price caps would limit their gains.
Further, this argument goes, if we could just get them to knock
it off, then this artificial shortage would end and power
prices would drop back down to reasonable levels.
Why do so many people want to believe in market power?
Putting the blame on suppliers diverts blame from the basic
design flaws and weaknesses in the current California power
market. An examination of the California power market does not
support the market power hypothesis. Power generators have
market power if they can act to set prices; however, high
prices alone can occur for many other reasons as well.
The California power exchange began operation in 1998. In
anticipation of this, we developed a computer model in CERA to
analyze the interaction of supply and demand in the
determination of prices. When we simulate the Western power
markets in 1998 and 1999 and compare the results to the actual
market-clearing prices, the evidence is quite compelling.
During this period the California power market was in a demand
and supply balance, and we observe that wholesale power prices
cleared at the level of short-run operating costs--fuel,
environmental costs----
Chairman Lieberman. What time periods was that, Doctor?
Mr. Makovich. This is 1998 and 1999.
Chairman Lieberman. Thanks.
Mr. Makovich. Fuel, environmental costs, and other
operation and maintenance costs.
Over this time frame, the California energy market was
doing just what it ought to do: Efficiently determining the
utilization of power plants to meet demand at each hour with
price signals reflecting the operating costs of rival
producers.
We must confront the fact that the industry structure that
delivered a competitive outcome in 1998 and 1999 did not change
in 2000. What did change was the demand and supply balance.
Since no significant generation additions were made, demand
finally outstripped supply. Any market with a severe shortage
of a commodity that customers value highly and have few
substitutes for will end up with buyers' bidding up scarce
supply--in other words, a shortage or scarcity premium.
We must recognize that when supply and demand were in
balance, the competitive energy market in California produced
prices with a level and volatility that was half of what was
necessary to support new power plant development. During 1998
and 1999, the annual wholesale power price of power was between
$14 and $30 a megawatt hour. The evidence is clear. The energy
market alone in California did not provide a timely price
signal for new investment. As a result, the shortage was both
predictable and preventable, and as early as April 1997, CERA
published a report predicting just that.
Other markets have capacity markets along with energy
markets--like Texas and New England--and they have been able to
attract more than enough power investment in just a few years
to avoid similar shortages. We must face the fact that
California competes with other power systems around the world
to attract power plant investment and price caps discourage
investment. Remember, the power business is one of the most
capital-intensive businesses in U.S. economy. California
remains a highly flawed power market in which the only way to
recover costs above short-run operating costs is through a
periodic shortage premium. By adding price caps to the current
flawed California market design, investors will see no way to
recover the full cost of power investment through the market.
California cannot afford to continue to bring forth power
development by guaranteeing payment through long-term power
purchase contracts from the Department of Water Resources. The
State's record in long-term power contracting is abysmal.
Remember, half the stranded costs in California that drove the
State to deregulate were due to long-term power contracts the
State mandated under the Public Utility Regulatory Policy Act.
California has not fixed its market to create a positive
investment climate for power development. To assist California,
the FERC should insist on a minimum set of structural elements
in its wholesale market design. It will be a mistake to make
price caps the centerpiece of a Federal response to the
California power shortage. They would make a bad situation
worse, and they do nothing to fix the flaws that so desperately
cry out for solution.
Thank you.
Chairman Lieberman. Thanks, Dr. Makovich. Thanks for your
testimony.
And, finally, Dr. Frank Wolak, whose impressive credentials
I will describe now. Dr. Wolak specializes in industrial
organization and economic theory at Stanford University where
he is professor in the economics department. His recent work
studies methods of introducing competition into infrastructure
industries and assessing impacts of this competition policies
on consumer and producer welfare.
Dr. Wolak is also notably the chairman of the Market
Surveillance Committee of the California Independent System
Operator and, therefore, again, right in the middle of the
California crisis. Thanks for being here.
TESTIMONY OF FRANK A. WOLAK, PH.D.,\1\ PROFESSOR, DEPARTMENT OF
ECONOMICS, STANFORD UNIVERSITY
Mr. Wolak. Thank you very much. I would like to focus my
remarks on a specific issue, and that is really the design of
what I will call--Paul Joskow called it bananas. I will call it
regulatory interventions required under the Federal Power Act
to protect consumers from unjust and unreasonable wholesale
electricity rates.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Wolak appears in the Appendix on
page 371.
---------------------------------------------------------------------------
First, I would like to state the two goals of regulatory
intervention, and then I will briefly explain why I believe
that the plan recently implemented by the Federal Energy
Regulatory Commission will fail to achieve these goals. And,
finally, I will just summarize the plan that has been proposed
by the Market Surveillance Committee in its December 2000
report to FERC, which I do believe satisfies the goals.
The first goal of market power mitigation is to reduce the
average wholesale price that California pays to a level that
would occur in a competitive electricity market, given
California's current supply and demand conditions and the cost
of input fuels. And any successful market power mitigation plan
has to guarantee that it can at least satisfy this goal.
The second goal of a market power mitigation plan is also,
I think, very important, to alter the incentives faced by the
market participants so that it will no longer be profit
maximizing for generators to essentially withhold capacity from
the spot market by bidding substantially in excess of the
variable cost of producing electricity from their facilities.
The idea is essentially to alter the rules in such a way that,
post-intervention, spot market functions in a manner that is
consistent with the competitive market in the vast majority of
the hours.
I believe the market power mitigation plan that has been
recently implemented by FERC is very unlikely to achieve these
goals. In the first place, the plan provides for no mitigation
during hours without system emergencies, and unfortunately, as
has been noted by a study prepared by the Department of Market
Analysis at the ISO as well as my own work with Severin
Borenstein and Jane Bushnell at the University of California
Energy Institute, the majority of overpayment due to the
exercise of market power occurred during the hours when there
were no system emergencies. Consequently, this market power
mitigation plan currently fails to address the greatest source
of the unjust and unreasonable prices in the California
electricity market noted by the Federal Energy Regulatory
Commission is its November and December 2001 orders.
So even if this mitigation plan was extended to all hours,
it still has the potential to be virtually ineffective at
mitigating market power. For example, the plan only requires
generators give all their uncommitted capacity into the ISO's
real-time energy market at what is called a proxy bid price,
which is computed by ISO to essentially account for the heat
rate of the unit, the price of natural gas, and the price of
other inputs that the firm might use.
However, a very straightforward way for generators to avoid
this requirement, is simply to sell its energy in advance to a
power marketer, and then even if this firm sells its energy to
an affiliated power marketer, that will satisfy the condition
that FERC now has to saying the capacity is committed, and
therefore not subject to the mitigation measure.
So this aspect of the FERC plan creates a very simple
strategy for a generation owner to essentially obtain higher
prices. The firm simply sells its energy to an entity located
outside the State on a day-ahead basis. This effectively
commits the capacity, so it is no longer subject to the real-
time bid rule. Then in real-time market approaches, the ISO
discovers it is short of electricity in California, and must
find some out-of-state producer to sell into the market. Under
these circumstances, the out-of-state suppliers can effectively
bid whatever they wish into the ISO's real-time energy market,
because they certainly have the option of not supplying energy
into California if they do not receive the price they want. And
through this process, a generator located in California can
effectively achieve significantly higher prices than what are
certainly seen to be envisioned by the mitigation plan by
selling outside of the State at a high price, knowing that in
all likelihood, this power will be sold back into the State in
real time when the ISO calls the out-of-state supplier to
produce more energy, because as all market participants know,
California is a net importer of energy, and this is
particularly the case in the summer months.
And to give some idea of the potential profitability of
this activity, it is not unusual for a megawatt delivered to
California to trade between 5 to 10 times in the forward market
before it is actually consumed. So a second aspect of the order
that I think will render it ineffective, even if it is applied
to all hours, is that generators still have the ability to
receive their justifiable costs, rather than the market-
clearing price computed by the ISO using the generator's proxy
big prices. So, for example, if a generator's proxy bid price
is computed by the ISO to be $50, and if this unit is necessary
to serve demand and it bids its cost-justified bid of $150, if
the bid is necessary to serve demand, the generator will be
paid its bid for $150 for the energy supplied, not the $50 per
megawatt proxy bid market clearing price.
So, consequently, even though the market-clearing prices
posted on the ISO website would say $50, generators can receive
substantially in excess of this market clearing price if they
are willing to cost justify their bids in the ISO's real-time
energy market. And given FERC's unwillingness to order
significant refunds from generators and their use of a
methodology that is exceedingly generous to generators in
determining the recoverable production cost, it is no surprise
that right now many generators are currently submitting bids
that are accepted and paid as bid at prices significantly
higher than the market-clearing price set by FERC under its
recently implemented market power mitigation plan.
So this provision for paying as bid for energy is very
similar to the $150 soft-cap policy, which was implemented in
2001. This policy said that all bids in excess of $150 had to
be cost justified, and if necessary to serve demand, they would
be paid as bid. And during the period July 1, 2001 to May 1,
2001, even though there was $150 soft price cap in place,
average prices in the ISO's real-time market were in excess of
$250 per megawatt hour. So this guarantee by FERC in its former
soft-cap regime, and in this recently implemented mitigation
plan to pay as bid any cost-justified bids, as I think the best
illustration of the point that cost of service regulation,
which is essentially what the soft-cap policy is, without a
prudency requirement, is the equivalent to no regulation at
all. Unless FERC seriously investigates the prudency of these
claims cost, something it did not do during the former soft-cap
regime, the current mitigation plan will once again return
California to a world without effective market power
mitigation.
And the final aspect of the FERC mitigation plan is that if
it were applied to all hours, and even if these two problems
described above were solved, it is extremely unlikely to
achieve the second goal of market power mitigation, because it
just does nothing to alter the incentives of generators to bid
aggressively in the spot market and to maintain their units in
top working order. This is effectively the point made by
Senator Feinstein. In fact, on the contrary, the plan creates
strong incentives for generators to declare forced outages and
planned outages of their low-cost units so these units will not
set the market-clearing price, but instead, their higher cost
units will more frequently set the market-clearing price that
is earned by all the units.
And, so, moreover, this mitigation plan creates incentives
for generators both in and out of California to sell outside
the State for the reasons discussed above, so consequently, the
FERC plan has the potential of creating the worst of both
worlds for California, a less reliable grid, because generators
do not want to sell into California and have little incentive
to maintain their plants, and high prices because it is very
easy to cost justify virtually anything with no serious
prudency review on the cost incurred.
And just to finish up, the December 1 Market Surveillance
Committee Report presents a plan which I think can achieve both
of these goals, and this remedy does not impose a soft cap on
the spot market, but it does require FERC to make a one-time
regulatory intervention that results in just and reasonable
rates in California for the next 2 years. The essence of this
plan is that all sellers in California would be ineligible to
continue to receive market-based rates only if they offer 75 to
80 percent of their expected annual sales in the form of a 2-
year forward contract at a price set equal to the perfectly
competitive benchmark over this time period. This after all is
market-clearing price that the FERC no-market-power standard
explicitly stated in its competitive market requirement for a
participant to receive market-based rates. So consequently,
with this mitigation measure in place, the firm still has a
significant upside potential, but California consumers are
protected from the significant volatility in the spot market
for at least 75 percent of their sales, and moreover, this plan
will create the incentives for generators to be aggressive
competitors in the spot market, to maintain their plants in top
working order, and the other advantage of it is, it is simply a
one-time intervention, and has no danger of essentially, once
implemented, remaining in place. Thank you very much.
Chairman Lieberman. Thank you Dr. Wolak. Thanks to all of
you for very interesting and thoughtful and helpful testimony.
You have come from different places. In fact, four of you were
asked by the majority, two by the minority.
Generally speaking, it sounds to me that though there may
be some disagreement on what action FERC should take, just
about all of you agree there should be some price mitigation
action, although I do want to give you a chance to clarify, Dr.
Makovich, because at the end of your statement, you spoke out
strongly against price caps. Do you think there is any role
here for FERC to play in what Dr. Joskow and others have called
price mitigation in the Western markets now?
Mr. Makovich. The price mitigation idea, as Dr. Wolak has
said, there is this opportunity to get around it with the power
traders. There is also a problem here that half of the power
produced in the west is not under FERC jurisdiction. So on a
practical basis, it is hard to imagine that this kind of bid
capping or price mitigation is really going to work, given the
reality of the jurisdiction limits out there and the ways to
end run this set of regulations.
Chairman Lieberman. So what would your answer be to folks
in California who say that prices are too high; in a year and a
half, supply is going to equal demand because of the power
plants that are coming online; we have done all we can in
California; the power plants are moving again; conservation is
working, we are 11 percent down; but we need the Federal
Government, through FERC, to come in and do something for us in
the short-term, temporary price leash. What would you say in
response to somebody from California who asked you that?
Mr. Makovich. Well, there is a number of things that needed
to be done in the short run, some of which were not done. So
the price increases that we have seen were important, but they
are very uneven. We have yet to----
Chairman Lieberman. Things not done by FERC, you mean?
Mr. Makovich. The retail pricing pieces. What has not been
done in the short run is there should have been more done to
bring additional supply in for this summer. And people say,
well, it takes 4 years to build a power plant. But the truth
is, I know people that can build barge-based emergency power
systems in the Houston ship channel, and within several months
could have that power plant--they could have hundreds of
megawatts of additional supply in various locations through
California. There were proposals to do that last year. Those
proposals were denied. There are, according to the California
Energy Commission, 5,000 megawatts of emergency backup
generation that we have never taken the legal and environmental
restrictions off temporarily to coordinate that supply to have
it available for this summer to help meet these demands. So
there are a lot of things that can still be done in the short
run, short of price caps, to help mitigate the blackouts that
are coming.
Chairman Lieberman. Dr. Borenstein, would you like to
respond to that?
Mr. Borenstein. Yes, I would like to respond to a number of
things. First of all, I think Dr. Makovich did not hear the
news, that in the last couple of days, there has been a lifting
of a lot of the environmental restrictions, and so a lot of
those backup generators are going to be allowed to run.
Chairman Lieberman. By the State.
Mr. Borenstein. By the State. They are heavy polluters and
that is certainly not the way I would go. If I ever asked
beyond price caps what the State should be doing, is pushing
much, much harder on conservation than we are pushing. We still
have buildings air conditioned to the point that people need
sweaters, and that is just crazy, given the situation.
I think it is really not accurate or at least not relevant
to say that half of the power produced in the west is not FERC
jurisdiction. Most of that is public power. In the case of
municipals, who produce their own power, those are not--they
generally are not ones exercising market power. It depends on
their net import or net export position. Most of that power is
produced by public utilities who are just consuming their own
power. So I think the argument that there is a lot of power you
could not control, is not a reason to implement price
mitigation. It is true that demand has outstripped supply, but
I really have to say, if Dr. Makovich's company is advising
companies and telling them that you cannot exercise market
power in this market, they need a refund, because if you are in
this market, and you own 4,000 megawatts of capacity in
California, and you cannot exercise market power, you are not
paying attention. It is really pretty straightforward. It is
something that many of us pointed out before the market even
opened. It is something that we have interacted with people at
these companies, who are certainly aware of their ability to do
it. They have argued that they are not doing it, but I think
that if that is the case, it is out of benevolence, which is
not how capitalist systems actually work well.
Chairman Lieberman. Let me ask one or more of the five of
you, who have advocated some sort of price relief by FERC on a
temporary basis, to respond--there was some mention of it, but
I would like to hear a little bit more about it--to respond to
the argument that price relief or price caps--although that is
a bad term; price relief or mitigation is better--if they are
imposed, they are going to cut off supply by reducing the
incentive for new power and new power plants by intervening in
the market in that way.
Dr. Kahn, what is wrong with that argument?
Mr. Kahn. The whole history of regulation of the electric
power industry has been one in which the effective regulation
on capacity has always been deemed to be one of encouraging
excessive expansion of capacity. There is no reason why, if you
set rates that insure an operator return on investment that is
sufficiently high to do so, that it will discourage
construction of new capacity. And it seems to be it is very
useful to look in history. People just say it and say it and
say it, but I was never aware of any contention--I was chairman
of the New York Public Service Commission and studied this for
50 years--that anyone has ever argued that had the effect of
retarding investment. On the contrary, it is a very well-known
phenomenon, which Paul Joskow has studied, and it is not always
empirically demonstrable, but I have never seen anybody argue
it had the opposite effect. The only thing that had the
opposite effect was, of course, the uncertainty in the 1990's
about what was going to happen.
Mr. Joskow. Senator Lieberman, let me take a crack at this.
I think the greatest danger right now to new investment in
California and the rest of the west is the continuing chaos in
the markets out there and the uncertainties about public
policy. The price mitigation programs that have been proposed
by a variety of different people, yield prices that make it
very profitable for new efficient generating plants to enter
the market. Those plants lined up for permits back in 1998 when
prices were very low. The new plants are 30 percent more
efficient thermally than the existing plants. They emit a tenth
of the nitrous oxide of the existing plants. There are just
enormous incentives, once those plants can get licensed, to
come in to the market, and many of them are being built in
California, and in Arizona, and in Nevada. So if this is done
effectively I think it will in fact, make it easier for
investors to commit resources to the west because they will
have a stable market and regulatory environment against which
to shoot at.
Chairman Lieberman. Let me just say it is an important
point, because we hear this in a host of different economic
areas here in Congress. The business community is always asking
for stability, predictability to base their judgments on. But
as both of you are saying, obviously, a price mitigation will,
under anybody's vision of it, preserve a healthy profit margin
for the producer. So, presumably the market will still be
there, sufficient to encourage them, particular with the
stability and predictability we are talking about, to get into
the business, which they are.
Mr. Joskow. Yes, indeed, and there is a very good study
that has been done by an economist at the California ISO, Eric
Hildebrand, which looks at exactly this question, if we kept
prices at the competitive levels that a number of us have
simulated, there is still a very healthy margin for new
investors. I would like to get us out of the game of placing
blame, of demonizing the suppliers, to recognize we have to do
something in the short run to keep the system from going out of
control, make long-run fixes, but to provide a stable
regulatory and economic environment for new investors to invest
in. I think that is substantially more important than
continuing what I think will be continuing chaos and the blame
game over the next 18 months if we do not take effective action
now.
Chairman Lieberman. Dr. Wolak, did you want to say
something?
Mr. Wolak. I just wanted to add something following up on
what Paul Joskow said. I think it is very important to bear in
mind the time lag that it effectively takes in a decision maker
deciding whether or not to build new capacity. What he is
interested in is not the prices right now, not the prices a
year from now, not the prices even 18 months to 2 years from
now, but the prices after the period when the plant is in the
ground and producing.
So following on what Paul Joskow said, if what we--the fear
I think of many firms is, what will happen in California if we
go through this summer and it is a complete implosion, then it
will be public power or whatever strange solution comes out of
the California initiative process and that will be the sort of
thing that I think will chase all investment away, because of
the fact that it takes 2 years to build a power plant. So high
prices now do nothing to signal new investment to come into the
market. It is the expectation of high prices 2 years from now
to 3 years from now, when that plant is in the ground and
operating, that cause me, as a rational firm, to invest in the
market. All you are doing by mitigating prices within the
interim 2-year period, is simply just not distorting any
investment decisions, but just reducing essentially the
punishment, as Professor Kahn said, that consumers have to bear
during that period.
Chairman Lieberman. Thanks. My time is up. Senator
Thompson.
Senator Thompson. Thank you very much Mr. Chairman. This is
a great panel, because we have so many people who are so much
more knowledgeable than we are, and it is always good when we
are struggling to try to keep up. I think maybe we are making
progress.
But on that point of investment, and listening to you talk
about that, it sounds like a rosy scenario compared with some
of the things we have heard from some people involved in the
activity. In a June 11 letter,\1\ Bear, Stearns' senior
managing director and chief economist Wayne Angell writes that
price controls are a recipe for disaster. He goes ahead and
makes the usual points, I guess, concerning price control, but
he says the confidence in the investment community has already
been severely damaged by California's regulatory policies, and
it will take time to repair the damage and regain credibility
with investors. The worst thing regulators could do at this
time would be to impose still more controls. A prepared
statement of June 13 from William C. Dudley,\2\ chief U.S.
economist, Goldman, Sachs; he says that price caps would deter
the type of investment in electric power generation and
transmission capacity that the State of California seeks to
encourage. The risk would rise because the imposition of price
caps is by nature arbitrary as to level, timing and duration.
If caps were imposed, this would increase investor anxiety that
the caps could in the future be lowered, broadened, extended,
in terms of duration. He says, ``In my view, the solution to
the California energy crisis lies not in price caps, but in
encouraging the installation of additional electric power
generation and transmission capacity, and imposition of price
caps work against this.'' We may be comparing apples and
oranges here, but I would ask that these two statements to be
made a part of the record here.
---------------------------------------------------------------------------
\1\ Letter from Wayne D. Angell, Bear, Stearns and Co., Inc., dated
June 11, 2001 appears in the Appendix on page 556.
\2\ Prepared statement from William C. Dudley, Goldman, Sachs and
Co., appears in the Appendix on page 558.
---------------------------------------------------------------------------
Chairman Lieberman. Without objection.
Senator Thompson. People in the community are concerned
about the attractiveness of California in the current
environment as far as future investment is concerned. It seems
to me that it is important to understand the nature of the
problem, complex in some respects, not so complex in others,
perhaps. It seems from all of you have said, and other experts
have said, that we do in fact have a system, that is not
working and from the very beginning, had inherent flaws: Retail
caps, which went against our need for conservation; utilities
with no ability to enter into long-term contracts, had to
operate on the spot market, which looked good at the time, and,
well, looks good today, as I understand. Now that California
has gone to long-term contracts, the spot market is down. So
they are buying high and selling low in both respects.
Insufficient capacity, perhaps insufficient infrastructure,
weather, all these problems come together. But in looking at
all of that, and listening to these comments, would anyone
disagree with the proposition, that as a part of this mix,
California needs to allow retail prices to rise more and be
more consistent with the actual cost?
Mr. Kahn, if I understood you correctly, you referred to
ridiculous freezing of retail prices. Mr. Borenstein, you
talked about the need for conservation. I do not see how we can
get there without that. Does anyone disagree with California's
need to do that?
Mr. Wolak. I think it is important to make the distinction
between the cost, prices that reflect cost versus prices that
reflect what people offer the power at. So I do not think
anyone would disagree that prices that reflect cost should be
passed on to consumers. The big debate is over exactly the
extent to which the prices that are currently being charged in
the market, are reflective of cost, because of the fact that
there is the standard under the Federal Power Act that says
that rates must be just and reasonable, and one way to obtain
just and reasonable rates is rates that recover costs, and as I
said with the various studies that have been done by the
various members of the panel here----
Senator Thompson. Even if the retail prices were what you
feel like they ought to be, without the influence of market
power, would you still not agree that the idea of retail caps
was a bad one?
Mr. Wolak. I think the other thing to remember with the
retail caps is this is not something that is unique to
California. This exists in every market that has been
restructured in the United States. The other thing that I think
is important to remember from the retail caps----
Senator Thompson. Retail caps, letting alone the wholesale
prices----
Mr. Wolak. Fluctuating wholesale prices and----
Senator Thompson [continuing]. And caps along these lines?
Mr. Wolak. Yes, it exists in PJM, New England, New York. It
is just the only difference is, is the extent to which there is
an outstanding position on the part of the retailer to sell the
power to purchase from the spot market. And the other markets,
the extent to which they have to--if you like their net short
for energy--is much less. They own significant amounts of
generation capacity to meet their own loan obligations, whereas
California, because of the divestiture, had large amounts of
net short, and that really is a major source of the problem.
Senator Thompson. These other States that have deregulated,
for example, have allowed long-term purchases, have they not?
Mr. Wolak. Yes. California did as well. It is just that--
the unfortunate thing is that California allowed the investor-
owned utilities to do that. It is just that the incentives that
the investor-owned utilities faced at the time were such that
it was a good deal not to engage in long-term contracts, so it
is not an explicit prohibition.
Senator Thompson. Mr. Kahn, would you comment about the
efficacy of these price caps?
Mr. Kahn. Yes. Two things. One, looking at it now, of
course, it is clear that the imposition of rigid retail caps
was a mistake. At the time, it may have seemed a reasonable
bargain, because you will remember that 4 or 5 years ago, the
main concern was that the distribution companies, the big
electric utilities, would be left with stranded costs. That is,
the cost of over investment in capacity, the cost of those huge
contracts that they were forced to buy at artificially-set
prices, and so at the time, it looked like a bargain. You give
us the assurance that we will be able to recover our stranded
costs. In exchange, we will freeze retail prices. So we have to
be a little bit gentle. The fact is, after the fact it has
proved to be a catastrophe from the point of view of the
companies who in effect----
Senator Thompson. There comes a point in time in which
public officials, theoretically, should be able to perceive
that it was a bad idea.
Mr. Kahn. I think that is right.
Senator Thompson. Mr. Makovich, do you have a comment?
Mr. Makovich. Well, I think the idea that this problem can
be solved simply by long-term contracting is one that is also a
fairly dangerous idea. There is a couple of problems there. One
is, suppose we got 80 percent of people to voluntarily contract
long run of their demand in California. If then we rely on the
spot market to supply the rest of it, and people will not build
on the basis of the spot market, which we have already seen,
and we come up short again. We do not have the capability to
cut off the customers that are covered under long-term
contracts versus those that are not. So there is an enforcement
problem here, because when we shed electric customers in a
blackout situation, we shed circuits. We do not differentiate
one customer to the next.
Second, if long-term contracts are the solution, and they
keep the market in balance because the price is high enough to
cover all the cost of a new power plant, power marketers are
going to attack them because they are going to be able to buy
on the spot market that clears on short-run costs, and they are
going to be able to have a short position, sell long term----
Senator Thompson. You are getting a little down into the
weeds for me. [Laughter.]
Mr. Makovich. Right.
Senator Thompson. I am not making a case for long-term or
spot. I assume you need both. What I am trying to get at is a
decent analysis of the structural situation that underlies this
and presents the problem.
Mr. Makovich. Suffice it to say, long-term contracts alone
will not solve the problem we have in California.
Mr. Borenstein. If I can answer on retail rates, I very
much agree with you, and we were very slow in California to
raise retail rates, and I am fearful that as the bills arrive
in the next few weeks, particularly residential customers are
going to find out their bills did not go up very much because
they did not on average. But I think it is important to
recognize that electricity is not a storable good. The cost of
providing electricity is something that varies hour to hour
tremendously, even in a completely competitive market.
Senator Thompson. So these great spikes we see, I
understand, are just momentary.
Mr. Borenstein. Right. We have deregulated the supply side
of the market and have not deregulated the demand side of the
market in the way we really need to to make that work, and that
is with real-time pricing. That is, prices that are sent
through reflecting the rate, the real rates. If all we do is
just raise the flat retail price you are going to be facing an
incredibly high price in the middle of the night which is way
too high, and the same price on a hot summer afternoon when it
is way too low. What the real mistake California did on the
retail rate is not the freeze, I would say, although I think
that is a big part of the problem, it is that we did not get to
pricing on the retail side that really reflects the scarcity.
Senator Thompson. Can I impose on the Chairman, and ask Mr.
Joskow to respond to that also?
Chairman Lieberman. Sure.
Mr. Joskow. I agree completely with Mr. Borenstein, who by
the way, was my student. I think California was too slow in
increasing retail rates, but I also think it is important to
make these markets work, that at least some significant
fraction of demand be on real-time prices.
Just to give you an example from June 2000. On June 8, the
demand was low and the price was $50. On June 13, 2000, demand
spiked and the price went up to $750. You cannot respond to
that if you are not seeing those prices, and if you get your
bill a month later that tells you that you paid that. One of
the things that makes markets work is that consumers can say no
when they see a high price. If you go into a restaurant and you
see on the menu that a hamburger is $85, you say I am not going
to have a hamburger. I will have a tuna sandwich, or I will
have a salad. You cannot do that now in these electricity
markets, and they are just not going to work until we implement
these kinds of strategies.
We have made a lot of mistakes. There is a lot of blame to
go around, not just in the west. In New England, in New York
and PJM, this was much harder to do than a lot of people
thought. We need State and Federal regulators to work together
to fix these problems, not just in California, but elsewhere in
the country, and I think that really is the big issue, not
finding blame. There is plenty of blame to go around. But to
get FERC, to get the State commissions, to get the reliability
councils together to make the system work in the short run and
the long run. I think we can mitigate prices in California this
summer if we take that approach. I agree with Frank Wolak. It
would have been better if they had followed advice that was
given to them by the Market Surveillance Committee last summer.
But FERC essentially ignored the Market Surveillance Committee.
But here we are. It is June 13. The summer is upon us. We have
got to work quickly together to get us through this summer and
probably next summer, while we do not forget that we need to
fix the longer run problems as well.
Mr. Kahn. This is not a new idea, 25 years ago the price of
electric power on Long Island was 5 cents a kilowatt hour,
morning, afternoon, evening, summer, fall, winter, and spring.
By the time I left, we had all big commercial and industrial
consumers on time-of-day meters, and the prices ranged from 2.5
cents at night to 30 cents when the thermometer got above 84
degrees. That was 1976.
Mr. Joskow. Fred was being modest when he said he knew
nothing about electricity. He was the chairman of the Public
Service Commission in New York, and in fact, implemented these
ideas in New York State.
Chairman Lieberman. Thank you both. Senator Carnahan.
OPENING STATEMENT OF SENATOR CARNAHAN
Senator Carnahan. Yes, thank you, Mr. Chairman.
I realize that our topic today is about energy in
California, but I want you to know that the people of Missouri
are very concerned about the energy picture as well. They have
watched as the crisis has unfolded in California, and they have
worried also as their own fuel prices have spiraled. I have
heard from a number of people whose natural gas bills have
doubled, and in some cases tripled, just since last winter.
Many of them are seniors on fixed incomes and working families
who are barely making ends meet.
So as we talk about the economics of the electricity
industry today, we should be mindful that this discussion is
about far more than just competing theories. And it is about
more than beliefs in free markets. It is about the everyday
lives of real people and the impact that our decisions have on
them.
The price spikes in many States, combined with the crisis
in California, and the current debate about a national energy
policy, have caused confusion and anger all across America. In
the past, most of us purchased our electricity from a single
regulated utility. State agencies determined the utility's cost
in producing the electricity, added a reasonable profit, and
set the price charged to consumers. Changes in the electricity
industry, including technology, have allowed us to consider new
deregulated systems. Under such a system, consumers would
choose from whom they wished to buy electricity. Many have
argued that competition should lead to lower prices, but
California's experiment with deregulation has caused serious
doubts among many Americans.
Whatever the original cause, California's problems have
been compounded by the hands-off approach of FERC. Instead of
vibrant competition, California has suffered from shortages and
skyrocketing prices.
Does this mean that deregulation is bad policy? No. We may
very well conclude that the best interest of the American
people are served by deregulated electricity industry, but I
think we must ask a very fundamental question. Is a deregulated
market the same thing as a competitive market? I think
California's experience shows us that the answer is clearly no.
Obviously, the deregulation must be approached with
caution. The transition from a regulated industry to a
competitive model is a process that will require a willingness
to make adjustments. When the initial approach proves
unworkable, corrections must be made. During that transition,
we must ensure that someone has both the legal authority and
the will to look out for the purchasers of electricity. Thus
far, the sellers have proved adept at protecting their own
interest.
Undoubtedly, as academics, each of you will continue to
study the wisdom of California's approach to deregulation for
some years to come. However, one thing is clear today: The
responsibility for insuring just and reasonable prices in the
wholesale electricity marketing in California and around the
Nation lies with the Federal Government and particularly FERC.
As you may know, Senator Lieberman and I recently wrote to
the General Accounting Office to express our concern about
recent reports that market power has been abused in California.
It is alleged that this, in turn, has contributed to the
spiraling cost of electricity in the State. We have asked the
GAO to use its oversight authority to review whether FERC is up
to the task of ensuring just and reasonable rates.
The recent debate has centered on whether FERC should take
measures to help ease the pain during the transition to a
competitive market, and I hope that today's discussion will
continue to shed light on that question.
I believe that part of the long-term solution to
California's problems lies in additional infrastructure--more
generation and additional transmission capacity. Some have
argued that any transitional efforts by FERC would disrupt much
needed investment. I must tell you that I am not entirely
convinced by that argument. Pennsylvania is often held up as an
example of how to manage the transition to a competitive market
correctly. I find it interesting that there are price caps on
both the wholesale and retail markets in Pennsylvania during
the transition.
I understand the need to protect incentives for investment.
However, I must question how much incentive is required. It
seems to me that the profits of the energy companies are more
than adequate incentives to be a part of this industry. For
example, last year the operating income of Enron, a Houston-
based energy company, rose 140 percent from the previous year,
from $802 million in 1999 to $1.953 billion in 2000. By
comparison, Anheuser-Busch is a Missouri-based Corporation with
a reputation for being a very well managed company. Last year,
they experienced outstanding sales and growth. Their operating
income grew by 8.4 percent, compared to Enron's growth of 140
percent. Last year, the S&P 500 declined by 9.1 percent.
Anheuser-Busch outperformed the index with a return of 30.5
percent, but Enron surpassed the S&P 500 with a whopping 89
percent return. This level of return indicates that the
incentives to invest in the energy sector are firmly in place.
I believe we can reasonably conclude that this will result
in additional supply. Once this additional supply is in place,
I would hope the market would level out. So my concern is how
we protect the interest of the consumers during the intervening
period. As we make the transition to a truly competitive
market, who will ensure that prices are just and reasonable?
Thus far, FERC's response has been timid. In my view, this will
not do. I hope that today's questions and answers will provide
insight into how the Federal Government can play a constructive
role in relieving this temporary but extraordinary crisis.
Mr. Chairman, I am having to leave in just a moment, but I
would like to ask Mr. Borenstein one question before I do.
As you know, many States are examining the deregulation
proposals now. These States may continue to believe that
competitive electricity markets can provide long-term benefits
to consumers. However, they are concerned about what is
happening in California. You have researched the situation in
California extensively, and based on your research of what is
happening there, what lessons can States like Missouri--that
have not yet moved to deregulation--what can we learn? What
guideposts should States use as they design a deregulation
process?
Mr. Borenstein. Well, there are a number of things that I
think we can learn from the California experience. And they
almost all fall under the general notion of making sure that
there is the infrastructure support for having a competitive
market. If you are going to move to a competitive market, you
have to make sure that the supply side of the market will be
competitive. To do that you have to have analytical tools that
will let you look into the structure of the market and what
sort of prices it will yield. In fact, these tools were around
in 1995, and many of us were suggesting FERC use them, and FERC
ignored them, and went ahead using a completely antiquated
approach of simply looking at the market share of each player.
But if you use the right tools, you can see how much
divestiture into separate companies would be necessary to get a
competitive market. At the same time, you have to have price
responsiveness. You have to be willing to let people see the
prices, and as I said to Senator Thompson, you have to be
willing to let the people see the prices in a way that reflects
in real time what is going on so they have an opportunity to
respond to those prices.
Then of course you have to have the infrastructure to
actually carry the power around. One of the mistakes that
California made, which has not really come to the fore yet, but
will in the next few years, is that we deregulated without
having a real vision of how to invest in transmission capacity
in a deregulated market, and transmission investment, as a
result, has virtually come to a halt. So we really do need to
have a system that will beef up transmission and will then
price power appropriately at each location in the system. If
you do that, if you make sure you have a competitive supply in
the market, if you make sure you have a demand that can respond
to prices, I think you can go forward with electricity
restructuring that can really work. At the same time, you do
want some fall-back position, and the way you get that is as
you enter restructuring, you have long-term contracts in place
or ownership by the regulated utilities, that are effectively a
hedge. One of things I pointed out in Pennsylvania is
Pennsylvania has had huge price spikes. It is just that
Pennsylvania buys very little power on the spot market because
they have effectively hedged, because the utilities continue to
own almost all of their capacity.
But I think if you follow that recipe, it is still a recipe
for success and eventually for benefits to consumers in
electricity markets.
Senator Carnahan. Thank you very much.
Chairman Lieberman. Thanks so much, Senator Carnahan. I
just want to indicate that I appreciate that you were one of
the first to draw this subject to my attention anyway. I know
our staffs have met with GAO, and we hope for some kind of
interim report in the next three or 4 weeks to our request.
Thank you. Senator Collins.
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. Thank you very much Mr. Chairman. I have
really enjoyed this hearing today and the chance to hear such a
distinguished panel of economists present their divergent views
on this issue. I think that the competition that we have seen
among ideas here is as important as the competition that we
hope to see among electricity generators.
I do want to take advantage of this opportunity, as the
Chairman has suggested, to share with the Committee some of my
thoughts on this issue. Many of our States, including my home
State of Maine, are striving to promote more competition in
electricity markets. Maine was one of those States that
pioneered this and plunged very early into the brave new world
of deregulation. Competition in properly functioning markets,
should, over the long term, result in cheaper prices, better
service, and more innovative products for our consumers. Since
price caps limit competition, they should be avoided in
properly functioning markets. Unfortunately, however,
electricity markets do not always function properly, and, as we
have seen, California is a clear example. California's
electricity markets are not functioning correctly because they
were not set up correctly. When you do not allow retail prices
to rise in the face of electricity shortages, you are setting
up a flawed system. It is clear to me, based on the testimony
we have heard today, that California needs to restructure its
market to remove artificial barriers that inhibit the
marketplace. Even in an electricity market without the kinds of
major design flaws that we have seen in California, however,
there are still some factors inherent in the nature of
electricity that can cause the market to function improperly.
Because electricity is generated and consumed simultaneously,
and cannot be meaningfully stored or inventoried, there are
essentially 8,760 hourly electricity markets each year. Even if
the markets work most of the time, there may be hours when,
because of an imbalance between supply and demand, they are not
workably competitive. This can lead to incredibly high prices.
Since it is impossible for most consumers to respond to high
hourly prices, the sellers of electricity can raise their
prices an unlimited amount for short periods.
I want to give you an example that affected my State last
year. During a few hours last May in Maine and the rest of New
England, the price of electricity in the spot market went to
$6,000 per megawatt hour. That is more than 100 times its usual
level, and, as Dr. Kahn and others have pointed out today, very
few customers saw this price spike in a timely way. They could
not adjust their demand. They could not respond by turning off
their air conditioners for a few hours, or waiting until later
to do their laundry. So in this instance, in my judgment, the
market simply did not work. Subsequent to this price spike,
FERC imposed a price cap of $1,000 per megawatt hour in New
England during periods of significant supply shortages. Given
its limited applicability and the extremely high level, this
cap seems to me to be a reasonable response. Furthermore, there
is no evidence at all that it is deterring new plant
construction in our region.
I want to emphasize that ultimately our goal by speaking is
to alert the consumers, not just in California, but in the
Nation as a whole. In Maine, homeowners and businesses alike
are burdened by some of the highest electricity rates in the
country. In fact, one of the reasons that Maine jumped into
deregulation early was the hope and the elusive promise that it
would lead to a lowering of electricity rates since we have
always been at a competitive disadvantage compared to other
regions in that area. Households are seeing their electricity
and other energy costs eat up more and more of their incomes,
and many businesses, particularly manufacturers, are seeing
smaller and smaller profit margins as more money goes to
purchase energy. Some businesses in Maine are even threatening
to move to other regions where electricity prices are lower. I
hope that we can succeed today in helping to identify solutions
for California, but I also hope that our goal is to identify
ways to lower electricity prices in the rest of the Nation. We
need to look closely, and we have looked closely, at the
lessons that we can learn from California, and we also need to
be careful that we do not blindly apply California-size
solutions to New England, which has been by and large very
successful in avoiding California-size problems. In fact, we
have had a number of new generating plants come online, and yet
we are still experiencing these distortions in the market.
In the final analysis if we are firmly committed to
competition, as I believe that we should be, we cannot seek
government intervention whenever the prices are high. But on
the other hand, we must recognize that electricity markets have
unique characteristics which may cause them to not work
competitively at times. Thus, in dealing with electricity
issues, I think we need to combine competition with common
sense. Finding the right mix, that which will lower electricity
prices for all Americans, is no easy task, but this hearing
provides a basis for us to try to strike the right balance.
I do want to ask Dr. Kahn a question, since I agreed with
so much of what you said in your statement.
Mr. Kahn. That is funny, Senator. I was going to say I wish
I had written what you just said.
Senator Collins. The approach you have suggested makes much
sense to me, as does the idea for short term carefully
constructed price caps. My one concern is that we have seen
price caps that were intended to be temporary, become
permanent. We have seen these results. And I like what you have
suggested about having them designed to be temporary, to
automatically sunset them and to make them inapplicable to new
capacity coming online. But, can you give us some more guidance
on what you think should trigger the expiration of the price
caps in the kind of scheme that you have described?
Mr. Kahn. There are only two ways that occur to me, both of
which I have mentioned. I like the idea of automatic sun
setting; that is to say, one makes a reasonable estimate of
what it takes for new capacity to come online and then requires
a reenactment, rather than requires an explicit repeal. So that
was the one that I suggested. We have been through a period 30
or 40 years ago where we tried to differentiate caps on old and
new sources of supply in the case of natural gas. And I think
we would have to say that was not a success, to put it mildly.
Whether that is feasible in these circumstances, I truly do not
know. Certainly, it is not a good long-term expedient. Power is
power is power, and it is absurd to have discrimination in
charges to different people. But some way of making absolute
the guarantee that new investment will not be subject to any
kind of--even if it is an arbitrary cap.
The only other observation follows partly from what I have
said. In electric power we have not had a problem of shortage
under regulation. On the contrary, regulation, by assuring an
adequate return on investment, has tended if anything, to
encourage gold plating of service, and having excess capacity.
Senator Collins. Which is why everyone thought it was going
to be this boon to consumers.
Mr. Kahn. That is why we thought we had such enormous
excess capacity, including by the way, the inflated prices that
the electric distribution companies were forced to pay to
independent generators. I think Dr. Makovich mentioned the
ridiculous prices under the Public Utility Regulatory Practices
Act. It has all been in the direction of encouraging excess
capacity. That is why I kind of bristle when people say yes,
but price controls always restrict supply. You have to look at
the particular situation. That is not true historically. But
other than that, I am really repeating what I said, different
ways of ensuring automatically that new capacity coming online
will not be subject to these.
Senator Collins. Thank you. Dr. Joskow, do you have
anything to add to that?
Mr. Joskow. Yes, Senator Collins, very briefly. By the way,
I would love to subscribe to your statement as well.
Let me talk about New England just to move across the
country. I remember those $6,000 megawatt hours very well, and
I think I paid for them in August. In New England I think we
can establish a relatively small set of criteria for when the
market is sufficiently reformed to remove price controls,
except perhaps for these kinds of damage control price caps at
very high levels, so that the price does not go to $1 million a
megawatt hour. So in New England right now we are in the
process of a major market redesign. There are specific items
that have to be completed. When they are completed, we should
be in much better shape in terms of operating the spot market
and dealing with congestion management. We have a number of
power plants in Maine, New Hampshire, Massachusetts and Rhode
Island that are in the process of being completed. The New
England ISO has a target minimum reserve margin. We are going
to reach that I hope next summer. That is another criterion.
Third, I think contract cover is important, that retail
customers and the entities that serve them, have substantial
contract cover. We are pretty good at that in New England right
now, and I think we need to stay at around 70 percent. Finally,
I would like to see us get about 10 percent of the load in New
England on real-time prices, really, some of their demand, so
they in fact, can see and respond to the $6,000 a megawatt hour
prices if they emerge again. I see those structural fixes being
in place over the next 18 months, and I am hopeful that the
markets in New England will really be working well then, and
that we can take off any of the heavy-handed regulation and
rely on continuing very, very light-handed regulation to ensure
that the markets work competitively.
Let me note that since last summer I have had more calls
from State officials in New England than I think I have the
rest of my life. Five of the six States in New England have
restructured radically. They did many of the same things
California did, and the people there are scared. We cannot do
what they can do in Missouri, which has not moved forward, and
I have been very, very pleased to see the kinds of cooperation
that the market participants, the ISO, the kind of cooperation
they have gotten from the public utility commissions in the
region, from the Governors of the States, from the attorney
generals. I really see people working together in New England
in a very, very constructive way, and I must contrast that with
the atmosphere in California. Maybe we are just more civilized
in New England. I do not know, but----
Senator Collins. I have always thought so.
Chairman Lieberman. We show a bipartisan agreement on that.
Senator Collins. That is right.
Mr. Kahn. I think it shows we can do a lot better if we
work together, rather than just screaming at each other. Thank
you.
Senator Collins. Thank you. Thank you very much. I really
enjoyed your testimony. It was very interesting.
Thank you, Mr. Chairman.
Chairman Lieberman. Thank you, Senator Collins, and thanks
for asking some questions about New England. Senator Voinovich.
OPENING STATEMENT OF SENATOR VOINOVICH
Senator Voinovich. I, too, have enjoyed the testimony this
morning. It may come as a surprise to you that Ohio is the
third-largest energy dependent State in the Nation behind
California and New York, and back in March 1999, in my first
State of the State address as Governor of our State, I called
for a comprehensive energy strategy to keep the lid on energy
and utility costs for our citizens, and to try and stay
competitive with other States that I was concerned would be
taking some of our businesses away because of the lower cost of
energy, particularly the State of Pennsylvania, which was one
of the first States to restructure. As a result of that effort,
we proposed and published the energy strategy report. That was
back in 1994, and we started to discuss the whole issue of
restructuring and did not pass the legislation until 1999, but
a lot of the heavy lifting in anticipation of it was done
during the 3 years prior to my leaving the governorship.
One of the major provisions in the restructuring effort was
that rates were capped during the first 5 years of energy
restructuring to protect our consumers, but we were careful in
terms of the rate because we had to recover stranded costs, and
we tried to get a reasonable return for our utilities, and it
has worked out, and we have had new energy producers come
online, several thousand megawatts, and have another 13,000 or
14,000 in the pipeline. The thing that bothers me about the new
facilities coming on is that they are all powered by natural
gas, and because of some environmental concerns, a new source
review and lawsuits that were filed by some folks in the
northeast, they have turned away from the use of clean coal
technology for our coal, and of course we are all aware of the
fact that we could be doing a much better job in terms of
taking advantage of nuclear energy in this country.
But the fact is that we have a crisis in California, and
everybody's wringing their hands, and I think California did it
the wrong way. They separated the major functions of the
generation transmission and distribution system. Three of
California's major utilities were required to divest large
portions of their generating capacity. They precluded major
utilities from entering into long-term contracts for
electricity supply and required that they sell their remaining
capacity on the spot market. I do not think they did it right,
and now the chickens have come home to roost, and they have a
problem.
The question I have for this panel is this: Does Congress
need to get into this and start passing legislation to deal
with this problem, or should we let this problem be worked out
through the traditional ways? Now FERC is involved. They got in
a little bit late, but they are involved in the process. Do we
need Federal legislation to deal with this, or should we leave
it to the system that we have in place? You were talking, Dr.
Joskow, about the governors and the utility commissions getting
together and working together. FERC is now involved. What is
your opinion about that? Should the U.S. Congress get involved?
Mr. Joskow. Senator, I think that is a very good question.
Ideally, I think no. I think FERC should enforce the law, and
if I could recommend anything, it would be perhaps a letter
from the U.S. Congress to remind FERC the Federal Power Act has
not been repealed, Congress has not just deregulated wholesale
power markets, that their job is to ensure that they work well
and to continue to oversight, of FERC, to get them to do their
jobs. I think in the longer run there are some questions in my
mind as to whether FERC is currently structured, both in terms
of personnel and its conception of its missions and its
procedures, to oversee the development of well-functioning
competitive electricity markets. I would like to see FERC
evolve more into an agency that is involved in monitoring,
identification of market failures, and mitigation. It is
structured as an agency that for almost 50 years basically did
rate cases when investor-owned utilities sold power to
municipal utilities. I think the agency needs to change. It has
got to be more like the SEC in monitoring these markets, and I
think that would be a very productive thing for Congress to
look at and to explore whether amendments to the Federal Power
Act are necessary to make that happen. FERC's responsibilities
are now very different from what they were only 5 years ago in
terms of the quantities of electricity, the amounts of money
and the nature of the industry. I think it does make sense to
revisit whether that agency is properly structured and whether
its objectives are properly focused on the new world rather
than the old world.
Senator Voinovich. Thanks. Dr. Hogan.
Mr. Hogan. Senator, I think this is a very good question.
Legislation by the U.S. Congress at this point would be
premature, and I think it is because the problems that you are
dealing with here are so complex, that trying to prescribe the
solutions that are going to be applicable for California and
the rest of the country, cannot be done through legislation. We
have an example of that going on in the discussion here today.
When Fred Kahn introduced into economist lexicon the term
``banana'', because of the difficulty of getting the ideas
across, he was talking about, as I recall, a situation where he
wanted the same idea but a different name, because he wanted to
be able to talk about it politically. I think what is going on
here is we are talking about different ideas and putting them
all under the same name, and people are very confused as I have
heard it in the discussion today. For example, Senator
Lieberman said that five of us were in favor of price
mitigation. But I think, at least for part of the discussion,
when I heard Paul Joskow talking, he was talking about market
failure mitigation, and that is a helpful contribution to this
discussion. I am in favor of market failure mitigation, and I
described a mechanism, the bid cap scheme, that FERC has been
pursuing that is directed at that problem. It may lower prices.
It may not lower prices. It is not targeted at price
mitigation. That is not the objective, and I do not think it
should be the objective. I think correcting the market failures
as quickly as possible should be the objective and that is
something that is not a good thing for the Congress to try to
do. That is something you need FERC to do. And then when you
look at FERC--I agree with Paul Joskow's observation. I do not
have any question in my mind about it. I do not think that the
commission is able to deal with these problems at the moment,
and I think they have been going in the wrong direction.
FERC's responsibilities have changed in reality, if not in
their perception, and their responsibility has to be to design,
and make sure that people adopt the rules for effective
markets, the kinds of market infrastructure that Severin
Borenstein has been talking about. They have been very slow to
do that, partly because they feel confused by these very
complicated problems. And if they are confused by these
complicated problems, imagine what it would be like trying to
write legislation. So the real challenge is to beef up the FERC
staff and change their mindset.
Senator Voinovich. One of the issues that this Committee
has been dealing with, and I have been addressing in the
Subcommittee on Oversight of Government Management and
Restructuring, is the human capital crisis that we have in the
Federal Government. I would be interested in your observations.
If it is like some of the other agencies, such as the Nuclear
Regulatory Commission, for example, the number and quality of
people really needs to be punched up if we expect it to do the
job that it is supposed to be doing.
Mr. Hogan. They have some very good people at FERC, but
they do not have enough, and they need more, particularly
people trained in markets and able to deal with market design
issues. They increased the size of that staff to reorient the
agency and to make the Commission take it on that it has a new
job--market design.
Mr. Joskow. And let me give you a couple of good examples.
The Federal Trade Commission has a large economic staff that is
fully integrated with the lawyers and others in enforcement and
investigations. It is considered to be a prestigious place to
spend a couple of years if you are an economist. The Antitrust
Division of the Justice Department is a similar type of
arrangement. FERC has lost some very good people in economics
and markets, and they never really had enough. I really think
that we should look at other agencies that have been
successful, like the Federal Trade Commission and the Antitrust
Division, to see if we can bring the best skilled people to
bear with the appropriate focus. I do think there are
compensation issues that have to be addressed. It is one thing
for me to come and spend a couple of years, take a leave from
MIT and spend a couple of years. It is another thing for a
civil servant to spend his or her whole life in the agency. We
need to recognize and compensate these people, as well as to
make it a rewarding professional experience for them.
Senator Voinovich. Dr. Wolak.
Mr. Wolak. I guess on your first question, what I would say
is, I think that the same fundamental problem is going to arise
again and again in competitive electricity markets until the
following issue is addressed, is that competitive markets do
not, by their very nature--or markets, rather, by their very
nature, do not yield just and reasonable prices. And having in
the Federal Power Act, a standard that rates wholesale
electricity prices must be just and reasonable, is really in
some sense incompatible with a market, because it creates, I
think as Senator Thompson said, ``this sort of incentive of OK
we will do what we do, but if things go really bad because of
the just and reasonable rate standard, we will get bailed by
the Federal Government.'' So if I was going to say the one
thing that would be necessary is to essentially either get rid
of it, of that standard in the Federal Power Act, and say,
look, in a market, prices will be what prices will be, so you
need to take the precautions necessary in advance to make sure
that those sorts of eventualities do not occur, and then I
think the market will work. But if you create the sort of
circumstance where there is this just and reasonable rate
standard, then you always have this problem that I always have
the recourse, and in some sense, that is to me the fundamental
incompatibility between a competitive market and this just and
reasonable rate standard.
Senator Voinovich. Any other comments?
Mr. Borenstein. I had one comment. I know personally of a
couple of economists who have gone to the FERC, and
compensation is an issue, but I think the much bigger issue is
the mindset. The economists and the policy analysts at the FERC
have not really had enough influence on decisionmaking. I was a
staff economist at the Civil Aeronautics Board during airline
deregulation. I was lucky enough to work under Professor Kahn,
and I was lucky enough to work at a time when we were going
through deregulation and we were spending many days sitting
around, saying, ``Well, if I were an airline and these were the
rules, what would I do trying to make as much money as I can?''
And just walk through that analysis. Had the FERC had people
who were doing that and were being listened to in 1996, we
would not be here today because there were many people telling
the FERC, ``If I were a generator and you set up these rules,
here is what I am going to do.'' Unfortunately, FERC did not
have that mindset. FERC had the mindset of, ``We have a legal
process we go through. People file documents. We read them,
etc.'' FERC really needs to get the staff, and to listen to the
staff, who are going to do that sort of policy analysis. And if
they do that, I think they can be quite successful.
Senator Voinovich. Thank you.
Chairman Lieberman. Dr. Makovich.
Mr. Makovich. My final comment on that. I think what you
see here is a general consensus that the California market was
set up flawed. Because it was so complicated and difficult to
do, it was not done well. What we have also, I think, agreed on
here, is it has not been fixed, and price caps are a Band-Aid,
not a solution to the problems there. So the role of the
Federal Government, either through FERC or legislation, is to
provide leadership here on how power markets have to be set up
right, and there are a minimum set of structural requirements
that we have to have in all power markets to avoid the market
failures that we have been talking about.
Chairman Lieberman. Thanks, Senator Voinovich. That was a
very interesting series of questions, and they really go right
to the heart of the Committee's oversight role, because what we
are really overseeing here is not the California or Western
energy crisis that happens to engage us, but it is what is FERC
doing about it? And I appreciate the comments you made about
the role of staff within the agency, and there is no question--
may be one of the unexpected results of this crisis is that
bright, young economists will think about going to work at
FERC.
Mr. Borenstein. Well, bright, young economists did in the
last few years, and they were there for a year, and they left.
Chairman Lieberman. That has to change then.
Senator Thompson. Speaking of the jurisdiction of the
Committee, I am reminded of the fact that it is very relevant
to another subject we spend a lot of time on, and that is
federalism. Here you have the classic question of what should
government do and at what level should it do it? We have got a
State responsibility and a Federal responsibility, and they
overlap somewhat. Each is trying to cast responsibility on the
other side, and each wants perhaps the best of all worlds. It
is a fascinating federalism issue.
Chairman Lieberman. True.
Mr. Kahn. A very brief answer, if I may, to Senator
Voinovich is, that this is an oversight committee, and I have
had 6 years of experience in two places with oversight
committees, and legislation, I do not think you could get any
agreement right now what the legislation would be. But inducing
the kind of discussion and thinking that is going on, or should
be going on here, I think that is where you all play a very
essential role. Everybody seems to agree with that.
Chairman Lieberman. That is certainly my hope here. I would
rather that we not have to go forward with the legislation,
that FERC provides a response that is adequate to the occasion,
whatever that might be. So thank you. Senator Carper.
OPENING STATEMENT OF SENATOR CARPER
Senator Carper. Mr. Chairman, I apologize to our panel and
to my colleagues. I have been presiding over in the Senate
during the debate on education, and I have missed, with the
exception of Dr. Kahn's comments, I have missed all of your
comments, and I will not ask you to repeat yourself, but I will
ask you to do one favor for me, and sort of provide us with a
benediction. I like to say sometimes when I am speaking to a
group, I try to tell them what I am going to tell them, I tell
them, and then when I finish, I tell them what I told them. And
we are at that point where I am going to ask you to tell us
what you told us.
What I want to do is this. I am going to ask each of you to
take maybe a minute, tell me where you agree. Tell me,
throughout this panel, where you agree and what is the
appropriate role for us in the Federal Government, in the
Senate, where is the consensus? And I will just start with you,
Dr. Borenstein.
Mr. Borenstein. You want to specifically focus on what the
appropriate role of this Committee is?
Senator Carper. The Federal Government, where is your
consensus? No, where is your consensus of the role of the
Federal Government?
Mr. Borenstein. I think the consensus is that California is
in the midst of a crisis this summer, that a lot of it needs to
be done at the Federal level. I think there is near consensus
that the FERC can do something to help mitigate prices for this
summer, and I think there is widespread consensus that that
should not be a long-run tool that the FERC should be using.
Senator Carper. Is part of that consensus that the FERC has
every authorization that they need to proceed without our
legislating?
Mr. Borenstein. I am not an expert in that area, but it is
certainly my impression that the FERC, if they wanted to step
up to the plate, would have all the powers they needed to.
Senator Carper. Thank you very much. Dr. Hogan.
Mr. Hogan. I think there is also a consensus that there are
a number of things that have to be done in California that have
not been done or done fast enough to raise prices to retail
customers, put in metering, get the demand side included in
this marketplace, and that is an urgent matter. It has been for
a long time, and it continues to be. This is something FERC has
relatively little control over, but it is something that
California has a lot of control over. And then fixing the
market design, which has been a problem since day one of
operation of this market, not just this last year, should be
completed, and that is a problem not just in California. It is
a problem in the west. It is a problem in the midwest, the
southwest, the southeast. About the only place that has, I
think, a workable market design is the northeast.
Senator Carper. Good. Thank you, sir.
Chairman Lieberman. Here here.
Senator Carper. When I was leaving, Dr. Kahn was saying
that there was somebody on the panel who was his former
student. Is that you?
Mr. Joskow. It was me.
Senator Carper. I noticed when he spoke, your lips moved.
[Laughter.]
Chairman Lieberman. In the interim, Tom, Dr. Joskow
indicated that Dr. Borenstein in turn was his student.
Senator Carper. And Dr. Borenstein then told us that he
worked for Dr. Kahn at the CAB, so it is a little bit--pretty
incestuous, is it not?
Mr. Joskow. Senator, I think there is actually a lot of
agreement on this panel. We all agree that the markets in
California and the west are broken. There is a lot of blame to
go around. We agree that there are both long-term problems and
short-term problems. We agree that FERC has the authority and
needs to do a better job in fixing both short-run and long-run
problems. I think a majority of us agree that mitigation
options exist for this summer that are important both to
protect California consumers as well as to convince other
States that are on the path to restructuring competition, that
Federal officials will not abandon them if they have problems.
We agree that these mitigation methods have to be designed
sensibly, that they can be designed in a way that does not
deter investment in new generating capacity, and I think on all
of those things, I think most of us agree. We have some
differences as to exactly what is wrong, exactly how much of
the price increase is due to market failures, market power, and
how much is due to higher gas prices and higher demand, and
higher NOX credit prices and so on.
But I think what you are hearing from this panel is that
FERC needs to step up to the plate, they need to become
informed, they need to do something. And I would add my
personal view, just looking at this over the--I do not know if
there is agreement--over the past year, there has been too much
screaming and too much paper flying back by Federal Express
written by lawyers, back and forth between Washington and
Sacramento. And I really would like to see the technical people
at FERC be able to get together with the technical people at
the ISO, with some of the economists in California, have a
series of technical conferences and work out some fixes for
this summer. I think this is not as hard as everybody has made
it. We need to have a more cooperative spirit here, and as I
said when you were out, there is plenty of blame to go around,
and let us all accept the blame and let us move forward. I just
think we can do much better.
Senator Carper. Well, as one who was trained as an
economist, not as a lawyer, I do not take any umbrage to which
you just said here. Dr. Kahn.
Mr. Kahn. I really do not have much to add to what the
people on my right have said. I do not think that legislation
is necessary. You have got the provisions of the Federal Power
Act now. It seems to me that the oversight function of getting
FERC here and saying, ``OK, there are your responsibilities,
what are you doing about it?'', is terribly important. You are
never going to get complete agreement about in what respect
these designs were perfect or imperfect, so there is a very
wide range of agreement. I am curious that no one has raised
the question about whether it was wise totally to require the
generating companies to divest their--I mean the distribution
companies to divest their generation.
Mr. Borenstein. I think there is agreement it was not wise.
Mr. Kahn. Obviously, it was not undertaken lightly. No one
has raised it. Obviously, if you still owned all the generation
and you were still regulated at the distribution level, the
situation would be very different.
The one area in which we may not have come sufficiently
close to agreement, but we have never really encountered, is
that there have been studies by people like Dr. Borenstein and
Professor Joskow, which purport to find definitively that there
has clearly been evidence of withholding, of exercising market
power, and I have not seen anybody directly challenge that
except The Wall Street Journal, which published an editorial
saying he left out five other causes--the price of natural gas,
the cost of NOX emissions--well, read his letter in The Wall
Street Journal today. As Paul says, I looked at every one of
those things. I mean, The Wall Street Journal is still trying
to get President Clinton impeached. It paid no attention to the
fact that he had done all these things, and so I have been
acting in part on the belief, and I think Frank Wolak has done
the same thing, that there have been people who have found that
there has been a market power problem here. Well, mitigation of
that is surely something you have the right to demand of an
agency that operates under your jurisdiction.
Senator Carper. Mr. Chairman, thank you. I really want to
thank you for being here today and for your good work over the
last several decades, as well as training a whole new
generation of economists. Please.
Chairman Lieberman. Senator Voinovich, did you have
something you wanted to say?
Senator Voinovich. I was just going to comment that I think
that Dr. Kahn, as one who has observed this whole area for many
many years, has two students, or one student and one indirect
student here, has made a great suggestion, and probably the
most positive thing that you could do as Chairman of this
Committee is to bring FERC in here and have a hearing and have
them respond about what they are going to do about it.
Chairman Lieberman. And in fact, they are coming in next
Wednesday on the 20th.
Senator Voinovich. Good.
Chairman Lieberman. That is exactly what we would want to
do. And I do want to repeat, I hope that FERC will act in a way
that the move to have legislation adopted here ends, because it
is not the best way to do it, particularly in the short-term
case here where everybody is saying what is needed is temporary
relief. Those who are saying that any relief is needed, say it
is temporary relief, so I look forward to having them in--all
five commissioners will be here next Wednesday.
Senator Carper. Two more witness, please, if you would just
conclude. Go ahead. Thank you.
Mr. Makovich. I think there is a consensus here that power
markets are very complicated, and as a result, we have got
multiple flaws as we look to the California example in
particular, which means that there is no simple solution
including price caps, that it is difficult to fix in the short
run, and that there are however, examples of people that have
done things far better than California, like New England, and
Pennsylvania, New Jersey, Maryland, the way they set up their
markets.
Senator Carper. PJM?
Mr. Makovich. Yes, PJM.
Senator Carper. Glad you mentioned that. Thank you.
Mr. Makovich. This can be done right. Just to differ on--
there is not a consensus here that market power is the problem.
It harkens back to, for example, when we had the blackout in
1965, 9 months later The New York Times ran an article about
the record births at Mt. Sinai Hospital, and there were experts
that had testified or had reported to The New York Times that
there was reasons to expect that the blackouts had lead to
people become amorous. And it was 5 years later----
Senator Carper. I am anxious to see where you are going to
take this.
Chairman Lieberman. I may have to exercise the gavel on my
first day as Chairman.
Mr. Makovich. It was 5 years later in August 1970, that
there was a study done by the School of Public Health at the
University of North Carolina that went through all the data and
debunked the notion that there was a boomlet of births after
the blackout.
Mr. Kahn. How disappointing.
Mr. Makovich. Some of this outage data, we have to be
careful, that we may be misinterpreting it right now. It is
complicated.
Senator Carper. Thank you, sir.
Chairman Lieberman. This might have led to an appeal for
more blackouts, and we would not want to have that adverse
market effect.
Mr. Wolak. The advantages of being last is you do not have
much to say, but the only thing I would say is, to follow-up on
what Paul Joskow said, as the chairman of the Market
Surveillance Committee, which was, believe it or not,
established by FERC to be, if you like, the eyes and ears in
the California market, it was shocking to me that in sort of--
when the crisis sort of first started, there was absolutely no
communication with the Committee, despite the fact that we had
prepared over the intervening 2 years, numerous reports, had
analyzed the bid data, the production data, etc., so I really
think that, exactly, rather than the lawyers talking it out, a
very good thing would be a discussion among the staff at FERC,
as well as the market monitoring committee, as well as the
department of market analysis at the ISO, to essentially work
to formulate a solution that will help to make things work, and
I think there are a lot of very good and capable people at the
ISO that I think could very much help FERC do its job very
well.
Senator Carper. My thanks to each of you. I again apologize
for missing much of your testimony.
Mr. Chairman, thank you for indulging me and I am delighted
to hear, in response to what Senator Voinovich said, that we
have got all five commissioners coming in next week, and we
will look forward to that. Sounds like a great idea.
Chairman Lieberman. Thanks, Senator Carper. That was very
helpful to do that.
I think Senator Thompson and I at least, and maybe Senator
Voinovich, want to ask a few more questions. So that was a
great summary of what has happened.
I appreciate the focus on FERC, and it is interesting that
as this discussion was going on today. It was noticeably
different, and one of the reasons I think is that we have been
thinking at least here in very legalistic terms, because after
all, FERC operates under a law and we have been talking about
just and reasonable rates and what powers they have and should
have to exercise them. I think there has been a lot of common
sense here at the table.
I am curious about whether so much experience and good
thinking around the table--are any of you ever consulted by
FERC in what they do?
Dr. Borenstein. When FERC did their investigation last
summer, I am on the governing board of the California Power
Exchange and director of the UC Energy Institute, and I called
Scott Miller, who was the person--I guess one of the people
running that, and never was called back.
Chairman Lieberman. Dr. Joskow.
Mr. Joskow. When the California markets were being set up,
FERC, at that time in 1996 and early 1997, had a series of
technical conferences, and they invited me to speak. Indeed,
one of them involved setting up a market surveillance committee
at the ISO, and what data they should collect. And so one of
the great mysteries to me in all of this, is why they set up
these entities which were supposed to be independent, and then
for 2 years, ignored them. I thought that was a brilliant idea,
to sort of decentralize the monitoring, that Frank Wolak, Carl
Shapiro, who has been the chief economist in the antitrust
division is now at Berkeley. Al Klevorick was on the PX, and I
think it is a worthwhile question to ask FERC. You set up these
market monitoring entities. They have got great people on them,
they do good studies. Why do you not build on that and work
with them? And I have asked them that, and I do not understand
the answer.
Chairman Lieberman. We will ask. Let me ask another
question. I think I will ask Dr. Wolak this one, and invite
anyone else who wants to respond. There has been some concern,
as you know, that even though FERC determined last November
that the prices in the California market were not just and
reasonable, that they have done not enough regarding examining
past overcharges and providing refunds to wholesale customers,
which might make up for some of the high costs. Do you have a
reaction to that?
Mr. Wolak. I very much agree with that.
Chairman Lieberman. Excuse me. Dr. Kahn, you have to
depart, am I right?
Mr. Kahn. In a few minutes.
Chairman Lieberman. Thanks very much for being here. You
contributed----
Mr. Kahn. I apologize.
Chairman Lieberman. No, not at all.
Mr. Kahn. The people who deregulated those dammed airlines.
[Laughter.]
Chairman Lieberman. Thanks very much for coming.
Mr. Kahn. I am awfully sorry.
Chairman Lieberman. Not at all. We are going to wind up
soon. You were a great help.
Mr. Kahn. Thank you so much.
Chairman Lieberman. Dr. Wolak.
Mr. Wolak. I guess as I said, I definitely agree with the
viewpoint. In fact, I would go even further to say that
effectively FERC said that if there is market power, then we
will essentially order refunds of any rates that reflect the
exercise of market power. Unfortunately, effectively in my
entire 2 years, almost 3 years on the Market Surveillance
Committee, FERC has never determined what constitutes the
exercise of market power, in other words, what prices would
reflect the exercise of market power? What behavior on the part
of the generator would result in prices that reflect the
exercise of market power? So in many ways it is sort of looking
for something that you do not know what it is. So what we have
had to do, as well as Professor Joskow has had to do, is
essentially say, well, we will use the standard definitions
from economics to determine what are the payments in excess of
competitive prices and what reflects the exercise of market
power. But as far as FERC is concerned, even despite numerous
meetings with FERC staff and conferences with FERC
commissioners, a definition for what constituted market power
and what constituted prices that reflect the exercise of market
power, that definition was never given. So in some sense, it
makes it very simple never to have to confront that issue.
Chairman Lieberman. Anyone else want to speak to the
question of refunds? Dr. Makovich.
Mr. Makovich. The question of just and reasonable prices is
a difficult one for many reasons, but right now, the prices in
California with the shortage are too high, and that is why the
finding of just and reasonableness by FERC was that these are
too high. But we have to remember, when the California Power
Exchange opened, on its first day, there were hours when the
price of power cleared at zero. And it continued. That is
something that we have seen through time, that the price will
clear at zero. Is zero an unreasonable or unfair price to a
producer? And the point that has been made here, is if there is
a 4-year lead time on building power plants, the prices are too
high right now but this is not the right time to give somebody
a signal to build. It was 4 years ago that we had to give
people the expectation that if they build a power plant, they
could make money. And if the explanation was, sure, prices
clear at zero. They are averaging $14, but in the year 2000 and
2001, there will be an extreme shortage, and you will be able
to make all your capital costs back within just 2 years,
although you will be vilified as the cause of the problem, I do
not think you would have got a lot of investment. So there is
fundamentally still a problem here on investment incentives and
just and reasonable prices. Capping them now neglects the fact
that they are too high now because they were too low
previously.
Mr. Wolak. May I just respond to that? I think it is very
important to bear in mind that the zero prices he is referring
to were not really paid to anyone.
They may have been paid to small, small, small amount of
capacity sold, but primarily most of the times when those
prices of zero occurred, these were in a capacity that is
called ``must take'' and is being paid under a different
contractual arrangement as primarily setting the price.
So the other, I think, I want to also correct a few more
misunderstandings here is the statement that these prices were
too low. The average price for 1998 was not $18, it was above
$30. And, moreover, generators in California also have the
opportunity to earn ancillary service payments, which are
payments to provide reserve capacity that roughly average on
the order of about 7 to 10 percent more revenues to their
facilities. Moreover, generators in California also have the
opportunity to sign up for reliability must-run contracts,
which pay them large amounts of money in payments to provide
local reliability service, in addition to the prices that they
receive for energy.
So, I think we want to be very clear on all of the sources
of revenue for generators in California.
Chairman Lieberman. We seem to be replicating the ``Cross
Fire'' show on television.
Mr. Makovich. Just a quick one----
Chairman Lieberman. Just a quick one because I want to ask
one final question, though it is a good exchange.
Thank you.
Mr. Makovich. The $30 level is an average on-peak price.
Mr. Wolak. No, it is not.
Mr. Makovich. Well, even if it is across all hours----
Mr. Wolak. Yes, it is across all hours.
Mr. Makovich. You need something closer to $50 to justify
building a power plant, and not everybody gets ancillary
services. It depends on location.
Mr. Wolak. That is not true, either.
Mr. Makovich. The fact that nobody built power plants in
California has to make one wonder, if they built them in Texas,
and they built them in New England and did not build them in
California, maybe there was a problem with the investment
incentive.
Chairman Lieberman. Yes. Let me move on because I was
really asking about refunds, and we got off a bit.
The final question is the effect of what is happening. We
are all focused on California, but they are part of a regional
grid, and I know seasonally power generating facilities in
other States have fed into California. I was in Washington
State, where, I am sure you all know, they tell me some of the
aluminum plants have stopped because they are selling their
electricity and making more than they could making aluminum,
and people are out of work. So it is serious.
I wonder whether you think that FERC should be including
the other Western States in its response to the problems in
California and its regulatory response to the problems in
California.
Dr. Joskow.
Mr. Joskow. Senator Lieberman, if I might, I think to make
the mitigation program that I mentioned before, which is
extending the protocol FERC put into effect on May 29 to all
hours, it is essential that it apply to the rest of the region,
as well. This is the only way to deal with some of the problems
that Frank Wolak mentioned, involving essentially daisy-
chaining the power from one reseller to another.
So I would strongly recommend that if that is the approach
that FERC takes that, in addition to extending the number of
hours, that it include at least the other major control areas:
Arizona Public Service, Tucson; Nevada, Bonneville; Public
Service in New Mexico, in this program, and that is going to be
the only way to tag the power plants that are supplying the
power and applying their marginal cost base mitigation plan.
Chairman Lieberman. Dr. Borenstein.
Mr. Borenstein. Yes, I agree with Dr. Joskow that we really
do need to do this on a regional basis because there are a lot
of loopholes that can easily be exploited. I think it is also
important to recognize, when we get onto this investment
subject, I should also say, as director of the Energy
Institute, I do not do consulting for any private companies in
the business. So I have no financial interest here.
It really concerns me when we start talking about the need
to give firms capacity payments in order to get them into the
market. Economics tells us pretty clearly that if you have
competitive prices all of the time, you will get the right
investment. Now it is going to be pretty disruptive in the
electricity industry if you do not have a demand that can
participate, and that is why you want to have long-term
contracts and that is why you want to have demand
responsiveness.
But we need a regionwide approach to this, and we need to
recognize that the goal here is not the lowest prices in
history. The goal here is competitive prices that will
ultimately serve consumers, and sometimes those competitive
prices will be very low, and sometimes they will be high. The
goal is to make sure they are the competitive ones.
Senator Joskow. Could I add a note of history to this? When
I was at Yale, I taught economic history. The Federal
Government induced California to build long transmission lines
to link them with the Northwest in the 1960's: Two AC lines,
one DC line, and then in the 1980's a third AC line for the
municipal utilities, and they were encouraged to rely on the
Northwest for power and for the whole region to operate as an
integrated system.
One of the things that has happened as a result of this
crisis is that every State is trying to grab onto its power
supplies, which is just the opposite of what we hope to emerge
in competitive wholesale markets, and abandoning would have
been one of the best examples of regional cooperation anywhere
in the United States, and I really think that we do not want to
go back to a system where every State think it has to be energy
self-sufficient. It would be a terribly, terribly costly
mistake.
Chairman Lieberman. My time is up, but, Dr. Hogan, I want
to give you a chance to respond.
Mr. Hogan. On this question of extending the FERC order to
around the clock and to around the region, there are a number
of things you have to be very careful about in doing this. It
is not so simple.
The FERC order includes a requirement that people bid in,
under these bid caps that they have put in place, and it is one
thing during these emergency hours. But it would be another
thing during all hours. For example, there is the credit
worthiness problem. They also are going to require that they be
paid, and right now a lot of the problem is that people are not
being paid, and that is why they do not want to produce. And if
the Federal Government is going to mandate that you produce,
they have to address that problem.
Second, there is the problem of dealing with facilities
that have cumulative limits because of environmental
restrictions or any other kind of constraints, hydro facilities
and the like, where the amount that you can produce over the
year is limited, even though in any particular hour it might
not be. And right now the order punts on that because they did
not know how to deal with that problem, but they were only
dealing with it during shortage hours so it did not matter so
much. But if they go around the clock, this is going to become
a big problem that they are going to have to address.
Right now they have a system where they have discriminatory
pricing rules for inside California and imports and power that
is coming from outside California. That creates the opportunity
for the marketers to get around the rules, as they perceive
them, which I think is a good thing. The way to solve that
problem is to simply go to a single-market clearing price. As
Fred Kahn said earlier, when the imports are the marginal
supply, then you should use those to set the marginal cost, not
trying to set multiple prices for different markets.
If they extend to the rest of the rest, they are going to
have to deal with the problem of reserves. Do you want to draw
down the reserves in Idaho in order to satisfy California and
create reliability problems? These are not trivial issues and
they are going to have to be worked out. There are solutions to
these problems. They are going to have to get demand-side
participation into the system somehow, which so far they have
not been able to get in California, and that should be done
across the whole West, if they can get to it.
Chairman Lieberman. Thanks very much. I will think about
your answer. Senator Thompson.
Senator Thompson. Thank you very much, Mr. Chairman.
I think it is good that we have FERC in, but least we spend
all of our time concentrating on what they might could do with
what I read is about 50-percent of the power that we will be
dealing with, I think we need to understand that we are in the
midst of a political issue. I mean, this is something public
officials are going to have to decide, and I think until then,
we need to take a close look at what FERC's proper role in this
should be.
But until we have some acknowledgment that California will
allow its consumers to pay a little closer to what their energy
costs really are, instead of relying on other forces and
outside forces to do that for them, I think politically you are
going to have great difficulty on shifting responsibility all
on FERC.
I just do not think that when you look at all of the
factors that everyone acknowledged played a part: The
structural situation that they set up, the insufficient
capacity to meet the demand, the infrastructure problems, the
weather problems--you are just not going to get most people to
believe, I do not think, that all of this is because of wicked
suppliers in Texas. So we need to look at a whole part of the
picture. The governor will be here, and hopefully we will be
able to see whether we could get the State and the Federal
entities to agree that everybody needs to do a little something
here and have a more likely solution.
I want to ask one question, but I want to lead into it a
little bit. I want to ask about the risk of not getting this
cap situation right. In the first place, Dr. Hogan, do you
agree that there is near unanimity with regard to the role of
market power in this problem or do you think that is
questionable?
Mr. Hogan. I do not agree with that. I have looked at the
analyses of this study, and I have done some independent
analysis of some of the data that we can get in the public
domain. My position on it at the moment is that it, with the
information that we have in the public domain, which is
insufficient, it is not possible yet to make a determination;
in other words, that the margin of error is larger than the
size of the effect we are trying to estimate.
Senator Thompson. But we have, I presume, somewhat of a
disagreement on the panel. At least two of you have questions
with regard to the significance of market power playing into
this price. Assuming that it does play a part or a large part,
I want to address the difficulty in getting the caps right--the
unintended consequences, the deciding of who, what, where,
when, and how. I also want to address the complexity, if it is
going to be a cost-based situation, of having hundreds or I
guess thousands of suppliers and trying to determine what their
individual costs are so you can determine what they are going
to be allowed to charge. Also there is the issue of FERC only
covering half the system and having two tiers, new entrants who
are not covered, and old entrants who are.
You know, we are reminded of Marc Rich back in the oil cap
days. That is the way he made his money, apparently, with those
two tiers and playing them against each other. Obviously, it is
different with electricity, but it comes to mind. The point
being the investors. You say in a perfect world here is the way
it could work. You put it on at the right price, not too high,
not too low. Have it administered correctly. Then you take it
off at the right place, knowing that there is nothing that the
government does that cannot be undone, causing credibility with
regard to potential investors.
My point being that it seems to me, and I think maybe
several of you have acknowledged on both sides of this issue,
that this is a complex proposition. It is a complex
proposition, perhaps not impossible, perhaps something that
cannot be done.
But I want to ask what if, in fact, it turns out that this
is not primarily a problem of market power? What if, in fact,
and let us say there is maybe even a 30- to 40-percent
possibility that it is not primarily a market power problem,
that it is a supply and demand problem, and we impose these
price caps or controls? From what I can understand of this,
there is a tremendous risk that we would have substantially
greater problems than we would otherwise have, and the
blackouts would be more pervasive than they otherwise would be.
First of all, Dr. Hogan, I will start with you. Is my
premise correct? That is, that if we are incorrect about our
assumption, basing all of this on the significance of market
power and it turns out to be other things, are the risks of
imposing caps into those circumstances great?
Mr. Hogan. I think the answer is yes. That is why I made
the point earlier that I think the diagnosis of what the
problem is, is critical in deciding what to do.
Senator Thompson. Excuse me, but as I understand it, if, in
fact, it is market power, then they are right. If you impose
caps, then the inducement to hold back is not there any more,
so you will come across with the electricity. Again, my concern
is are we that certain that this is the cause, that we can go
in this direction? And if we are wrong, what are the
consequences?
Mr. Hogan. Well, I think there are many causes, and I am
not certain about which is the dominant effect here. That is
why the proposal that the FERC is pursuing, this bid cap
proposal, is attractive if we are going to do anything at all.
That is because a bid cap is the most robust policy with
respect to the problems that you are talking about. To the
extent that it is scarcity and you have a competitive market
out there, and it is not market power, the bid caps effectively
become redundant. It is a complicated process to get it put in
place, but they effectively become redundant.
And if you have market power out there and people are
withholding, the bid caps target that problem exactly, and that
is what they are trying to do to eliminate it.
This is a very delicate business because when you are
trying to do this, there are many ways to get it wrong, but
this is, I think, the most robust mechanism. That is why it is
so important to be careful about trying to target the market
failures, rather than just worrying about making prices lower,
because our objectives should not be just to make prices lower.
Senator Thompson. If I understand what you are saying, you
sound to me like you are somewhere in the middle between market
caps, on the one hand, and what FERC is doing today.
Mr. Hogan. I would not characterize what FERC is doing
today as a price cap, in the traditional sense. I think it is
different, and the term of art is a bid cap mechanism. It does
not determine what the market price will be. The market price
can go up and down and varies with conditions at every hour and
depending what plants are running and what is happening to the
water in the Northwest. You do not have to decide those things
before the fact. It adapts it the same way, trying to emulate
what the competitive market would do, and so it targets the
market failure. But it does not guarantee--you have to be
candid about it--it does not guarantee that prices will be low
because if there is a scarcity problem, prices will be high.
Senator Thompson. Dr. Joskow.
Mr. Joskow. Thank you, Senator Thompson.
There is one thing I would like to make crystal clear.
Nobody who has done the studies of market prices, market
behavior and market power in California in year 2000 has
concluded that the dominant source of the price increases was
market power. We have all recognized gas prices went up, demand
went up, imports went down, NOX credit prices went up and have
tried to take that into account in our analysis.
Merely $5 to $6 billion out of $27 billion, I think that is
the average of the various studies, are due to market power. I
think that is a lot of money. It would be a lot of money to me.
I have done a study with public data, the ISO has done a study
with confidential data. Frank Wolak, Severin Borenstein, and
Jim Bushnell have done a study with public and some
confidential data, and they basically all come to the same
conclusion. There is evidence of market power driving prices up
above what would have already been high prices.
And Mr. Hogan wrote a very thoughtful paper criticizing
some of these studies, and I am about to finish a response that
recalculates our numbers. I would be happy to provide it to the
Committee. I hope it will be done in a week. So that is my
first point.
Senator Thompson. Is it fair to say, and do not let me keep
you from your second point----
Mr. Joskow. Sure.
Senator Thompson. Is it fair to say that the confluence
perhaps of all of these circumstances in this history put
California in a situation where market power could come into
play?
Mr. Joskow. Absolutely. This is not a conspiracy issue.
This is a result of the conditions in California that provide
suppliers with opportunities to maximize profits that lead to
prices that are above competitive levels.
The second point I would make is that FERC is already
applying a price mitigation program. We can call it whatever we
want. I will not use the term ``price caps,'' but it does
effectively cap prices at a certain level when it is
implemented. I agree with Mr. Hogan that is the appropriate
framework because it is targeted on trying to simulate
competitive prices.
I would like to see us at least explore whether we can
expand the number of hours, and more importantly close some of
the loopholes in the current program by bringing other States
into the program as well.
And the final point I would make is that we have a lot of
experience with applying mitigation mechanisms around the
country. You would think from the public discussion of this
that this is some new thing that has never been done before. It
has been done. We have had bid caps and PJM for 6 months. We
have had price caps in New York and in New England. It has not
discouraged investment, it has not led to shortages. It has
given folks the confidence that they can fix what were pieces
of broken markets without unreasonable economic consequences.
So I think we have a lot of experience. If they bring
knowledgeable people to the table to fix this problem, we can
do it in a way that minimizes the concerns, the legitimate
concerns that you have, and we need to recognize that none of
these schemes are going to be perfect. We need to do the best
we can in an imperfect world.
Senator Thompson. Thank you. Before I call on Dr. Makovich,
we always or oftentimes go back and get the statements of
experts or academics and cross-examine them with them. I want
to turn the tables a little bit here and point out that Dr.
Makovich wrote, in April 1997, an analysis of the California
market, and said, ``There is no reliable mechanism in
California to pay for the fix and operating costs of new
generating facilities, since the means for doing so, that is,
long-term contracts and high ancillary service payments are
unlikely to be widely available for several years, given the
rate for these and above-noted trend toward low PX prices. This
is likely to lead to extended periods of low prices, followed
by periods of very high prices, as supply shortages and
surpluses develop. Price volatility will not be conducive to a
smooth transition to competition.''
Congratulations, Mr. Makovich. Not only apparently was this
foreseeable by some, it was foreseen. I understand the folks at
Bonneville, in early 1999, pointed out that it looked like
there was going to be some hydro shortages in the Northwest. So
that is a parenthetical. I do not want you to move too far away
from the question I ask, and that is the consequences of
getting it wrong.
Mr. Makovich. Right. Well, I think the consequences of
getting it wrong are very serious. For example, it has been
mentioned today it would be a good idea to exempt new supply
from any kind of price cap proposal, but it is important to
realize, as we look back over the decade of the 1990's, a major
source of new supply in this country, if not the majority of
new supply over the first half of that decade, came from the
refurbishment and investment in existing power plants.
And so we are either going to create a disincentive to
investing in power plants and improving efficiency, and
availability and capability, or we are going to create a very
complicated review process, where people are going to have to
try to argue what percentage of my plant is now new capacity
versus old capacity.
We have already seen, within the past week, an announcement
that 500 megawatts are not going to be developed in California
by a major supplier who had a site that was permitted, and they
were ready to go on construction.
And, finally, with this idea, there is a bit of a circular
argument here with withholding capacity. The conditions of the
very inelastic supply and demand curves only exist in a
shortage so that the only way it is rational to withhold is if
you have got a shortage. So to argue the shortage is caused by
withholding is a bit of a circular argument, and there are
problems with the basic data. People are running these power
plants far harder this year and last than they ever did before.
So the basic data here is something that has to be looked
at far more carefully to come to the conclusion because it is a
very dramatic accusation to somebody that they are withholding
capacity and supply from this market----
Senator Thompson. You could ask why they did not withhold
in 1998 and 1999, I suppose.
Mr. Makovich. It would have been worth a lot more to them
to do so.
Senator Thompson. My time is up, but obviously----
Chairman Lieberman. Do you want to have the last word?
Mr. Borenstein. Well, actually, it would not have been
worth a lot more to them to do so. In 1998 and 1999, there was
a lot more supply, and the economics of withholding were much
less attractive in 1998 and 1999.
Put simply, the right question to ask is, when you put
yourself in a position when the ISO is near a blackout, they
have 2-percent reserves left, and you own 6 percent of the
capacity in the State, what do you bid? And the answer is
whatever you can get away with, and that is not to demonize the
generators. They are out there trying to make money. That is
what they are supposed to do. Our job is to create markets
where when they try to make as much money as they can, they end
up helping consumers.
But it is a fantasy to say that this is a market in which
generators cannot exercise market power. It is a serious issue.
I do want to respond to Senator Thompson's question that it
would be a major disaster to set the price caps too low. We saw
that last November when we had this 250 price cap, and the
price of natural gas went too high, and generators did the
rational thing and shut it off. That is exactly the 1970's all
over again, only worse.
However, it would also be a major disaster to simply walk
away and pretend there is not a problem here. Because at those
times of peak demand, if we have no price mitigation, we will
have billion-dollar prices. There is just nothing to stop it.
Chairman Lieberman. Thanks, Dr. Borenstein.
Thanks, Senator Thompson, and thanks to all of you. It has
been a long hearing, but it has been a very productive hearing.
I think we have all learned a lot about the situation in
California, and frankly about FERC, and you have helped us to
get ready to ask some constructive questions of FERC. I do
think that there is agreement that the rates in California now
are not just and reasonable, that FERC has some role to play
here, although there is a disagreement as to what the role is.
The other thing I have heard is that no one thinks, in
spite of the drop in prices out there in the last few days,
that the crisis is over or that everything is going to be OK
this summer. So this calls on us all to continue to work
together. And I hope that some of the kinds of discussions
among technical people can occur that many of you described,
and that may get us some way forward.
Anyway, thanks for taking the time to come here. Thanks for
sharing your expertise with us. It has been a very productive
morning.
The hearing is adjourned. Thank you.
[Whereupon, at 1:19 p.m., the Committee was adjourned.]
THE ROLE OF THE FEDERAL ENERGY REGULATORY COMMISSION ASSOCIATED WITH
THE RESTRUCTURING OF ENERGY INDUSTRIES
----------
WEDNESDAY, JUNE 20, 2001
U.S. Senate,
Committee on Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 9:35 a.m., in
room SD-106, Dirksen Senate Office Building, Hon. Joseph I.
Lieberman, Chairman of the Committee, presiding.
Present: Senators Lieberman, Durbin, Torricelli, Carper,
Carnahan, Thompson, Collins, Voinovich, Domenici, and Bennett.
OPENING STATEMENT OF CHAIRMAN LIEBERMAN
Chairman Lieberman. Let me ask everyone to take their seats
and we will begin the hearing. I appreciate very much the
presence of all of our witnesses and guests. I wish you good
morning and I thank you for joining us today as the Senate
Governmental Affairs Committee continues its hearings into how
the Federal Government has conducted itself in response to the
deregulation of the U.S. energy industries, with a particular
emphasis, of course, on the cost and supply of electricity in
California and the Western United States.
Last week, we heard from five economists, including Alfred
Kahn, the father of deregulation himself. They agreed that the
California market was so dysfunctional that the Federal
Government needed to intervene and temporarily regulate. On
Monday, the agency that oversees electricity rates, the Federal
Energy Regulatory Commission, which is known here in Washington
by the acronym FERC, agreed to take action.
Today, we are going to hear about FERC's latest order and
whether or not it adequately carries out the Commission's
statutory responsibility to provide just and reasonable rates
for electricity consumers in California and the West.
I must say that I am relieved that the Commission has
asserted itself more aggressively to address the severe
problems in Western power markets, although I remain concerned
that even at this late date it has not done all that it could.
The price limits established by FERC may still be too high, and
ratepayers in California and in other Western States may still
deserve substantially greater refunds for overcharges that have
previously been imposed for them.
We are very fortunate today to have most of the key
participants in this complex matter as witnesses before the
Committee, including Governor Gray Davis, the Governors of
North Dakota and Montana, Representatives from the State
Governments of Oregon and Washington, the five members of FERC,
as well as three distinguished colleagues here in the Senate.
To put this hearing briefly in historical context, let me
say that Federal oversight of wholesale electricity sales began
in 1935 when Congress passed the Federal Power Act mandating
that prices for electricity be just and reasonable.
Originally, those oversight duties were assigned to the
Federal Power Commission, which in the 1977 reorganization of
the Department of Energy became FERC. The Federal Power Act
remains, however, the primary statute governing FERC oversight
of wholesale electricity sales. And the law requires that all
rates in connection with the transmission or sale of electric
power under the Commission's jurisdiction shall be, ``just and
reasonable and not unduly discriminatory or preferential.''
FERC is authorized upon outside complaint, or its own
initiative, to investigate prices that appear suspect. And if
the rates are found to be unjust or unreasonable, the
Commission is obligated to take remedial action, including the
ordering of refunds to customers.
Traditionally, FERC has met its obligation to ensure just
and reasonable rates by ordering rates that provided for cost
recovery plus a margin of profit, in the same manner that most
State public utilities authorities or commissions have done for
generations.
More recently, FERC has allowed market-based pricing or
proxy pricing, such as it ordered Monday, to be the standard
for just and reasonable.
No matter what the methodology, FERC remains responsible
for ensuring that the wholesale markets operate competitively
and that the rates they produce are just and reasonable.
As the Committee heard last week, in 1996, California
enacted legislation to deregulate its electricity markets
beginning in 1998. To put it mildly, it has not been an easy
transition, either for California or other Western States,
because of record prices for electricity, supply shortages,
rolling blackouts, and price spikes for natural gas.
The transition to deregulation prompted the bankruptcy and
near bankruptcy of major investor-owned utilities, and in an
extraordinary development, the State of California has now
assumed responsibility for wholesale power purchases.
So as I see it, the question today is: Has FERC responded
adequately to this crisis? What is the record? Last July,
almost a year ago, FERC began a staff investigation into
electricity problems in the West and a formal investigation
into California prices. In a December 15 order, FERC concluded
that the California market was deeply flawed, which, when
combined with other factors, caused electricity prices to be
neither just nor reasonable. So the Commission ordered changes
in the California market and established a procedure for
refunding excessive charges.
Yet in March and April of this year, as the Commission
began implementing that procedure, it also significantly
limited the number of transactions subject to refund and the
circumstances under which prices would be mitigated.
In April, the Commission also initiated a formal Federal
Power Act investigation of the Western electricity market. Two
days ago, FERC expanded those actions by setting a soft cap on
energy prices, around the clock, and regionwide.
In my opinion, the Commission's record in this matter
raises serious questions about whether it will, and has,
adequately overseen newly deregulated energy markets. It has
been very slow in responding to this real and painful crisis.
While the Commission by its own admission has had the authority
to intervene to ensure just and reasonable rates, it has been
surprisingly reluctant to do so. It did not initiate a formal
investigation of the Western market outside of California until
April of this year. In the past, when it has intervened in
response to California's problem, the result has fallen short
of what the public interest required.
I, of course, hope that Monday's order will be more
successful, but I continue to have substantial concerns. I
believe the order addressed the matter of refunds for
electricity in California in an unsatisfactory manner, and it
did nothing for refunds for consumers elsewhere in the West.
Monday's order will constrain some price spikes and close
some loopholes in the previous FERC order, and that, of course,
is all to the good and appreciated. But will it ensure that
electricity prices in California and throughout the West are
just and reasonable? That is not only the bottom-line question,
it is the law. And it is that question that I hope our
witnesses will address this morning.
Senator Thompson.
OPENING STATEMENT OF SENATOR THOMPSON
Senator Thompson. Thank you very much, Mr. Chairman. I
think it is obvious to all of us that California is in a state
of crisis. Two of its largest utilities have gone under or one
has taken bankruptcy. California bonds have been downgraded on
two occasions. Producers, suppliers, who the State is going to
have to depend upon for additional supply in the future, are
expressing concerns. Some projects now have been delayed. We
have seen blackouts, and we are told that, apparently
regardless what happens from here on out, we are locked into
future blackouts this summer. It is of concern to all of us,
not only from a humanitarian standpoint but from an economic
standpoint. California, of course, is extremely important to
the rest of the Nation from that standpoint. So we are
addressing the question of what to do about it at this stage of
the game and who is responsible.
I am reminded, as I look at this, of the wisdom of the
Founding Fathers and the system of federalism that they
created, and that was that we should have responsibility at two
different levels of government, and one of the reasons for that
was to assess accountability. And if there was ever a place
where we do not have federalism, it is here. We have a split
system where the State is responsible for the retail market, as
it were, and a Federal system where the Federal Government has
some responsibility in terms of wholesale prices with regard to
private suppliers. And it ensures that no one will really have
to accept accountability when things go wrong, and that is one
of the reasons, of course, we are seeing all of the finger-
pointing and the blame-gaming that we are seeing now.
But it is true that this hearing today has been focused on
FERC. I think it is unfortunate. I see we have five panels
here, and a certain thing in some businesses they refer to as
``prime time,'' and FERC's appearance is not in it. And I
certainly hope that we have at least a semblance of the
interest in hearing the FERC testimony, which is supposed to be
the primary subject of this hearing when they come on sometime
probably mid-afternoon.
But they do have a responsibility in certain areas, and
part of that has to do with just and reasonable prices,
whatever that may be. The idea of a Federal agency deciding
what is just for something as important as this would be
laughable in any other context, but that is the law, and that
is what we operate under.
That has led many to call for hard caps. Constituents and
elected leaders, after thoughtfully mulling over this for long
periods of time come down on the side of lower rates instead of
higher rates. But we know that in any long-term sense, anyway,
that generally speaking caps do not work when supply is the
problem. And neither the FERC while President Bush is President
or the FERC while President Clinton was President has thought
that hard caps were a good idea. In fact, the prevailing
opinion is that when supply is the problem, they make a bad
situation worse.
Now we are told that this is different, this situation is
different, that we can apply a Goldilocks test to this one and
we can get the rates not too high, otherwise, they would be
ineffective; not too low, otherwise, we would drive supply out
of the market; and we would lift it just at the right time and
all of that would work out, although I see no model for that in
history anywhere. There are a lot of very credible people who
think that that is the way to go.
So there has been tremendous pressure on FERC because of
that. They have taken several actions. I was reading a summary
of the written testimony of FERC Commissioner Linda Breathitt.
She says that since last August, FERC has issued 50 orders
implementing important remedial measures and price mitigation,
instituted investigations into rates and market design flaws,
established programs to maximize electricity supply and
delivery and demand reduction, and directed sellers to provide
refunds.
And, of course, those refunds, rebates, are an important
part of this process. It does not shock me to find out that in
a matter involving this much money and this many people and
this many suppliers that there probably have been some out
there who have not behaved as they should, even though I see no
allegations of criminal activity--at this point, anyway. Those
investigations are ongoing, and they should be ongoing. But for
most people, the idea that this problem was caused solely or
even primarily by that is far-fetched, to say the least. So let
that play out as it may. Let's acknowledge that that might be a
part of the mix.
FERC, on April 25, of course, entered into a price
mitigation system. Prices have dropped since that time. Now we
are switching somewhat from a blame game to a credit game, and
everybody is scrambling to claim credit for the recent drop in
prices in California, and we will watch that play out with some
interest. But now they have expanded the price mitigation
system. It is not a hard price cap, and it is not price
controls in the normal sense of the word, I would think. But it
has been expanded to all of the Western grid and to an around-
the-clock operation.
However, some people believe that this problem has to do
with more than just a Federal agency fine-tuning wholesale
prices, and I am one of those. And some people believe that to
determine where to go, it is good to consider how we got here
in the first place.
Now, for Governor Davis, the answer is simple. A bunch of
Texas cowboys got down at the corral and decided they were
going to take advantage of helpless California, and we are
seeing the results of it. In fact, we have seen no shortage of
villains. The governor at one time or another has blamed
Federal regulators, State regulators, the President, suppliers,
the former governor, and a bankrupt public utility.
However, I think we need to cast our net a little wider.
Clearly, there are other factors at play. We know, for example,
that we had a drier Northwest during crucial periods of time
that cut back on the hydropower that the West normally sent
down during the summer months and that California depends on.
We had an inordinately hot summer. We had an inordinately cold
winter. During all of this, we were experiencing increased
demand throughout the West, and especially in California
because of the growth of that part of the country. It was clear
that California was becoming more and more dependent upon
imports.
Surely, none of us can blame anyone for those factors, but
the other interesting point about that is none of those factors
were secret developments. One would have thought that State
officials might have noticed those things as they were
occurring, especially since they were getting warnings as early
as early 1999 with regard to the problems in the hydropower
situation, at least.
Other factors, of course, enter into play, and that has to
do with the policies of California, the policies of the Public
Utility Commission, and the governor. No power plants in 10
years. The governor is not responsible for most of that. But
capped retail rates at a time when the utilities were locked
into spot markets, which everybody acknowledges was a mistake.
When deregulation came about, we had a supply surplus of about
30 percent in California. That situation, as we saw, rapidly
changed, but the policies did not change with it.
So PG&E was paying 30 cents and selling for 3 cents and, of
course, ultimately went bankrupt as they were saying last year
that they needed relief and others were saying they needed
relief. No relief was coming.
So no additional power, capped retail rates, locked into
spot markets, a siting process that was longer than apparently
anybody else's made it very difficult to put new power online.
And then even more warnings from experts who were talking about
the storm clouds that were looming, and then, of course, we saw
shortages in May 2000.
So all of the policies that were clearly a part of the
problem were locked into place and kept there until the problem
became a disaster. I think that it is instructive to look at
other States around the country that have deregulated, that
have not had similar problems. They did not have some of the
natural problems either that California had, in all fairness,
but they did not have some of the policies or adhere to them
the way that California did either.
Now, after blackouts are inevitable, apparently, according
to the experts, some changes have been made. California now
enters into long-term contracts, but apparently they are paying
very high rates for the contracts, higher than spot markets. So
when spot market prices were higher than long-term contracts,
they were paying spot market prices. Now that long-term
contracts are higher than spot market prices, they are paying
long-term prices. A policy of buy high, sell low. And we do not
know exactly what prices they are paying because California has
not been willing to release the prices that California citizens
are paying for the long-term contracts for municipalities,
which, of course, continue to be large suppliers of power.
So I do not want to rain on anybody's parade here today as
we bring FERC to task, but I guess, as Paul Harvey would say,
perhaps we ought to look at the rest of the story and, before
the day is over, perhaps a more balanced view we will have not
only as to what should be done at the Federal level but as to
how we got here in the first place.
Thank you, Mr. Chairman.
Chairman Lieberman. Thank you, Senator Thompson.
It is a long hearing. We do have serious questions to ask.
I assure you I will be here when FERC comes on, regardless of
what hour it comes on. And in some sense, the morning testimony
will pose questions which I think will be fair and reasonable
both to those who are in the morning and to those who will
follow in the afternoon.
As is our custom, we will now go to Members of the Senate
who asked to testify this morning, though I do note the
presence of a growing number of members of the California
delegation. I do want to welcome them here. I see Congresswoman
Jane Harman, Ellen Tauscher, Hilda Solis, Anna Eshoo, Joe Baca,
Lois Capps, and Lynn Woolsey. And I thank you. Obviously your
presence here is an expression of your concern about the
ongoing problems regarding electricity rates in your State and
your hope that we and FERC together can bring some relief to
citizens and businesses in your State and to the economy of the
State generally.
I am pleased to have three colleagues with us. I can go in
alphabetical or seniority order. Do you have a----
Senator Murray. Seniority order.
Chairman Lieberman. This is most encouraging. Your two
colleagues from Washington State, acknowledging that you are
obviously much older than either one of them, Frank, have
yielded to you. So, Senator Murkowski, ranking member of the
Senate Energy Committee, we thank you for being here and look
forward to your testimony.
TESTIMONY OF HON. FRANK H. MURKOWSKI, A U.S. SENATOR FROM THE
STATE OF ALASKA
Senator Murkowski. Thank you, Mr. Chairman, and let me
thank the two gracious ladies on either side of me. I am most
appreciative that you included Energy and Natural Resources
Committee representation here at your hearing.
Everybody seems to want to get in on the energy crisis at
this time. There are many chairmen holding hearings, and that
certainly is the prerogative. Some are even involved in
spinning away their responsibility associated with the crisis
in California. We have heard criticism of our President, of our
Vice President, for being chummy and cozy with big oil,
criticism that indeed the higher costs associated with the
shortage are the responsibility of the administration.
It strikes me, Mr. Chairman, that if you have a sickness--
and we have a sickness right here with the gentleman that just
turned the chart over. It is upside down. [Laughter.]
He is relatively highly paid--or I mean he was.
Chairman Lieberman. Of course, there was some chance that
we were upside down and the chart was right side up.
Senator Murkowski. Well, we have been accused of that, too.
Senator Thompson. I am glad we noticed.
Senator Murkowski. But the point I wanted to make relative
to the criticism of the President and the Vice President for
being too chummy and out of the oil patch and part of the bad
guys from Texas, I think somebody did a calculation that
suggested that Texas-owned companies contribute about 12
percent of the energy that California consumes. But,
ordinarily, if you have a sickness or a crisis of some kind,
you address it with some degree of expertise as opposed to
holding a public hearing. And I think the energy situation in
this country is a sickness. You need people who know something
about it, how to correct it, and how to bring about change. And
I think both our President and our Vice President fit that
category.
Now, we know something about energy as well, Mr. Chairman.
We have held 24 hearings, Senator Bingaman and I. We have had
164 witnesses. And what we found is very simple: We must
increase production, we must develop alternatives and
renewables, and we must improve conservation. It is just that
simple. And those that suggest it is more complex are leading
you down either goat or rabbit trails, as the case may be.
We had a hearing in this room yesterday. We had FERC here.
We had all five commissioners. And it was rather interesting
because they did reach a conclusion. All five concluded that
Congress should not legislate price control legislation or
wholesale price caps, as the case may be.
I would also remind you that FERC is just recently up and
running. They just obtained the last two members, and now they
have a five-member commission. Further, both sponsors of the
price cap legislation, Senator Smith and Senator Feinstein,
have indicated they will not push for legislation to a markup
on their proposed wholesale cap bill, which I think is relative
to the action that FERC has taken and their belief that FERC is
doing the job that they were set up to do.
Now, I commend the President and the Vice President for
staying the course, staying the course against wholesale caps.
This is the only way the energy supply will increase. If you
put caps on, you will not get investment. We heard testimony
given yesterday by the investment community relative to the
fact that if you have tight caps, there is not the incentive
for investment. And the investment can go a number of places.
I think it is also important to point out that under the
Bush Administration, FERC has taken their responsibilities
seriously, somewhere between 30 and 50 orders, as Senator
Thompson indicated, since they took over. Now, where was FERC
before that? Well, they were running pretty lean. But,
nevertheless, the crisis did not occur beginning in January.
The crisis in California was in effect beyond that. And why
FERC did not act, why, perhaps you could pursue that. Their
just-issued West-wide order will further help both California
and the entire Western United States.
Now, we do have the chart now right side up, and the point
I want to make with that chart is that it is working.\1\ What
you are looking at is California's price structure relative to
the peak power costs. And you will see it is down now to
somewhere in the area of $48, and when you compare it to what
it was, nearly $550 or $600, I think you can see that it is
moving in the right direction.
---------------------------------------------------------------------------
\1\ The chart entitled ``California Day-Ahead Power Prices,''
appears in the Appendix on page 551.
---------------------------------------------------------------------------
Now, basically, that FERC has done its part, the question
is what must California do, and I think that is an important
reflection on the responsibility of the Congress.
California, of course, has driven one investor-owned
utility into bankruptcy and has put the other two on the brink
of bankruptcy. The governor once said that he could solve
California's problems in 15 minutes if he just let the true
cost of electricity be passed on to the consumer. Well, you can
ask him about that. But it appears that California has
continued to try and hide the true cost of power by having the
State now pay for it instead of the utilities. This puts the
taxpayer of California on the hook for somewhere in the area of
$47 billion.
My question is: What is the difference between the
ratepayer and the taxpayer? I find little difference. Although
California officials accuse investor-owned power as being
``pirates,'' they have done little to protect California
consumers from power sold by municipally owned utilities that
are within California's own authority.
A recent Los Angeles Times article reported that the city-
owned Los Angeles Department of Water and Power was one of the
largest moneymakers in the California spot market and made
$17.8 million. And I would remind you that is owned by the city
of Los Angeles.
Further, California's problem is not lack of regulation. It
is really a lack of generation. California bet it could stop
building new power plants and instead import power from outside
the State. California ordered its investor-owned utilities to
divest their fossil fuel generation but exempted the municipal
utilities. Why would they exempt one and not the other? Well,
you can ask the governor.
California prohibited its investor-owned utilities from
using long-term contracts for power and forced them to rely on
the spot market. This strategy can work for a time when there
is excess in that spot market. But it did not work when that
excess was removed.
California has taken steps to expedite power plant
construction. It has let a lot of permits. But the question is:
How many of those permits have firm take-outs from financial
bodies that are prepared to back them without a degree of
certainty on the rates that those investments are going to
amortize?
So I think the jury is still out whether the California
investor will want to build in California given the investment
climate the State has created.
As we look at the issue, Mr. Chairman, of those that are
alleged of profiteering, I am going to ask that this be
included in the record, the ``Top 10 in Profits.''
According to the California independent systems operator
say that they total $505 million. Two-thirds of that are
associated with British Columbia Power Exchange, $176 million,
Mr. Chairman; Bonneville Power, $30 million; Los Angeles
Department of Water and Power, $17.8 million. There you have a
significant portion of those overcharges, and they are
municipally owned. In the case of BC Power, they are outside.
Finally, in conclusion, the solution to California's
problems is more power plants of all types, natural gas,
nuclear, renewables, and incentives for conservation. And you
provide that incentive for conservation when you pass on the
true cost of power to the consumer. Then the consumer will
conserve, go down and buy a new refrigerator or whatever.
FERC's order clears the way for Congress to focus on the
national energy crisis that is affecting millions of families
from coast to coast, not just California. Before the recent
change in the Senate, we were on a course to bring President
Bush's task force legislation to the floor, Senator Bingaman
and I in a bipartisan package. As I have indicated, we have had
the hearings. Senator Lott said at that time the energy
legislation would be the next order of business after the
Senate finished education. But under the new Senate schedule,
energy has slipped on the Senate schedule. That is unfortunate
in view of the fact that polling indicates that energy is the
number one issue in the country at this time.
So now is really the time for action on a comprehensive
energy legislation to bring about a long-term and meaningful
solution to the Nation's real energy problems, and I am
convinced that the time for talk is behind us. The time for
action is now.
Thank you for the courtesies extended to me. I would ask to
be excused. I have another hearing on the Energy Committee at
this time.
Chairman Lieberman. Thanks, Senator Murkowski. Thank you
for being here.
Senator Murray.
TESTIMONY OF HON. PATTY MURRAY, A U.S. SENATOR FROM THE STATE
OF WASHINGTON
Senator Murray. Thank you very much, Mr. Chairman and
Members of this Committee, for calling this hearing. In my home
State of Washington, there is no more important issue than the
energy crisis today. Two days ago, after months of delay, the
Federal Energy Regulatory Commission finally woke up and took
action against alarming energy rates. FERC, as all of you know,
put in place price controls that are similar to what Senator
Lieberman and I and Senator Cantwell and others have been
urging for months. I am glad that FERC finally came around,
helping us bring some order to this volatile energy market, but
this one step is not going to solve the energy crisis.
The energy crisis is very real, Mr. Chairman. It is not
going away, and the Federal Government needs to do its part to
help our communities. Today, I want to share with this
Committee how the energy crisis is hurting Washington State,
and then I want to offer six things that the Federal Government
must do to protect our people and our economy.
Let me begin with the impact in Washington State. We have
already lost thousands of jobs because of rising energy rates.
Entire industries could be idle just to prevent massive rate
increases. According to one estimate, Washington State could
lose another 42,000 jobs over the next 10 years unless we take
action. Not only are there economic costs, but there are
environmental impacts as well, including our ability to recover
endangered salmon.
I want to share with you a typical letter I received from a
constituent in Washington State. Mrs. Valeria Mesler of
Okanogan, Washington, wrote to me: ``I am a 91-year-old widow
living on my Social Security check each month, which is small.
I cannot afford any increase in the cost of my electricity. I
am sure there are many like me and also younger families on low
incomes.''
Mr. Chairman, she is right. There are thousands like her.
Today, the energy crisis is hitting our pocketbooks, and
unless we act, tomorrow it will threaten our prosperity. Even
Washington State schools are feeling the impact. Nancy Olson,
who is the superintendent at the Ocean Beach School District
wrote me that energy costs will add another $200,000 to their
budget. As a result, they are going to have to lay off the
equivalent of 3.5 teachers. According to Superintendent Olson,
``We have no extras anywhere in our budget. We will now have to
resort to cutting teachers, which means increased class
sizes.'' They are even, Mr. Chairman, considering going to a 4-
day week in that school because of the costs.
Energy is impacting everything from our kids' education to
jobs in our economy, to every family's personal quality of life
and finances. We in Washington State are doing our part. We are
conserving and we are cutting our energy use. Several of
Washington's public utility districts have worked with
consumers and have agreed to cut back on the amount of power
they receive from Bonneville Power Administration. Last week,
the Benton County PUD agreed to reduce its energy load by 10
percent. Recently, Clark Public Utilities, Franklin, and
Ponderay and Grace Harbor PUDs have signed load reduction
agreements as well.
People are changing their habits and buying more energy-
saving products. In fact, in many parts of my State, you cannot
even find a compact fluorescent light bulb on store shelves
because they are all sold out.
We are also bringing new energy sources into service,
especially renewable sources like wind. We have a 300-megawatt
wind field being developed near Walla Walla and another 150- to
500-megawatt wind field planned for Prosser. We have a company
in Kelso, Washington, that takes plastic from landfills and
turns it into high-octane, low-sulfur diesel fuel. We are doing
our part. But we need the support and the leadership from this
administration.
I, of course, am not saying that this administration caused
this crisis. It did not. But I have believed that it has stood
in the way instead of providing us the help that is critically
needed. First, they identified it as just a California problem.
Then, instead of urging conservation, they decried it as simply
a personal virtue. And later, when we introduced bipartisan
price cap legislation, the administration said no. Instead,
they sent us an energy plan that focuses too much on drilling
for oil and gas with very little support for alternative and
renewable sources of energy.
Throughout, FERC has not done anything to help Washington
State consumers get relief from predatory pricing. This week
the administration's FERC appointees finally came around and
accepted what we have been telling them all along, that we need
price caps, temporary price caps, to protect consumers from
outrageous rates. Frankly, I think the bipartisan legislation
we have pushed has helped them make that decision.
Mr. Chairman, this administration has minimized this crisis
for months, and people across my home State of Washington are
paying the price. We are doing our part to conserve and to
generate new, clean energy in Washington State. Now it is time
for the Federal Government to do its part, and I want to
quickly outline six steps I think we need to do at the Federal
level.
First, we need a disaster declaration so that hard-hit
small businesses can get low-interest loans from the Small
Business Administration.
Second, we need real Federal support for conservation.
Third, we need to diversify our energy sources.
Fourth, we need to site new plants.
Fifth, we need FERC to keep its word and investigate price
gouging in Washington State and other Western markets. If
prices have been unjust, there have to be swift refunds.
And, finally, we need to make sure that as we expand our
energy infrastructure, our oil and gas pipelines are safe.
Mr. Chairman, those are the steps we need to take at the
Federal level to keep this crisis from getting worse. I hope
that this administration will see the wisdom of acting now to
protect our economy, our communities, and our citizens before
it is too late.
Thank you, Mr. Chairman.
Chairman Lieberman. Thank you, Senator Murray, for that
testimony.
Senator Cantwell, good morning and thanks for being here.
TESTIMONY OF HON. MARIA CANTWELL, A U.S. SENATOR FROM THE STATE
OF WASHINGTON
Senator Cantwell. Thank you, Mr. Chairman and Senator
Thompson. I thank you for this opportunity to testify before
the Committee today and for your leadership on this important
issue.
The Senate Energy Committee, of which I am a member, has
had numerous hearings on this issue, and I want to applaud
Chairman Bingaman for the leadership and commitment that he has
brought to this issue, and to Senator Murkowski for the number
of hearings that we have, in fact, held for his attention to
this issue.
Today's hearing focuses on a subject that I believe
Congress must explore fully and, more importantly, be prepared
to act on: The role of FERC. Our Nation's top energy regulator
probably has never been more important than today.
As the energy crisis has evolved, I have had an opportunity
to get to know all the FERC Commissioners and am pleased that
we now have a full contingent of commissioners with two new
members, Commissioner Pat Wood and Commissioner Nora Brownell.
Today, the FERC is in the unenviable position of being on
the Congress' radar screen. I think it is important to keep in
mind that this agency is in transition, responding to a brave
new energy world. But as our recent experience in the Northwest
has shown, the FERC has a long ways to go in its transition.
I am concerned about two things. I am concerned that the
agency has been slow to respond, and even when it has
responded, it has not always acted with equal vigilance from
State to State. One cannot, as Senator Murray pointed out, open
up newspapers in Washington State without finding stories about
the energy impacts on our State, families, businesses, and
community. As perhaps too few people realize in the midst of
these bright lights shining on California, this really has been
a crisis from which the Pacific Northwest has suffered. Yes, it
has been exacerbated by a drought that has been the worst
drought in 30 years. But, nonetheless, our need to go out and
buy power on the spot market left us subject to rates 11 times
what they were a year ago today.
The results have been devastating and have touched every
part of our economy, from traditional energy-intensive
industries such as aluminum and paper, to small businesses,
farmers, and even technology companies. Thousands of people
have already lost their jobs and plants have been shut down. A
hospital in Washington State has experienced probably $1
million in additional energy costs that will come off of their
bottom line. Small businesses as diverse as grocery stores and
hotels have already started adding energy surcharges. And this
is despite an effort by most of these businesses to curtail
their energy consumption by over 30 percent.
Governor Locke has issued a challenge for people and
business in Washington to conserve 10 percent. Many businesses
are reaching far beyond that and still seeing rate increases
that are the same amount as what they paid for their entire
energy bill last year. Our State's LIHEAP caseload is expected
to rise by over 50 percent this year due to skyrocketing energy
prices.
These facts point to an inescapable, common-sense
conclusion--that the Western power markets have been
dysfunctional for quite some time and that the electricity
prices in the Northwest have been neither just nor reasonable.
Like many of my colleagues, I want to say I appreciate the
steps that the FERC Commissioners took on Monday, June 18, to
help mitigate the impacts of the Nation's energy crisis and
rein in the runaway electricity prices in 11 Western States. I
am hopeful that these actions will help address the crisis in
the Northwest.
However, during the hearing before the Senate Energy and
Natural Resources Committee yesterday morning, I had an
opportunity to ask the FERC Commissioner and the FERC's general
counsel about my concerns given that we had not had a chance to
read the order. In response to my questions, I found one piece
of information very troubling. That is, Mr. Chairman, despite a
year of skyrocketing prices throughout the Northwest and other
Western States, the FERC admits that it will not provide a
mechanism for those in the Western States outside of California
to seek refunds--this is a very important issue--other than
refunds that would occur after July 2, 2001.
On the one hand, FERC has offered long overdue relief to
Washington State consumers who are staggering from these high
energy prices. But, on the other hand, it has taken away an
opportunity for us to get these refunds. With the support of
Senator Murray and other Senators from the Northwest, I am
sending a letter to FERC Chairman Curtis Hebert today asking
for a rehearing on the Commission's December 15 order in which
FERC denied Puget Sound Energy's complaint regarding the West,
outside California. We are asking FERC to set a refund
effective date consistent with Puget Sound Energy's October
2000 filing.
Mr. Chairman, whether this refusal to consider consumer
refunds outside of California is an oversight or an accident,
it is certainly the latest in a series of FERC actions that
have elicited questions and concerns from many people in my
State.
Over the last year, people in Washington State have endured
many impacts from this energy crisis, and I think it is very
important that FERC go further in addressing this issue of
repayment.
Mr. Chairman, obviously this Committee and the Congress in
general, as policymakers, need to ferret out the many causes of
FERC's slow-to-act performance in the face of this crisis,
whether it is lack of a clear mandate arising from dramatic
changes in the energy industry, a lack of necessary information
or resources to do its job, or simply just a lack of will. But
as we work to prevent such crises in the future, we also need
to focus on how to correct the mistakes that have been made.
We know that there are Pacific Northwest communities that
have been devastated by plant closures and job loss due to an
unprecedented run-up in electricity prices and FERC's inactions
and omissions. It is simply unacceptable that the Federal
agency charged with ensuring that consumers are protected does
not meet that responsibility.
With this in mind, Mr. Chairman, I hope that FERC heeds our
calls to reverse its decisions on issues of retroactive refunds
for Northwest consumers and applies the same standards of
fairness to the constituents of my State as they have to
ratepayers in California.
I thank the Committee for this opportunity to speak on this
issue, which is important to so many people in Western States,
and I thank the Chairman for holding this hearing and look
forward to your continued oversight of this commission.
Thank you.
Chairman Lieberman. Thanks very much, Senator Cantwell, and
we will be sure to ask the members of FERC this afternoon some
of the very relevant questions you have raised here this
morning.
I note the presence of another member of the California
House delegation. I am delighted to welcome not only to this
hearing but to the Congress Congresswoman Diane Watson. Thank
you for being here.
Before the Committee calls the Hon. Gray Davis, Governor of
the State of California, Senator Boxer, our colleague, has
asked to very briefly introduce Governor Davis.
TESTIMONY OF HON. BARBARA BOXER, A U.S. SENATOR FROM THE STATE
OF CALIFORNIA
Senator Boxer. Mr. Chairman, Senator Thompson, thank you so
much for inviting my governor here. I promised you that I would
make a minute, a minute-and-a-half introduction, and I will
because I know how many people you have yet to come.
But I want to say that in California we need the help of
everyone on this Committee. The reason we have such a beautiful
delegation sitting behind me here is because of their deep
concern. They have got many other issues on their plate. I
think it shows and demonstrates that we are all speaking with
one voice, that we need relief for our consumers, and our
governor has been fighting this fight in the middle of a crisis
that he did not make. And he has been doing everything he can
to heed what Members of this Committee have said, which is to
bring sources of power online to push the State toward energy
efficiency and conservation, which we are succeeding at--we
really are--and also to call attention to the gouging. And if I
might say, that is the only word I can use, and I think when
you hear the governor, you will understand why we use the term
``gouging.''
Mr. Chairman, I think this Committee is key for us. You are
an investigative committee. You are a Committee that is an
oversight committee. It is very appropriate that you oversee
the FERC. I believe with your leadership, Mr. Chairman, and
others on both sides of the aisle, we have seen FERC finally
look at their charter, which says they must protect against
unjust and unreasonable prices. We have seen them take action.
We in California welcome that action, and at this time, it is
really my honor to introduce a man who has been working on this
crisis day and night. It is a lonely and difficult thing, many
times, and he has really done everything within his power to
keep the power on in our State.
Thank you very much for welcoming him here, and thank you
for your deep concern, Mr. Chairman, and also Senator Thompson.
Chairman Lieberman. Thanks, Senator Boxer.
Governor Davis, I am honored to welcome you here. I
appreciate very much that you took the time to come out and
share your thoughts and your experiences with us. This is a
hearing room that is often used by another committee. I am
privileged to be a member of the Senate Armed Services
Committee, and it does strike me that there are some parallels
here. I feel like I do when we had leaders of our military come
in from areas of battle to report on how the battle was going.
It is not quite that serious, but you face a serious crisis
that was not of your making. You have been tested. I think some
of the improvement that is reflected in the charts that we have
seen from Senator Murkowski you deserve some credit for. I am
delighted to hear from you now, and I suppose the question is:
How goes the battle?
TESTIMONY OF HON. GRAY DAVIS,\1\ GOVERNOR, STATE OF CALIFORNIA
Mr. Davis. Well, we are making progress, and thank you very
much, Senator Lieberman, and Ranking Member Senator Thompson.
Thank you for inviting me as well. I want to thank our junior
Senator, Barbara Boxer, for her friendship and for her
introduction, and our senior Senator, Dianne Feinstein. They
both worked very hard on price relief for California and the
West, and I want to thank all of our Congress people that have
been staunch allies in this. You have mentioned their names,
but I would like to repeat: Congresspersons Tauscher, Harman,
Solis, Eshoo, Baca, Watson--have I missed any?--Lois Capps and
Lynn Woolsey. Did I miss anybody else? And there are many
others who are not here. They are very busy, and I appreciate
their taking their time to be here today. Obviously this is an
important issue. That is why so many people have come today. I
applaud the Committee for having this hearing.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Davis appears in the Appendix on
page 391.
---------------------------------------------------------------------------
I want you to know that California is doing its part to
meet the energy challenge. As you know, there are two
constructive things the State can do: Build more plants,
conserve more power. We have approved 16 plants since I have
been governor starting the fourth month I was in office. Ten
are under construction, more than at any time in our State's
history. We are also the most electricity-efficient State in
the Union, as that chart, based on U.S. Department of Energy
figures shows, and we are not resting on our laurels. It is in
our self-interest to become even more electricity efficient as
the summer proceeds.
Those two goals--building plants and conserving--are the
major prongs of a long-term energy plan that we have put
together for every Member of this Committee. Long-term
contracts are also a big part of that, and I want to thank
David Freeman, who is with me today, formerly of the Department
of Water and Power--he helped negotiate those--and Michael Kahn
who is president of our ISO, who is also with me in attendance
today.
Let me just elaborate for a second on the building of power
plants and conservation. As was noted earlier, for the 12 years
before I was a governor, not a single major power plant was
built in our State. Not one. But we began earnestly to right
the ship, and as I said, we have licensed 16. Ten are under
construction. Four will be online this summer. The first one a
week from today will come online in Bakersfield. Two more will
come online by July 7. Those three plants will provide roughly
1,200 megawatts of power. In addition, we have sited 10
peakers. Through my emergency powers, I have cut the permitting
process to 21 days to site peakers. They represent more than
800 megawatts of power.
Part of our effort to get more plants online involve
reducing the time to site permits. That was mentioned earlier.
We have cut that in half from a year to 6 months, and I have
reduced that even further through my emergency powers to 4
months.
So the combination of the plants online plus additional
renewables, distributed generation, and re-rating of existing
power plants we believe will provide 4,000 megawatts of power
by the end of September. Then we have 5,000 megawatts coming
online in each of the next 3 years for roughly 20,000 megawatts
by the end of a 4-year period. Suffice it to say, at no time in
the history of the State have so many plants been under
construction in California.
On conservation, we are not resting on that laurel. I
signed the bill for $850 million, which encourages more
efficiencies in people's homes and places of work. Plus we
signed an executive order which gives people and businesses a
20-percent rebate if they reduce their electricity by 20
percent any of the 4 months--June through September--of this
summer. Plus we have signed agreements with 137 companies,
including the Bank of America and Wells Fargo, Hilton Hotels,
for them to reduce their consumption by 20 percent from June to
September of this year. We have signed agreements with 225
municipalities, special districts, for them to achieve between
10 and 20 percent conservation. So all across the State,
Californians are pulling together to build plants and to reduce
electricity usage.
I think the proof is in the pudding. In May, it was
reported that Californians had reduced electricity usage over
last year by 11 percent and by 10.4 percent during peak
periods. I think that is a remarkable contribution, but we are
going to do even more.
So I think it is fair to say on long-term contracts, which
have reduced our dependency on the spot market by roughly 40 to
45 percent, on building plants, more than any governor has done
before, and on conservation, California is doing its part. The
one mission element, at least until Monday, was any efforts to
regulate the wholesale price of electricity. As the Chairman
correctly pointed out, that is exclusively the function of the
Federal Government. The State has no control over that, even if
it wanted. Our only power is the power to advocate, testify,
occasionally to shame, to make sure that action is taken.
As the Chairman also said, the Commission is responsible to
see that rates are just and reasonable. That comes as a great
shock to some people who think that market forces should take
hold no matter what. I am going to speak to that a little
later. But that is not the law. As Ranking Member Thompson
pointed out, the law does require just and reasonable rates be
enforced, and FERC by its own admission has allowed those rates
to remain in effect, even though they made a finding November
2000, reiterated in December 2000, reiterated again in April
2001, that our rates were not just and reasonable and our
market was dysfunctional.
Under law, the Commission must order refunds once they make
a finding that a marketplace is dysfunctional and rates are not
just and reasonable. Under law, if rates are not just and
reasonable, they are by definition unlawful, and the ordering
of refunds is not a matter of discretion. It is a matter of
law.
Yet at every point where the Federal Energy Regulatory
Commission could have restored some sanity to wholesale prices,
it failed to do so. I have done my best for approximately a
year to advocate, to urge, and to encourage appropriate Federal
action. I have testified before the Federal Energy Regulatory
Commission. I have written countless letters. I have spoken
personally to Presidents Clinton and Bush. Our electricity
oversight board, the independent service operator, and the PUC
have made at least 100 filings for relief. But in every case,
even in the face of mounting evidence in support of our
position, our requests have been denied or ignored.
Two days ago, the Federal Energy Regulatory Commission did
bow to public pressure and took a step in the right direction.
But here is what the Commission's inaction over the last year
has yielded, and I refer you to the chart on the right where it
says ``Total Wholesale Cost of Electricity in California.''\1\
In 1999, Californians paid roughly $7.4 billion for
electricity. In the year 2000, with demand up only 4 percent,
we paid $27 billion, roughly a 400-percent increase in
electricity costs. This year, we are on track to spend between
$50 and $60 billion, even though we are reducing our
electricity usage by roughly 9.5 percent each month. And as I
explained to President Bush when we had a nice visit in Los
Angeles, a functioning market in which the consumer is reducing
use by 9 to 10 percent a month should produce a reduction in
prices, not a doubling. So we are looking at ratepayers' paying
700 to 800 times more for electricity than they did just 2
years ago.
---------------------------------------------------------------------------
\1\ The chart referred to by Governor Davis appears in the Appendix
on page 742.
---------------------------------------------------------------------------
You will not be shocked to hear that Duke Energy Company
acknowledged not too long ago that they charged the State about
$3,800 a megawatt in January. Reliant, I pointed out, charged
us $1,900 a megawatt on 2 successive days a month ago. So it is
clear that the energy companies have exerted extreme power over
our market and are driving up prices dramatically. That is why
Governors Locke, Kitzhaber, and I, some time ago proposed cost-
based pricing which would allow for a reasonable profit on a
temporary basis until more plants could come online.
A number of noted economists, including Alfred Kahn, the
proponent of airline deregulation, came before this Committee
last week and spoke to the wisdom of temporary price relief for
California and the West.
On Monday, the Federal Energy Regulatory Commission again
refused to impose cost-based pricing. I want to thank
Commissioner Massey for his long effort in that regard. I
believe to this moment that that is still the most effective
way to restrain prices and provide a reasonable profit.
Again, my thanks to our two Senators for their long efforts
and our congressional allies, not just in California but
throughout the West, who have worked night and day for price
relief for the West.
On Monday, with two new commissioners, the Federal Energy
Regulatory Commission did grant some price relief. I thank them
for that. The commission did correct the most obvious errors in
its April order, but it was months too late and there is much
more for FERC to do.
The California ISO estimated that from May 2000 to February
2001, power generators charged Californians $6.7 billion more
than a competitive marketplace would otherwise warrant. They
have recently updated those figures through May, and the
overcharges are now $8.9 billion.
To date, however, Mr. Chairman, not a single penny in
refunds has been returned to California. I believe it is
unconscionable if generators are allowed to keep these
egregious overcharges. Mr. Chairman, FERC must move quickly to
enforce the law. FERC must order these energy companies to give
us back our money.
Then, finally, Mr. Chairman, FERC must turn its attention
to natural gas. Until very recently, California natural gas
prices were 2 to 3 times higher than the national average, and
for a while they were 8 times higher. That was due in part to
the fact that El Paso Natural Gas controlled a significant
portion of the major pipeline into Southern California. It was
not until that contract expired and was divided essentially to
30 other energy companies that the price started to come down
and get close to what the rest of the country is enjoying.
So, clearly, FERC must be--I would suggest this commission
could do a useful service in urging FERC to exercise its
responsibility to enforce laws against manipulation on
interstate pipelines to California.
Mr. Chairman, in conclusion, California will continue to do
its part, building all of the plants California needs and
setting an example for the rest of the country on conservation.
With the greatest of respect, I would ask this distinguished
body to do its part by joining us in holding the Federal Energy
Regulatory Commission's feet to the fire. It is unconscionable
that the commission look the other way while energy companies
bilk Californians out of $9 billion. Californians are due
billions of dollars in refunds. Together we have made progress
on price relief. Now it is time to move forward on refunds, not
just refunds for California but refunds for the entire West.
Again, I thank you for the privilege of being here. I know
there were a couple of questions earlier that were raised about
California's activities, and if it is appropriate to respond to
those questions, I will.
Chairman Lieberman. Thanks very much, Governor Davis, for
that excellent testimony. I think the record does make clear,
as you have documented, that the State of California and the
people of California have taken very significant steps forward
in a most difficult situation which no Member of this Committee
would want to have their State go through, to try to make
things better. That says the obvious. I would say no governor
of one of our States would like to have that State go through
that either. Both in terms of bringing more power online
through the State, but also in the very impressive conservation
figures that are coming out now from California, which means
that individuals, families, businesses understand the crisis
and using less electricity, progress is being made.
We are focused, because we are Federal an oversight
committee, on the Federal Energy Regulatory Commission. And as
you said, and I said before, that is the group that we have
been asking to do what you cannot do and no one else can do--
that is, the State cannot do, and that is to deal with the
wholesale price of electricity.
I wanted to ask you a few questions about the order that
came out on Monday. The first is this--I am going to get to the
nature of the price relief in a moment, but in its order, FERC
provided price relief until the end of next summer, September.
And my question to you: Is that enough time? In other words,
can we expect that by that time enough of the power plants that
are now in the process of being constructed will be online, and
conservation will be sufficient so that supply and demand will
be equivalent or that supply will surpass demand and we can
have a genuinely competitive market? So is September of next
year sufficient time for the State at this point?
Mr. Davis. Well, as I said, I think the Commission's action
is a step in the right direction. They will have to be vigilant
to make sure that there are not too many loopholes and that the
order is enforced.
We will not have, however, about enough power to meet our
demand until sometime late in 2003. Alan Greenspan has said on
a number of occasions that electricity deregulation really does
not work unless you have 15 percent more power than demand. We
will not get to that point until sometime late in 2004.
So, optimally, the order should extend at least until we
get enough power online to bring demand and supply into
equilibrium, and that will not be until late 2003.
Chairman Lieberman. I will ask that question of the FERC
Commissioners this afternoon, why they limited the order to the
end of next summer and whether they are open to extending it if
conditions suggest that they should.
My second question goes to this matter of refunds. In my
own review of the law, it does seem to me that the statute is
clear that if FERC decides that rates are unjust and
unreasonable, not only that they have to take action
prospectively but they have the power to act in a just manner,
which is to order refunds.
In the order that came out on Monday, as has been testified
to earlier, nothing was said about refunds for the overcharges
outside of California along the Western grid. And I was struck,
as Senator Cantwell or Senator Murray said this morning, that
their electricity prices in Washington State have gone up 11
times, by a multiple of 11 in the last year.
FERC's new plan issued Monday, as I get it, is for a 15-day
settlement conference presided over by an administrative law
judge. So I wonder if you have had enough time to give a
response to that as an adequate forum in which to try to obtain
the refunds necessary for the State. And if you do not, what
other avenues do you have available to you?
Mr. Davis. Well, as you suggest, there does not appear to
be much guidance to the administrative law judge as to what to
consider and how to proceed. Obviously, I believe California
should have a seat at the table. So should the other States who
believe they have been overcharged. And we would present
information from the California ISO that is advised by many of
the economists that you had testify before you last week and
have come to the conclusion that Californians are owed at least
$9 billion in overcharges.
Again, the FERC itself came to that conclusion on three
separate occasions, but it has taken no action to put money
back in the pockets of Californians. So they have suggested
that about $120 million might be subject to refund, but there
is an ongoing process that allows the companies to rebut that
and put in evidence to the contrary. The bottom line is no
money has yet come back to California.
I do not know if 15 days is enough time to resolve this
issue, but I do believe the FERC should get a clear signal from
this Committee that refunds are part of its function. Yes, they
have provided some relief going forward. It is not exactly what
we wanted, but there is no question that it will have a
downward impact on prices, on the real-time market. But that is
only half the job. The other half of the job is to give us back
the money that was wrongly taken from us. The Commission made
the determination it was wrongly taken from us. They just did
not follow through and order refunds.
What I would suggest is that at the end of the 15-day
period, you call the FERC back to this hearing and ask what has
happened, how much progress has been made, have States had a
chance to make their case, and what is, in fact, going to
happen on refunds. Refunds--I mean, as you know, there is
really no justice if you have a right but no remedy. We have a
right to $9 billion, but there has been no remedy.
Chairman Lieberman. Thank you. I agree with you. And let me
just say that it is my intention, though the Committee has a
lot on its agenda, that this is an important enough crisis, and
it is a crisis, obviously, that affects the West, but it sets a
precedent for how energy price and supply crises will be
responded to by the Federal Government. So I intend to continue
to exercise, on an ongoing basis, the oversight authority of
this Committee with regard to FERC. And I hope that will be
helpful to them and to people throughout the country.
Mr. Davis. If I may, Mr. Chairman, I might suggest that you
put those questions to Commissioner Wood. I have had three
conversations with him. I find him to be a very reasonable
person. He suggested to me that he thought a more aggressive
approach to refunds might be in order. So I think he might be
sympathetic to----
Chairman Lieberman. I will do that this afternoon. Thank
you.
Senator Thompson.
Senator Thompson. Thank you very much. Governor, welcome
very much.
Mr. Davis. Thank you, sir.
Senator Thompson. Governor, you heard my opening comments,
and they will lay the basis for some questions I have. I
started off by saying that I admire you in many respects. I
wouldn't wish your problem on my worst enemy. You certainly
were not responsible for many of the things that occurred,
certainly as they developed before you became governor a couple
years ago. I was especially impressed by the fact that you said
you had seen all my movies. [Laughter.]
Chairman Lieberman. Late at night.
Senator Thompson. Which makes two of us, now that I have
calculated. Perhaps you can talk to the Chairman about salutary
effects of that. But you have made some pretty pointed comments
concerning other people. You have made some here today. I have
made some. And I am sure that you understand from one elected
official to another that it is appropriate that we get into
some of the history of this and some more pointed comments and
questions. And I appreciate the fact that you do not shy away
from that and you come here today and present yourself for some
of those questions.
So having said all that, I want to ask you how it was that
you seemed to let things get totally out of hand. My
information is that back as far as 1998, the California Energy
Commission warned of possible energy shortages as early as
2000. In February 1999, Bonneville put out a warning concerning
the problems as far as hydropower in the Northwest. In July
1999, the CEC once again warned of short supplies. All this
time, of course, you are becoming more and more aware, and, of
course, last summer, a hotter summer than normal, the lack of
moisture in the Northwest, all of the other factors that we
have mentioned concerning increased demand--I think your
electric power demand from 1996 to 2000 increased by about 24
percent. You were obviously becoming more and more dependent on
imports for your power. May 2000 spikes, shortages,
California's first two-stage alert. January of this year, a
letter from 20 prominent economists saying it would be a
fateful mistake to proceed with current policies such as the
price caps and the spot contracting.
All of those things obviously developed over a period of
time, it looks like a couple of years. But they were there for
anyone to see. Did you see these developments as they were
occurring? Did they cause you concern? If not, why not? And if
you did, why didn't you act sooner?
Mr. Davis. In my testimony, I made clear, Senator, that we
started licensing plants my fourth month in office. I became
governor in January 1999. We talked about electricity usage
increasing from 1996 to 2000. I came in in 1999. We started
approving plants in April. That first year of 1999, before this
matter was really--had not really been chronicled, it certainly
was not in the newspapers with the regularity it is now, we
approved six new plants.
When the matter worsened in 2000, particularly in San
Diego, which experienced the full frontal effect of
deregulation, we passed appropriate legislation to relieve the
problem there, and I began testifying in front of the FERC in
the fall of 2000 after a San Diego meeting.
So I have spent an inordinate amount of time on this issue.
It is obviously important to the growth of the economy in the
West and in California.
But just to put a couple things in perspective, according
to the U.S. Department of Energy, 85 percent of the growth of
electricity in the West in the last 5 years has been outside of
California. We have, as you can tell, a very enviable record on
conservation, and that is not just the product of the work that
I have been engaged in with our legislature. But for 20 years,
we have been requiring energy-efficient buildings, appliances,
all kinds of things which have reaped benefits for our State.
So we have been working on this for a very long time, and
to suggest otherwise is simply not accurate.
Senator Thompson. Well, I see my time is up. I would ask
you, though, to--I want to ask one more question. You can
answer it now or later, if I might.
Mr. Davis. It depends how hard it is.
Senator Thompson. I will just take a few seconds.
I take note of what you said, but in the eyes of many
people, many more fundamental problems were not addressed, for
example, the lifting of the retail caps. Mr. Kahn, who, as you
correctly pointed out, testified here last week in favor of
caps, said that the idea of keeping these retail caps on was
ridiculous. You acknowledge yourself that you could probably
solve the problem if you wanted to raise rates. So you have the
combination of keeping the retail caps on, forcing the
utilities to buy on the spot market, which was great when the
spot market was not, not good when it became high. The approval
process, the siting process, you addressed after the blackouts
occurred, I believe.
These are fundamental structural things, I think, which all
investment advisers--we have had Bear, Stearns, Goldman, Sachs
and others testify--say that these were structural things that
clearly, regardless of who was responsible for how you got to
that point, that clearly had to be addressed. And now they are
being addressed at a price that is much greater than you would
have had to have paid had you addressed them last year, last
summer, when the crisis was obvious to everyone.
So do you not claim--or do you not accept any
responsibility for not having addressed these structural
problems that were inherent in your system that obviously had
to be changed when so many of the circumstances were changing,
especially in light of your emergency powers, if you needed to
exercise them?
Mr. Davis. First of all, it is nice for us to sit back here
and talk about passing on the true price of electricity. But
let me assure you, if I passed on a 700-percent increase to the
citizens of California, there would be an outrage the likes of
which you have never seen, and electricity deregulation in this
country would not benefit from the----
Senator Thompson. I do not think anybody is suggesting a
particular price here today.
Mr. Davis. Well, but I do not know that--I do not think you
have, Senator, but I believe I have heard many people say why
didn't we pass on the true price of electricity. The
legislature and I believe it is important not to shock our
economy into recession, and so we have phased this out over
about a 10-year period. The highest residential user this year
will get about a 45- to 50-percent rate increase. We did
increase rates in January of this year. They went up again 2 or
3 months ago. There are also a number of incentives for
conservation no matter what your rates are, and the people who
are the most efficient, who just use 130 percent of baseline
usage, do not see their rates go up.
But we are trying to manage a system which, as your
question suggests, was basically flawed. The bill that passed
in 1996 unanimously, with every Democrat and Republican voting
for it, and the previous governor signing it, deregulated the
wholesale market but not the retail market. The flaws of that
did not become crystal clear until sometime in 2000, and we
began earnestly taking steps above and beyond the steps we had
done in 1999 to improve the siting process and to put new
plants online.
So, everybody benefits from hindsight, but I make no
apologies for the aggressive efforts we have taken to correct
situations that we inherited. I did not, as you suggest, cause
the electricity problem. President Bush did not cause it.
Obviously it is on our respective watches. We have to try and
manage it as best we can for the people of our State. And I
think we are doing that.
Senator Thompson. Thank you.
Chairman Lieberman. Thank you, Senator Thompson.
Let me just say for the record that it is my understanding
that in almost all States that have deregulated electricity
prices, retail caps, caps on retail prices for a temporary time
period are the rule, the custom. That is the norm, usually. And
so what was adopted here I know had an adverse effect because
of all the other things that went wrong. But I would just make
the point that if, in fact, California electricity customers
were forced to pay the true price of electricity as it was
being fed into the State, I think unfairly, very unfairly, it
would have not only been a jolt to your economy and the
American economy, because you are almost 15 percent of the
national economy, but I honestly think it would have terminated
the movement toward energy deregulation. I mean terminated the
deregulation of energy which is occurring across the country,
and is, generally speaking, I think the way to go.
So I think what is on the line here in your response to
this crisis and FERC's response is not only how this Federal
agency is doing, but whether we are going to continue to enjoy
the benefits of deregulation.
Senator Thompson. Mr. Chairman, if I may just point out, I
think that the issue is not a very good solution versus a very
bad one. I think the issue is a choice between two bad
solutions and whether or not by allowing more of the true price
to be passed on we are creating a larger problem down the road.
Chairman Lieberman. This dialogue could go on a while, but
I think we will hear more of it as the other Senators question.
I am going to call on Members as they arrive, going from
Democrat to Republican. Next is Senator Durbin.
OPENING STATEMENT OF SENATOR DURBIN
Senator Durbin. Thank you, Mr. Chairman. Governor Davis,
thank you for joining us.
Mr. Davis. Thank you, sir.
Senator Durbin. I have listened to your plight with great
interest. You would think that if you are from Chicago or
Illinois, far away from California, it would just be an
academic endeavor. It is not. We have faced natural gas price
increases, home heating cost increases over the last winter
that are at record levels in Illinois. We have just seen a run-
up in gasoline prices, which mercifully are starting to come
down again. And it has sensitized people across my State and I
think across the Nation to the fact that this is not just
California's problem. This is a national energy debate.
Sadly, your State and the people living there have been the
first victims of some of the worst things that have occurred
here. But what I find interesting is that the debate usually
centers on whether or not there is an understanding of market
forces. And those who want to explain away what has occurred in
my State and yours say you just do not understand supply and
demand.
I think behind that statement is the suggestion that we can
trust supply and demand, that we can trust the market forces
when it comes to energy. And yet for a long time here in
Washington, we have come to the opposite conclusion.
In 1935, when we created the Federal Power Administration,
we basically decided that energy was so important to our
Nation's future and that the energy corporations so
unpredictable that they could not go unguarded or unsupervised.
So from 1935 forward, we said we as a government, as a people,
will regulate this market, this industry. It is just too
important to ignore. And I think that brings us to where we
were a few years ago and where we are today.
In 1996, as States like your own embarked on deregulation,
before you were elected governor, I can tell you that
repeatedly the folks from the industry came to us and said,
Washington, get out of the way, we do not want you involved in
this. Every State is going to come up with its own solution.
One size does not fit all. This is not a national thing to do.
Let the States do it.
And as you have noted, and Senators Thompson and Lieberman,
in 1996, when Governor Wilson came forward with his plan, it
passed unanimously in the California General Assembly, which is
probably a rare occurrence on an issue of this complexity. And
so those who were second-guessing whether that California
deregulation was smart or not so smart have to understand that
in the context of 1996, virtually all the parties to the debate
said this is the way to go, setting the stage for what happened
to California and to your administration just a few years
later.
I think that is a background which we should not lose sight
of. As we look at this today, we should be reminded that 66
years ago, this Congress created the precursor to the Federal
Energy Regulatory Commission and said: Watch this market, watch
energy in America. There are things here that can happen that
are devastating. California sadly today is on center stage as
we look at the results.
Let me ask you about a couple things in particular. First,
you have suggested that California should have a seat at the
table in this discussion. I wholeheartedly agree. I think the
residents of all the States should have a seat at the table.
Sadly, this debate comes down to a face-off between the energy
giants and the giant bureaucracies, and there seem to be some
groups that are absent here, including families and businesses
and others that are going to get nailed if we let the market
run amok.
I have proposed a consumer energy commission that will
involve all three, not only the producers and the regulators
but also the consumers, so that they could have a voice at the
table about the need not only for generation and conservation
but also, as in your remarks--and I thought this is critical
from where I live--stabilization so that there is
predictability, so a business knows from month to month or week
to week the parameters of potential energy increases.
I would like to have your comment on that, and particularly
I would like you to address your repeated suggestion, which I
can surely understand, about this need for a refund. FERC has
the authority to give refunds. They have not addressed this
issue. As I sit here I do not know if historically they have
ever considered doing that. But I would like you to comment on
that refund question, what it would mean to your State and
whether there is any precedent that you are aware of at FERC
for such a refund.
Mr. Davis. Well, first of all, I appreciate your
description of the background to the situation we currently
face in California. It was accurate and well done.
Obviously, refunds are a primary way of policing the
market, and if the Federal Energy Regulatory Commission is
supposed to be a watchdog for the consumers--and that was the
original notion back in 1935--then their primary vehicle is to
provide relief, not just prospectively but retroactively. It is
one thing if--well, I was going to give an analogy, but I will
not.
So it is helpful to know that maybe we will not reach $60
billion this year, although we are halfway through it, in
expenditures for electricity--a little shocking when you
realize it was just $7 billion 2 years ago--but that does not
fully balance the equities since we have shelled out far more
money for electricity than would be the case.
All I can say is that whether or not there is a precedent
for refunds of this magnitude, they are owed, they should be
paid, and this oversight committee I believe, and with respect,
should hold FERC's feet to the fire and ensure they issue the
orders to give us back our money. That is the only message the
energy companies will understand. If they have to reach in
their pocket and write a check back to Californians, they will
think long and hard before they take advantage of the market
again.
And in response to your question, Senator Lieberman, I
consider myself a marketplace Democrat. My parents were
actually Republicans. But this is a special market. You cannot
store electricity, unlike any other commodity. The user has to
have it on the day they need it, whether you are on a fixed
income, whether you are a police station or a hospital, and the
seller has to sell it on that day. And so you do need some kind
of buffering situation, and the umpires in this contest, if you
will, are the Federal Energy Regulatory Commission. They need
to see themselves as the--again, another analogy--circuit
breaker to make sure they step in when there are problems. And
the best remedy, I think, is refunds. That sends a very clear
message.
Senator Durbin. Thank you, governor, and I just in closing
would say to the Committee here, your tragic experience in
California has taught some national lessons, and I think
particularly in the area of conservation. You have given us
some real guidance as to what we can do as a Nation to deal
with energy and view conservation as more than just a personal
virtue.
Thank you.
Mr. Davis. Thank you, sir.
Chairman Lieberman. Thanks, Senator Durbin. Senator
Collins.
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. Thank you, Mr. Chairman.
Governor Davis, I would like to join my colleagues in
welcoming you this morning. Although Maine and California are
far apart geographically, we actually have quite a few things
in common. We each have beautiful coastlines. We were each
early movers in electricity restructuring. And both of our
States have citizens that recognize that women make great
Senators, although California has not gotten the party
affiliation right yet.
There are also, however, some major differences,
particularly with how our States have handled electricity
restructuring. Maine has been steadily building new power
plants. California went a decade without building any. Perhaps
most important, Maine did not make California's fundamental
error of artificially capping retail rates.
Fixing retail rates, even in the face of power shortages
and escalating wholesale rates, has clearly been a disaster for
your State. You cannot expect the benefits of a free market if
you have a market which is not free.
Nevertheless, as I said at last week's initial hearing,
electricity markets are not like other markets. By its very
nature, electricity is a unique commodity. It cannot be stored
or inventoried. It is sold continuously on the spot market at
prices that may vary widely.
We had a case last summer in Maine where the spot price for
a megawatt of electricity went to $6,000, which is more than
100 times its usual rate. And, obviously, it is very difficult,
if not impossible, for most consumers to respond to price
spikes by turning off air conditioners or doing the laundry at
a different time.
So it seems to me that while it is fundamental that
electricity markets must first and foremost be structured
properly, they can also create instances where they do not
operate in what FERC calls a workably competitive manner
because consumers are not aware of price spikes. Therefore, I
believe that FERC's actions to mitigate prices appear to be
reasonable.
But while it is important that FERC take action in the
clearly dysfunctional California market, I would caution the
Governor of California to be careful about what you ask for.
While it may be tempting to ask FERC to exercise even more
control of the California market, I know from our experience in
New England that there may well come a day when you will wish
that FERC would exercise less control.
In New England, FERC decided that we needed to give
generators more incentives to build capacity, so FERC increased
what is known as the installed capacity fee. This is a fee that
is paid by consumers to generators to encourage additional
generation. What was really striking was that FERC ordered a
50-fold increase in the I-cap fee over the level agreed to by a
supermajority of the members of the New England Power Pool and
recommended by the New England independent system operator.
It is ironic that FERC ordered this increase despite the
fact that FERC's own report shows that New England already had
plenty of capacity, and it is even more ironic that FERC
ordered this fee in New England when the region with the
biggest capacity problems, California, has no I-cap fee at all.
Governor, with better planning, your State will eventually
be where Maine is today. You will have adequate generating
capacity to meet the needs of your State. Generators will
eventually charge lower rates, although, as in Maine, they
still are unlikely to be cheap. But if you ask FERC to exercise
more authority over your market today, how will you ensure that
FERC does not exercise unwanted authority over your markets
tomorrow. If you call for FERC to set prices today, how do you
know that at some point in the future FERC will not set prices,
or at least some components of that price, at a level that
Californians will almost universally agree is too high? And,
finally, if your answer is going to be that only FERC has
jurisdiction to act on these issues and questions, are you
recommending that we change the allocation of authority between
State and Federal regulators?
Mr. Davis. Well, I appreciate your comments, Senator, about
the flip side of asking for assistance. FERC has been such an
omnipresent factor in our market, ever since I became governor,
that I never contemplated a day without FERC, even though it is
probably worth a few minutes' contemplation.
I do want to make one comment. You touched on it, Senator
Lieberman touched on it. Electricity deregulation might work
efficiently if there is more power than demand. That is the
key. And to States considering electricity deregulation, I
would discourage them from doing so unless they first acquire
more power than demand, because otherwise you are at the mercy
of market forces that will extract every dime FERC allows them
to from your citizens.
I think it is fair to say, Senator, if you were in my shoes
and facing the extraordinary price increases that our citizens
have, you would feel, as I do, that our first obligation is to
fight back and try and get some relief from those price
increases and assure people that the markets will stabilize and
that henceforward they will not be subject to these rapid price
spikes.
So, yes, I am asking for assistance. What we got on Monday
was not perfect but is a step in the right direction. And I am
hoping that this Committee will ensure that refunds are
forthcoming. I think that will have a very sobering influence
on the behavior of energy generators in the future. I want them
to make money, I want them to be profitable, but not at the
expense of driving our economy into a recession, which will
have an adverse consequence on the American economy.
Chairman Lieberman. Thank you, Senator Collins. Senator
Torricelli.
OPENING STATEMENT OF SENATOR TORRICELLI
Senator Torricelli. Thank you, Mr. Chairman.
Governor, welcome to the Committee. Governor, I do not know
that it is productive to engage in partisan blame in this
matter. People in California simply want this problem solved.
But I do have a sense of what is fair. Some things have been
said about you and your administration that simply do not bear
scrutiny. But the fact is your predecessor did not build power
plants. You are building or planning 28. You claim that that is
more than your predecessors or more than at any time in
California history. You suffer from unnecessary modesty. That
is not simply more than at any time in California history. That
is more power plants ever built by any State at any time in any
comparable period. And the record should reflect it.
It has been said, indeed, that conservation should be part
of this equation. Indeed, at no time in American history has
demand fallen by comparable levels. California is not simply
now exercising conservation. You have the most efficient use of
electricity of any State in the Nation. Indeed, if the State of
Maine were to become the model, every citizen of California
would have to double their consumption next month to follow the
Maine model.
On the question of whether or not there is responsibility
for the current flawed deregulation plan, it should be noted
that you did not write it, you did not design it, you did not
vote for it, and you did not sign it. You just inherited it.
And now you are fixing it, and that is to your credit.
Now, I do not think that matters to people of California.
They just want this solved. But fair, nevertheless, is fair.
And I think you have handled this very well.
Now, second, let me say something to the people on the FERC
board. This Senate in confirming Presidential nominations looks
to integrity and it looks to competence. Speaking only for
myself, I want to make clear for FERC members who come before
this Senate again, I am going to look for something else:
Whether in this moment of crisis for the people of California
they were responsive.
FERC has been late. Its response has been inadequate. I am
glad they have acted. But unless or until this response carries
the State of California through this building program until you
have adequate supply, their response is not adequate. And I
hope every member of the board who intends to return to this
U.S. Senate listens very carefully to those words. This is now
a Democratic majority Senate. It will remain so for some years,
and we are watching how the people of California are treated,
and we are watching very closely.
Third, let me say there are those who, I think, are genuine
in wanting to help your administration. But there is a partisan
overlay that perhaps separates the fate of California from what
is happening with the rest of the country. That might be true
with some States. It is not true with your State. If the
economy of the State of California suffers, this country will
follow. There is no separating your economic performance from
that of the Nation as a whole. Everybody has a stake in how
this evolves and whether or not this is solved properly.
Then, finally, let me add to you it is my observation that
if this Committee were meeting on the price of corn or cotton
or housing prices and we were witnessing falling demand,
increased supply, and a 700-percent increase in prices, we
would not be citing the laws of economics.
We would be citing the criminal laws, because it is against
the law. There is a prima facie case that there must be some
collusion. Prices are being set. The free market is not
working. And this is one of the greatest examples I have ever
seen in the history of our country, watching what is happening
with these projections.
I, simply for my part, because you have answered so many of
these questions, wanted to offer my compliments and to say that
there is a public perception because of the national debate,
that some people are talking only about increasing supply,
other people are talking only about the controls of pricing and
what we are doing about consumption. Indeed, you have set
records in both directions: The greatest reductions in
consumption with the greatest conservation and the largest
building program in American history for supply. Everybody else
may have run to their extremes. It appears to me, you, if you
alone, have struck a balanced program.
I hope the people of California in this difficult moment
have the patience to see this through. There clearly is an
answer on the horizon. And I hope, also, Members of this
Committee and the administration will realize that those
numbers of $60 billion for consumption, what is behind those
numbers. Every rise in that cost represents a family that
cannot meet a mortgage, cannot educate a child, is taking from
their retirement income to pay electricity bills. These are not
some abstract numbers. It is people's quality of life and the
future of their children that are being impacted.
And so when we talk about rebates from these energy
producers, when we talk about the need to control their prices,
this is not vengeance against some unnamed corporate entity. It
is preserving the quality of life of individual families in
California who are paying with their futures and their
children's futures by this unconscionable taking advantage of
this situation.
So, governor, I am glad you are here. You may have noted
there is not a question in there, but, nevertheless, I thought
there were some things that you might have been unwilling to
say on your own behalf that needed to be said. I suspect I have
no time, but if I do, it is yours. Thank you.
Chairman Lieberman. I was going to advise you, governor,
that after Senator Torricelli's statement, you could rest your
case. [Laughter.]
Mr. Davis. Thank you, Senator.
Chairman Lieberman. Thanks, Senator Torricelli.
And now, Senator Bennett.
OPENING STATEMENT OF SENATOR BENNETT
Senator Bennett. Thank you. Don't get too comfortable.
[Laughter.]
I lived in California for 12 years. I was there while you
were Chief of Staff to Governor Brown and I welcome you to the
Committee now.
I am delighted to have you say that President Bush did not
cause this. I would hope you advise your political consultant
of that fact. I will just leave it at that, but you saw the
piece in the Wall Street Journal, as did I, as to how your
political consultant tries to write economic policy by focus
groups. I hope you will tell him, and then through him the
people of California, that President Bush did not cause this.
Now, having said that, let me note that by virtue of what
you have done, you have effectively nationalized the power
industry in California. If California were a separate country,
you have taken action similar to action taken by the parliament
in Great Britain when the Socialist Party, the Labor Party,
took it over, and have started doing things yourself as the
chief executive of California which previously were done by
private entities. You are entering into long-term contracts on
behalf of the State, taking out of the hands of the private
entities the right to make those kinds of price decisions.
Let me review, therefore, the record from California with
respect to your administration's ability to do this. I do this
as a cautionary note. I have a quotation here from the Wall
Street Journal. That is seen as a right-wing newspaper, so I
will stay with newspapers in California and the comments that
they have made about your stewardship in this area as you now
step up with a nationalized program.
This is from the San Francisco Chronicle, not known as a
right-wing newspaper. This is last February. ``Governor Gray
Davis was slow to respond to the economic realities of
California's power crisis despite warning signals from
legislators, regulators, and utility executives stretching back
to last summer. Indeed, documents and interviews with industry
insiders, regulators, and lawmakers show Davis may have
contributed to the meltdown of the State's two largest electric
utilities by neglecting a repeatedly suggested strategy for
stabilizing wholesale prices.''
``In addition, a top former Federal regulator said he told
the governor's advisors and State Public Utility Commission
officials as early as July that a key Davis proposal, to lower
wholesale price caps, wasn't likely to solve the State's power
problems. `The Governor resorted to a log-rolling strategy to
get us to do things that we understood at the outset were not
going to be real solutions,' said James Hocker, an appointee of
President Clinton's, who stepped down in January as the
Chairman of the Federal Energy Regulatory Commission.''
Now, moving to March and to the Sacramento Bee, Dan
Walters, ``Crisis Also One of Leadership.'' I will not quote
all of it, but he says, ``It is evident that it would have been
a relatively minor bump in the road had Davis not frozen last
summer when the first indications of price spikes arose. Had
Davis done what private utilities, power suppliers, and others
urged him to do then, adjust power rates slightly and allow
utilities to sign long-term contracts with energy brokers and
generators, the major crisis could have been averted.''
Now, going to a source outside of California but one of the
leading left-wing newspapers in this country, The Washington
Post yesterday says, and I quote----
Chairman Lieberman. We will note that the laughter was
coming from the media table. [Laughter.]
Senator Bennett. Well, if I am going to refer to the Wall
Street Journal as a right-wing newspaper, I have to be even-
handed and refer to The Washington Post as a left-wing
newspaper.
Quoting from The Washington Post, ``The Senate will hold
hearings on California tomorrow.'' This appeared yesterday.
``Governor Gray Davis, having won the argument on price caps,
plans to use that occasion to demand billions of dollars in
refunds from generators for the period when price caps were not
in place. This is not a smart way to persuade generating
companies to invest in new power plants in California, and
without investment, blackouts will return to California sooner
or later.''
Now, as I said, governor, you have nationalized the
industry in California. You have just entered into a contract
for 8 years with Constellation Energy Group that would put a
peak of $154 per megawatt and off-peak of $58 per megawatt.
That is the decision you have made. The State has entered into
that contract.
I would point out that Enron, who has come in for a good
degree of criticism in California politically, last summer with
the utilities offered them 5 years at $50 per megawatt. You
have just entered into a contract that is worse than the one
that could have been obtained a year ago on the free market,
and that raises questions in my mind about your ability to
handle the nationalization of energy in the State of
California.
I am assuming we will have a second round, Mr. Chairman, so
I have laid the predicate for where I am on this first round,
and either now or during the second round, we can get the
governor to respond, because I do not want to unfairly put him
in a position where he cannot respond. But I think the actions
California has taken here are unprecedented, and in the second
round, I will quote the assumption about those actions that are
in both the Los Angeles Times and the Wall Street Journal and I
think we ought to explore that very carefully.
Chairman Lieberman. Senator Bennett, it had been my desire
that there not be a second round, but if the Members want it,
we will have a brief one, only because we have two other
governors and the Attorney General and the Public Utilities
Commission and the five members of FERC. But I wonder, Governor
Davis, if you want to take a moment to respond to the
statements that Senator Bennett has made.
Mr. Davis. Yes, Senator. I mean, I readily acknowledge I
have a number of critics and you have quoted some of them. I do
want to pick up on a couple other things you have mentioned. I
have given President Bush credit for expediting Federal
approvals that have allowed us to license 16 plants. I thank
him for the extension of a couple emergency orders at the
beginning of his term, and I believe in giving people credit
when they do what I believe to be the right thing.
As to why the State stepped in in January of this year to
buy power, it was very simple. These prices have brought PG&E
to its knees. Edison was deemed uncreditworthy, and in a
meeting here in Washington, the generators told me, we are not
going to sell any more power to your utilities. So you either
find us a creditworthy buyer or your lights are going out. The
State decided to become a creditworthy buyer and has done our
best to keep the lights on, the power flowing, and to spread
out the Herculean rise in prices over a lengthy period of time,
which ensures all the power costs are fully paid, but we don't
shock our economy into recession, which I suggest would not do
well for your economy or for the economy of this Nation.
If you want to get into the details, if there is a second
round, I brought David Freeman with me. He oversaw the
contracting process and is more familiar with it than I. But I
have total confidence in his work. He ran the New York Power
Authority. He ran the Tennessee Valley Authority. He ran SMUD.
He ran the Department of Water and Power. Some people think he
can't keep a job, but he has actually done a good job in all
those places and he had to negotiate with these energy
companies starting in late January when we had no leverage,
prices were running $1,500, $1,600, and $1,700 for a megawatt
of power, and I think he did a good job, not just in getting a
good price for the State over 5- and 10-year period, but in
shrinking the spot market, without which we would have seen
higher prices than we are currently seeing this summer in our
purchase on the spot market, because we have shrunk it to the
point, through long-term contracts, where the price has started
to come down.
Chairman Lieberman. Thank you. Senator Carper, you are
next.
OPENING STATEMENT OF SENATOR CARPER
Senator Carper. Thanks, Mr. Chairman.
I want to say to my old colleague, Governor Davis, it is
great to see you and I warmly welcome you to this place.
When I was running for the U.S. Senate a year or so ago, I
asked a sitting Senator who had been a governor, what is the
difference between being a governor and U.S. Senator, he used a
football analogy. He said, when you are the governor, you are
the quarterback on the field calling every play. When you are
the U.S. Senator, you are the athletic director sitting in a
box watching the game.
It is easy for us to sit here in the box watching the game
to be critical of you and the other quarterbacks calling the
plays and trying to move the team down the field. Senator
Torricelli has already spoken, and I think eloquently, about
your efforts, and I would just say to my colleagues, we could
find pundits in our own States and throughout the country who
would question our votes and our steps and missteps just as
questions have been raised about some of the actions of
Governor Davis. I applaud the efforts that you have undertaken
and hope for you and for the people of California that the end
will be a good one and a satisfactory one.
I want to ask you, if I may, to take the lessons that you
have learned in California with respect to electricity
deregulation and with energy conservation and to share with us
what applicability there is for the rest of the country for our
national policy, particularly with energy conservation. What
are the lessons for us as a Nation derived from your
experiences in California for electricity deregulation and for
energy conservation?
Mr. Davis. In terms--I shared earlier one of my thoughts
about electricity deregulation. States who have not yet decided
to go down that road, in my judgment, should not do so until
they acquire more power than their project demand. That will
then give them leverage and allow them to say no to prices that
are unduly high. We look forward to being there someday, so
when someone offers us power at $400 or $500 or $600 a megawatt
hour, we can say, well, we will just turn on one of our
peakers, or thank you very much, if you want to offer it to us
for less than $100, we will talk to you, and you have the
leverage, they know you have the leverage, and you come to a
reasonable resolution of that issue.
On conservation, this has been very exciting because it is
something we had to do. It is not a question of whether we
wanted to do it, it is a question of necessity for us to
improve upon the conservation gains that had been built into
the system before I got there, and it is just exciting to see
what people are willing to do.
When the President was in town, before my meeting, we met
with technology companies. One company is making a flat-screen
computer which reduces electricity usage by 75 percent. Intel
is making a new chip that makes your computer much more
efficient on ``sleep mode,'' so it can receive information and
still conserve about 60 percent of electricity.
We just tell people in their daily lives, if you are not in
a room and no one else is in the room, turn out the lights.
Turn up the thermostat two or three degrees. I believe in
personal example. My wife has taken this cause of conservation
to new heights. When you come into my house at night, it is
like entering a tomb. There is no light, none, except a little
crack of light under whatever door in the room she is in, and
she has replaced all the lights with fluorescent lights. In the
winter, the temperature was down to 55 degrees, so it was--I
went to bed with a sweatshirt on. But her bill the first month
was down 36 percent, last month, 63 percent.
So it is amazing what you can do if you are determined to
reduce electricity, plus it is exciting to see some of the
technology gains that will be on-line, not just for us but for
the rest of the country, because no matter how much excess
power you have today, you will get to a point when you don't
have it and you will want the benefit of these technology
improvements, which our crisis is forcing us to develop, and
obviously, we will share them with everyone.
Senator Carper. You mentioned, in fact, you described here
and earlier the actions that the FERC announced on Monday as a
step in the right direction. What might be some appropriate
further steps in the right direction, one, for the FERC, and
two, for us in the Congress?
Mr. Davis. Well, I think they have to look closely at there
is still some potential for manipulation. Everything is geared
to the least-efficient unit in the State. Everything keys off
that.
Chairman Lieberman. Governor, can I interrupt you?
Congresswoman Susan Davis was here from San Diego and I know
she has to leave now. Before she leaves, I want to note her
presence for the record. Thank you for being here.
Mr. Davis. Thank you very much for being here. Thank you so
much for staying. I lost my thought----
Senator Carper. We were talking about steps in the right
direction, appropriate next steps, one, by the FERC, two, by us
in the Congress.
Mr. Davis. We believe what FERC has done will offer us some
price relief. I notice that Mr. Hebert was suggesting that the
order that he implemented on May 29 was responsible for some
falling prices in California, and it may well have been for 2
days, the 30th and 31st. But we haven't had a stage one alert
since then, so that order only affected us 2 of the 22 days it
has been in effect. So now, by making it applicable across the
board during any purchases, real-time purchases of power, it
should have a downward impact on prices.
I don't know all the potential for manipulation, but the
people in the energy business are smart folks. They have got
trading floors that compare favorably with the New York Stock
Exchange. They have teams of meteorologists. They have media
operations that would shame a network, and so I am sure they
will do their best to find whatever loopholes are there and we
need to be vigilant. This Committee needs to be vigilant, and
so does FERC, to make sure that the thrust of its order is, in
fact, carried out and the relief that is intended is made
available to us and, hopefully, to the rest of--in terms of
refunds, to the rest of the West.
Senator Carper. The last half of my question. What
appropriate steps are in line for the Congress? What should we
be doing? Should we simply be monitoring the actions of the
FERC, holding hearings like this, conducting oversight
operations?
Mr. Davis. There are many things that obviously compete for
your attention. I tried not to give you too long a laundry
list. I mentioned two. The President, when we met with him, and
again, I thank him for the meeting. Even though we didn't agree
on price caps, we agreed on this. There was no reason that the
price of natural gas should be significantly higher in
California than in the rest of the country, particularly
natural gas coming from Texas, and he was open to the
possibility, because I ran this by him twice and he said,
``Yes, you can say this,'' he is open to the possibility that
the tariff should be reimposed on the transportation quotient
of natural gas. Natural gas is deregulated, but there used to
be a fixed price you could charge for transporting it. That is
one possibility to reexamine.
So the two things that I would suggest this Committee focus
on in terms of its dealings with FERC are the potential for
manipulation on the natural gas issue, because natural gas is
not only a cost in and of itself but a huge part of electricity
costs, and what I think is the necessity is providing refunds
to Californians and other citizens in this State who have been
unduly victimized by extraordinary electricity prices.
Senator Carper. Again, welcome. Thanks.
Mr. Davis. Thank you. It is a pleasure to see you in your
new capacity.
Senator Carper. Thank you.
Chairman Lieberman. Thanks, Senator Carper.
Next, we will go to Senator Voinovich.
OPENING STATEMENT OF SENATOR VOINOVICH
Senator Voinovich. Welcome. I was just thinking that nobody
knows the trouble a governor has unless they have worn the
shoes of that governor. I went through the minefields of
deregulation while I was governor of the State of Ohio. The
deregulation legislation finally went into effect a year after
I left.
I have looked at your deregulation and I think that it
ought to be revisited, and I think that some of us that came in
afterwards learned some lessons from California.
Last week, we had five outstanding economists come here to
speak before us and the question to them was, do we need a
legislative solution to the problems that you are dealing with
in California. Their answer was, no, FERC already has authority
to handle the situation, although they did admit that FERC has
been slow to take on new responsibilities that have come with
deregulation, and that they probably needed some more people
and expertise.
As you know, FERC has recently adopted a system of price
controls that allow for all generating units that provide
energy to California to recover their costs plus a reasonable
profit. That is what we did in Ohio. We created a restructured
electric utility system that recovered stranded costs while
also allowing for a reasonable profit for generators. That, in
turn, encouraged greater investment in new generation. In fact,
by 2007, governor, we are going to have 18,000 new megawatts of
on-line power because we had a 5-year cap, but it took into
consideration that companies have to make a profit and recover
their costs. I think that FERC's decision this last week is
going to provide some short-term relief for you. But I do not
think there is any quick fix.
The point I am making is that price caps will not solve
supply shortages in California. In fact, price caps that are
set too low discourage investment, as you know. I think Robert
Samuelson noted in the Washington Post last Wednesday that the
root cause of your problem is demand outran supply, and for
California to avoid the constant worry over the ability to
provide power, investment in new power generation has to be
encouraged, including the implementation of a streamlined
siting process that protects public health and the environment,
and I think that you perhaps ought to look at your deregulation
law again.
Other States, and this is something that is really
significant, have worked through deregulation issues on a
cooperative regional basis. By contrast, the California
situation seems to be extremely polarized, with California
insisting that Western States take definitive positions for or
against price caps.
The question is, at what point will California be willing
to become part of a regional solution, as called for by FERC,
rather than insisting on its own independent governance
structures to run the electric grid? Instead of a single State
operator of the transmission grid, I think the opportunity
exists for a regional transmission organization to be
established, just as we did in the Midwest when I was governor.
We had a multi-State ISO. What do you think of going to a more
regional approach instead of your current handling?
Mr. Davis. As you know, the next largest State in America,
Texas, is not under FERC jurisdiction because they have not yet
separated generation from distribution. The next two States,
Florida and Texas, have submitted to the FERC permission to be
their own ISOs because of the size of their economies. Because
we are the fifth--at least last year, we are the fifth largest
economy on the planet, I think at least for the foreseeable
future, we should be our own ISO, as well. Now, I certainly
believe that until we get to a situation where we have more
power than demand.
This has been, as I am sure you can tell, being a former
governor, one of my least favorite things to do, occupying a
great deal of my time, and I think it is just imperative that
we stay the course on building new power plants, on
conservation. I am pleased that there is some response from
FERC on price relief prospectively. I am hoping that with your
assistance, there will be response on price relief
retroactively.
So I would not be open to the State joining a regional
ISO--I would not be open at all until we reach the point where
we got to 15 percent more supply than demand. Then I would be
willing to revisit it.
That is not to say I don't have great respect for our
neighbors in the West. We have a particularly friendly
relationship with the neighbors that border us, be it Arizona
or Nevada or Oregon and also with Washington, and a sharing
relationship with our neighbors to the Northwest.
Senator Voinovich. Being next to California is like being
in bed with an elephant, and you have had a dramatic impact on
your regional area. Ohio is the third-largest user of
electricity in the United States of America. We had a regional
ISO and we have found it to be beneficial. I would suggest,
governor, that you look at that. I know FERC has recommended
that. I would appreciate, as a member of this Committee, that
you seriously review that issue again and I would like to talk
to you more about it.
Mr. Davis. As a courtesy to you, Senator, I will do that,
and I would be pleased to have a discussion with you.
If I could just make this final point, until Monday,
despite a year of effort on my part and all the agencies that I
work with in California, we did not have a satisfactory
response from FERC on any matter. As a matter of fact, we think
their lifting our price cap in December 2000 was responsible
for blackouts because there were no blackouts when we had a
price cap in effect, none, and it was only when the price cap
was lifted there became an incentive to withhold until the last
minute. Gaming became a great prospect.
And while I quickly acknowledge that price caps on a long-
term basis don't make economic sense, I also want to
acknowledge that 12 of the 16 plants that we have licensed
submitted their application when the hard price cap was in
effect of $250. So they must have thought that was sufficient,
offered sufficient return on their investment. And in terms of
conservation, there is nothing that will discourage us from
improving upon our conservation because we have to do that to
minimize the potential for blackouts and disruption.
So while theoretically I acknowledge that price caps do
not--they may well discourage conservation and discourage
investment, our experience in California, given the situation I
have described, is to the contrary.
Senator Voinovich. I have learned in my life that when
things go wrong, so often what we do is point to other people
as being responsible for our problems. I have found that it is
good to look to one's self and see if there are things that one
can do to improve the situation, and I believe that is the
attitude that you and your State should have and work with FERC
and everyone else. But I think that the finger-pointing ought
to end and we ought to figure out how to get this job done,
because it is not only affecting your State, but the entire
country, including my State.
Chairman Lieberman. Thank you, Senator Voinovich. Senator
Carnahan.
OPENING STATEMENT OF SENATOR CARNAHAN
Senator Carnahan. Thank you, Mr. Chairman.
Welcome, Governor Davis.
Mr. Davis. Thank you, Senator.
Senator Carnahan. I have appreciated the forthright manner
in which you have responded today.
I realize that our topic is primarily the situation in
California, but Missourians are very concerned about the energy
picture, as well. They have watched the crisis unfold in
California and they have been worried about their own energy
bills and how they, too, have increased steadily.
It is important to focus on the proper role of Federal
regulators as we restructure the electricity industry. As we
consider future policies at the national and State level, we
should learn from the problems of the past.
We are told that a fully-functioning deregulated market
should lead to lower prices, and, of course, this is a very
appealing argument. But for all of the initial optimism about
lower prices, California's experiment with deregulation has
caused me to question how future transitions should be managed.
If the deregulation is to continue, we must have the structure
in place for a successful transition. Public confidence is an
important component of any successful market, but competitors
must also feel that there is a level playing field and that
markets are not designed in ways that unfairly benefit some
players while creating barriers for others.
This brings us to FERC's role in the process. There is
certainly no shortage of opinions on the merits of the order
FERC announced last week. But the question in my mind is even
more fundamental. What is the appropriate role for the Federal
Government to play as more and more markets move from
regulation to competition? Regardless of our views on the
merits of FERC's order, the fact remains that FERC's action
came long after the market was found to be dysfunctional,
months after the rates were found to be unjust and
unreasonable.
Like many other States, my home State of Missouri is
considering deregulation. If Missouri deregulates, assuring
just and reasonable rates for Missouri consumers will be
entirely in the hands of FERC. FERC's performance in California
does not inspire confidence.
This week, FERC finally began closing the door on rate
gouging in California, but only after letting a $50 billion
horse out of the barn. Missourians deserve assurances that if
our State deregulates, we won't be stampeded by runaway prices.
I am sure that leaders in California have spent countless
hours considering what mistakes they have made in the past and
what they can do in the future to improve the situation. Now, I
would hope the Federal Government would conduct the same sort
of analysis.
In April, Senator Lieberman and I wrote to the General
Accounting Office asking that it conduct an independent review
of a number of matters relating to FERC. Specifically, we
requested that the GAO study whether FERC has fulfilled its
mandate to ensure just and reasonable prices. FERC played a
very different role when they were Federal caretakers over an
often stodgy regulated industry. But I am coming to believe
that a new approach will be required to oversee what has become
a very dynamic industry.
FERC must seriously reexamine its role in light of recent
experiences. This Committee must aid that effort. If we find
that FERC is not living up to its mission, or if it simply
cannot live up to this mission because of limited resources or
other factors, we must determine the most effective and
efficient remedy. Otherwise, I believe that a truly competitive
market for electricity may well be a long time coming.
To instill public confidence in our energy markets, FERC
must prove capable and willing to assert its authority by
closely monitoring markets and better anticipating potential
problems, and perhaps most importantly, it must be prepared to
take swift corrective action when there is evidence of flawed
markets or abuse of market power. This is a duty we owe to the
American people.
I want to thank you for being here today. I admire your
courage and your willingness to take on this very tough
problem. I have just a couple of questions I would ask you at
this time.
From your experience, do you believe that FERC is equipped
to fulfill its responsibility to ensure just and reasonable
prices as we transition from a regulated to a deregulated
energy market?
Mr. Davis. I think the jury is still out on that. Clearly,
we feel we have been denied relief, at least from November 2000
until Monday, and then the relief we have received is
prospective in nature. The true test of their leadership on
this issue and whether or not they are going to fulfill the
mandate of the Federal Power Act will be seen on how they deal
with the refund question. So I can't answer that question any
more clearly.
I know it is customary for witnesses to sort of break down
on partisan issues, but the commission did not take a positive
step until the two Bush appointees joined it. I don't know if
that means they will take a positive step on refunds or not. It
remains to be seen. I hope they do.
Senator Carnahan. And one other question. Recently, we have
seen some individual transactions where prices were abnormally
high and some have argued that this has resulted from
manipulation in the market and abuse of market power. Should
FERC be more aggressive in its investigation of abnormal
transactions to determine if market power, in fact, has been
abused?
Mr. Davis. I think the answer to that is unequivocally yes,
Senator. In our State, we have logs that indicate plants were
shut down per marketing division. Now, in and of itself, that
may not be conclusive, but you have to ask yourself why the
marketing division would have an interest in telling a plant to
shut down.
The maintenance of our plants, admittedly old ones, some 30
and 40 years old, averaged 3,000 megawatts in each of the years
of 1999 and 2000, averaged about 11,000 to 15,000 megawatts the
first 5 months of this year, and the figures I gave you before
were a comparison, April through May of 2000. In 1999, it was
about 3,000. This year, it started at 11,000 and went up to
15,000. I mean, we can't prove that they withheld power in
order to drive up the price, but it does seem kind of odd that
so many megawatts were out of service.
So I think that is at least one area that the FERC could be
more aggressive in ensuring that the market is not manipulated
and that consumers are not unduly charged with excessive
prices.
Senator Carnahan. Thank you very much.
Mr. Davis. Thank you.
Chairman Lieberman. Thanks, Senator Carnahan.
Senator Domenici
OPENING STATEMENT OF SENATOR DOMENICI
Senator Domenici. Thank you very much, Mr. Chairman.
Governor, it is good to be with you.
Mr. Davis. I, as well.
Senator Domenici. I want to just talk about one area that
concerns me, and I have difficulty understanding what happened
and why it happened, and that has to do with the absence of
long-term contracts during most of this crisis. I have tried my
best to go through a chronology of events with dates and I have
been able to come up with 11 opportunities at different times.
Starting in mid-June 2000, there are 11 times when a U.S.
governor was either offered the opportunity to enter into long-
term contracts or you were urged by some committee or group
that was advising you about the problem, where long-term
contracts were recommended but that recommendation went
unheeded. So let me go through a few and you tell us what
happened.
In mid-June 2000, Southern Cal met with you, according to
what we have here, and the top advisors, and they warned that
electric prices in San Diego could soon go sky high and that
his company would have to take on significant debt. I
understand at that opportunity, at that event, the suggestion
was that long-term contracts be entered into. If that is the
case, why was that ignored at that time?
Mr. Davis. I would like to ask if I might bring David
Freeman with me, who helped negotiate some of these long-term
contracts. Could I ask him to come forward?
Chairman Lieberman. Sure. Mr. Freeman, why don't you come
up, take the seat next to Governor Davis, and just identify
yourself for the record. Don't tell us all you have done in
your life because we do not have enough time.
Mr. Freeman. I am Dave Freeman and I am the senior energy
advisor to the governor, I think I am the oldest guy around.
Chairman Lieberman. That is a good sign.
Senator Domenici. The oldest guy around, where, in
California or up here?
Mr. Freeman. Both. [Laughter.]
Senator Domenici. Let me say to you, as the advisor, I
prefer to ask these questions of the governor, but if he needs
help from you, that is fine with me. I understand that.
Mr. Davis. I understand that.
Senator Domenici. Let me take two or three of them and then
you can answer together. I just gave you one, mid-June,
Southern Cal meets with the governor--I assume you are aware of
this meeting--and the recommendation was that prices were going
to go sky high in the San Diego area and that that company was
going to have to take on significant debt. On that occasion,
the idea of long-term contracts was broached, entered into, and
nothing was done about it.
Mr. Davis. I can answer that question. That was before the
State got into the business of buying power in early January
2001. The PUC did give approval to the three utilities to enter
into long-term contracting. The PUC insisted that it keep its
prudency review, which only makes sense because a utility could
enter into a contract for 3,000 or 4,000 megawatts an hour and
then the consumer would be obligated to pay that.
Some of the utilities took advantage of those long-term
contracting opportunities, others didn't, but the PUC did act,
I believe, in August to allow all three utilities to enter into
long-term contracts.
Senator Domenici. OK. Well, let me move----
Mr. Freeman. Senator, that is correct, and they just
didn't.
Senator Domenici. Please?
Mr. Freeman. I think the utilities who were then purchasing
their own power just failed to enter into long-term contracts.
If they were here, they would say that they weren't sure that
the PUC would approve them, but they did not try.
Senator Domenici. Well, let me go on to a couple of other
dates and tie two dates together. July 21, 2000, PG&E files an
emergency motion seeking authority and guidelines to sign long-
term contracts with electricity suppliers.
On July 27, the governor calls on FERC to extend wholesale
electric price caps. Now, it seems to me he must not have been
supporting long-term contracts at that point and I want to
know----
Mr. Freeman. No, sir. The two actions----
Senator Domenici [continuing]. Were they not good?
Mr. Freeman [continuing]. Are not inconsistent at all.
Senator Domenici. Is there something wrong with long-term
contracts?
Mr. Freeman. No, sir. The two actions are not inconsistent
at all. The price caps were to control a runaway spot market
that was literally taking the money out of the pockets of the
people of California. The long-term contracts were designed for
the future, to establish a just and reasonable market rate. But
the caps were needed not to control long-term contracts----
Senator Domenici. No, I know that.
Mr. Freeman [continuing]. But to control the spot market.
So the two actions were completely consistent.
Senator Domenici. I understand they are different, but it
seems to me that I have ten instances when the governor had a
chance to support long-term contracts and didn't. On a number
of occasions, instead of doing that, shortly around that time,
he suggested caps. It seems to me that is what he wanted all
along, was just caps. That was his proposal.
Mr. Davis. Senator, the Public Utilities Commission met in
August and granted all three utilities the right to enter into
long-term contracts. Some utilities took advantage of that,
some didn't. As David Freeman correctly points out, they will
complain that they had to be subjected to a prudency review,
but every PUC commission in the history of our State that has
granted long-term contracts has always insisted on an
opportunity to review the prudency of that contract for the
reasons I suggested earlier.
So we did--I can't just say, you have long-term contracts.
That is not within my power. The Public Utilities Commission,
then consisting of three members appointed by Governor Wilson
and two by me, did agree to grant that permission in August,
the month after the question arose.
Mr. Freeman. Senator, if I could just add, the minute that
this governor had the authority to enter into long-term
contracts, that is when we started doing it, almost the very
day, in fact, a few days before the statute was actually
enacted by the legislature. It wasn't until January 2001 that
the State began buying power. Before that, it was the utility's
responsibility and the dates that you are mentioning are all
before Governor Davis and the State got into that business. But
the minute we did, we negotiated $42 billion worth of long-term
contracts in several weeks, the largest exercise of that kind
in the history of this country.
Senator Domenici. Well, let me just generalize and then ask
two more questions. Are you suggesting here before our
Committee that you, governor, and if you are his advisor, you
can answer that, you promoted and encouraged and wherever you
had authority, you actually pursued long-term contracts during
all of this crisis? Were you not at some point against entering
into long-term contracts?
Mr. Davis. No. There are two separate periods in question.
First is a period when the utilities were buying power, and was
a period when we were buying power. We started buying power
January 18, 2001. I asked David to start buying power, was it
before the month was out?
Mr. Freeman. Yes, sir. It was----
Mr. Davis. We asked within a matter of days after the State
started buying, and net short, for the State to secure long-
term contracts because we wanted to wean ourselves from total
dependency on the spot market.
Now, the earlier phase, when the utilities were buying
power, at various points, they did raise to me the issue of
long-term contracts, something, I might add, that FERC
discouraged in 1995, 1996, and 1997. I advised the Public
Utilities Commission, in my judgment, it made sense--they had
to schedule the meeting, they have 30 days' notice, they gave
permission in August 2000. I think two of the three utilities
took advantage of that opportunity to obtain some long-term
contracts, but all three were given permission to do it.
Senator Domenici. If you have another chance, I will ask
another question.
Chairman Lieberman. Yes. Thanks, Senator Domenici.
Governor, some of my colleagues on the Committee have asked
for a second round, and because of the importance of the issue,
notwithstanding that we have a couple of governors, attorney
general, etc., waiting, I am going to go ahead and do that. I
am going to ask my colleagues to stick to 5 minutes.
I do want to ask you, would you like to take a brief break?
Mr. Davis. If I could take a 5-minute break, I would
appreciate it.
Chairman Lieberman. This reminds me. Once before, a few
years ago, I was going to meet with President Assad of Syria
and probably the most significant advice I got, excuse my
explicitness, was to go to the restroom before the meeting
because I could expect it to go on for a long time. This
apparently is also true of testifying before a Senate
Committee. So we will take a 5-minute break.
[Recess.]
Chairman Lieberman. Let us reconvene. I am sure not just
Governor Davis, but all of us benefitted from the break and an
opportunity to stretch our legs a bit. I thank you very much.
It has been a very productive and interesting morning.
I want to say to my colleagues, though we are going to go
to a second round, I hope everyone knows they do not have a
constitutional or legal obligation to ask questions on this
round.
Senator Bennett. Yes, we do. [Laughter.]
Chairman Lieberman. I will now call on Senator Thompson.
Chairman Thompson. Thank you very much. Governor Davis, I
think that one of the increasing concerns that we all have is
whether or not these plants that may be in the process of being
licensed are actually going to get built. There are several who
have expressed reservations about investing in new generation
in California.
Merit, for example, a spokesman said that--well, this is
from the San Francisco Chronicle, June 2, 2001. An Atlanta
company that just got approval to build a power plant in
Antioch is holding off construction, citing California's push
for Federal price controls and rhetoric about possible seizures
of power plants. The Charlotte Observer, April 27 of this year,
says even though Duke Energy Corporation is building one, the
Power Star, of California's biggest power plants, top executive
Rick Prowery said the company would hesitate to build more
California plants because the State's energy economy resembles
that of a third world. Reliance expressed some similar
concerns. ``Ridgewood Power said generators find it more
predictable and less risky to operate in third world companies
than they do in the State of California,'' griped Marty Quinn,
Executive Vice President and Chief Operating Officer.
Of course, obviously, some of these folks have their own
axes to grind. There is no question about that. But we have
also heard from investment bankers, as I indicated earlier,
about this. You can't get away from comparing that with the
rhetoric that has come out of California. These power suppliers
have been subjected to all manner of description. You have an
Attorney General there who apparently wants to introduce the
head of Enron to your President so that he can be introduced to
a fellow named Spike.
Assuming that these energy executives don't want to meet
Spike, I wonder what that is doing to the atmosphere when you
are going to threaten to seize plants. What is that doing to
the atmosphere when you are going to have to be, I think, in
the future--we are talking about short-term solutions here
right now primarily. You are going to have to be dependent upon
substantial new investment at a time when the regulatory
environment is very uncertain for these people to start with,
and now they are finding a very hostile political environment.
Is that a wise strategy at this time? Are you concerned about
the completion of plants and suppliers who are expressing these
serious reservations?
Mr. Davis. Well, Senator, with all due respect, the people
I represent are mad. They don't like paying 700 percent more
for electricity. Small businesses in San Diego don't exist
anymore because they had to face this problem in the year 2000
and they want us to fight back, and that is what we are doing.
This is a rough business. You know these energy companies.
Many of them have a wildcatter mentality. My grandfather had
something to do with the oil business and I know what that
attitude is like. California has been a cash cow to a lot of
energy companies around this country who have done
extraordinarily well, and occasionally some harsh words get
exchanged. But my job is to fight back and say we are not going
to take it, and I suggest to you, if it were not for a good
deal of what you might consider political hyperbole, we might
not have the attention of the Federal Energy Regulatory
Commission that stiffed us for almost a year.
Chairman Thompson. Do you think that FERC responded to your
Attorney General suggesting that the head of Enron be thrown in
jail with Spike, or do you think FERC responded because you
called the suppliers pirates and words of that nature? It may
make you feel better, and it may be understandable in
responding to your constituency. We all have the temptation to
do that from time to time. You are not alone in that respect.
The only difference here is, you are going to be very dependent
on these same people.
Regardless of the past, it looks to me like you have to
look to the future. Is it the responsible thing to do to create
an environment for the very people who are in the process of
looking at California for future investment, and sometimes have
requested license applications, who are now doubtful because of
the regulatory and the political environment in your State when
you are the head of that State?
Mr. Davis. Well, first of all, as Senator Torricelli
pointed out, we are building more power plants than anyone has
ever built.
Chairman Thompson. How much has come on-line in the last 2
years?
Mr. Davis. It takes about 2 years to build a plant, but as
I said in my initial comments, there will be three plants on-
line between now and July 7, representing about 1,200
megawatts. There will be ten peakers representing about 800
megawatts. And there will be a total, when you count
distributive generation, additional renewables, re-rating power
plants, approximately 4,000 megawatts by the end of September.
We anticipate 5,000 megawatts for each of the 3 years following
that for a total of 20,000 megawatts.
Now, obviously, we want the State to be an attractive place
for investment, but we don't want companies walking all over
our citizens. We want--responsibility is a two-way street. We
understand the obligation to be responsible and we expect
corporations that operate in our State to be responsible, and
by and large, they are.
Chairman Thompson. Thank you, Mr. Chairman.
Chairman Lieberman. Thanks, Senator Thompson. Senator
Bennett.
Senator Bennett. Thank you. I want to go in the same
direction, Governor, as Senator Thompson. Last time, you said I
quoted your critics. This time, I will quote you, and it is
interesting that Mr. Freeman is sitting next to you, because
here is a circumstance where the two of you may have said
different things.
Here is a quotation, a release from the Office of the
Governor on May 31, 2001: ``I met with the municipal utilities
about 3 weeks and I was very disappointed to learn that they
were charging us more for power than the generators. Here we
have been maligning the generators, properly, because they have
been selling us power at 600 to 700 percent what we paid for it
just 2 years ago. I find out the munis are charging us even
more. So I said, listen, you are going to sell us your excess
power this summer at a cost-plus basis, roughly 10 to 15
percent over cost, or I am going to seize it from you and I am
going to make sure that we get that power at an attractive
rate.''
``I gave them a couple of weeks to negotiate with the
Department of Water and Resources. The first day they had to
negotiate was this Tuesday. We will see what happens in 2
weeks, but if they don't come through with contracts, I am
going to seize the power because they are creatures of the
State legislature. They are supposed to provide power on a
cost-of-service basis, not make a zillion dollars by charging
more than these out-of-State generators who set the Guiness
Book of Records for greed themselves. The munis are doing even
more.''
And then, Mr. Freeman, you are quoted in the Los Angeles
Times, not specifically in response to the Governor's
statement, but generally. `` `These charges go under the
heading, there is no good deed that goes unpunished in this
State,' Freeman said, noting that DWP Power helped avert more
blackouts across the State. He did acknowledge, however, that
the agency has charged high prices for surplus power at the
11th hour, but said that was only because it cost more to
produce. `We have consistently charged Cal ISO our cost-plus 15
percent,' he said. `It is not as though we are up there
peddling a bunch of power to jam it down their throats.' ''
Now, my question--first, if you want to challenge the
statements, that is fine, but my question is, you are here
asking for refunds and rebates from those whom you say gouged
and bilked Californians. Are you planning to ask of that from
California munis?
Mr. Davis. I believe everybody that unduly took advantage
of this situation should be required to make rebates.
Californians expect people to treat us fairly. We expect to
treat them fairly in return.
The statement you quoted from me was accurate. I was
appalled to find out that these municipal power authorities,
which were creatures of the legislature, we gave them
permission to exist, because they were not supposed to be
competing with the free market, they were supposed to provide
cost-of-service power, had, in fact, charged us roughly $360 a
megawatt hour while the generators had charged us about $310 a
megawatt hour, and I found that out about 30 minutes before the
meeting we had with the munis.
So my job is to protect all the citizens of this State from
getting a raw deal and it doesn't matter to me if the raw deal
comes from a generator from Houston or a municipal power
authority in Los Angeles.
Senator Bennett. Mr. Freeman, the governor has asked you to
the table. Do you feel that you gouged the State while you were
running the muni and charging cost-plus 15 percent?
Mr. Freeman. No, sir, and your researcher overlooked one
relevant fact, which is that the day after I left the
Department of Water and Power, that board of commissioners
changed their policy to start charging market prices for power,
and it was that market price policy that Governor Davis
correctly was criticizing. They have since then backed off and
they have now agreed to sell at cost. So the governor is
entirely correct, but I think that I was accurate when I said
that our policy when I was there was to sell at cost-plus 15
percent.
Senator Bennett. Do you feel that----
Mr. Freeman. But if there is any investigation that shows
that we charged more than that, the muni should refund the
money just like anyone else and the governor is being
consistent. Indeed, he should be congratulated for being just
as hard on the municipalities in California as he is on the
other generators. It seems to me that this is just more
evidence that he is standing up for the consumers across the
board.
Senator Bennett. I appreciate that clarification. Just one
last comment, Mr. Chairman, if I might.
Your $50 to $60 billion projected figure does not coincide
with the earlier chart that Senator Murkowski put up that shows
that prices are, in fact, coming down. I would appreciate it if
you would supply information for the record as to whether or
not you are prepared, after examining where prices are, to
lower that projection or if you stand by it. We don't have the
time to go through it here, but we have had two separate charts
that show different projections for the future and I would
appreciate whatever further clarification you could give to
that.\1\
---------------------------------------------------------------------------
\1\ Chart entitled ``California Day-Ahead Power Prices,'' appears
in the Appendix on page 551.
---------------------------------------------------------------------------
Thank you, Mr. Chairman.
Chairman Lieberman. Thanks, Senator Bennett.
Just real briefly, I do want to quote with regard to the
impact of price relief or price mitigation questions. Fair
questions have been raised about the impact of that on the
willingness of power producers to come into the California
market. The Los Angeles Times, which I will not describe
according to any particular ideological inclination, says
today, headline, ``Curbs Won't Halt Plants.''
First paragraph, reports reporters Nancy Vogel and Thomas
Mulligan, ``The expanded electricity price limits approved by
Federal regulators could squeeze big energy traders but will
probably not discourage power plant construction in California,
electricity producers said Tuesday.'' ``But the companies,'' I
go on, skipping a paragraph, ``the companies generally asserted
Tuesday that the order would not deter them from investment in
the vast power-starved Western region, though they have often
raised such a prospect in arguing against price controls.'' So
that is certainly an encouraging dispatch or independent
report.
I think I am going to control myself and not ask any more
questions because you have been on a long time.
Governor Davis, you have been tested generally in this
crisis. You have been tested this morning. But by my judgment,
you have passed the test very, very well. I appreciate your
testimony and I appreciate not only the fact that you have
become an expert in something you probably weren't an expert in
a couple of years ago, but the tone in which you have spoken.
I think you were quite right. You said that neither you nor
President Bush was there at the origin of this problem. The
question is, what do we all do about it now, and that is the
question that we are asking FERC. This is not a partisan
matter, by any means. This is just a question of a genuine
crisis, not of your making, not of the President's making, but
so genuine that it threatens the economy. And I have noted now,
California's economy is now the fifth largest, if it were a
country, in the world, and it is critically important that we
all do our share to overcome the crisis.
I think, as you have testified very directly and eloquently
today, the State of California, the legislature of California,
the people of California have done their part and FERC has
finally come into the arena and done some things to be helpful.
I have concerns, as I stated at the outset, about how fully
effective it will be. I share your concern about the inequity
of not ordering refunds to go to electricity customers in
California and the West because they suffered damage here. When
you have a right, as you said, without a remedy being offered,
that undercuts our system of justice. And, it does not deter
future behavior of that kind by energy wholesalers or anybody
else who would take advantage of a consumer.
So we are going to ask that question of FERC this afternoon
and we are going to stay on the case until we feel that we have
done as much as we can by way of our oversight to make sure
that the Federal Government plays an appropriate role here, or
at least that we have adequate public discussion of the role
that it is playing.
I thank you for the time you took in coming out here. You
have contributed substantially to our understanding of the
problem and I wish you well.
Mr. Davis. Thank you very much. Thank you, Senator
Thompson.
Chairman Lieberman. Thank you. We will now call the Hon.
John Hoeven, Governor of the State of North Dakota, and the
Hon. Judy Martz, Governor of the State of Montana.
According not just to the tradition but the rules of the
Committee, we try to conduct these hearings and our
deliberations generally in a bipartisan fashion. Senator
Thompson requested that these two governors be called and I am
delighted that you two have taken the time and made the effort
to be here. Your presence obviously punctuates the fact that we
have all been testifying to, that though California may have
been most extremely impacted by this energy price and supply
crisis, that certainly other States in the West, let alone
States throughout the country, have an interest in this. So we
look forward to your testimony.
Governor Martz, do you want to proceed first?
TESTIMONY OF HON. JUDY MARTZ,\1\ GOVERNOR, STATE OF MONTANA
Ms. Martz. Sure. Thank you very much. Thank you, Mr.
Chairman, and thank you, Senator Thompson and Members of this
Committee. My name is Judy Martz and I am the Governor of the
Big Sky State of Montana. I appreciate the interest this
Committee has shown in the struggles of Western States to deal
with an electricity crisis. I may, as Vice Chairman Thompson
said, rain on a parade.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Martz appears in the Appendix on
page 821.
---------------------------------------------------------------------------
We are here to discuss the role of the Federal Energy
Regulatory Commission associated with the restructuring of
energy industries. However, the real issue seems to be what
went wrong in California and could it happen elsewhere? Let me
try to answer this question.
The facts show that the primary responsibility for the
electricity crisis in the West lies within the State of
California. A series of mistakes made by the State and the
failure by the State to take corrective action once problems
first arose more than a year ago led directly to the crisis we
are in now. This crisis, I believe, could have been avoided if
California had taken timely action.
Instead of acting, I believe the State, unfortunately,
engaged in a prolonged exercise of blame shifting. I don't say
this to be disagreeable. I really don't. I say this from the
perspective of a State that has been hurt by the California
electricity crisis. I also say this to make sure that other
States do not make the same series of mistakes California made
in the recent years.
We all want to do our share, but it is killing us. Montana
has been hit hard by the very same issues that Washington State
has. As a result of the California electricity crisis, Montana
industrials have gambled on declining future power prices that
have been hurting us as a result of the power prices rising. We
have seen several closures in Montana, a State whose economic
base cannot afford to lose even one single job.
But because we are tied to the Western grid, any excess
energy is pooled to other States and we face higher rates
ourselves. Industries that chose to shop for energy found their
traditionally low rates of about $30 per megawatt rise to as
high as $300. Much of the pain that my State and others have
felt could have been avoided if California had not shied away
from making tough decisions when they were called upon last
year.
Let us review how we got here today. California was the
first State to open its retail electricity markets to
competitive markets in 1996, with Pennsylvania following
quickly on its heels. The California electricity law is often
described as deregulation, but it was nothing of the kind.
California did not deregulate electricity markets but merely
exchanged one set of State regulatory rules for another, which
led to disaster. We did better than that in Montana.
The 1996 law had a number of unusual elements. It forced
California utilities to divest much of their electricity
generation. It required utilities to rely completely on
volatile spot markets to buy all of their power, something no
other State did. It also imposed regulatory rules governing
spot market sales that increased wholesale market prices. It
froze retail rates.
One provision missing from the 1996 law was reform of the
State siting law. It can take up to 7 years to build a power
plant in California, and on the average period, it is 4.5
years, nearly twice the average as in Texas. This was a crucial
mistake. Since California retained a siting process suitable
for long-term planning by regulated utilities with 10- or 20-
year planning horizons, but completely unsuitable for a
competitive market where independent power producers build
virtually all power plants using much shorter planning
horizons.
The failure to address siting reform was, I believe, a
major mistake. Independent power producers moved quickly to
meet California's growing electricity demands, filing
applications to build 14,000 megawatts of new generation
beginning in 1997. Because of the failed State siting process,
none of these power plants are operating yet. Montana did not
make that same mistake. We revised our siting laws to exempt
generation facilities.
It is important to note that the supply shortage in
California did not occur overnight. It developed over a 5-year
period when electricity demand rose by 6,300 megawatts.
Incredibly, over this same period, electric generating capacity
in California actually declined. As I indicated earlier,
California took a big gamble by forcing its utilities to buy
all their power through a volatile spot market. It took an even
bigger gamble by not ensuring that electricity supplies were
adequate to meet the needs of consumers and businesses. It
doesn't take a panel of economists to know that supply
shortages and spot markets are not a good combination. They
produce the sky-high prices that California and the West have
been paying now for the past year.
California has had price caps for the wholesale power sale
since 1998. Last year, California experimented with four
different price caps, starting with a hard cap of $750 per
megawatt hour. This year, FERC changed tactics, approving price
mitigation that reflects gas costs and other costs. That
approach seems to be working, and FERC earlier this week
expanded the scope of its price mitigation plan.
Price caps exacerbated California's supply problems last
year. Since the caps did not apply to the Western markets and
State power producers often chose to sell electricity outside
of California at prices higher than the hard cap, as a result,
power exports from California rose 85 percent and California's
electricity supply fell by 3,000 megawatts. By the end of the
year, when the hard cap had been lowered to $250, the price cap
was seriously exacerbating California's electricity supply
problem, since prices in an uncapped market had risen to more
than $400. Ultimately, California had to ask to lift the price
caps on the grounds that it was causing serious supply
problems.
On December 8, 2000, the California ISO filed an emergency
petition to waive the $250 hard cap, which FERC approved. At
their request, FERC set a soft cap. Price caps last year did
not control high prices. Each time prices were lowered, average
monthly prices rose. The experience last year showed that price
caps failed to control high prices and exacerbated supply
problems.
The lessons California apparently drew from the failure of
price caps last year was to expand the scope of price caps to
encompass the entire West, notwithstanding the opposition
expressed by eight of the 11 governors in the region, and I
repeat that. Eight of the 11 governors in the region opposed
price caps.
The main cause of the California electricity crisis is a
supply and transmission shortage. It is each State's
responsibility, not the Federal Government, each State's
responsibility to license power plants and to get us moving. It
has been clear for a long time that California's siting process
is broken. Although it has made cosmetic changes, the State has
shied away from making meaningful reforms to the siting
process.
The secondary cause of high prices is the disastrous
regulatory rules imposed on the electricity market by the
State. Unfortunately, the State has simply refused to act in a
timely and effective manner. The California electricity crisis,
in large part, is a result of inaction over a crucial 9-month
period after the price spikes and supply shortages began in May
2000. This inaction forfeited the last chance to prevent a
crisis. State rules barred California utilities from recovering
wholesale power costs from retail rates, forcing utilities to
buy power at 30 cents per kilowatt and resell it for 3 cents.
It was those rules imposed by the State of California that
destroyed the financial health of the utilities and drove
Pacific Gas and Electric into bankruptcy. If the State had
allowed cost recovery, the utility's credit would not have been
destroyed. PG&E would not have gone bankrupt, and the State
would not be spending its surplus buying electricity and
bailing out the very utilities whose credit is destroyed. The
bankruptcy of PG&E could have been avoided if the State had
allowed cost recovery.
Perhaps the most serious mistake made by the State was
forcing the California utilities to rely entirely on the
volatile spot markets for all of their power, even after
wholesale prices had risen tenfold. If the governor had allowed
the utilities to enter into bilateral contracts last year,
electricity prices would be a fraction of what they are now.
The State only recognized the need for bilateral contracts
after the financial health of utilities were destroyed and the
State assumed the burden of buying power for Californians. Once
the State was paying the bills, it realized reliance on
volatile spot markets was foolish and began to enter the
bilateral contracts. Ironically, the contract prices California
has announced, and much of this remains secret, indicated that
they agreed to pay up to three times higher than what Duke
Energy offered them last year.
The State's indecision on raising retail rates was another
major mistake, one that led to higher rate increases than were
necessary. Last fall, the utilities requested a modest rate
increase. The State refused to consider this proposal, which
directly led to the PG&E bankruptcy. In the end, the State
ended up approving a much larger rate increase than was
necessary if it had acted in a timely and effective manner. We
governors have a lot of power. It is called executive power,
and I truly believe that could have been used in this case.
Nine months after the beginning of this crisis, Governor
Davis began to take action. In February, he announced an
emergency plan to build 5,000 megawatts of new generation by
July 1. According to recent reports, only 1,300 megawatts of
plants that were under construction before his announcement
will be available on that date.
Governor Davis announced a conservation plan to lower
demand by 3,000 megawatts. I understand that plan also is
falling short and may produce less than 1,000 megawatts in
demand savings, which is a good savings, but nowhere near what
the demand was.
The governor's plan to restore the financial health of
Southern California Edison appears to be languishing in the
State legislature, and I am glad the State is taking this
action, but regret they only acted in response to a crisis,
instead of trying to prevent one.
Threats by the governor and others to seize power plants
and impose punitive taxes, which we did not do in Montana
ultimately, will discourage what is needed most, investment in
new generation. California has seen at least two power plants
on hold now because of uncertainty about regulatory stability
in California. As Senator Thompson said and one other power
company said, ``I have more confidence in regulatory stability
in Brazil than I do in California.''
If the governor takes a rash step, investment in new
generation in California will come to a complete halt. The
State will find itself in the business of generating and
transmitting electricity on a permanent basis. The State will
continue to spend billions of dollars on electricity instead of
on schools. The power plants and transmission infrastructure
will slowly degrade. And California's neighbors, Montana
included, will find that they must continue to supply the power
that California needs, since California refuses to provide it
for itself.
The time has come to quit shifting the blame, quit shifting
it to the Federal Government. We as governors have, as I said
before, tremendous power to take advantage of our own destiny.
FERC has taken strong actions to mitigate high prices in
California. The time has come for the State to buckle down and
do its job, ensure adequate electricity supplies for California
consumers and businesses.
So please, I am asking you, do not put caps on the
utilities of the Western States like Montana. It will be the
same as inflicting foot-and-mouth disease on our agriculture
industry. It will discourage construction of generators, it
will discourage transmission, and it will surely discourage
people from conserving, and it does not encourage us anymore.
I liked what Senator Carper said, that we are like the
quarterback on a team and that you are maybe the athletic
directors, but I tell you what. If the athletic director
doesn't work right, the team is out of business, and I really
see if you put price caps on us right now, if Governor Davis
wants that for California, then I would advise him to do that
for California. He has the power to. But do not inflict it by
FERC on the rest of the States because it will kill us. Thank
you.
Chairman Lieberman. Thanks, governor. I have the feeling
this morning that we are down on the field now. [Laughter.]
Ms. Martz. That is right.
Chairman Lieberman. We are no longer athletic directors.
Governor Hoeven, thank you for being here. I look forward
to your testimony.
TESTIMONY OF HON. JOHN HOEVEN,\1\ GOVERNOR, STATE OF NORTH
DAKOTA
Mr. Hoeven. Chairman Lieberman, thank you for the
opportunity to testify. I must say that I admire the diligence
of both you as Chairman and the Ranking Member, Senator
Thompson, for conducting these hearings and sitting throughout.
I appreciate it very much.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Hoeven appears in the Appendix on
page 825.
---------------------------------------------------------------------------
I have to say this. I do not know if I should, or not, but
Senator Thompson, I really did enjoy your movies.
Chairman Thompson. I knew I would find somebody.
Chairman Lieberman. Do not let this go to your head.
[Laughter.]
Mr. Hoeven. My comments today, and I will be brief, which I
am sure you will be pleased to hear, my comments today will
focus on the President's leadership in setting the right
direction for energy policy. His plan calls for a market-based
approach that will stimulate supply, promote conservation, and
enable North Dakota and other States to meet this country's
energy needs.
North Dakota exports 75 percent of the electricity
generated in our State. We are encouraging the construction of
new and efficient generation and the development of
environmentally friendly renewable energy. We have also
developed one of only two coal gassification plants in the
world, converting coal into natural gas, and as you know, there
is a tremendous need for natural gas right now, which will be a
big benefit to California as they continue to site new power
plants that utilize natural gas.
This diverse and growing energy portfolio will serve North
Dakota's needs for a long time in the future while allowing the
excess energy to be exported and help serve other parts of the
country, like California. We are also one of the low-cost
energy producing States in the Nation, using clean coal
technology, natural gas, and hydro, a fact that we are very
proud of.
We have worked hard to ensure that we have enough
electricity to meet the demands of our consumers and
businesses, and our citizens recognize that you cannot maintain
economic growth if you lack the electricity infrastructure
needed to encourage economic development and continued growth.
We also see energy generation as an important job creator for
our State's economy, while helping to meet a national need.
In order to assure economic growth, our State has a
partnership called Vision 21, investing $10 million with any
company that undertake feasibility studies for new clean coal
technology generation plants. This program will seek to access
the clean coal program in the President's energy policy, if it
is authorized by Congress, creating a Federal, State, private
sector partnership for new energy generation.
For America to move forward and ensure our energy
independence, our Federal Government must utilize market-based
policies that will encourage new and efficient infrastructure.
We must stimulate private investment in new generation and
transmission in order to develop a vibrant, regional wholesale
market. To do this, I believe the Federal Government has two
roles. One is leadership, and the other is to provide market
and regulatory certainty.
President Bush and Vice President Cheney have shown our
Nation the leadership necessary to ensure our future energy
independence. President Bush has developed a long-term national
energy policy while also directing his administration to take
steps that can help address short-term problems like that of
the California energy crisis. The President's initiatives to
help solve the California energy crisis include: Two days after
taking office, the Bush Administration extended emergency
orders giving the State time to enact legislation authorizing
it to buy power on behalf of Californians. A month after taking
office, the President issued an executive order directing
Federal agencies to expedite permits needed to increase
electricity supply in California. In order to reduce demand,
the President issued an executive order directing Federal
facilities in California to maximize conservation this summer.
And at the governor's request, Secretary Abraham asked FERC to
extend a waiver for qualifying facilities from PURPA fuel
requirements, a request that FERC granted. Finally, 4 months
after taking office, the administration took the first steps
towards removing a transmission constraint, the Path 15, that
has caused repeated blackouts.
For a long-term energy independence, the President
developed and released the administration's National Energy
Policy. Not all of the recommendations are popular, but they
all should be considered as part of a comprehensive national
energy policy. America cannot depend on other countries to meet
our energy needs.
In order for new investment to begin in some parts of the
country and continue in others, we must ensure that there is
regulatory certainty at both the State and the Federal level.
State legislative and executive agencies must show they can
assure the investment community that rules will be set and
followed in an expeditious manner. We must ensure that agencies
will make tough decisions, however unpopular, that benefit the
good of the entire State and the region. The Federal
Government, both Congress and the Executive Branch, must move
expeditiously to change the laws and promulgate the rules
necessary to move our energy and electric industries forward.
The Congress must quickly decide what laws need to be repealed
and modified to ensure a vibrant and efficient market. The
FERC, EPA, Interior, and other agencies must implement sound,
market-based rules and enforce them to ensure that market
participants are playing fair while not gaming the system.
The FERC took a step in that direction on Monday. It
remains to be seen if that order will work as designed, but we
do know that all of their orders and rules must encourage new
investment in electricity generation and transmission.
Development of new transmission will require a reasonable
return on investment and reasonable access to the
infrastructure.
In closing, given the right type of Federal and State
regulatory environment, private industry will make the large
investments and long-term commitments necessary to build our
energy generation and transmission infrastructure. President
Bush has provided a road map for the Federal Government's role,
a market-based approach that will help States provide industry
with the regulatory certainty needed to move forward. Though
there will continue to be bumps in the road, we are making
progress. The challenges are great, but by working together, I
am confident we can develop dependable, affordable, and
environmentally sound energy for our future. Thank you, Mr.
Chairman.
Chairman Lieberman. Thank you, governor.
Governor Martz, in your statement, you put a lot of the
blame for the crisis on inaction or mistakes by the State of
California, by the Government of California, but let me ask you
this. I do think that Governor Gray Davis was asked most of the
questions that you asked, so I think he has given his answers
for the record. Part of his response, apart from his response
to the specifics, was that the State of California, the people
are doing what they can now, as much as they can do now, but
because they are so adversely affected by the price they are
being charged by the producers outside the State who are
wholesaling electricity into the State, that they need help
from FERC because only FERC can do anything to mitigate those
prices.
It is probably hard to imagine. We were joking before about
what if this had been Montana that had been affected by this
crisis. But if it had been and you felt you were at a point,
leaving aside what the causes were, at a point where you had
done everything you could, wouldn't you also be appealing to us
for the Federal Energy Regulatory Commission to help protect
you from being unfairly treated by out-of-State wholesalers?
I am coming to your point that governors have great power.
That is absolutely right. But they don't have the power, in
this case, to regulate or at all affect, really, certainly the
price charged by out-of-State producers of power.
Ms. Martz. That is a very fair question, Senator, and I
don't believe I would be coming to the Federal Government for
help. I really believe that I would, if I had the emergency
powers that Governor Gray Davis does, I would be ordering
facilities being built so that we could start to speak to our
own energy needs.
You talk about them having to pay high prices. Because they
are buying our markets, they are causing us to have to pay
those high prices. They are not doing anything that we are not
having to do because of them.
So I don't believe I would. You don't know until you are in
those shoes, but I really believe this is something States
should solve on their own and I really do think that he has
some powers that he hasn't used yet.
Chairman Lieberman. I know you criticized the State and the
governor for not building enough power plants. I am sure you
know that he was elected in 1998 and took office in 1999. It
was pretty hard, I think, but let me ask you to respond, to
have built enough power plants to have been on-line in that
short of a time to deal with the price spikes that began to
occur about a year ago.
Ms. Martz. Well, I think he could be having power plants
on-line right now. He has got 6,300, I think, ordered. He has
got 1,300 coming up, and they are not there yet. Each of us in
our own States has to do what we have to do. We are looking at
wind, we are looking at solar, we are looking at biodiversity,
we are looking at coalbed methane, we are looking at coal, and
we are going to be building as quickly as we can, also.
We have enough power in our own State--people say, well,
you haven't built in your State, either. We haven't because we
never needed to. We export almost as much as we use in our own
State out of State. So we didn't need to build until
California's crisis came upon us.
Chairman Lieberman. Let me ask you this. I have a copy of a
letter dated April 6 of this year that a number of governors in
the West, I believe all Republicans, sent to the Chair of the
Federal Energy Regulatory Commission, and the two of you signed
it. In it, it says, ``Your resistance''--this is to Mr.
Hebert--``your resistance to the considerable pressure to
impose `penny wise and pound foolish rate controls' has served
a long-term interest of our region.''
I wonder, now that FERC, most recently, 2 days ago, has
acted to impose what some call price mitigation, some call
price relief, some call price control, some call soft price
caps, how you feel about FERC's action in light of your earlier
request to the Chairman that they not impose, as I read it, any
form of price controls.
Ms. Martz. In our State, already, meetings with the utility
companies, we have a transition advisory committee working on
these energy issues. Already, some of the utilities have
concern over that. So we are going to have to see how that
plays out. We did not have the full document. We had the press
release from FERC that tells basically what that does, but we
don't have the full document to be able to read that yet, so we
will have to see how that plays out in our State. It may not be
a healthy thing for us. We do not want price caps. We want the
market to play itself out.
Chairman Lieberman. Your 5 minutes is up, but I do want to
give you a chance, Governor Hoeven, to give me your reaction to
what FERC did on Monday.
Mr. Hoeven. On the ruling? Well, I view it as price
mitigation, designed to make sure there is no price gouging or
overcharging. If it works that way and still allows the market
to operate so that, again, we stimulate the increase in supply
that we need, particularly in the Western area power pool, and
at the same time encourage conservation, then it may work, and
I think that is what remains to be seen.
And I think that is the point that I am trying to make.
FERC has to set rules of the game that are certain so that
industry can come in and make long-term commitments and make
investments and know that not only are they going to be able to
recoup that investment, but they are also going to have access
to transmission lines they build and so forth so that they can
do business and truly solve this problem for the consumers of
California and other States.
Chairman Lieberman. Governor Hoeven, am I right, North
Dakota is not on the Western grid, is that correct?
Mr. Hoeven. Right. We are in the mid-America power pool.
Now, we are members of the Western Governors' Association and
we sell power, of course, to a variety of other States.
Chairman Lieberman. Right. So it is both as a seller of
power, but also generally interested in electricity and energy
issues, that you are here today.
Mr. Hoeven. Ironically, this is an incredible opportunity
for our State. We need development in rural North Dakota, in
Western North Dakota. We have oil, we have gas, we have hydro,
we have clean coal technology, we are converting coal to
natural gas, we have bio-diesel, we have ethanol. We are
busting at the seams trying to export energy to the markets
that need it, but we need help from the Federal Government in
terms of the rules of the game so that our companies can invest
in transmission and get that power to market, not only in terms
of recouping their investment, but also in terms of access to
the line they have built. They might build a transmission line
and not even know what access their company is going to have on
that line under the rules that FERC has because it is so much
in transition and there is so much uncertainty.
Chairman Lieberman. Thanks. Senator Thompson.
Chairman Thompson. Thank you, Mr. Chairman.
Governor Hoeven, I think you have hit right directly upon
the nature of the problem when we try to look at FERC's
actions, and I think you have the right solution, and that is
certainty. I mean, that is what we look for across the board in
our country. It is called the rule of law. You may have good
laws, bad laws, indifferent laws, some kind of good, some kind
of bad, but the main thing for business and for individuals is
to know what the deal is, know the game that you are playing.
So now we are launching off under this great pressure. We
are launching off into something that has something to do with
the business' costs, figuring out all these suppliers,
utilities, I suppose, what their real costs are and what is
just. And we put FERC in the position of deciding, somebody
withholds power and they say, well, we need repairs and what
not. Well, what is really on your mind? Why are you really
doing this? We put them in a position of deciding what is just.
So if I were thinking about building new power sources, I
would have to wonder how certain is this. I mean, is somebody
going to wake up some day and look at this thing totally
differently? I think that is the problem. It is not that we can
sit here and say that it is a good idea or a bad idea. I think
hard caps are obviously a bad idea, but that is the problem.
Carrying it further, part of the problem with hard caps is
that it is, as I said, a Goldilocks formulation, not too hot,
not too cold, just right, and if we do this and if we do that
and that works out, and we lift the caps when we say we are
going to. What supplier believes government when they tell them
that? There is no reason for them to believe. So it is
uncertainty, again, and that is why you are seeing, I think, a
lot of the comments you are seeing from potential suppliers in
California.
I think, also, you are right when you say the prices are
high, therefore, what are we going to do? We have got to look
at that, and that is what we are looking at, but we also have
to look at the front end. Why did prices get so high? How did
it come about that we developed this supply problem?
Governor Martz, how is Montana affected by being a part of
the Western grid when California is in the shape that it is in
and urging the things that it is urging? All the talk is about
California, as I am sure you know. All the concentration is
about California. The lead-off witness, in effect, was the
Governor of California. We spent all morning, just about, with
the Governor of California. You other States are out there,
too. And I might point out, as you said, eight of the 11
governors are Republicans and the three who are for price caps
are Democrats. All three of those States will be represented
here today, by the way, but eight of the 11 governors oppose
price caps. Why is that and how is your State as a part of the
grid affected by all the attention and the pressure that is
being brought to bear on behalf of California?
Ms. Martz. Well, thank you, Senator, for the question. In
the morning, when California wakes up, say if they are down
3,000 megawatts in the morning and they have to go out on the
spot market and buy, we can't even buy power in Montana. Right
now, we have tried--we are a regulated market until 2002 for
our homeowners. Twelve major companies went off of that
regulated market when we deregulated, had the opportunity to go
off of the market. They are having a terrible struggle now
buying power, even finding power to fill their need because
most of the power is bought up at a higher price. We can't buy
power. It is contracted out. We are looking at power, when the
2002 market comes up, we can't even satisfy the full load that
we need for our homeowners because of what is happening in
California. They are paying such high prices for it, so it is
driving our prices up.
Chairman Thompson. And, of course, we only know part of the
story. I can't figure out yet what has been released and what
has not been released because the State of California has
resisted, and relented, I think, partially now on releasing to
the taxpayers of California and the ratepayers of California
how much they are actually paying. And I think they still
haven't released what the municipals are paying. And you have
suppliers out here who don't want to reveal the high prices
they are charging. You have purchasers in California who don't
want to reveal the fact that they are paying several times more
than they would have paid last year if they had done what
everybody was urging them to do. So we know they are paying
higher prices. We don't know how much because of that.
I have a note here that you need to leave right away, and I
think that is probably--well, my time is up. How convenient.
[Laughter.]
Chairman Lieberman. Thanks. I am going to let you go, but I
cannot help but say you taught us something. You created part
of a record here that we haven't had before, which is obviously
that anybody on the grid is affected by what is happening in
California, so that if the price goes up there, it makes it
harder to purchase in Montana. But it also brings me back to
the fact that, though I know you are opposed to any form of
price mitigation or relief control, that if FERC imposed some
sort of order here and lowered the price of electricity in
California, wouldn't that help the folks in Montana?
Ms. Martz. No, because we then cannot even build more
generation to keep in the State at all.
Chairman Lieberman. Oh, well that is the tipping point.
Ms. Martz. See, what FERC did, it is important to remember,
the only thing that they did, the only thing you can do to
prevent blackouts is increase supply and reduce demand. Those
two things, you can do. Yesterday's ruling doesn't address
either of those. Price caps won't address getting more power.
Chairman Lieberman. That is correct. Of course, these are
only--I am going to let you go, but these are only temporary. I
mean, there is no question that, conceptually, you could
certainly reach a point where price caps were so severe that
you would discourage supply. Nobody wants to get there. But
what I am suggesting as I hear you is that some temporary price
relief until supply can overcome demand in California actually
would help folks in Montana, too, because once the price is
lowered there, you are not going to have to pay so much more to
buy it off the grid.
Ms. Martz. But Senator, FERC admits this themselves.
Anytime they have ever put a price cap, it has never been
removed. So we are not looking at consistency for the producers
at all, and, boy, if I owned it and I am a small business
person, I would not invest. That is all I can say. And maybe
some people can wait a year. Montana can't. We cannot lose any
more jobs.
Chairman Lieberman. I look forward to that oversight
hearing, hopefully, in the not-too-distance future, when we
press FERC as to why it has not removed the price cap.
Ms. Martz. Thank you.
Chairman Lieberman. Because supply has----
Chairman Thompson. I thought you already guaranteed it
would be temporary.
Chairman Lieberman. Just listening to the governor, I said,
if they do not remove a price cap, we will be back here when
supply exceeds demand to ask that they do that.
Thanks so much for making the effort and taking the time to
come out here and I wish you both well.
Ms. Martz. Thank you very much.
Mr. Hoeven. Thank you very much.
Chairman Lieberman. The next panel is the Hon. Attorney
General of the State of Washington, Christine Gregoire, and Roy
Hemmingway, Chairman of the Oregon Public Utilities Commission.
I thank you both for your patience. I thank you for coming
out. I was honored to become Chairman of this Committee
recently and I said I was feeling like I was Attorney General
again, which was definitely six great years of my public
service career. Of course, one thing I missed when I came here
was that nobody called me ``General'' anymore.
Anyway, General, it is nice to have you here. We welcome
your testimony.
TESTIMONY OF HON. CHRISTINE O. GREGOIRE,\1\ ATTORNEY GENERAL,
STATE OF WASHINGTON
Ms. Gregoire. Thank you, Mr. Chair, Senator Lieberman,
Senator Thompson. Thank you for the opportunity to come before
you today and testify.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Gregoire appears in the Appendix
on page 415.
---------------------------------------------------------------------------
Let me also publicly thank both of our Senators from the
State of Washington, who came before you this morning, for
their support and their hard work with regard to the energy
crisis facing the State of Washington.
I am here this afternoon primarily in my role as chief
enforcer of the State and Federal antitrust and unfair business
practice laws for the State of Washington. But I also come to
speak on behalf of my colleagues from the State of Oregon and
California regarding the multi-State law enforcement
investigation that we began recently.
First, let me say that I am pleased that FERC recognized
that this is a West-wide crisis involving all 11 Western
States. Consumers in my State have been paying extraordinarily
high prices for the last year. These issues are not just about
legalities and economic theory, but about, fundamentally, the
day-to-day lives of people, our businesses, our schools, and
our environment. Let me share some of the impact this crisis
has had on the people of the State of Washington.
Our utilities, especially our publicly-owned utilities,
have paid hundreds of millions of dollars for power over the
last year. For example, Seattle City Light paid $312 million to
buy power on the open market this past year compared to a
normal year in which it spends about $50 million. Seattle
consumers' rates were raised 42 percent since January of this
year, and there is another expected rate increase of 22 percent
in October. These increased costs reverberate throughout our
economy and our society. Our schools have diverted funds from
needed educational programs to purchase power, and we have
idled or shut down major industries. Georgia Pacific shut down
its Bellingham plant and idled 420 workers, citing power costs
as the reason.
Let me turn now into the multi-State investigation into
unlawful business practices. The multi-State investigation
launched by the attorneys general of Washington, Oregon, and
California focuses on the causes of the exorbitant prices
charged to utilities serving the West Coast consumers. We are
concerned that the energy prices and supply in the past year do
not appear to be the result of natural market forces. In the
past year, let me tell you what we have observed that has led
us to this investigation.
First, the wholesale market rates for a megawatt hour of
electricity skyrocketed from about $30 to $300, sometimes even
as much as $3,000. Were these massive price hikes caused by
some form of unfair business practice or collusive activity
among the generators and the marketers?
Second, sudden, unplanned maintenance outages at generating
plants in California, to the point where 40 percent or more of
the generation capacity has been consistently off-line,
compared to historical averages of about 10 percent. What
caused so many competing generating plants to suddenly go off-
line at the exact same time?
Third, prices remaining high 24 hours a day, even though
power is being purchased for off-peak hours. Why can prices
stay so high when demand has been reduced?
Fourth, transmission capacity restraints during crucial
times, further exacerbating the high prices and the
availability of power. Were the companies exchanging
confidential data in a joint effort to create transmission
problems?
And fifth, suspicious activity in the California natural
gas market, including claims that companies may have
collusively agreed to suppress competition or otherwise engage
in illegal activity.
If we ultimately find evidence to support a violation of
Federal or State antitrust or unfair business practice laws, we
will seek restitution, injunctive relief, civil penalties, and
our costs for investigating the matter. In California, a
criminal grand jury is being convened in early July to
determine if criminal activity has taken place. That grand jury
will be exploring State, RICO, or other criminal violations,
including false claims under California law.
Let me note something else about our investigation. We are
having difficulty getting access to power generators' records.
California issued civil investigative demands on these
generators in February. It is now June and these three States
still do not have the documents that we requested. Some of the
power generators are simply not cooperating, and this has
delayed our antitrust investigation. They do this despite their
public claims of full cooperation. Where is the cooperation
with the chief law enforcement officers of these States? My
question for the companies is, what do they have to hide? If
you have not done anything wrong, let us see. Let us see the
records on an unconditional basis in a way that is timely and
responsive to our questions. Let the truth be the judge.
Now let me return to my role as public counsel for the
ratepayers of the State of Washington. I understand how very
complex this issue is both for FERC and for Congress. However,
among all the complexities is a very simple, straightforward
principle. FERC has a statutory duty to ensure that rates in
the wholesale market are ``just and reasonable.'' Though I am
very disappointed that FERC did not act earlier to address the
problem on a West-wide basis, I am pleased that it has now
expanded its most recent order to provide relief West-wide. It
is a step in the right direction.
I remain concerned that the order does not provide remedies
for all of the harm that has been suffered by Washington State
citizens, and I want to see if, in fact, at the end of the day,
it does address the problems prospectively. For those reasons,
I would like to encourage this Committee in its oversight role
to do the following.
First, monitor carefully the implementation of FERC's
order. Judge its effectiveness by FERC's statutory duty to
ensure just and reasonable rates.
Second, ensure FERC has the resources and the guidance to
continually monitor the market and investigate rates that may
be unreasonable, to enforce its order and any subsequent orders
designed to make the markets work, and to provide appropriate
refunds to all consumers, including those in California.
Third, if this order does not appear to be working, FERC
must take immediate, decisive, corrective steps to ensure that
the rates are just and reasonable. In addition to protecting
ratepayers, FERC must be vigilant to make sure that energy
efficiency and protection of the environment is an essential
part of any solution, both short- and long-term.
Again, these competition and FERC issues, are not just
about legalities. They are not just about money. They implicate
the day-to-day lives of our citizens, our businesses, our
schools, and our environment. As we move forward, we must keep
these interests, truly the public interests, in the broadest
sense, in mind.
In conclusion, this energy crisis has had a tremendous
impact on my State's citizens, its business, its economy, and
its environment. It is a West-wide problem and has been going
on now for a year. Although we will continue with our law
enforcement investigation, FERC really is uniquely situated to
monitor this energy market and to provide the appropriate
remedies to all who have been harmed by unjust and unreasonable
rates. We ask this Committee to make sure that, in the end,
FERC fulfills its mandate that energy rates be just and
reasonable at all times for consumers. Thank you again for
allowing me to testify.
Chairman Lieberman. Thank you, General, for that testimony.
Mr. Hemmingway, welcome.
TESTIMONY OF ROY HEMMINGWAY,\1\ CHAIRMAN, OREGON PUBLIC
UTILITIES COMMISSION
Mr. Hemmingway. Thank you, Mr. Chairman and Senator
Thompson. I am speaking today as the Chairman of the Oregon
Public Utility Commission. At the beginning, I want to make
three points clear about Oregon's position.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Hemmingway appears in the
Appendix on page 423.
---------------------------------------------------------------------------
First, Oregon believes in competition in markets. We have
begun a gradual and flexible opening of our retail electricity
markets to larger customers, but due to the Western power
crisis, even this go-slow approach is in political trouble and
I cannot predict its future in the Oregon Legislature at this
time.
Second, Oregon believes in sending appropriate price
signals to retail consumers. We have passed on prices to
consumers, as have some publicly-owned utilities in Oregon, and
this crisis has not been brought about by the failure to pass
on higher prices. Passing on to consumers unjust and
unreasonable prices at 1,000 percent above cost will not
alleviate this crisis.
Third, Oregon does believe that there is a shortage of
electricity in the West. Some of this, a good deal of it, is
caused by the fact that we have had a drought year in the
Pacific Northwest. If we had had the rainfall we had in 1998
and 1999, we would not be here today. There would be plenty of
electricity and our plans to build new generation would come
on-line just in time.
I say all this to emphasize that we who advocate serious
Federal intervention in the Western power markets have been
doing our part to augment supplies. We are not against market
competition in the electricity business. We are not advocating
repeal of the laws of supply and demand. We are simply asking
that the Federal Government undertake its historical role in
regulating electricity marketplaces when they are characterized
by high prices and inadequate numbers of competitive suppliers.
The principal argument that FERC has given for not imposing
serious wholesale price controls is that they will work against
bringing increased supply to the market. FERC seems to confuse
here long-term supply issues with the immediate need in the
Western market for power supply. There is no way, as I think
other witnesses have indicated, that the amount of supply that
would create a truly competitive market that could be built in
time to significantly temper the prices that utilities have
been paying in the wholesale market in the last year. The lead
time is simply too long.
Oregon, for instance, has under construction 1,500
megawatts of new generation, and we have in a plant in the
permitting stage 3,000 megawatts of new generation, and in the
planning stage even more. This is in a State with 5,500 average
megawatts of consumption, 10,000 megawatts of peak, so this is
an extraordinary amount of generation that is under
construction. But only one of these plants of about 400
megawatts will be on-line by July to meet the summer problem.
Not enough generation is likely to be able to be brought on-
line this summer to alleviate the real and contrived shortages
in the Western market.
In summary, the high prices supported by FERC are simply
not needed to stimulate investment in long-term generation
because--long-term investment in generation, because that is
occurring, and they cannot magically bring in new supplies in
time to deal with the crisis this year.
Theoretically, high wholesale prices should stimulate
suppliers to bring on generation in the short term that would
otherwise not come to market. But in truth, the unfettered
wholesale market favored by FERC has done little to increase
supply. Over the last year, the California market, in
particular, has been characterized by record levels of plant
outages, despite these stratospheric prices.
The high prices have had a perverse effect. Owners of
generation do not need to bring new supplies to the market in
order to make record profits, which almost all the energy
suppliers in California have done, if you look at their balance
sheets. Without colluding, energy suppliers can figure out that
not bringing every kilowatt to the market will boost prices and
create profits. Only as power prices have declined in recent
months have we actually seen lower plant outage rates. The
shortage has given incentive to suppliers not to bring all
their supplies ready to the market because it has meant that
they get higher prices.
I would like to turn now to the June 18 order that FERC
issued this week. I believe this order is a step in the right
direction, but I want to make clear that it is a small step and
it will not end the worst abuses that have characterized the
Western power market this year. The order remains flawed in
fundamental ways.
It allows all sellers, no matter what the cost of their
generation, to get the price of the highest cost resources
operating at the time. While marginal cost pricing of this kind
is appropriate for commodities in a competitive market--I think
any economist will tell you that--in a market where consumers
have choices, electricity in the Western power market has not
yet reached that point. Electricity is a commodity for which
there are no immediate substitutes and there are no technically
feasible ways yet to send immediate retail price signals when
wholesale prices are high. High wholesale prices on a hot July
day do not mean that consumers will get that signal at the
right time to reduce consumption and reduce the costs to the
utility system.
Worst of all, the new FERC order still provides incentive
for gaming of the system by suppliers. All power sold in the
market gets priced, as I said, at the cost of the highest and
most expensive resource running at the time. As a result, there
is still incentive for suppliers to ensure that there are not
enough efficient resources running and that the inefficient
price-setting resource does operate.
With supplies tight in a small number of suppliers, a non-
competitive market results where individual suppliers can
anticipate the actions of others. FERC has not yet shown that
high wholesale prices in a non-competitive market will deliver
equal or more short-term supply than in a fully-regulated
market. In fact, recent history suggests the opposite.
FERC is still acting as if electricity in the West were
like wheat or pork bellies, where buyers can find substitutes
and respond to high prices and no one supplier can affect the
market or anticipate how other sellers into the market will
respond. None of these conditions is true. In the current
Western power market, we do not have a competitive market.
For over 60 years, FERC and its predecessor, the Federal
Power Commission, oversaw conditions that created a stable
power market that brought electricity to utilities and
consumers at affordable prices and rewarded investors with
reasonable rates of return. FERC's recent ideological devotion
to free-market principles in a market that is anything but free
and competitive has shattered the public's faith in the Federal
Government's willingness and ability to ensure an adequate and
affordable supply of power. FERC's actions threaten to bring a
political end to appropriate deregulation initiatives around
the country, such as Oregon. This is a sad legacy, indeed,
which I hope will be remedied as swiftly as possible by the
Congress. Thank you.
Chairman Lieberman. Thanks, Mr. Hemmingway.
You touched on something fundamental to the FERC order that
I want to ask the commissioners this afternoon, because
although it is a step forward, there remains the question from
our perspective, how much of a step forward? And it does seem
to me, as you said, and I appreciate it, because you are a
regulator, a utility regulator, that they have created a system
here, the so-called proxy pricing, which stated in complete
layman's terms does peg the price to the highest price obtained
in a given period on the market and it allows everybody to come
up to that price. As I understood it, in the off-peak hours,
they can charge up to 85 percent of that high price. So it is a
ceiling, and I suppose it will, therefore, protect consumers
from the most extreme price hikes, but it is a pretty tall
ceiling.
What would you have done if you were a one-man FERC in this
case?
Mr. Hemmingway. Mr. Chairman, I would have looked for the
possibility of reimposing cost-plus price controls. You can
provide plenty of incentive and reward for investment with a
cost-plus arrangement without allowing a supplier to get 1,000
percent greater than its costs when selling into the market.
Chairman Lieberman. And that is what we traditionally have
thought of as utility regulation. Again, we are all for--not
all, but I am certainly for deregulation with competition. It
does strike me that the cost-plus system--the idea that you get
your money back that you spent plus some reasonable profit--is
also easier to apply than this system. It is certainly easier
to understand, for me, than this system that FERC has adopted.
Am I right from a regulator's perspective or not?
Mr. Hemmingway. Well, there is the problem that there are
hundreds of transactions that are going on and these have to be
tracked.
Chairman Lieberman. Right.
Mr. Hemmingway. But FERC is experienced at this. After all,
it did it for over 60 years, so I think they could go back to
that.
And I am for competitive markets and believe it is a better
way to price a product than is regulation, but you need to have
a fully competitive market with multiple suppliers in it in
order to get to that point where you can say that that kind of
pricing is appropriate and I do not think we have that in the
Western power market today.
Chairman Lieberman. Right. General Gregoire, obviously, the
FERC order is good news for Washington State and the rest of
the West in that it both extends the previous FERC order to 24
hours a day, 7 days a week, but more importantly for you, it
extends the order throughout the Western grid, including your
State. The bad news for your State, obviously, is that there is
nothing said regarding refunds that you think you are entitled
to. So let me ask you, what, if anything, the State can do to
right that wrong, and if you have any counsel for this
Committee or for FERC, I suppose, as to how to deal with the
question of refunds that electricity customers in Washington
State may be entitled to.
Ms. Gregoire. Well, thank you, Mr. Chair. I am one who
believes that there have been unjust and unreasonable rates
beginning about June 2000 and that needs to be corrected and
refunds are in order, and you heard from both of my Senators
this morning speaking to that issue, as well. FERC has
suggested that it does not think it has the legal authority in
that the Federal Power Act would call for it to be able to give
refunds only 60 days after it had opened its investigation, and
that would, for purposes of this particular instance, for the
West-wide investigation, didn't occur until April 26.
The problem with respect to that is we have been asking for
a West-wide investigation for some time. California utilities
first approached to FERC in August. It was joined by Washington
in October. FERC declined to do a West-wide investigation in
December. A motion for rehearing was brought in January,
supported by Washington. We went to the D.C. Circuit to ask the
D.C. Circuit to order FERC to open up a West-wide
investigation, and that was declined.
At the end of the day, our consumers may be with no redress
if they have to turn to FERC. I think that is fundamentally
wrong. At the end of the day, our antitrust investigation may
provide a remedy, but I am not optimistic that will be done
soon given the lack of cooperation with the generators.
Sometimes that takes years to accomplish.
So if, in fact, FERC says it has no jurisdiction and we are
unable in reconsideration to convince them otherwise, I would
ask this Committee to take that issue up so that we do not find
this situation occurs again in the future.
Chairman Lieberman. So the current procedure is that you
are not entitled to refunds until the period covered 60 days
after an investigation----
Ms. Gregoire. Is opened. Correct.
Chairman Lieberman. I know this should be clear to me, but
it is not. Has FERC reached a conclusion for parts of the
Western grid outside of California that the rates charged are
now unjust and unreasonable?
Ms. Gregoire. Correct. They did in their order on Monday.
Chairman Lieberman. On Monday.
Ms. Gregoire. So it only goes back the 60 days from the
time they opened that investigation, which would put refunds
due to the rest of the West to begin in July.
Chairman Lieberman. Yes.
Ms. Gregoire. That is fundamentally unfair, since our
consumers have been harmed now for a year with unjust and
unreasonable rates.
Chairman Lieberman. Yes, I agree with you. It is very
unfair. So you are suggesting that the Committee may want to
look, assuming that you will do everything you can to try to
obtain refunds through litigation and other means, appeals to
FERC, that the law itself is flawed and we ought to, as one
result of these oversight hearings, deal with how to correct
that inequity so it doesn't happen again?
Ms. Gregoire. We would ask you to do so, yes.
Chairman Lieberman. My light is flashing. My time is up.
Thank you. Senator Thompson.
Chairman Thompson. Thank you, Mr. Chairman.
Mr. Hemmingway, Governor Davis has been critical of the
amounts charged by the Bonneville Power Administration, which,
of course, is big in your State. Do you believe that Bonneville
has engaged in price gouging?
Mr. Hemmingway. Senator Thompson, no, I don't believe they
have been. They have been selling into the ISO market and been
a price taker in that market, and I think that they have been
able to resolve their issues with Governor Davis on that. I
mean, we can check with him. They have not been able to set the
price of the power that they sell into that market. They merely
take whatever the market clearing price is of that day.
Chairman Thompson. So you would disagree with the governor
with regard to that particular entity, anyway.
Mr. Hemmingway. [Nodded head up and down.]
Chairman Thompson. General Gregoire, with regard to your
investigation, you were talking about the generators and, of
course, you and I both know that saying, ``I am from the
government and if you don't have anything to hide, turn over
your records,'' is not the standard, of course, that we
normally use in court or anywhere else. In fact, civil
libertarians would have a hard time with that if it were
anybody else except power generators.
But having said that, you say you have issued subpoenas.
How many generators have you subpoenaed?
Ms. Gregoire. We have issued civil investigative demands,
and what that provides for those companies, by the way, is
absolute confidentiality, and to date, the companies that have
not complied are Duke, Mirant, and Reliant. We have had
cooperation, on the other hand, from AES and Dynergy. We have
yet to issue with regard to a couple of the other companies and
we are in the process of doing so now.
Chairman Thompson. How many have you issued so far?
Ms. Gregoire. Well, we have sent ones to Mirant, Reliant,
Dynergy, Dynergy Inc., Dynergy Energy Services, Duke Energy
Corp., Duke Energy Trading and Marketing, Duke Energy Power
Services, and AES.
Chairman Thompson. How many of them own generation
facilities in Washington?
Ms. Gregoire. None of them do. They sell into Washington
State.
Chairman Thompson. What percentage of the wholesale market
do these generators supply to Washington?
Ms. Gregoire. Well, let me give you an example. In
Washington State, for example, the purchases last year to
Washington companies by AES was $15 million, by Enron was over
$1 billion, by Dynergy, $195 million, Mirant, $283 million, and
Reliant, $224 million.
Chairman Thompson. Generally, what percentage of the
wholesale market would that be?
Ms. Gregoire. I don't know that.
Chairman Thompson. Well, it seems as if it would be a very
small percentage of your overall wholesale market.
Ms. Gregoire. We do not rely--most of our power comes from
Bonneville.
Chairman Thompson. Well, that was----
Ms. Gregoire. We cannot rely on these generators.
Chairman Thompson. That was going to be my next question.
What are the largest wholesale suppliers, electricity
suppliers, in your State, Bonneville?
Ms. Gregoire. Correct.
Chairman Thompson. Who else? Powerey?
Ms. Gregoire. We have some coal, we have some nuclear, and
we have these generators, primarily.
Chairman Thompson. What about BC Hydro or Powerey?
Ms. Gregoire. We have some, yes.
Chairman Thompson. That is electricity generation, of
course. Bonneville is electricity.
Ms. Gregoire. Right.
Chairman Thompson. Have you issued subpoenas to them to
investigate their role in this?
Ms. Gregoire. We have had full cooperation by Bonneville.
We have not yet issued anything to any of the generators in BC
Hydro.
Chairman Thompson. So I suppose if I was a generator out
there, when you are talking about compliance, I would wonder
why you would be issuing these subpoenas or requests, whatever
you call them, for those companies that have very little--have
no presence in your State, supply what seems to me to be a
small percentage of the wholesale market, on the one hand, and
you really haven't done the same thing with regard to those
generators who supply a much larger percentage of your market.
Ms. Gregoire. Well, Senator, it is a multi-State
investigation involving all three States, and, of course, these
generators are located in California and have not cooperated
with California at all, as well. They have refused to provide
documents to California and, in fact, have brought a protective
order motion in court to ensure that whatever documents they
get, they cannot be released to either Washington or Oregon.
Chairman Thompson. Of course, that is normal when a
governmental subpoenas documents that they are not put on the
public record unless there are further legal proceedings.
Whether or not a company is cooperating, of course, begs the
question, whether they are properly exercising their legal
rights that any company or any citizen has in this Nation. So
the fact that they are or are not cooperating, of course, begs
the question. You will have to resolve that, as to whether or
not they are not cooperating for appropriate reasons. But
again, if I were one of them, I would be wondering why you are
going after all these out-of-State folks and not going after
the ones that are supplying most of the power.
I have nothing further.
Chairman Lieberman. Thanks. Very brief factual questions.
Earlier, one of the Senators from Washington State said that
she thought that the increase in electricity costs in the State
was a multiple of 11 times in the last year. Is that right?
Ms. Gregoire. That is correct.
Chairman Lieberman. And what would be a comparable figure
for Oregon?
Mr. Hemmingway. Mr. Chairman, it would be a comparable
figure for companies that are buying in the wholesale market.
We have a number of utilities which are largely publicly-owned
utilities which have bought a percentage of their power at
those prices and they have had to raise their retail rate as a
result by 20 to 40 percent.
Chairman Lieberman. Is it possible to state what percentage
of that in each of your States, roughly speaking, is derivative
from the problem in California and what percentage is more home
grown, if you will? If you can answer that, fine. If you
cannot, then we will let you think about it and submit a
written answer.
Mr. Hemmingway. Mr. Chairman, it is one grid, and so it is
very difficult to separate out the problem as a result of the
drought from the problem in California.
Chairman Lieberman. That is what I was thinking.
Mr. Hemmingway. As I said before, if we were not having a
drought, even California would not be having a problem, in my
opinion, because we export so much power from the Pacific
Northwest in good water years to California that it--that is
the reason, essentially, these problems started to creep up in
the year 2000, was that the first year that we did not have, in
a long time, really large exports to California.
Chairman Lieberman. General, a final question. In light of
your multi-State investigation, to the best of your knowledge,
is the Antitrust Division of the Justice Department
investigating this matter at all?
Ms. Gregoire. No. To my understanding, the U.S. Department
of Justice is not involved. We have asked them to join with us
in the investigation and they have not joined us as yet. It is
a three-State multi-State investigation.
Chairman Lieberman. How about the Federal Trade Commission?
Do you know of any----
Ms. Gregoire. No.
Chairman Lieberman. No active investigation? I do not have
any other questions.
I thank you for coming out, for your patience. Your
testimony was very helpful. I appreciate it very, very much and
wish you a safe trip back home.
Ms. Gregoire. Thank you.
Chairman Lieberman. Senator Thompson, it is my inclination
now to take a half-hour break to allow everyone who must be
here to stretch their legs and get some lunch and we will be
back at 2:15 with the five members of the Federal Energy
Regulatory Commission. The Committee stands in recess.
[Recess.]
Chairman Lieberman. The hearing will come back to order.
I thank the five members of the Federal Energy Regulatory
Commission, at times in its history little known, I would say
now probably at one of its highest points of visibility with
all the attendant responsibilities thereto.
I think you know that this Committee is an oversight
committee. And the hearings we are conducting here are pursuant
to that authority, to make a judgment as to how your commission
has been responding to the general subject or matter of energy
deregulation with particular regard, of course, to the
electricity markets in the West, and most especially in
California. We heard testimony last week from some leading
economists. We heard testimony today--perhaps you followed it--
from Governor Davis, Governor Hoeven, Governor Martz, Attorney
General Gregoire of Washington State, the Chairman of the PUC
from Oregon, Mr. Hemmingway, and members of Congress.
I know that you have some prepared testimony. Mr. Hebert, I
want to start with you and we will give each of the members a
chance after that. We have been running a 5-minute clock on the
witnesses. Mr. Hebert, if you go a little longer, I do not
think we will physically eject you from the room. And then
Senator Thompson and I will proceed with some questioning.
Thank you for your understanding about the time pressures
today and keeping yourselves available. I appreciate it. It is
important business and you are right at the heart of it, so we
thank you for being here. Mr. Hebert, it is all yours.
TESTIMONY OF HON. CURT L. HEBERT, JR.,\1\ CHAIRMAN, FEDERAL
ENERGY REGULATORY COMMISSION (FERC)
Mr. Hebert. Thank you, Chairman Lieberman. Thank you for
the opportunity to appear here to discuss the Federal Energy
Regulatory Commission's role in restructuring of the
electricity markets.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Hebert appears in the Appendix on
page 430.
---------------------------------------------------------------------------
The Commission's experience in regulating electric and
natural gas utilities and, indeed, the Nation's experience in
pricing and allocating vital goods and services have taught us
an important lesson. Consumers are better off if supply and
pricing decisions are based on market mechanisms rather than
bureaucratic fiat. Thus, the Commission is committed to helping
move this country toward open, competitive energy markets.
At the same time, we recognize we must ensure that broken
and dysfunctional markets are fixed. This poses challenges,
particularly in California and the West, where there is a
substantial imbalance of supply and demand.
In response to these challenges, the Commission has been
working aggressively to reform market structures and to enhance
consumer welfare in California and the West. The Commission has
not lost sight of the point that the best way to lower
wholesale electricity prices and to keep them low is to promote
investment in badly-needed supply and delivery infrastructure
and to encourage demand reduction. The Commission's task
remains to balance these goals to ensure that short-term
measures do not undermine long-term priorities.
My written testimony, which I submitted Monday morning,
describes the dozens of orders the Commission has issued in
recent months addressing California and Western energy markets.
The Commission has done everything that it can within its
jurisdiction to extract every last drop of electricity out of
existing resources and to free up additional megawatts from
demand reduction initiatives. Moreover, the Commission has been
no less active in its efforts to investigate and lower the
price of natural gas in and bring additional pipeline capacity
to Western markets.
In my limited time this morning, I would like to focus on
action undertaken by the Commission on Monday afternoon after
the filing of my written testimony. By a unanimous 5-0 vote,
the Commission expanded the scope of a market monitoring and
price mitigation plan for California and the West. An earlier
version of that plan went into effect on May 29 of this year.
Since that date, as we all know, prices of electricity and
natural gas in both spot and forwards markets have plunged
dramatically. Energy prices in California and the rest of the
West are lower than at any time in the past year and are coming
close to prices in the rest of the country.
Building on that success, the Commission voted unanimously
to expand its price mitigation plan for California's spot
market sales to all hours of the day. The Commission also
extended the limitations on spot prices to all 11 States in the
Western System Coordinating Council. The details of the
Commission's plan are many. For this reason, I have submitted
for the record the Commission's 60-page order which was issued
yesterday afternoon and a 7-page press release on the order
which was issued Monday afternoon.
In a nutshell, the price mitigation ordered for the West
and applicable during all hours is based on the market clearing
price concept adopted in the Commission's April 26 order. The
market clearing price is based on the bid of the highest cost,
least-efficient unit in California that is called upon by the
California ISO to serve load during any day in which available
reserves dip below 7 percent. Sellers other than marketers have
the opportunity to justify individual prices above the market
clearing prices based on their costs.
I am very proud of the Commission's approach toward
reforming California and Western electricity markets. The
Commission's mitigation plan manages what many said could not
be accomplished, restraining prices while encouraging
investment. The key is that price mitigation is based on market
forces. The market clearing price is not a blunt, arbitrary
figure that bears no resemblance to market conditions and is
subject to political pressures and whims.
That is what was tried in California just last summer, Mr.
Chairman. The ISO lowered the price cap last summer from $750
per megawatt hour to $500 per megawatt hour and then $250 per
megawatt hour. All this did was cause an increase in the
average electricity price and a reduction in the ability of the
ISO to procure emergency power. Indeed, last December, the ISO,
the California ISO, begged the Commission to allow it to remove
the cap, explaining that it was impairing the ISO's ability to
meet demand and undermining the reliability of the electrical
grid, what we knew all along.
Also, the mitigation price is not based on the cost of
individual generators. A return to traditional regulation would
entail months and perhaps years of administrative and appellate
litigation over cost structures and reasonable rates of return.
This type of delay and uncertainty is simply unacceptable at
this critical juncture.
The other point that certainly needs to be made is that
under that scenario, Mr. Chairman, the most inefficient units
would be guaranteed profits probably at levels that they will
not get under our plan. Even more disturbing, regulation based
on cost would provide no incentive for the various suppliers to
become efficient and to reduce their costs and thereby lower
prices for consumers. The Commission's plan, on the other hand,
provides every incentive for suppliers to reduce their costs
and improve their efficiency. Nothing is now guaranteed.
A generator or a marketer now makes money by increasing the
efficiency of production. Its profit is determined by how much
of a differential there is between its own cost of production
and the cost of least-efficient, last-dispatch unit. A
generator is now able to recover its fixed costs, but the
extent of its capital recovery and the size of its profit is
determined by the very efficiency of its operations, Mr.
Chairman.
In this manner, a generator will find it profitable to
retire old, dirty, inefficient units and replace them with new,
cleaner burning, more efficient units. I am very proud of the
green initiatives of the Commission's plan. The best way to
clean our air, as we all know, is to never pollute it in the
first place.
And finally, through enhanced monitoring and coordination
of generator outages, along with additional tools to act
against withholding and other forms of anti-competitive
behavior, the Commission has removed any doubt in that we are
committed to ferreting out and remedying any form of market
manipulation and behavior no matter when it occurs, 24 hours a
day, 7 days a week.
As Monday's order makes clear, anti-competitive behavior
simply will not be tolerated by this Commission. Indeed, in
Monday's order, the Commission directed Duke Energy to make
refunds for the period earlier this year when it charged
California consumers approximately $3,800 per megawatt hour for
electricity. In other orders this year, the Commission has
directed the refund of over $130 million for past overcharges
and manipulative behavior and has ordered an expedited hearing
into allegations of affiliate market power abuses concerning
the transportation of natural gas to the California border.
Other investigations are underway, as well.
There should be no doubt that this Commission is actively
pursuing refunds and other appropriate remedies for past
behavior. Frankly, I believe that the best way for California
consumers to be made whole is, if possible, to have the parties
themselves negotiate a fair and comprehensive settlement of all
outstanding refund issues. The Commission is not ducking these
issues. Rather, it is giving the parties, including the State
of California, 3 weeks, which is not a lot of time, to do what
is best for the people of California.
I hope that all parties will come to the table. I hope that
all parties themselves will spare consumers the pain and
uncertainty of protracted litigation over past market behavior.
If, however, these parties are unable to reach agreement, the
Commission stand committed to act quickly and decisively to
resolve these issues.
As for the rest of the West, the Commission's refund
authority presently extends from July 2 of this year, the
earliest refund effective date allowed under the Federal Power
Act. I understand the pleas for an earlier refund effective
date, and this is a matter that the Commission is currently
considering on rehearing of its December 15 order of last year.
In that order, the Commission denied a complaint brought by
Puget Sound Energy which sought an investigation into rates
charged, not for the entire West, but rather one limited to the
Pacific Northwest.
I can state, however, that Western parties outside
California are not shut out of the settlement discussions
scheduled to commence next week, as of Monday. To the contrary,
those discussions are open to all entities which are parties to
the proceeding that was the subject of Monday's order. Those
parties include Puget Sound Energy, the City of Seattle,
various Pacific Northwest utilities and industrial companies,
and the Bonneville Power Administration.
In conclusion, the Commission has been doing a great deal
of work to help ease the present energy problems in California
and the West. The Commission's efforts have contributed to the
recent decline in Western energy prices. Monday's order, issued
by a unanimous Commission, improves upon a plan that is good
for California, good for the Pacific Northwest, and good for
the entire West.
It is a plan that respects market forces and that attempts
to restrain prices, while at the same time offering incentives
for investment in supply and delivery that is the only real
solution for the West's immediate energy problems. It
represents an effort to provide relief now, while making sure
that mitigation is short-lived. The Commission's goal remains
to fix dysfunctional markets and to ensure that markets regain
their competitive footing as quickly as possible.
There has been a lot of talk about the past and I would
like you to know, Mr. Chairman, Senator Thompson, and the
Committee, that this Commission--I can't speak for a previous
Commission, I can't speak for a Commission prior to January 22.
I had no control over that agenda. But I will tell you, sirs,
that we have been engaged. We have issued over 60 orders for
the State of California. We have issued a price mitigation
plan. We have improved upon that plan. We have issued refunds
that no other Commission has done. We are moving forward
quickly. We are trying to resolve gas issues, asking for
transparency. We are committed, and I assure you, sirs, I
assure the members of this Committee that I know in my educated
mind and I truly believM in my heart that we are well on our
way of improving this marketplace and getting them on their
feet while bringing the consumers reasonable prices, but at the
same time attracting necessary investment.
I read in today's issuance of the Wall Street Journal, and
I brought up websites that say, under this order, they remain
bullish and are bringing opportunities into California, and I
think we have done it right and I am committed to it. Thank
you, sirs.
Chairman Lieberman. Thank you, Mr. Chairman.
Just as a point of clarification, I appreciate your
testimony. I think you said some things there that are directly
responsive to questions that were raised by the witnesses this
morning. I just want to clarify what you said, and then I will
go on to the other Commissioners. You said that once the 15-day
period that is called for in the order, Monday's order, in
which parties will work together under an administrative law
judge on the question of refunds, that if that does not reach a
solution that is satisfactory to the Commission, that the
Commission might--or satisfactory to the parties, that the
Commission would consider reentering on those matters.
Mr. Hebert. Let me take 15 seconds. One, I did not get to
see this morning's hearing. As you know, we are busy.
Chairman Lieberman. Right.
Mr. Hebert. But I will tell you that the process is there
is 15 days for the parties to reach settlement. If not, this
Commission by a vote of 5-0 has instructed the administrative
law judge to recommend to us a settlement within 5 days of
that--I am sorry, 7 days of that.
Chairman Lieberman. OK.
Mr. Hebert. So 22 days, and then this Commission can act.
Chairman Lieberman. And just on the second point, which was
obviously of concern to people in Washington State and Oregon
who believe that their quest for refunds is not within the
purview of the administrative law judge, did I hear you
correctly to say that, as you understand it, that they are
wrong, in other words, that the judge will consider their
request for refunds, as well?
Mr. Hebert. You are going to require me to be very careful
here, and let me do it.
Chairman Lieberman. I am not meaning to put any words in
your mouth.
Mr. Hebert. No, you are not.
Chairman Lieberman. I just wanted to make sure I understood
what you were saying.
Mr. Hebert. This is a very delicate situation because I
have the December 15 order, which speaks to that, under
rehearing at this time, so I do not want to conflict myself out
on that case, so I have to be very careful in my answer.
The beauty, I believe, as an attorney who has been involved
in settlement processes, I will tell you that there are two
things that settle issues and cases, uncertainty and deadlines.
You trade certainty for uncertainty and there is a deadline
that closes it out.
We did not define the parameters of the settlement process.
We left it open. That is, in fact, the beauty of the process.
They are parties to that process. They will be in the room. It
will be up to them to negotiate what they believe to be in the
best interests of them and the parties that they represent.
Chairman Lieberman. Well, that is very heartening. I just
saw a copy of a letter that is on its way to you--maybe you
have received it already--from some of the Congressional
delegation from Washington State asking these questions, so
they will be grateful for that. I will hold my additional
questions.
Commissioner Breathitt, welcome. Thank you.
TESTIMONY OF HON. LINDA K. BREATHITT,\1\ COMMISSIONER, FEDERAL
ENERGY REGULATORY COMMISSION (FERC)
Ms. Breathitt. Thank you, Mr. Chairman and Members of the
Committee. I appreciate this opportunity to appear before you
this afternoon to discuss the role of the Federal Energy
Regulatory Commission regarding the restructuring of
California's electricity market and its implications for other
States and regions.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Breathitt with an attachment
appears in the Appendix on page 462.
---------------------------------------------------------------------------
The problems that have been experienced by consumers in the
West have been the primary focus of the Commission for almost a
year now. What we have learned through our investigations and
inquiries is that the causes of the present energy situation in
California and other Western States are highly complex and
multifaceted. I am sure you heard a lot of that this morning. I
believe the Commission has taken bold and decisive actions
within our jurisdiction to remedy the extreme distortions in
the California markets and to address the instances of
potential market power abuses.
Since last August, the Commission has issued over 50
orders--I think the Chairman said 60 now--implementing
important remedial measures and price mitigation mechanisms,
instituting investigations into rates and market design flaws,
establishing programs to maximize electricity supply, delivery
and demand reduction, directing sellers to provide refunds of
excess amounts charged for certain electric energy sales.
Our actions are starting to have a dampening effect on
prices in California and the West. Prices have decreased
significantly since our market monitoring and price mitigation
plan for California took effect on May 29. For instance, during
the week of June 9, prices for spot purchases of power at
Western trading hubs fell to less than $55 per megawatt hour
from a high of about $170 per megawatt hour earlier in the
week. The low prices continued into the next week, and equally
important to me, the price for the longer-term contracts has
also come down dramatically. We have seen forward contracts
drop for 2003 to $41 per megawatt hour in the past month.
We have long stressed--the Commission has long stressed the
importance of long-term contracts to minimize the reliance on
the volatile spot market, and I believe we are down to about 20
percent from 100 percent when we started issuing our orders.
In my pre-filed testimony, I highlight several of the major
orders that we have issued and I hope that you will note those
when you are going through the testimony. It is important for
your Committee to understand the breadth and the scope of our
myriad actions in the Western energy crisis. Critics have said
we have done nothing and that is simply not true.
My testimony also discusses the relationship between the
problems we are experiencing in Western energy markets and
those in natural gas markets and I point to numerous
impediments in natural gas markets that must be addressed.
I have a deep concern about the impact of the prolonged
periods of high natural gas prices on industries and
communities in the West and particularly the impact on the
electric generation costs, since so many of the units in
California use natural gas.
But this afternoon, I would like to focus on our most
recent action. On Monday, the Commission instituted a market
monitoring and price mitigation plan for the entire Western
United States. These new procedures build on our April 26
order, which implemented similar orders just in California, and
we initiated the investigation that has made it possible to
cover the entire Western United States back in April.
The plan that we announced is designed to reduce prices in
all hours that are just and reasonable and to emulate prices
that would be present in a competitive market. The purpose of
the plan is to stabilize the market in the short term and
permit California and the Western States to repair
dysfunctional market mechanisms. The mitigation plan is
intended to provide breathing room for the markets to self-
correct. Importantly, the plan will apply to all sellers,
including marketers and non-public utilities across California
and the balance of the United States portion of the Western
States Coordinating Council.
I fully support the premise of this order, which is that
all sellers in the West should be treated similarly to remove
the incentive to sell into one area versus another, so-called
megawatt laundering. While I wholeheartedly encourage
conservation and embrace demand reduction, we need to
acknowledge that natural gas and electric infrastructure needs
to be expanded and upgraded. I believe this market-oriented
approach that we took in Monday's order will provide the price
mitigation needed and it is my hope that it will not discourage
necessary investment.
I would also like to note before concluding that I attached
a concurrence to express my views about one aspect of the order
that I didn't fully endorse, and that was a section that
instructs the ISO to impose a 10 percent creditworthiness
surcharge to the market clearing price. I believe that the
imposition of such a surcharge virtually conceded to the ISO
the issue of whether or not the ISO must implement our
creditworthiness standards, and I thought that was premature.
And finally, I wanted to state my support for the
settlement conference. You brought that up, Mr. Chairman. I am
keenly aware of the difficulties that the parties face and the
compromises that will need to be made to fashion a very
comprehensive settlement. I have long been an advocate of
negotiated resolutions and I encourage all the parties,
including the State--I believe I heard the governor this
morning say that his delegated officials would be parties to
the settlement, and I was very pleased to hear that, and I hope
that all these parties work very hard at the daunting task of
settling past accounts and structuring new arrangements.
Mr. Chairman, I had a few final remarks, but I will stop
there by saying that I think that all of these goals work
within a market-oriented framework and that is an approach that
I have endorsed. Thank you.
Chairman Lieberman. Thank you, Commissioner Breathitt.
Commissioner Brownell, welcome.
TESTIMONY OF HON. NORA MEAD BROWNELL,\1\ COMMISSIONER, FEDERAL
ENERGY REGULATORY COMMISSION (FERC)
Ms. Brownell. Thank you. Thank you, Mr. Chairman, Senator
Thompson.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Brownell appears in the Appendix
on page 484.
---------------------------------------------------------------------------
Chairman Lieberman. Do you think it was a friendly act to
appoint you to the Commission at this point? [Laughter.]
Ms. Brownell. Well, it is full employment. I don't have any
boring moments in my day, or night, I might add.
Chairman Lieberman. That is for sure. Welcome. Thank you.
Ms. Brownell. In fact, I would like to start out by saying
that I am pleased to be here and I think that my first
experience in getting out this order suggests a culture at the
Federal Energy Regulatory Commission that has not been largely
recognized. There was a sense of urgency, there was open and
honest communication, and there was innovation in the
development of this order. All of my colleagues and the staff
worked very hard to address a number of concerns raised by
stakeholders, and I think we responded responsibly. We have
created a road map to bring certainty for the next two summers
so that we can all get down to the business of creating markets
that work, that work for market participants, but most
importantly that work for consumers.
I would like to talk a little bit today about what we
experienced in Pennsylvania and what we learned, lessons
learned that I think we can bring successfully to the way we do
business at the FERC.
First of all, we were asked to define the differences
between California and some of the States, and I think you know
them well, and I do not say that judgmentally. There are just
fundamentals that it takes for a market to work--good market
design, appropriate capacity, an independent system operator,
and I emphasize that, and sufficient infrastructure.
But while we have, in fact, had great success in
Pennsylvania, there were things that didn't work and things
that we needed to do to transform our Commission to
successfully respond to market changes. Markets are
transitional. You don't declare them open 1 day, declare
victory, and walk away. They don't happen overnight. They are
fragile and they need nurturing. And they need more work with
the regulatory process than I would have anticipated, frankly,
when we started. But they can't use the standard regulatory
responses. Markets don't wait for answers. Markets need
certainty. They need quick responses. People are making
business decisions. Consumers are making buying decisions.
So we designed successfully in Pennsylvania several
flexible approaches that I believe address the issue of
transforming markets. All of our restructuring decisions went
to settlement processes that took no longer than 30 to 45 days
to resolve. What did that accomplish? All of the stakeholders
knew what the rules were. The market participants were not
exposed in the capital markets for an undue period of time. And
we did not have to wait for the standard litigation process, to
wait 1, 2, or 3 years. We were able to bring the benefits of a
retail market to Pennsylvanians, who saved in the first 3 years
almost $3 billion. That only would have happened if we had not
used these new flexible approaches.
In the early stages, we had a lot of operational issues
that traditionally would have had to wind their way through a
rulemaking or some other process that would have taken 8 to 9
months. We had an operational SWAT team that met, in some
cases, every day in the early stages. The rules were, no
lawyers, no lobbyists, no commissioners. We had a staff person
who led a team of operations experts who brought instant
solutions so that there were no market delays, billing
problems, or other kinds of impediments to the market.
The second thing we learned was that market monitoring is,
indeed, a critical issue in managing the transformation and in
building the credibility of the market. It is something I think
we are all learning. I am suggesting to my colleagues that we
bring in some outside experts who do this kind of thing for a
living. We have been rate makers. We have not been market
monitors. And I think the staff is the first to say that they
have worked very hard to design a system that works, but they
would love some advice from the FCC, from the FTC, and from the
SEC. So I would like to move forward with that because I
understand that you, your colleagues, and all of our
constituents need the confidence that we are going to take a
good look at these markets and that there will be transparency
and honesty and equity.
The third thing I think we realized and is more critical
today than ever before are regional solutions. We need to reach
out to the stakeholders in the regions, the States, the
creation of RTOs, listen to what they have to say, listen to
what their experiences are. Yesterday, we had a hearing on
seams issues for RTOs and I think it made a big difference in
informing us on how we must move forward. Our order called for
a technical conference on technology in the introduction in
demand-side management that will bring new technology to the
market, I hope, as soon as we can. We are reaching out to learn
things and to listen to stakeholders to learn. I think this can
be very successful.
So I understand why there are concerns, but now that we
have moved beyond the crisis, let us move to solutions that
will work for the longer term and create the credibility and
the confidence that we all need to introduce the benefits of
competition to all Americans. Thank you.
Chairman Lieberman. Thanks, Commissioner Brownell.
Commissioner Massey, thank you for being here. We look
forward to your testimony.
TESTIMONY OF HON. WILLIAM L. MASSEY,\1\ COMMISSIONER, FEDERAL
ENERGY REGULATORY COMMISSION (FERC)
Mr. Massey. Thank you, Mr. Chairman. Mr. Chairman, and
Senator Thompson, our June 18 order brings dramatically
expanded price controls to a broken Western market. I supported
the order because it adopts measures that I have been
championing for the past 8 months. Price controls are now
extended to the entire Western interconnection, thereby
eliminating the megawatt laundering problem that has vexed the
mitigation programs adopted by the Commission and the ISO over
the past year. Cost-based price constraints are now extended to
all hours, not just those of reserve deficiency. We have long
needed 24-hour-a-day, 7-day-a-week coverage, and now we finally
have it. These caps will remain in place until September 2002,
giving the market two full summers to correct. I endorse these
measures.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Massey appears in the Appendix on
page 494.
---------------------------------------------------------------------------
While better late than never, I wish this Commission had
taken effective action sooner. Until this order, the Commission
had stubbornly refused to implement full-time price constraints
despite rather clear evidence that prices were not just and
reasonable. Businesses have closed down, putting thousands out
of work and hurting the Western economy, and all because of a
broken electricity market. By acting 12 months ago, we could
have prevented much of the economic carnage in the Western
interconnection that has occurred over the past year, and I
regret that we did not.
Given that the Commission adopted measures that I have long
advocated, however, I am tempted to declare victory and let it
be, but I cannot. There are some aspects of the order that I
have strong reservations about. One aspect is the addition of a
10 percent surcharge to the market clearing price to reflect
credit uncertainty. I do not see the need for this. The
Commission has issued orders in the past few months instructing
the ISO to abide by the creditworthiness requirements of its
tariff. I am concerned that the adder may diminish the ISO's
enforcement of those requirements. Moreover, it is my
understanding that, recently, all sales into the ISO markets
have been backed by a creditworthy party--recently, all sales,
not until recently.
Instituting this surcharge does have a modest bright side,
however, I must admit. Generators may no longer attempt to
justify bids on the basis of credit risk above what is provided
for in the cost-based clearing price methodology. This was a
major flaw in the old, ineffective $150 benchmark in our
earlier mitigation program announced in December. Eliminating
that ground for high prices is a positive development.
Second, the order should have provided guidance to the
parties that will participate in this massive settlement
conference that we order. I believe we are avoiding our
responsibility under the Federal Power Act to set just and
reasonable prices by requiring parties to settle a multitude of
issues with a price tag of billions of dollars without at least
2 cents' worth of guidance.
Third, I do not agree with the rhetoric in this order that
characterizes cost-of-service pricing as irrelevant and perhaps
even downright harmful on the theory that it would discourage
new supply. I do not understand the need nor the logic of this
language. We have made a choice in the order to strike a
balance between strict generator-by-generator cost-of-service
regulation and a blind reliance on the market. The mitigation
program puts in place important cost-based price caps while
relying on market-based pricing. The order sets out reasons for
this balanced choice and articulating them is all that is
needed to support our decision. Make no mistake, this is a
cost-based program. The maximum price is limited to the costs
of the last generator dispatched.
I strongly disagree with the statement in the order that a
cost-based inquiry alone would not be sufficient to fulfill our
statutory duty under the Federal Power Act. I do not read the
Federal Power Act and the relevant court decisions so
restrictively. I have aggressively supported this movement to
markets, and I still do, but there is still an important role
for cost-of-service regulation where markets melt down and
prices are not just and reasonable.
What is curious about this aspect of the order is that the
concern is to avoid discouraging new supply. However, as well
respected economist Alfred Kahn recently said of our long
reliance on cost-of-service regulation, and I believe he said
it before this Committee, ``If the literature agrees on
anything about that experience, it is that cost-based
regulation as traditionally practiced has encouraged the gold-
plating of service and the very excess capacity that seems to
promise such enormous benefits to consumers during the past
decade if rates were deregulated.''
Mr. Chairman, I notice the red light is on. May I have 2
more minutes, please?
Chairman Lieberman. Indeed. Go right ahead.
Mr. Massey. Thank you. Dr. Kahn, therefore, believes that
cost-of-service regulation may lead to too much supply. Thus, I
do not understand the order's logic concerning cost-based
regulation discouraging supply adequacy. There may be
legitimate reasons against cost-based regulation, but
discouraging new supply is not one of them, at least according
to Dr. Kahn.
These concerns notwithstanding, I supported the order and
the price protection plan it puts in place. To ensure that this
price protection plan is successful, the Commission must
exercise all of its statutory powers to keep natural gas prices
in the West at just and reasonable levels. Virtually all of the
formula, all of the formula except a $6 O&M adder, is tied to
the cost of fuel. For the marginal unit, that will be natural
gas. Thus, the success of the plan we adopt in lowering prices
depends in large part on fluctuations in the price of natural
gas. If natural gas prices stay reasonable, our plan will
provide reasonable price mitigation.
Today's price protection plan gives California and the West
breathing room while the markets are brought back to health. A
number of items need to be addressed in the next 15 months.
There must be substantial amounts of new generation capacity
brought on-line, a more balanced supply portfolio must be
developed as California moves away from over-reliance on the
spot markets, a robust demand response program must be
implemented through demand bidding and accurate price signals,
the transmission constraints must be relieved.
Without these measures, which must be implemented over the
next 16 months, I would be concerned about whether the markets
in the West can be brought back to health. Thank you, Mr.
Chairman.
Chairman Lieberman. Thank you, Commissioner Massey.
And finally, Commissioner Wood, welcome to you.
TESTIMONY OF HON. PATRICK H. WOOD, III,\1\ COMMISSIONER,
FEDERAL ENERGY REGULATORY COMMISSION (FERC)
Mr. Wood. Thank you, Chairman Lieberman and Senator
Thompson. I would just ask that my written comments represent
my views here. I am the fifth guy of five, so I won't belabor
you other than to say, from my own experience as a State
regulator in Texas, I share a lot of Commissioner Brownell's
perspective on these issues and recognize that it is so
important that the Federal Commission be perceived and be in
reality a co-player in regulating these very important
infrastructure industries, electricity and natural gas.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Wood appears in the Appendix on
page 504.
---------------------------------------------------------------------------
One of the important aspects of competition, the only
reason that competition works, and as we have seen the counter
case in California, is that there are good market rules in
place and a sufficient infrastructure, infrastructure being a
broad word, meaning supply side and demand side, resources
meaning the delivery that gets them there, whether that be gas
transportation pipelines or electric transmission lines. It
doesn't work well--it doesn't work at all if the infrastructure
is not in place.
I think one of the lessons learned by this Commission is
that our historic reliance on individual States or on private
industry organizations to oversee that sort of reliability is,
I think, a thing of the past. I do think that is a role now
that clearly ought to move to this Commission and ought to be a
constant oversight for us as we determine that the competitive
infrastructure is in place before we move to a deregulated era.
So that is what I hope we will do. I think we probably are
going to need some resources to do that and we will be, I
think, reviewing that in the appropriate way with the Chairman
and with our oversight committees, as well.
But in addition to people and financial resources, I think
also one of the things that are important for regulators to
have are big sticks, not that they ever need to be used, but
when they hang from your belt, the people who you are trying to
regulate understand. Certainly, the ability to revoke a
certificate, or as my colleagues here recommended, at times to
go from a market-based certificate to a cost-based certificate
may be perceived as a penalty of sorts. I think administrative
fines, certainly ordering refunds is one issue, but to order
refunds with an administrative penalty attached to those would
be perhaps a useful tool for the Commission to have in its tool
shed.
I think perhaps we were asked if there were treble damages,
much as exists in antitrust lawsuits. We found that we did not
have the statutory authority to do that in this order that was
issued yesterday, but that again may be an important tool for
the Commission to have. Those do not exist today, but I think
if we are going to be a vigilant market cop, we need to make
sure that our bite can match our bark.
So I look forward to working with you, Chairman Lieberman,
Senator Thompson, your Committee, Committee staff, and my
colleagues on making sure that this Commission is fully
equipped to do the job that I know you want us to do well.
Chairman Lieberman. Thanks, Commissioner Wood, for that
statement, very interesting statement.
I have been thinking as I have been listening to the
testimony today. This picks up a thought that you just
articulated, which is that the market is a magnificent
mechanism for stimulating, facilitating economic growth,
thereby general well-being, and through competition getting
people the goods or services they want at the best possible
price.
I am paraphrasing somebody, maybe famous, maybe not. The
market, notwithstanding its great attributes, its positive
attributes, has no built-in conscience so that if there is not
genuine competition, then there arises in a market without the
pressure of competition, the genuine need--you just uttered the
word, for what I would say a cop on the beat, to bring back the
conscience, to bring back a sense of right and wrong, and
limits. Otherwise, people will suffer.
And I do think in the environment we are in now, both in
terms of deregulation of certain elements of the energy
industry and then more broadly the grave national concern about
fluctuations in energy pricing, that this is a role that
various agencies and departments in the Federal Government have
to play. And I appreciate what you said. I think that there
will be a way in which this Commission, I hope, has crossed a
bridge to a new chapter in its history through this period of
time. So I appreciate what you have done.
As I said this morning, I think the order that was issued
on Monday was a real step forward and I appreciate it. I have
some questions about it, both in terms of the formula chosen
and the means chosen as well as questions about refunds which,
in part, Mr. Hebert, you answered.
But let me go to the formula. Once you decided last
December that the rates in California were not just and
reasonable, and I gather on Monday in the order made the
similar decision for the rest of the Western grid. The question
then is what relief to provide.
I am from a State Government background. I was Attorney
General. My office represented the Public Utilities Commission,
control authority as we call it in my State. So the notion of a
cost-of-service-plus--some reasonable profit seemed much more
simple and certain, and I suppose easier to administer to me.
As I look at the system you have chosen, I want to ask this
question. It seems to, as one of you said, peg the acceptable
price in California to the last price offered during the period
of time, the highest price, and, therefore, arguably the least-
efficient price, the least-efficient company setting the price.
Then they can charge up to 85 percent of that in the off-peak
hours.
So there is no question that this system will impose some
constraints on pricing to the benefit of electricity consumers,
energy consumers in California and now throughout the West. But
considering that the standard of law is just and reasonable
rates, how can you feel comfortable that this system will
guarantee just and reasonable rates? In other words, you have
put on a ceiling here, but because it is being set by the
highest price, the last price charged, the highest price, it
can be a pretty darn high ceiling and there still can be a lot
of latitude for unjust and unreasonable pricing underneath that
ceiling.
Mr. Hebert. Let me speak to that as quickly as I can, and
that is really the crux of what we are trying to accomplish
here. One, and I know you understand this, while we were trying
to put this together, our goal was to bring prices to a
reasonable level while at the same time attracting adequate
investment so we can get the supply there, we can build the
deliverability up so that we can deliver that supply, therefore
keeping prices down in the long term for consumers.
We weren't really looking for the easiest way to get there.
We were, in fact, looking for the best way to get there. I
think that is what this plan is.
I have heard many people on this Committee, Mr. Chairman, I
have certainly heard you speak on green issues and making
certain that we have a green environment. Through driving the
efficiency, we do two things. One, we bring down prices. Two,
we strive to never make our air dirty through bringing in the
cleaner units. If the most inefficient unit that clears the
market is setting the price at which other people may take,
then you are going to drive everyone's efficiency, and the
secret is this. As they enter the bid stack, no one knows which
units are going to be called and which is going to be the last
unit, so there is no way to predict or manipulate which is the
most inefficient unit and which one is going to be called last.
There would be some people who would suggest, well, it is
going to keep the dirty units on for the long term. Well, that
is not true, because if they are what is clearing the market
and if their costs or their market inputs is what is setting
that price, then their profit is much lower than anyone who has
got a 7,500 heat rate system as opposed to a 40,000 heat rate
system. So what they are trying to do is, hopefully, we will
retire these dirty systems. They will go away. We will bring in
the newer 7,500, and even under compressed situations, 4,500,
heat rate systems. They will be much more efficient and they
will clean the air.
Now, that is better for consumers in two aspects and it
meets the balance of bringing prices to a reasonable level
while at the same time attracting investment and providing for
clean air.
Chairman Lieberman. Let me ask you and any other
commissioners who want to respond, why is that better than
having gone to a more traditional cost-plus-reasonable-profit
system, such as has existed traditionally at the State level?
Mr. Hebert. I will give you the brief answer and I would
like to give each of my colleagues an opportunity to answer it.
One, we have come up with a plan that I think we are going to
be able to move forward with as we move towards cost-based. We
have seen the litigious nature of that, the appellate review of
it, the indecision that ever comes from it. We need something.
California and the West needed immediate results. They needed a
problem solved today. Cost-based does not do that.
And the other thing that cost-based does is it does exactly
the opposite. It would guarantee a profit at maybe 10, 12, or
13 percent return on these inefficient units and you would keep
them around a very long time and we need those units off.
Chairman Lieberman. Do any of the other commissioners wish
to respond? Yes, Commissioner Breathitt?
Ms. Breathitt. Mr. Chairman, I would like to make a point,
that this plan is only covering 20 percent of the electricity
sales occurring in California. The number that we have gotten
from State officials in California is that they have been able
to secure 80 percent of their sales in fixed price contracts.
So we are only talking about this plan mitigating prices for 20
percent of the energy purchases, and I think that is an
important factor. It is not 100 percent.
The plan also is a market-oriented plan that has incentives
as we believe that will incent new investment, but at the same
time, you can call them price caps, you can call them price
controls, you can call them a price mitigation, it does put in
price controls that have proven to be effective from our March
29 order, and if this continues to hold forth, it is going to
be effective all hours, all the time.
Chairman Lieberman. I do want to note for the record that
two of you have used the term ``price control.'' I was
expecting Groucho's duck to come down from the ceiling.
[Laughter.]
Ms. Breathitt. I will say price cap.
Chairman Lieberman. You are truly bold.
Chairman Thompson. I wish the governor had stayed around to
listen to this. He ought to be here.
Chairman Lieberman. Commissioner Brownell, do you want to
add anything?
Ms. Brownell. I will try and dodge the issue of calling it
anything as long as it works, frankly.
Chairman Lieberman. Yes.
Ms. Brownell. I would add simply that I think it is pretty
clear from other markets that you do not get innovation when
you have monopolies and cost-based kinds of pricing, that the
kinds of opportunities that capital flows to are created by
markets where people can make economic choices and to make
choices based on other kinds of preferences. We saw almost 20
percent of the market in Pennsylvania choose green power. For
the first time, we actually had investment in a number of green
plants, many examples of economics that work, but an example, I
think, that will prove true over time.
I also think that the commentary by the investment
community yesterday and this morning would indicate that it
also satisfies some of their concerns, so you will have
stability both for the incumbents to the extent that they deal
with their other issues and the market players. I think that is
important, as well.
Mr. Massey. Mr. Chairman, my preference was to return
temporarily to a system based upon the cost of each individual
generator in the market. I think that would have been a more
effective time out and I would have exempted any new generation
from that. I hope my colleagues are right that a cost-based
system tied to the least-efficient generator will actually
encourage the retirement of those generators. A lot of
economists believe that it will. Others believe that it may
provide an incentive to keep some of those old dogs around so
that the market clearing price can be pegged rather high.
So I don't have 100 percent confidence that this is the
right approach, but it seemed to me that it was a dramatic step
forward.
Chairman Lieberman. Commissioner Wood, I thought I heard
you say in your opening statement that you have left the door
open to situations where the Commission might want to
temporarily order a cost-of-service-plus rating system.
Mr. Wood. I think that is always an option, Senator. Some
perspective on this. The State in 1996 put forward a plan that
FERC approved that said they wanted to move away from it as
part of their restructuring plan. The Commission, wanting to
work with the States, in fact, approved that. That moved the
procurement of almost all the power by the major investor-owned
utilities to the spot market mechanism where you take the last
unit's price.
Back in that day of surplus and prior to the drought, that
incremental unit was cheaper than the average unit, and I think
had that world continued for forever, people would have
continued to be better off under the deregulated plan than the
regulated plan. But the drought, which hydroelectricity is a
big part of the energy picture in California and in the
Northwest, the drought and the lack of investment in anything
new caught up with the State and with that region last summer,
and in the fall, the Commission moved in its December order to
really preempt the State plan and say, this will not work
anymore. We have got to get you guys out of the spot market and
move you to a contract-based market. So that is when, as
Commissioner Breathitt pointed out, we are now down from 100
percent to 20 percent of the power plants playing in this
hourly marketplace, and so that has meant quite a bit of
difference.
As I mentioned yesterday, and I am sorry I do not have my
crude drawing skills as at the Energy Committee, but in
response to Senator Feinstein's proposed legislation with
Senator Smith, what we have found is that the units that are
playing in this spot market pool are largely the older gas-
fired plants, we call them the old dogs, and they are largely
about the same heat rate. They are about the same level of
inefficiency.
So because of that unique situation, it seems to me that
cost-of-service ratemaking in that spot market might actually
cost the customers of California more than what the Commission
adopted. Now, that may not always be the case, and it is a
tool, as your question asked, Senator, that is a tool in the
regulatory toolshed, that if a cost-of-service rate is the best
way to get to a just and reasonable rate, it certainly is in
the statute and it is certainly something the Commission can
do. I do think for the reasons stated that it may be advisable
to move toward ones that are more incentivizing than we have
had in the past.
Chairman Lieberman. Thanks. My time is more than up. I
appreciate your answers. I think I understand better why you
made the decision you did on Monday.
I must say that I am left with a question about whether the
system you have chosen will ultimately fulfill the statutory
responsibility to maintain just and reasonable rates, but I
think the answer to that is that we are not going to know until
we see for a while how this system you have chosen works. So we
will all, hopefully, be following it with open minds and learn
from the experience.
Senator Thompson.
Chairman Thompson. Thank you, Mr. Chairman.
I appreciate the Commission being here and the work that
they are doing. I imagine you feel somewhat like a center on a
football team. Nobody notices much what you do until something
goes wrong. But I think people are beginning to realize more
and more the work that you have been doing, the 50 to 60 orders
that you have put out, the addressing of this issue. Just
because you do not do what people want you to do, one side or
the other or both, does not mean that you are not addressing
the issue. I think, if nothing else, you have disabused the two
extremes, and these are the people who say that FERC has no
role in this and the others who say all you need to do is cap
retail prices and wholesale prices and prices will be low and
everybody will be happy.
So, hopefully, we have moved away from both of those. I
think one thing that we have learned is that if we have prices
that wind up driving the demand up and the supply down, you are
going to have problems. And we can't just look at the problem
today and what we do about it in the short run because we run
the risk of exacerbating an already troublesome situation.
It does seem to me like this is, in many cases, short-term
versus long-term consideration. Something that might be helpful
in the short term and pleasant, or more pleasant, might not be
the right thing to do in the long term, and those are the
balances that you have to make. I think the more we learn about
it, the more we see the complexities of it.
I do not think, for example, you can talk about the March
order and whether it is successful or not. Until we get a way
down the road, you may have gone not far enough, you may have
gone too far. I don't think anybody knows. I mean, that is the
nature of the situation, and especially the nature of
electricity, it seems to me. If there was an answer--we have
brilliant people here now for the second day on both sides of
the issues. If there was an answer, we probably would have
discovered it. So we have to do the best we can and learn as we
go along.
One of the things that puzzles me is what are we going to
do, and I know the tremendous pressure that this Commission has
been under, but the Department of Energy, Senator Murkowski
testified today and he pointed out that the Department of
Energy has pointed out that, as I understand it, that there
will be blackouts in California. Now, you know what is going to
happen. There is going to be a hue and cry that the Commission
didn't go far enough. That will be definite proof that the
Commission didn't go far enough, and the pressure that you see
today will be magnified many times over.
My question is, what are you going to look at? I know you
are not going to just respond to the public opinion polls. What
are the factors that you will look at when that happens? Are
you going to look at what has happened since this order and
conclude that that can tell you what the sound policy is for
the future, or will your analysis at that point be the same
analysis that you have today. That is, you consider all of the
factors that you ought to consider and you put this down for
time enough to see whether it works, however long that might
take.
But it seems to me that from a, I do not want to use the
word ``political'' standpoint, but that is something we have to
consider if you do not, but you are buying into a tough hand
here because you are coming up with a policy in your considered
judgment--some of you have some reservations about it, but in
your considered judgment is the way to, knowing that if it
works as well as it can possibly work, you are going to have
blackouts. How are you going to handle that when the time
comes?
Mr. Hebert. Senator Thompson, I will tell you that you are
exactly right as to the politics and the pressure, there has
been a lot of pressure applied by the Senate and the House and
State leaders. The important thing is that this is an
independent agency, hopefully not susceptible to pressure. I
want to thank my colleagues for taking a bold move by believing
in this and saying we believe this will work.
We cannot, ``we'' being FERC, control blackouts. It is
outside the realm of our ability to change. The reason for that
is we can't site generation. We can't build generation. We
can't cite intrastate gas pipelines that supply fuel that,
quite frankly, is constrained right now in California. There
are things that are outside the realm of opportunity for us,
and that means we need help and we need California to help.
We will just have to continue to believe in what we need,
and that is to call balls and strikes. Part of the beauty, I
think, of this Commission of five, Commissioner Wood brought it
up about two State Commissioners. Actually, you have four State
Commissioners, previous State Commissioners, I think three of
which, including myself, that were previous chairmen of State
Commissions. So we are sympathetic to the needs and plight and
understand the political pressures that are on State leaders,
as well, in this regulatory environment.
There are mechanisms that we are going to continue to pay
attention to. This plan stays in effect through the end of
September 2002. There have been lots of questions come up, is
that long enough? How long should you go? Well, the end of
September is an educated guess based on what we are being told
is going to be brought to the marketplace in California and the
West as far as generation.
Now, there was a release in April of this year by the State
of California, perhaps it may have been the governor's office,
I can't recall, that there was going to be around 5,000
megawatts brought on-line by the end of this summer, which is
very important to this Commission and certainly important to
the people of Commission.
Chairman Thompson. By July.
Mr. Hebert. Right. The newest numbers that are out are
suggesting to us that 2,309 megawatts are going to actually be
what is going to be what is on-line. That is less than half of
what we are told. If those megawatts are not brought on-line,
the blackouts will continue and they will be harsher because
demand is increasing. We have no control over droughts. We have
no control over outages, although we are trying to inject
ourselves there to make sure we understand the schedules.
The short answer is, I don't have an answer for you,
Senator Thompson. I wish I could tell you that politics are not
going to play a role in this and I wish I could tell you that I
know and I am willing to bet my life on this plan. This is an
evolution that we are going through. We are learning this
process. I think right now it is the right move and I believe
it will bring down prices and at the same time bring in new
supply. But I remember when I got this job on January 22, the
California crisis was right in the middle of our face and I was
asked about it by some reporter, ``What are you going to do
about it?'' and I said, ``Well, we are going to work hard and
we are going to be committed. I did not start this fight, but I
am going to try to finish it.'' And that is what we are doing.
Chairman Thompson. Does anyone else have a different
observation or additional--Mr. Massey?
Mr. Massey. Senator, my view is that this order does about
all that we can do at the Federal level, this order and
previous orders, to prevent blackouts this summer. The ISO is
skillful and has adequate tools to keep the system in balance
if there is enough supply. There is a ``must offer'' provision
that requires all generation in the Western interconnection
that is not committed to native load or wholesale contracts to
be offered in every hour of every day. The ISO in California
will supervise maintenance schedules and outages within the
State to ensure that the maximum supply is available.
We have, by imposing these price controls, I think,
eliminated any incentive to withhold generation to drive up
price. That strategy is simply not available anymore because it
won't work. So that is about all we can do.
There will still be blackouts this summer in California
because there is just not going to be enough supply in some
hours, and I am not sure what this agency can do about that at
this point.
Chairman Thompson. Thank you, Mr. Chairman.
Chairman Lieberman. Thank you, Senator Thompson. Senator
Collins.
Senator Collins. Thank you, Mr. Chairman. Mr. Chairman,
before I question our witnesses this afternoon, for the honor
of my State, I have to correct a wrong statement that was made
this morning by Senator Torricelli after I had left. It is my
understanding that the Senator from New Jersey made comparisons
about Maine's per capita energy use versus California and
implied that Maine was much higher. That is incorrect, which
does not surprise me. And I would also note, though I am sorry
he is not here to hear this, that the residents of New Jersey
use 35 percent more electricity per household than do the
residents of conservation-minded Maine.
I thought it was very important for the record that I set
that straight, and I would ask unanimous consent that a table
doing a State-by-State comparison of average monthly bills be
included in the record.\1\
---------------------------------------------------------------------------
\1\ The chart entitled ``Average Monthly Bill By Sector,'' appears
in the Appendix on page 744.
---------------------------------------------------------------------------
Chairman Lieberman. Without objection.
Chairman Thompson. How does Connecticut fare? [Laughter.]
Chairman Lieberman. Actually, I think we do pretty well,
don't we? You don't have to give me the answer now.
Senator Collins. I am sure that you would be interested in
that----
Chairman Lieberman. The thrifty New England Spirit.
Senator Collins. That is right.
Mr. Chairman, I very much appreciate the opportunity to
discuss with our FERC Commissioners this afternoon some issues
that are of great concern to the people of Maine, and since I
have been in touch with many of them on the issue I am about to
raise, I am sure it will not be a surprise to them.
I first want to congratulate the two new members,
Commissioners Brownell and Wood, on their recent appointment
and tell you that I checked you out with the members of the
Maine Public Utilities Commission, on which a former counsel to
me serves. They speak very highly of you and I am confident
that coming directly from State regulatory commissions that you
will be especially sensitive to how your decisions affect
consumers, particularly those who have little or no control
over what they pay for electricity.
I would like to pose some questions about the charges for
installed capacity, the so-called ICAP fee, which has been a
very controversial issue in my State. I realize there may be
some limits on your ability to respond, and I will respect
those limits.
To provide some background to my colleagues, Maine leads
the Nation in the percentage of its electric load served by
competitive providers with numbers that recently passed those
for Pennsylvania and that continue to grow. Unfortunately, what
appears to be good news on the surface is the result of a less-
happy development, mainly that our consumers pay very high
prices for standard offer or default service. This is because
of the interest in promoting competition. We have done more
than any other State to expose our consumers, especially our
business consumers, to current market prices for power. That
obviously contrasts dramatically with the approach taken in
California.
And it is a tribute to the people of Maine that they have
largely accepted these price increases with stoicism, if not
silence. But it would be unfair and unwise to abuse their
patience with additional government-imposed costs that cannot
be absolutely justified. The market is already making them pay
dearly for energy, and in my judgment, the Federal Government
should not be adding to this burden through high capacity
charges.
I appreciate the importance of providing incentives for new
generation, but unlike California, it is difficult to see that
New England has any kind of problem on that front. More
significant, we should be very careful that in our eagerness to
create incentives for new generation, we do not want to create
incentives for voters to pull the plug on electric competition.
Against that backdrop, I have two questions. First, to what
extent has FERC considered the appropriateness of using a
deficiency charge for capacity that was developed during a time
of fully regulated, vertically integrated utilities in a time
when power is sold in a competitive market? To be more
specific, in the prior world, utilities sold each other energy
based on their actual costs. Most owned substantial generation,
and government could ensure that the proceeds of any capacity
charges were used for new construction or otherwise benefitted
consumers.
Now in States like Maine, energy prices are based on what
the market will allow. Companies that sell power to consumers
often have to buy all of their capacity in the market and
capacity charges are simply another cost imposed on consumers
with no guarantee that they will be used to improve
reliability.
Should these dramatic changes in the nature of the industry
alter how FERC sets deficiency charges for capacity and how the
proceeds are allocated, and if so, how? Mr. Hebert.
Mr. Hebert. You are well-educated on an issue that you
should not be required to be educated on.
Senator Collins. I agree with that. [Laughter.]
Mr. Hebert. I want to remind my colleagues that this is a
pending matter. This is a remand back to us from the First
Circuit, so, therefore, we have jurisdiction of it at this
point. I would ask the Senator's permission to very carefully
draft you an answer in writing as opposed to giving you
anything orally that may cause me to recuse myself. That is a
pending matter. Mr. Welch and I are friends, as well, and I
hear you, heard him, and we will be acting.
Ms. Breathitt. Senator, I think that is why you saw us all
sort of shifting back and forth and talking among ourselves. We
have had this before us for a while. It went to the court. The
court remanded it back and I hope we will be acting soon.
Ms. Brownell. Senator, I would just like to add that you
asked the right questions. The questions are not only being
asked in New England, but in PJM and throughout the country,
both by the market participants and the ISOs. So it is an issue
that we will be dealing with and I think we are cognizant that
a transforming market requires new looks at everything.
I would also like to suggest it would be a great thing if
you could lead a conservation competition among all the States.
It would be the fastest way to get demand-side management to
the market that I could think of.
Mr. Massey. Senator, I have no idea whether we got that
$8.75 charge right or not. I think our decision was reasonably
well motivated. We want load-serving entities to come to the
market meeting their requirements plus some measure of reserve,
and if they fail to meet that reserve capacity requirement, the
question is, how do you create incentives for them to meet that
capacity reserve requirement and should they be penalized if
they fail to meet that requirement? That is really what this is
all about. And if they should be penalized, what should the
level of penalty be? That is what is before us.
The Court of Appeals said to us, you can retain the $8.75
per kilowatt month penalty if you choose to, but if you choose
to, you have to provide a much better explanation of why you
made that choice, or you can move off of that choice. We now
have before us a new proposal from New England about how to
calculate that fee, and I won't comment on the wisdom of it
because I haven't reviewed it, but I know it is before us.
But I do think one of the issues this Commission is
struggling with generically, and frankly, it rose out of the
California debate, there was no capacity market in California
and no reserve requirement and not enough generation being
built and----
Senator Collins. But New England is not California, and
that is part of our----
Mr. Massey. That is true, but one of the reasons New
England is not California is there is this capacity
requirement, and the question is, if the load-serving entities
don't meet it, to what extent should they be penalized? That is
really the issue before us. I am sensitive to your concerns. I
am glad you raised it and we will try to do the right thing on
rehearing.
Senator Collins. Mr. Wood, did you want to add anything?
Mr. Wood. I think, as kind of a general matter, because
this was really the last piece of unfinished business on the
agenda when I left the Public Utility Commission of Texas,
which like New England and unlike any other place in the
country both have in excess of 20 percent excess capacity
looking at this summer and next, one would think in a market-
based scenario, in a market that is slightly overbuilt, that
the costs of buying social insurance for excess capacity would
be relatively low, if not zero. In a market that is really
tight, if you were buying social insurance for capacity, like
in California, maybe that would be a relatively expensive
purchase.
So philosophically, the answer to your question is that a
market would price things different than a regulated area. How
it does so is going to be, again, subject to this proceeding
that is coming up. But I think it is a critical question to get
right, because as I mentioned before, relying on external
sources to make sure we have enough capacity in future years is
something that the Commission can no longer do. We have to
ensure that mechanism is something that is ordered by this
Commission, if it doesn't already exist.
Senator Collins. Mr. Chairman, I am wondering if you would
indulge me with one more question----
Chairman Lieberman. Go right ahead.
Senator Collins [continuing]. Since it involves New
England.
Chairman Lieberman. That was a very craven appeal to my
partisan, or my regional, parochial, regional interests. There
are only three of us, so you should see the red more as a
cautionary yellow light.
Senator Collins. Thank you. [Laughter.]
My second question is this. The independent system operator
of New England recently submitted a proposal to FERC which
provides that sellers of capacity must agree to bid their
energy into the market at a price that is capped at $1,000 a
megawatt hour. I earlier talked about a situation we had in New
England last May when there was a price spike that went to
$6,000 per kilowatt hour, more than 100 times the usual rate.
I won't ask you to comment on the specific proposal,
because I understand the constraints you are under. But in
general, should a generator who receives capacity payments have
any limits on the prices that it charges for energy? Mr.
Hebert.
Mr. Hebert. As you know, we do have a matter pending before
us and, therefore, I am going to be precluded from answering
that. I will tell you that this Commission, I think, has been
very clear that we are conscious of rising prices, we are
conscious of problems that markets that are not fully designed
and fully functioning create, and that we are willing to do
what is necessary to make certain that those markets are
working and on their feet.
Senator Collins. Let me ask just one final question that is
not related to a matter that is pending before you. But I have
to tell you that those matters that are pending before you are
of extraordinary importance to my State and have caused a great
deal of consternation, and whenever I go to a manufacturing
plant, it is the first issue that comes up. In fact, you would
not believe the number of people in Maine who know what ICAP
means. That is really frightening.
Let me switch gears for a moment. It seems clear to me that
given the short-term inelasticity of electricity markets, that
there are periods when at least some sellers can know with
certainty that their output will be purchased no matter what
the price. Now, during these periods, what steps do you think
we can take to constrain prices--I know the $1,000 cap has been
one approach--that will preserve public confidence and still
provide sufficient incentive for capital investment in
generation?
And one particular matter I would like you to comment on,
in addition to price mitigation or price caps that could be
imposed, is whether or not we should be looking to develop a
real-time demand response, and whether you have any thoughts on
how such a response could be incorporated into the market
structure. When we had that $6,000 spike, consumers didn't know
that at that time they should turn off their air conditioners
or delay doing laundry or curtail their use of electricity.
They don't have any way of knowing when we have hourly
electricity markets what the prices are for that particular
time. Mr. Hebert.
Mr. Hebert. Actually, what the Commission has done is we
certainly, I believe, have a full understanding that we have to
be committed to a wholesale marketplace that works. What you
are talking about is fluctuations in a marketplace from time to
time that get price spikes.
I will tell you, individually myself, not speaking for the
entire Commission, I understand price spikes, but what
consumers truly feel are average prices. A price spike every
now and then may give some certainty to the investment
community as to where they need to send their dollars to
invest, to build new generation, perhaps to deal with
congestion or bottlenecks.
Through our Order 2000, this Commission believes that if we
set up regional transmission organizations, which we are in the
middle of right now, we can somehow get the free flow of
electrons. The end state hopefully will be flow-based rates
that will give us some opportunity to make certain that all
consumers get the benefits of a market that works. We are not
there yet. We are in the middle of that process. It is a part
of the evolution, but we are continuing to go down that road.
We are working with State regulators. I mentioned to you
Mr. Welch. We are trying to make sure that all State regulators
understand the need in us working together with the regional
transmission organizations to get these grids to work. Ideally,
we would love to have one North American grid. That is not
going to happen. We have got the interconnection difficulties,
but we are trying to get it down to a lower level than we have
currently got. We need investment in infrastructure. We need
investment in supply. And the Order 2000 will bring about that,
I believe.
Senator Collins. Commissioner Breathitt.
Ms. Breathitt. Senator, I would like to add that if there
is sufficient supply in your area, in your State, that that
expensive bid for power may not ever be needed to be called
upon by your grid operator. So one thing that can be focused on
in your area is if there is the right planning process to site
new needed generation, and because of the installed capacity
program in your area, there should be the incentive in place to
ensure that there always is a reserve margin.
The other thing that is in place in the area that
Commissioner Brownell comes from, and we have seen it in ISOs
to the north, Pennsylvania, New Jersey, Maryland, is the
circuit breaker concept that you mentioned of $1,000. The few
times it has been used in the PJM control area, I think we
asked recently and they have only gotten up to $1,000 under six
times. So it is rare that it gets up there, but it is a circuit
breaker if sales do reach it. So adequate infrastructure,
climates that allow for that, and a circuit breaker approach
works.
Ms. Brownell. Senator, I would simply add that another
issue is you have to have the rules in place that make sure you
know what is going on in that market and why that spike took
place, and you have to have appropriate things like congestion
pricing that is responsive to the market. So I think those are
things that we are working on and they are important. We do
have a $1,000 cap in PJM and I think it just sends a signal.
But critically, you have to know why that spike was there.
On demand side management, in our order on Monday, we
called for a technical conference in two phases. The first
phase will actually bring in technology providers--it is really
extraordinary what is out there--and learn what is available,
and then in the afternoon probably talk about implementation
issues.
The reality is, I think customers are a whole lot smarter
than we think they are and I think if we can encourage the
development of technology, we can bring down costs and let
everyone from large business to small business to homeowner
begin to use the tools that are available. So we are committed
to doing that and we do understand that is a reality, an
important reality, in any market.
Mr. Massey. Senator, I think it is a wonderful question.
You have really put your finger on an issue that I think we
have grown to believe is extraordinarily important in any
electricity market. Electricity markets aren't like other
markets where a purchaser simply decides not to purchase if the
price gets too high. In other markets, that has a substantial
price dampening effect, as you point out. But in electricity
markets, we simply don't have that yet, but we are working on
it. It requires, I think, a strong Federal role and an even
stronger State role to make that happen. But because of the
nature of electricity, I think it is important that price
volatility be minimized to the extent possible. It is simply
not acceptable in electricity markets.
We need to implement demand response programs, working with
State Commissions. It will require a substantial portion of the
load actually seeing a price signal in real time, I think,
having the tools to respond to that price signal to cut back on
usage. I think the technology is available to do that. This
conference that Commissioner Brownell played a leadership role
in establishing, I think could be a watershed event in this
Commission moving forward to understand the relationship
between the wholesale markets and the retail markets,
particularly as they relate to the demand side, so I very much
appreciate your question.
Mr. Wood. I guess the only thing I would add, Senator
Collins, is that unlike buying gasoline or milk or a new car,
you get a bill 30 days later and it is a little hard to change
your behavior because it has already happened. The big
customers tend to have real-time meters on their premises, and
when, as we move to hourly markets, as you all have in the
Northeast, hourly prices are then corraborated with the usage
of the plant, the manufacturing plant that you mentioned in
your question, that those folks are pretty cognizant of what
the prices are, as you know, and have the ability to respond to
them.
Actually, 30 percent of the market, which would be the
commercial and industrial, the large guys, if those people have
the ability to react in real time by cutting off their power
usage in whole or in part and getting paid for it, which is
what the demand side mechanism that Nora and Bill just talked
about are all about, i.e., if you are going to pay $6,000, I
will take $3,000 to shut off. This guy will take $2,000. This
guy will take $1,000. We will get down below that $1,000 cap
pretty quick. These people will take some money to get shut
off. Interruptibility has a price. Then that really becomes
another player in the market, just as good as building a new
power plant.
So it is a critical silver bullet to solving this market-
based transition that we are in and I am glad to hear you are
interested in it, too.
Senator Collins. Thank you. Thank you, Mr. Chairman.
Mr. Hebert. If I might add one thing on the demand side,
Mr. Chairman----
Chairman Lieberman. Sure.
Mr. Hebert. Senator Collins, a couple of things. The demand
side issue is something that has certainly been in front of
FERC, that we have been engaged in. Actually, the first time I
think we supported it together was March 15. We had it in our
March 15 order. We had it in our April 26 order. And now, the
5-0 vote of the Commission the first time we have been able to
get together on it.
But I will tell you, understanding, and this is, again,
where I think it is important to have four former State
Commissioners engaged in this, the demand issues are State
issues and they extend beyond our jurisdiction here at the
FERC. But what this Commission, through removing obstacles and
impediments, is willing to do is complement the services of
States that are willing to get into demand issues. We are
willing to help them when and where possible in looking for
ideas and answers. Thank you.
Senator Collins. Thank you very much. Thank you, Mr.
Chairman.
Chairman Lieberman. Thanks, Senator Collins.
I have a series of questions about the order on Monday,
just to clarify on some questions that have come up. The first
is on the question of refunds, which there was a lot of concern
about this morning. I think I understand, Mr. Hebert, what you
established and what your understanding is regarding the
California--the 15 days before the administrative judge--
parties will discuss the settlement, the judge has 5 days or 7
days thereafter then to recommend to the Commission, and there
is some latitude there to begin a process.
You also indicated, I was pleased, that there is some way
in which Oregon and Washington can become parties to that
process. Additionally, those two States expressed a concern,
and the letter that I mentioned before is from the four
Senators from the States, Senators Wyden, Smith, Murray, and
Cantwell, to the Commission, which undoubtedly will be waiting
for you when you return.
The question is the law and the fact that they need to wait
60 days after the investigation is opened to enjoy any benefits
of refund, which would not in this case, in their case, occur
until early in July of this year, and that is the law. Because
that seems like an inequitable situation to me, and my question
is, is there any way to work around that within the law?
Mr. Hebert. I like that question.
Chairman Lieberman. The reason I ask that is----
Mr. Hebert. As a lawyer, I love it, but----
Chairman Lieberman. The Attorney General of Washington
suggested that if there is not, one of the things the Committee
ought to do, working with the Commission, is to see if we
cannot find a way to change the law, and I do not mean with
regard to these cases, but in the future.
Mr. Hebert. Well, obviously, the Federal Power Act is the
law that we go by in regard to this, and certainly Congress can
amend and change and whatever law is passed down to us, we will
follow. We have to follow the law and that is what we are
doing.
Sixty days after the notice is exactly right. That is why
it is July 2, and I think that is the case you are talking
about. As I told you, there is a pending matter before us in
dealing with Puget Sound and we will have to be very careful in
any comments we make due to that, because I nor anyone else
wants to be recused. We all want to sit on that case.
But I will tell you at the same time, as I shared with you
a little bit before, I think that is the beauty of the
settlement process that we set up through this order that we
issued on Monday, and that is that there are entities from the
Northwest, the Pacific Northwest, that are parties to this
California settlement.
Chairman Lieberman. Because they are suppliers into
California.
Mr. Hebert. And I will tell you that we have, I believe,
one of the best settlement judges around, our chief judge that
is going to handle this matter. Now, this Commission felt it
was important to leave the uncertainty there. What this judge
ends up doing within the confines of that hearing room, I don't
know nor can I give direction to, legally or ethically. But I
will tell you, I believe that is the beauty of the settlement
process.
My guess is that through this settlement process, there are
many issues within our jurisdictional grasp--``we'' being
FERC--that will be settled. As with most settlements that I
have ever seen or been a part of, my guess is there are some
issues that are outside of our jurisdictional grasp that will
be settled, as well. What are those? I have no idea.
Chairman Lieberman. I appreciate your answer. It was
artfully done.
Mr. Hebert. Thank you.
Chairman Lieberman. I am not going to push any further. I
think it does leave some hope here for the folks in Oregon and
Washington that there may be some possibility of refunds, but
that is my conclusion, not----
Mr. Hebert. I am not going to draw any conclusions, but you
are certainly welcome to, sir.
Chairman Lieberman. Thank you. Let me ask this question by
way of exercising our oversight function. For the moment, let
us assume that--well, we do not have to assume anything. The
fact that the ability to obtain refunds is contingent on the
date on which an investigation is opened obviously puts a
premium in that way and many other ways on a swift response to
complaints.
One of the criticisms of FERC in this matter, and I will
ask it now as a question, the criticism generally is that the
Commission has acted too slowly here. Price increases began in
California last spring or summer. I guess the Commission pretty
quickly opened an investigation in July, but it was not until
December that the decision was made that the rates were not
just and reasonable. Then, incidentally, no investigation was
opened until the end of April regarding non-California States
on the Western grid, particularly in this case, Oregon and
Washington.
So the question is, or the allegation is, that until
Monday, in some sense, until last Monday, that the Commission
has been sort of dragged along more by events and rising
anxiety about economic impacts of prices in California than it
has taken control of the events--until Monday. So I want to
pose that question to you, Mr. Hebert. How would you respond to
it? How would you defend the Commission's behavior? And then
particularly that question about Oregon and Washington and why
did you wait until late April to get into that?
Mr. Hebert. I will defend it by my record, Mr. Chairman. I
would tell you that I think the record of this commission since
January 22 has been solid.
Chairman Lieberman. In fairness--excuse me--you did not
arrive until January 22.
Mr. Hebert. I did not become chairman until January 22.
Chairman Lieberman. I am sorry. You didn't become chairman
until then.
Mr. Hebert. I was a commissioner, and actually, if you talk
about proceedings and the ability to get proceedings before
this Commission, under the previous chairman, the El Paso case
has been one of the big cases that so many people have talked
about and questioned about why we moved so slowly. I actually
issued a concurrence in the El Paso case under the previous
chairman that we had made enough procedural and discovery calls
and it was time that we made decisions on the substance of the
matter with the El Paso case and moved forward. And one of the
first things we did when I became chairman of this Commission
is to move forward with the El Paso case. A lot of people said,
why did it take you a year? Well, it was the same question I
was asking, and I actually issued in a concurrence prior to
being chairman.
We did study not only California and look at and try to
make good balls and strikes calls when it comes to the
Northwest, as well. I think if you look at January 22, getting
through that process, getting what we had to be done at the
staff level to get adequate information, to call the right
balls and the right strikes, I don't think April is that bad,
actually. I think that is actually pretty good. And if you, and
I know you do, know as much about a government as anybody, that
is a pretty quick call.
And at the same time, most people do not understand, we
were working with a commission of three that, quite frankly,
was left with a backlog of 2,000 cases. We have reduced that
backlog by about 25 percent now while at the same time dealing
with California, issuing refunds that had never been done
before.
So I feel very good about our record and I think we are
going to continue to move in a strong, fast, and furious, but
reasonable and legal, manner.
Chairman Lieberman. I want to yield to my colleagues in a
moment. I could ask this as a question, but I am just going to
make a statement on it. Just when you mentioned the backlog it
came to mind that under Monday's order, FERC is taking on some
very significant responsibilities to monitor energy markets in
the West on a 24/7 basis. The question, and it is a larger
question for another day, is how are you going to do it as a
matter of process and organization? Do you have the personnel
that will enable you to carry that out?
Mr. Hebert. I would like to quickly try to answer it, if
that is all right, Mr. Chairman, because I think I do have an
answer for you.
Chairman Lieberman. Yes.
Mr. Hebert. Several things. One, this Commission saw that
early on, actually through our Order 2000. We believed it was
important through the regional transmission organizations to
give them a monitoring role, to try to give them some shared
responsibility. So that is a part of Order 2000 and that will
help us monitor those markets.
At the same time, and I don't want to speak for my
colleagues, I want to give them an opportunity, but if I recall
correctly, there were some organizations, one including one
division of FERC that was put together, that we all disagreed
with. When I became Chairman, I reassessed our resources. I
looked at those resources and I split that division back up,
which was the litigation division. We had around 150 people. We
needed at least half of those people, the technical people, to
be involved in monitoring those markets. So we sent them to the
division that properly would handle that through those markets
and we sent the others to OGC to handle the legal situation at
hand.
So I think we have taken our resources. Do we need
additional resources in the future? We will see. Again, we are
in an evolution mode, but I will tell you, we are moving
forward with monitoring efforts. We probably don't have
everything we need at this point. What will that include in the
future, I will be glad to keep you abreast of.
Chairman Lieberman. Yes, I would appreciate that, because
that is part of our oversight role, as well.
One last final question, and a quick answer, I hope. We
have talked about the order that you issued on Monday being
effective through September of next year, 2002, which would
take us, as a few of you have said, through the two summers,
give time for this to settle out, and I think that is all good.
There is another perspective on it, not negative to what I
have just said, which is that the folks in California have
projected that supply will not be in any equilibrium with
demand until about a year later. I will ask if any of you want
to comment on it, but real quickly if you would, in deference
to my colleagues, will you be open to extending the order
beyond September of 2002 if that seems appropriate?
Mr. Hebert. I think it is important that we set a deadline,
and as I said earlier, there are things out of our control--the
siting of generation, making certain that generation comes on-
line, dealing with Path 15, dealing with the intrastate network
on natural gas. All these things are problems in California. If
they get resolved, and they should be, then yes. If not,
perhaps they do not get in 7 percent reserves. Perhaps they
stay within 10 or 11 percent. My suggestion will be that, yes,
the plan should change. To what extent, we can't make that call
at this point.
Chairman Lieberman. Does anybody else want to add to that?
Mr. Wood.
Mr. Wood. I think if the market rules are fixed and the
infrastructure sufficient, then competition can work.
Deregulation can follow from competition. And I think it is our
job to make sure that the infrastructure is in place.
Chairman Lieberman. OK. Thank you all.
Senator Carnahan, I think you were here first, if that is
OK with Senator Carper.
Senator Carnahan. Yes. Thank you.
I have a question for Commissioner Massey. You said
previously that you do not believe that FERC has met its
responsibility to assure just and reasonable prices in the
wholesale market. Given the experience in California, how might
FERC reconsider its approach in the future to better reflect
the current realities in the energy market?
Mr. Massey. Senator, I have supported the movement to
markets for electricity with one caveat, and that is it must
benefit consumers. And so it seems to me that we have to ensure
that the markets are structured in a way that they produce just
and reasonable prices all of the time, and if they don't, we
have to intervene.
There are a number of things that we can do. First of all,
we have granted market-based pricing to over 900 sellers using
a screen that literally everyone passes. A market power screen
that every seller passes is no screen. We may as well just
issue a rule saying everyone passes. So I think we need to come
up with a screen that is sensitive enough to actually measure
market power in the marketplace and deny market-based pricing
to those that have it.
Second, we need to get very serious about market design. We
need to ensure that the rules are in place in the market so
that the market will produce just and reasonable prices in all
hours. That is a big job in the California market right now.
Perhaps the market should be redesigned to include an installed
capacity market, a reserve requirement. We need to move
dramatically away from over-reliance on the spot market.
Progress has been made in that area. We need to do a lot of
work to ensure that there is a robust demand response, in other
words, consumers deciding not to consume electricity when the
price gets too high. If we can achieve that goal, it will have
a substantial price mitigating effect.
And the markets need adequate supply. Our experience in
California makes me wonder whether we should have markets where
we know that the supply is inadequate. What should we do? What
protections should we build in if we know it is a capacity-
short market and that prices will soar? So those are my
thoughts on it.
Senator Carnahan. When you think of beefing up FERC's
enforcement, I have heard from many that SEC might be able to
serve as a model. The SEC closely monitors the market and it
proactively investigates anything that seems unusual. Do you
think that is a good idea?
Mr. Massey. It is a good idea if Congress is willing to
fund it. It seems to me that to be the tough cop on the beat, I
have come to believe that we need more resources than we have
and we probably need more people involved in effective market
monitoring. We need to attract--we have excellent economists
and investigators, but we need to attract more, it seems to me.
Perhaps we should look at the SEC model, but I think the SEC
devotes about half of its staff to investigations. It is a
large percentage. I don't know what percentage ours is, but it
is probably a small percentage of our staff.
So I think we perhaps will need to retool, because
whenever--despite our best efforts to structure good markets,
there may be problems, there may be market power, there may be
abuses, and we have to be willing to investigate those
effectively and step in.
Senator Carnahan. Thank you. My next question is for Mr.
Hebert. In your prepared testimony, you listed numerous actions
taken by FERC over the past several months, and I understand
that you have taken those actions based on your best judgment
of how to help. In your view, have the prices in the wholesale
market in California been just and reasonable?
Mr. Hebert. I think the mitigation plan that we put into
effect April 26, that actually was effective as of May 29, and
I believe the plan that we put into effect on Monday that will
actually take effect tomorrow, is and will bring down prices to
more reasonable levels. This Commission has spoken in its
December 15 order to say, in fact, that we have found and
believe rates to be unjust and unreasonable at certain times
under certain conditions.
That was my belief then. That continues to be my belief,
and that is why we have taken the action we have taken, to
bring reasonable prices to the consumers of California and the
West while at the same time attracting investment in supply and
infrastructure that will continue to bring them better
opportunities and, therefore, lower prices in the future.
Senator Carnahan. In the future, how do you feel FERC might
play a more constructive role earlier in the process to better
meet its statutory obligation to assure just and reasonable
prices when additional States now are undertaking deregulation,
such as my home State of Missouri?
Mr. Hebert. I have said before, and I will say again, that
FERC probably made a mistake--not probably, FERC did make a
mistake in giving too much deference to the State of California
in waiting too long to intervene and step in. We hate for
government to intrude in any time that they don't need to, but
clearly, we had a dysfunctional market. We needed to step in.
We have done so now and I think the record will speak for
itself that we are doing a good job of that.
So many people want to look in the rear-view mirror and
talk about what happened last year and the year before. I
wasn't the umpire at that point, so I am not going to go there.
But I will tell you, I believe that we are moving in the right
direction. Things are going to be better.
In saying that, I think it is only fair to say right now,
since the Commission has been trying to move California away
from its reliance on the spot market, and we are very proud of
where they have moved. They have got around 20 percent--
Commissioner Breathitt had talked about that--in the spot
market at this point. Whereas we do want to move them away from
reliance on that spot market, when we talk about forward
markets and them moving towards the forward markets, I want to
be very clear that there are forward markets that are
reasonable and there are forward markets that, quite frankly,
are very risky.
It is my thought and my belief that once you start getting
outside of 5 years, if you get beyond that on signing
contracts, I would tell you that those are very risky
contracts, especially given the volatility of energy.
Senator Carnahan. Thank you very much.
Mr. Hebert. Thank you.
Chairman Lieberman. Thanks, Senator Carnahan. Thanks for
your interest in this subject.
Senator Carper.
Senator Carper. Thanks. I was here earlier today, and I
don't know if you folks were in the audience then or not, but
these hearings are broadcast on C-SPAN. Sometimes they show
them at night and people might be seeing this around the
country around 3 o'clock in the morning someplace. They are
waking up from a little nap and say, what is this all about,
FERC? I just think, a month or two ago, most people had
probably never heard of FERC, and now you are getting to be a
household word, almost like Lieberman. [Laughter.]
Mr. Hebert. We preferred, or at least I preferred the
secrecy of FERC.
Senator Carper. Well, you are a secret no more.
Mr. Hebert, you were saying that you became the chairman
back in January but you served on FERC prior. How long?
Mr. Hebert. Since 1997.
Senator Carper. All right. And Ms. Breathitt, how long have
you been there?
Ms. Breathitt. I joined the Commission in November 1997.
Senator Carper. All right. And Ms. Brownell, you are pretty
new, aren't you?
Ms. Brownell. A week that seems like a thousand years,
Senator. [Laughter.]
Senator Carper. You are a brave soul to take this on.
Mr. Massey, how long have you been on this team?
Mr. Massey. Eight years, Senator.
Senator Carper. Eight years, wow. Mr. Wood.
Mr. Wood. Two weeks.
Senator Carper. Two weeks. OK. Let me just ask, for people
that might be watching this around the country and are waking
up in the middle of the night wondering what is this all about,
could you just explain for them and for this late-arriving
Member of the Committee--and I am going to ask our newest
members to do this--just explain to folks who might be tuned
in, what did you all actually agree to and announce on Monday
of this week?
Mr. Wood. What we agreed to do, Senator, was to take
action, perhaps a little delayed action, but action
nonetheless, to help repair a broken market out West. There is
an electricity market that was deregulated through State
initiatives in 1996, or 1995 time frame.
That worked pretty well at the beginning, but it quit
raining and the State depends for about 30 percent of its power
supply on the hydroelectricity. There was no new investment in
new gas-fired plants or other kind of plants to keep the
infrastructure in place. That confluence of bad weather and
lack of investment and a deregulated market meant that prices
went up.
The step that the Commission took this week was what it
could do to help mitigate the economic impact of those events,
but unfortunately, no step we could have taken or can take will
make up for the fact that there are more megawatts being
demanded than will be available to be used this summer. So we
did not promise that it would be a panacea.
I think, quite frankly, we want to make sure that we
mitigate not only the price, but mitigate the expectations that
things are going to be rosy this summer in the West Coast. They
will not. There will be blackouts. But I think what we wanted
to take a step on was to make sure that those blackouts, the
insult of those wouldn't be accompanied by the injury of a very
high and unjust bill for the power.
Senator Carper. Thank you. Ms. Brownell, do you want to add
or take away anything from that?
Ms. Brownell. I would never take away from my colleague,
only to add----
Senator Carper. Unlike us. [Laughter.]
Ms. Brownell [continuing]. Just a little bit. And that is,
I think that we laid out a road map. We took a number of steps.
We laid out a road map that will give certainty to consumers,
to the State of California, to the participants in the market
there about what will happen through the next two summers so
that we can begin to deal with the broader issues of a longer-
term plan of how to site more generation, create market rules
that actually work, and that will provide for just and
reasonable rates in the long term. We took the surprise of the
day out of the market so that people now know what is going to
happen.
I think the second thing we did was respond very positively
to the stakeholders from California's issues and reached out to
the State of California to work with them, because we all have
a role to play and it is critical that we each do our part.
So I think we could give you 25,000 details, but most
importantly, we took a lot of steps and we now have a plan, a
map, and some certainty, and that is important.
Senator Carper. All right. Ms. Breathitt and Mr. Massey, if
I could ask you two the next question, and that is how do you
know if what you have agreed on unanimously to do, how will you
know that it is working or not working?
Ms. Breathitt. We have a several-week trial of this plan
having worked in what we call emergency conditions, when the
grid operator in California says reserves have diminished to 7
percent. Our plan kicked into effect in late May and we have
evidence that that methodology worked. What we did was extend
that methodology to all hours rather than just triggering when
there was an emergency condition called by the grid operator.
So we have some evidence that it worked the times that we
were in an emergency, and we tweaked it slightly for the 24-
hour condition to actually even limit more the market clearing
price for the non-emergency hours. So we think that it will
work. We have some evidence that it is working and what we did
was extended the plan to all hours and we covered the rest of
the Western States. So we now have it in 11 States.
Senator Carper. Mr. Massey, do you want to answer?
Mr. Massey. Senator, I think the answer to your question is
we don't know for certain whether it will work or not so we
have to pay attention and----
Senator Carper. What will tell you that it is working or
not working?
Mr. Massey. For me, the real question in whether it is
going to provide substantial price relief is tied to the costs
of the last generator to be dispatched. It could have been
tighter than that, but we know the price won't be higher than
that in the market.
That last generator to be dispatched will probably be a
natural gas-fired generator most of the time. About 95 percent
of the dollars in the formula for determining the market
clearing price under our order will depend upon the price of
natural gas. That is it in a nutshell. If the price of natural
gas remains reasonable, this plan will produce reasonable
prices. If the price of natural gas skyrockets in California,
the price for electricity will skyrocket. And so I think we
still have a lot of work to do to ensure that prices for
natural gas are just and reasonable, as well.
Senator Carper. Mr. Chairman, I have one last question I
would like to ask of Mr. Hebert, if I could do this as a
follow-on. You have explained, and I think very nicely, what
you agreed on and you have given us a pretty good notion of how
you will know and maybe we will know if it is working. Let me
just ask, when Governor Davis was here today, he described the
unanimous step that you took, he described it as a step in the
right direction.
Let me just ask, and this I would ask of you, Mr. Chairman,
if the kind of success you are looking for and hoping for
doesn't occur, what would be an appropriate next step?
Mr. Hebert. First, let me say that Governor Davis and I
agree on that. It is a step in the right direction. What do we
do from here? I think it depends on what we learn from here. My
experience in government and regulation and energy markets, and
I have been involved in legislating and regulating energy since
1988, my experience is it is important to listen and learn
before you lead and I think that is what this agency has done.
I believe we have done that wisely, responsibly, and in the
best interests of the consumers by looking at not only short-
term benefit of bringing down prices and making them
reasonable, but at the same time focusing on supply and
deliverability and making certain that we have got an
infrastructure that will work and will, in the long term, bring
better prices and more choices to the people of California and
the West.
What do we do beyond that? Some of it, as I have said, is
outside of our control. We can't site one generating unit in
California. The leaders in California can, and I believe and I
hope that they are committed to that. We are going to look at
this plan again on several opportunities. In the plan, we talk
about looking to make certain that the generation that has been
discussed and scheduled does come on-line in California, also
that there is less and continued to be less reliance on the
spot market.
So we are going to continue to monitor these markets. We
are evolving through that process. We have got additional
people working on that right now, as I have said. I have taken
the resources at our agency and moved them around and taken
half of those 150 people who were doing nothing but litigating
and got them now monitoring these markets. We are going to have
the regional transmission organizations through Order 2000
monitoring markets along with us. I believe we will be
successful. If we have learned anything in the meantime that
says we made a mistake or says that we need to change something
we did, we will, in fact, do that.
Senator Carper. Good. Mr. Chairman, I wish I could have
been here for the whole hearing. This has been quite a hearing
and we are grateful to each of you for being here today and for
your service. You come to your positions, a couple of you, in a
very exciting time, and Mr. Massey, for 8 years. For you, no
purgatory, straight to heaven. [Laughter.]
Chairman Lieberman. That was not a power of the Committee
that Senator Carper was talking about. That is individual
authority. [Laughter.]
Thanks, Senator Carper, for coming back, and for your
thoughtful questions.
I thank the members of FERC for very good testimony. This
has been a long day, very interesting to me and an important
day, and I think ultimately an encouraging day. I mean, we have
a real problem that occurred in California. There are a lot of
reasons for it. I have the impression that everybody is now
trying their best to make it better, and by your own judgment,
last December, the rates for electricity were and are unjust
and unreasonable and it required action by yourselves and, of
course, other kinds of actions by the State.
Though occasionally, because these are important matters
and we are all in politics, there gets to be an edge to the
back and forth. These are not ultimately partisan matters. We
may have different ideological points of view. We may have
different jobs to do. We may have different authorities. But
these are real problems that cry out for solution and I
appreciate the efforts you made.
The Committee is going to remain involved here. We think
this is important. We would like to work with you. As I said,
we not only are going to press you and ask you why you did this
or why you did that, but sometimes we are going to ask you,
what do you need to do th things we are asking you to do? And
then, we will try to become your advocates.
I do think, as Commissioner Wood said earlier, the fact is
that the Commission is at a new chapter in its history. The
very fact that you have two new commissioners and you are now
up to full strength says that. But also, I believe that, and
you are more expert at this than I, but from what I know of
FERC, that this has been a--we tend to use the term ``defining
moment'' too much in our Senatorial lives, but it seems to me
this has been one of those defining moments in the life of this
Commission and that what follows will be different. And we need
you to be actively involved because of the obvious central
effect that energy pricing (that you have some authority over)
has on the lives of individual Americans, but also on the
vitality of our economy.
So I thank you very much for your service, for your
patience today, for your outstanding testimony, and we look
forward to seeing you again soon.
The hearing is adjourned.
[Whereupon, at 4:20 p.m., the Committee was adjourned.]
THE IMPACT OF ELECTRIC INDUSTRY RESTRUCTURING ON SYSTEM RELIABILITY
----------
THURSDAY, JUNE 28, 2001
U.S. Senate,
Committee on Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, in room SD-342,
Dirksen Senate Office Building, Hon. Joseph I. Lieberman,
Chairman of the Committee, presiding.
Present: Senators Lieberman and Thompson.
OPENING STATEMENT OF CHAIRMAN LIEBERMAN
Chairman Lieberman. Good morning, and welcome to our
witnesses and our guests. We thank all of you for being here.
Two votes are going to occur in the Senate at around 9:50,
so we can probably at least go until about 10 o'clock before we
have to break for a while and then return, for which I
apologize.
This morning, I am pleased to continue this Committee's
examination of the Federal Government's response to the
deregulation of the energy industry. This is the third hearing
we have held on this issue in as many weeks.
In our first two hearings, we focused on the problems of
electricity deregulation in California and the West and the
need for more vigorous oversight and intervention by the
Federal Energy Regulatory Commission.
Fortunately, last week, the Commission did step up its role
in addressing the Western power crisis. This Committee will
continue to keep watch on those efforts to determine whether
they bring adequate price relief to besieged energy consumers.
Today we turn to a related concern, and that is the
reliability of the electric grid. The grid is our energy
lifeline, a vast network of transmission lines that carry
electricity from a myriad of energy producers, large and small,
to the utilities and ultimately into our homes and businesses.
It is a lifeline that we take for granted every time we switch
on the lights, sit down at a computer or open the refrigerator.
The national electric grid is vital to our lives and to our
livelihoods, and it has been greatly affected by the
deregulation of electric utilities. So today, we are going to
ask who is operating the grid, and who is watching what is
happening on the grid on behalf of electricity consumers, and
who is it that keeps the lights on--or, as people in California
no doubt have been asking, who is to blame when the lights go
off.
Not long ago, that was an easy question to answer. Local
electric utilities ran the show top to bottom. They produced
the power for homes and businesses in their service areas, made
sure there was enough of it, and saw to it that the electricity
ran in the proper voltages and frequencies to be transported
and used safely. Local utilities built and ran the transmission
lines to get power from their plants to their customers, and
they built interconnecting lines to neighboring utilities that
allowed for modest trading in times of shortage.
That diagram is roughly meant to show how neat things were
before deregulation.\1\
---------------------------------------------------------------------------
\1\ Chart entitled ``Bundled,'' appears in the Appendix on page
819.
---------------------------------------------------------------------------
But the deregulation of electricity markets has scrambled
this picture.\2\ Utilities no longer make the power they sell
to retail consumers. Instead, electricity generators compete on
the market to sell to utilities and sometimes even directly to
retail customers.
---------------------------------------------------------------------------
\2\ Chart entitled ``A Fully Unbundled Electric Industry Model,''
appears in the Appendix on page 820.
---------------------------------------------------------------------------
Nor do local utilities anymore always control the
interstate transmission lines. In several regions of the
country, independent system operators, known as ISOs, act as
electricity traffic cops, routing power from sellers to buyers.
That means that the ISOs are responsible for keeping the
system up and running. So what was once a relatively sleepy,
largely local network has been transformed into a fast-moving
and extremely congested national electricity delivery
superhighway.
While deregulation obviously offers potential economic
benefits, the new arrangements it has brought to the national
electricity grid also pose some risks to the reliability of the
grid. In fact, a Department of Energy task force concluded in
1998 that the current configuration, devised in an age of far
less usage of the transmission grid and far more regulation of
the utility industry, is clearly ``unsustainable in the newly
decentralized and competitive electricity industry.''
In fact, problems have already occurred. A November 2000
Staff Report by FERC describes a disturbing incident in July
1999 when power was tight and prices were high. As I understand
it, engineers monitoring the Midwest electricity grid noticed
something unusual and troubling. Some of the electricity that
should have been in the system just was not there. What
happened? According to a later FERC report, Cinergy, a large
Midwestern utility, just took power off the grid, which
apparently it had no right to, in order to supply its own
customers rather than disconnecting them or buying the extra
power it needed, which would have been at significantly higher
prices.
Another account of the incident which appeared in the Wall
Street Journal notes that the utility put power back into the
system later, but only after demand and prices had dropped. The
utility was never punished for this behavior because the system
has historically depended on voluntary industry standards
rather than a regime of Federal regulation and enforcement.
Grid reliability has also been an issue in California,
where the grid is managed not by the local utilities but again,
by one of the new independent system operators.
To fulfill its responsibility to keep the lights on in the
spring of last year, the California independent system operator
contracted to buy extra power in times of shortage from what is
known in the industry as an RMR, ``reliability must run'' unit.
But as an April 2001 FERC Order describes it, when the
California ISO needed the backup supply last spring, some of
these power plants did not cooperate. In other words, the
``reliability must run'' units were not reliable and did not
run. According to the FERC Order, to keep the lights on, the
ISO was forced to scramble to fill demand on the spot market,
obviously at much higher prices.
FERC subsequently investigated that case and approved a
settlement, with generators paying for the $8 million
difference in price.
Although FERC has jurisdiction over the interstate
transmission system under the Federal Power Act, it has not
historically regulated reliability. Instead, FERC has deferred
this responsibility to regional voluntary Electric Reliability
Councils, which include all of the electric systems in the
continental United States, Canada, and part of Mexico. Industry
has relied upon the voluntary standards set by these councils
through their governing body, the North American Electric
Reliability Council, or NERC.
With the changing structure of the electric industry,
however, we now need to ask whether the Federal Government
should play a more active role in maintaining and policing the
national electricity grid. Indeed, Congress has actively
considered amending the Federal Power Act to require FERC to
establish reliability standards and a system for enforcement,
although no such proposal has yet been enacted.
That is the issue that we are going to explore today. Some
of the questions that I would like to ask include: Does the
shift from heavily-regulated utility systems to deregulated
competitive markets threaten reliability of the grid? If so,
does FERC have adequate statutory and regulatory authority to
protect the public interest in a reliable electricity
transmission grid? And what is the proper division of
responsibility between Federal and State regulators concerning
electricity reliability overall?
I look forward to hearing our witnesses answer these and
other questions, and I thank them very much for joining us this
morning.
Senator Thompson.
OPENING STATEMENT OF SENATOR THOMPSON
Senator Thompson. Thank you very much, Mr. Chairman.
Our topic today is less controversial than the two energy
hearings that we held previously, but this one is important. We
have seen demand for electricity grow across the country, and
we are watching as new generation is being built to try to keep
pace.
What may be lagging behind, however, as you point out, is
the new transmission and proper enforcement of standards to
maintain the reliability of our grids. Prior to restructuring,
integrated utilities were responsible for generating,
transmitting, and delivering electricity from the power plant
to the consumer. The reliability standards in place have been
voluntary, established by the North American Electric
Reliability Council, and when there is a violation, there is no
penalty, even if the violation threatens the integrity of the
grid, possibly resulting in blackouts.
In recent years, we have seen dramatic change take place.
The electric power industry is dividing itself into different
components. As a result, there is no single entity that is
responsible for overall reliability. We have seen over the
years instances, some of them serious, of individual actions
that have adversely affected reliability.
So, as the electric power industry restructures, we need
someone made responsible for ensuring reliability and someone
who has enforcement authority.
We should note that the problem is not simply one of
enforcement but also of investment. A greater demand on long-
distance sales will require more transmission. I am pleased
that the President recognizes this fact and included in his
National Energy Policy Report the need to streamline the siting
process to allow for construction of more lines. While the
country moves down the road toward restructuring and
competition, it is important not to leave any key component of
our electricity system behind.
The good news is that we as a Senate have addressed this
issue. The Energy Committee has held hearings on this topic,
including one last month; I believe Mr. Cook testified at that
hearing. In addition, in the last Congress, the Senate passed
by unanimous consent a bill to establish an organization to set
reliability standards and to take disciplinary actions when
those standards are violated. That legislation did not pass the
House, but it has been reintroduced this year.
Earlier this year, Senator Lott had planned to have an
energy bill ready for the President's signature by July 4.
Unfortunately, despite the urgency and need we have seen for
some action, it does not appear that there will be discussions
about the timing of such a bill until after the July 4th
recess. Perhaps at that point we will address the energy issues
which are becoming more and more critical every day and which
are the focus of your well-timed hearings, Mr. Chairman. They
of course will include the issue of the reliability of our
system.
Mr. Chairman, I want to apologize in advance. As you know,
we have the patient bill of rights on the floor, and my
amendment is up as we speak, so I am going to have to break
away. It has to do with exhaustion of administrative remedies;
it is very exciting, and I am sure that you will want to be a
part of that as soon as the hearing is concluded.
Chairman Lieberman. And I am going to try not to be
exhausted by it.
Thanks, Senator Thompson, for coming by. I appreciate it
very much.
Let us begin with David Cook, who is General Counsel of the
North American Electric Reliability Council, to which Senator
Thompson and I both referred.
This is one of those hearings for which preparation
educated me greatly, and I think the hearing will continue that
process.
Mr. Cook, please.
TESTIMONY OF DAVID N. COOK,\1\ GENERAL COUNSEL, NORTH AMERICAN
ELECTRIC RELIABILITY COUNCIL
Mr. Cook. Thank you, Mr. Chairman and Senator Thompson.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Cook with attachments appears in
the Appendix on page 509.
---------------------------------------------------------------------------
NERC welcomes the Committee's attention to the critically
important issue of the reliability of the bulk electric system.
As you indicated, NERC is a not-for-profit organization
formed after the Northeast blackout in 1965 to promote the
reliability of the interconnected bulk electric systems. NERC
comprises of 10 Regional Reliability Councils that account for
virtually all of the electricity that is supplied in the United
States, Canada, and a portion of Baja California Norte, Mexico.
For more than 30 years the industry has followed a system
of voluntary reliability standards. Those standards have worked
very well, and we have had an extremely reliable electric
system. As you indicated, the reliability standards have no
enforcement mechanism. Peer pressure has been the only means
available for achieving that compliance.
As good as that system has been, the voluntary system will
not serve us well for the future as the electric industry
restructures. Here is why. The grid is now being used in ways
for which it was not designed. There has been a quantum leap in
the number of hourly transactions and in the complexity of
those transactions on the grid.
Transmission providers and other industry participants who
formerly cooperated willingly are now competitors.
Rate mechanisms which in the past permitted utilities to
recover the costs of operating systems reliably are no longer
in place or are inadequate given the increased risks and
uncertainties they face.
The single, vertically-integrated utility that formerly
performed all reliability functions for an area is being
disaggregated, meaning that reliability responsibilities are
being divided among many participants. Some entities appear to
be deriving economic benefit from bending or violating the
reliability rules.
Construction of additional transmission capacity has not
kept pace with either the growth in demand or the construction
of new generating capacity, meaning that the existing grid is
being used much more aggressively.
The result of all this is that the transmission grid is
being increasingly stressed, and that stress shows up in two
ways. NERC is seeing more congestion on the grid for more hours
of the day, and NERC is seeing increased violations of its
reliability rules.
Not changing the way we deal with the reliability side of
the business as the electric industry restructures would be
like an airline switching to jet airplanes without increasing
the length of the runways. Not having everyone follow a common
set of rules for how the interconnected international system is
operated would be like allowing individual airlines to choose
their own routes and altitudes at which they fly.
NERC and a broad coalition of State, consumer and industry
representatives have developed and are actively pursuing
consensus legislation to convert the voluntary reliability
guidelines into mandatory and enforceable rules.
The goal of that legislation is to set mandatory and
enforceable rules for all operators and users of the
international interconnected bulk power system in North
America. It would be fairly developed and fairly applied by an
independent industry self-regulatory organization with
oversight in the United States by FERC and similar oversight by
governmental authorities in Canada.
It would have respect for the international character of
the interconnected transmission system, and regional entities
would have a significant role in implementing and enforcing
compliance with those common reliability standards.
Because of FERC's limited jurisdiction and authority,
because of the international character of the North American
grid, and because of the technical expertise required to
develop and oversee compliance with bulk power system
reliability standards, this is not a job that can simply be
given to FERC.
Nor can we simply have regional organizations set and
enforce their own rules in their own way. Having an independent
international industry self-regulatory organization develop and
enforce reliability rules under government oversight recognizes
the interconnected and international nature of the bulk
electric systems, takes advantage of the huge pool of technical
expertise that the industry currently brings to bear on the
subject.
That combination of industry technical expertise to work on
the substantive reliability rules and government oversight,
FERC and the United States, provincial regulators in Canada, to
assure fairness in due process, is an effective and efficient
way to address these issues.
As you indicated, the Senate passed a version of the NERC-
supported reliability legislation last year. The bill died in
the House. That legislation is before the Senate again this
year, both in Senator Bingaman's bill, S. 597, and Senator
Murkowski's bill, S. 389.
Your letter inviting NERC to testify specifically asked us
to address the issues of the role of independent system
operators and regional transmission organizations in
maintaining reliability as well as the role of State
commissions.
In the pending legislation, ISOs and RTOs are defined as
system operators. As such, they must comply with the
reliability rules established by the independent SRO. I would
add that having the potential for RTO development is important.
It is a positive development in being able to address
reliability issues, because I think it will enable us to deal
effectively with some of the issues that we are facing. If
those RTOs develop all across the country, with the full scope
and authority that FERC has envisioned for them, it will
greatly facilitate dealing with some of the issues we face.
Nevertheless, since the actions of any one system operator
can affect the result of the interconnected transmission grid,
RTOs will still need to follow a common set of reliability
rules independently established and administered by an
international self-regulatory organization.
NERC commends the Committee for focusing on this critical
issue of assuring the continued reliability of the
interconnected bulk power system as the industry undergoes
restructuring. Legislation now pending would allow for timely
creation and FERC oversight in the United States of that needed
industry SRO. The reliability of North America's interconnected
transmission grid need not be compromised by changes taking
place in the industry provided that reliability legislation is
enacted promptly.
Thank you, Mr. Chairman.
Chairman Lieberman. Thank you, Mr. Cook. That was very
helpful and interesting testimony about the impact of
deregulation on the grid, and I suppose I should say that it is
not every day that we have a representative from industry
coming to Congress, asking for regulation. So it is a measure
of the new landscape in which you are operating.
Thanks.
Chairman Lieberman. Mr. Harris, welcome.
TESTIMONY OF PHILLIP G. HARRIS,\1\ PRESIDENT AND CEO, PJM
INTERCONNECTION, L.L.C
Mr. Harris. Thank you, Mr. Chairman.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Harris appears in the Appendix on
page 526.
---------------------------------------------------------------------------
I have prepared testimony that I would like to submit for
the record if I may.
Chairman Lieberman. Without objection, your testimony will
be entered in the record. I have gone over the testimony that
each of you have submitted, and I appreciate it very much. It
is very thoughtful and very helpful to the Committee, and all
testimony will be entered into the record of this proceeding.
Mr. Harris. Thank you, Mr. Chairman.
As you know, the critical test of any law or economic
concept is the test of use. I come to you today from the Mid-
Atlantic region where, for 4 years, we have been operating the
world's most successful competitive wholesale energy
marketplace.
We have over 200 buyers and sellers and traders in our
marketplace, and we have an arrangement with five States and
the District of Columbia wherein the States are active in the
participation of this market development.
We have an arrangement where the environmental groups are
active and participate in our marketplace and have meaningful
input into the rules and practice and procedures that we follow
in the Mid-Atlantic region.
We also have active participation by all of those who have
an effective interest in our planning. We have a total regional
planning protocol. As a matter of fact, we are the only region
in the Nation that has a regional protocol. That has resulted
in over 40,000 megawatts of generation being planned. Currently
in the Mid-Atlantic region today, we have nearly 7,000
megawatts of generation under construction. Additionally, we
have over $700 million of transmission under construction to
support that generation, so that over the next 10 years, we
believe that we will not have a reliability problem.
We have many buyers and sellers and traders in our
marketplace. What we have seen over 4 years of rolling up our
shirtsleeves and actually doing it is that reliability has
increased in the Mid-Atlantic region and that competition has
worked.
Mr. Chairman, we have had over 70 different countries visit
our area to ask questions about why is it working here and what
are some of the root elements that we are engaging in, what are
some of the presumptions that we made several years ago that
have born fruit today. It is from that perspective that we
would like to share some thoughts with you today.
I think the first and most important thing that this
Committee should do for the Federal Energy Regulatory
Commission is ensure that it keeps its focus.
The second thing is to ensure that the Federal Energy
Regulatory Commission achieves ``end'' solutions. As the
Chairman mentioned, there are many needs that are important.
You must meet the environmental needs. You must meet the State
needs. You must meet the local needs. Having ``end'' solutions
that achieve reliability and competition is what it is all
about, ultimately.
The third thing is to ensure that the Federal Energy
Regulatory Commission promotes a national energy marketplace.
If I may, I would like to talk about each one of these.
First, ensure that the Federal Energy Regulatory Commission
keeps its focus. The Energy Policy Act which was promulgated in
Federal Energy Regulatory Commission Order 888 and FERC Order
2000 had one purpose, and that was to ensure that customers
have the benefit of competitively-priced electricity. If we
lose sight of the fact that the customers are the ones who are
supposed to benefit from this change in the energy marketplace,
we lose sight of the objectives of the Energy Policy Act that
this Congress established and what it is all about.
We must ensure that we have the appropriate form over
function. FERC Order 2000 delineates certain functions that are
necessary to ensure that the customers will have the benefit of
competitive price generation, and ensuring that the Federal
Energy Regulatory Commission is true to those functions--that
they do not ``dummy them down,'' that they insist on regional
planning protocols, for example, so we can coordinate among
regions to ensure that there is sufficient generation for
reliability and ensure that the differences between regions are
adequately addressed is absolutely imperative, and FERC should
have that authority.
Second, ensure that FERC truly achieves ``end'' solutions.
As the Chairman has mentioned, electricity touches the very
fabric of our lives. We know that price is important, and it is
important that pricing be done appropriately. Electricity is a
speed-of-light ecological system. It is the only product in the
world that, at the very instant someone wants to consume it, it
is produced. You turn on the light switch, and nominally, you
are controlling a nuclear plant. That process goes far beyond
just the bulk system. It affects the distribution system, which
the States are responsible for; it affects local delivery to
the home, because it is an instantaneous, speed-of-light
product.
In truth, there really are no pure reliability/economic
principles. They all overlap and are intertwined. What we are
seeing today with the wonderful network information
technologies which PJM has employed quite successfully to
enable these competitive marketplaces through technology is
that these things are blending and merging. So it is very
difficult to say this is reliability, and this is not. We would
recommend that this Committee ensure that the Federal Energy
Regulatory Commission assert its authority over all the things
to achieve these ``end'' solutions.
Third, we think that you have to have national energy
marketplaces. We have seen competition work, but the
electricity grid is like a giant synchronous motor. The Eastern
connection is 650,000 megawatts; there is not another motor
like that in the world. The West is a 125,000-megawatt motor.
It needs to work well together, and the Federal Energy
Regulatory Commission should take the lead in ensuring that we
have a true national marketplace that can meet the focus of the
Energy Policy Act, and that is to ensure that customers have
the benefit of competitively priced generation.
Thank you, Mr. Chairman.
Chairman Lieberman. Thanks very much, Mr. Harris. That was
excellent testimony.
We will recess briefly now so that I can go over and vote,
and then I will come back.
The Committee stands in recess.
[Recess.]
Chairman Lieberman. The hearing is reconvened.
I apologize to the witnesses and others here. We ended up
having two votes on the Senate floor; hopefully, there will now
be a reprieve from floor action for a while.
Mr. Harris, thank you for your testimony.
We will go on now to Kevin Kelly, who is the Director of
Policy Innovation and Communication at FERC.
Thank you, Mr. Kelly, for being here.
TESTIMONY OF KEVIN A. KELLY,\1\ DIRECTOR, DIVISION OF POLICY
INNOVATION AND COMMUNICATION, FEDERAL ENERGY REGULATORY
COMMISSION
Mr. Kelly. Good morning, Chairman Lieberman.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Kelly appears in the Appendix on
page 533.
---------------------------------------------------------------------------
My name is Kevin Kelly, and I am Director of the Division
of Policy Innovation and Communication within the Federal
Energy Regulatory Commission's Office of Markets, Tariffs, and
Rates.
I am appearing here today as a Commission staff witness,
and I do not speak for the Commission itself or for any
individual commissioner.
Thank you for the opportunity to speak on how the
reliability of electric service is being affected by the
industry's restructuring and the Commission's role in ensuring
the reliability of electric service.
The Commission's fundamental role in the electric utility
industry is to regulate public utilities with respect to the
sale of electric energy at wholesale in interstate commerce and
the transmission of electric energy in interstate commerce. In
short, the Commission serves as an economic regulator.
Since the electric power industry began, reliability has
been primarily the responsibility of the customer's local
utility as overseen by State and local regulators.
Increasingly, electricity trading over large regions leaves
many matters affecting reliability outside the exclusive
control of the local utility. So it is more important than ever
to have reliability rules that everyone follows.
But the Commission has no statutory authority to promulgate
and enforce mandatory reliability rules.
One approach to ensuring reliability is to enact Federal
legislation. In May, the administration released its National
Energy Policy Report, calling on the Secretary of Energy to
work with FERC to improve the reliability of the interstate
transmission system and to develop legislation providing for
its enforcement by a reliability organization, subject to
Commission oversight.
I believe that a legislative approach is preferable to
another approach that some have been trying in the absence of
legislation, that is, to ensure reliability through contractual
commitments.
Congress should understand, however, that mandatory
transmission reliability rules alone are not enough to ensure
reliable electric service. Senator Lieberman, you asked who is
watching the grid. We believe it should be RTOs, and partly for
reliability reasons, the FERC has strongly encouraged the
formation of Regional Transmission Organizations. These RTOs
would eliminate many of the reliability problems caused by the
highly Balkanized way in which the interstate transmission grid
is now operated.
In adopting its RTO rule, called FERC's Order 2000, in
December 1999, the Commission set out at length the need for an
RTO in each region to ensure reliability. The needs include
coordinated operation and maintenance of interconnected
transmission systems, improved determination of transmission
system throughput capability, and unified regional planning of
necessary grid additions.
The Commission required in particular that a RTO must have
the authority to ensure the short-term reliability of the
regional grid and also must be responsible for planning and
arranging necessary transmission expansions and additions that
will enable it to provide efficient and reliable transmission
service.
But reliability requires more. It also requires adequate
generating resources. A current issue, for example, is whether
those who sell power to retail customers all over the country
must maintain a specified level of generating reserves.
Reliability also requires that generation support transmission
in certain ways, and the Commission required in its ``open
access rule'' of 1996, called Order 888, that all public
utility transmission owners must offer generation-related
ancillary services to their transmission customers, including
the provision of minimum levels of generating reserves.
Senator Thompson pointed out in his opening remarks that to
further ensure reliability, we also need to find ways to
encourage the construction of new transmission facilities.
Market and regulatory rules must be designed to elicit
sufficient investment in new transmission. For example, to
provide transmission owners with an incentive to meet the needs
of transmission users, the Commission could adopt performance-
based rates reflecting the reliability of a transmission
owner's system. The Commission already had authority to adopt
such rates under the Federal Power Act.
In closing, restructuring of the electric power industry
makes it necessary to consider new means of ensuring the
reliability of electric service. The Commission has only
limited authority to address reliability, and the need for new
approaches is clear. Federal transmission reliability
legislation is one such approach but alone is not sufficient.
The Nation must also develop regional transmission
organizations for reliable grid operation and must develop its
transmission and generation infrastructure.
Again, thank you for inviting me to testify this morning.
Chairman Lieberman. Thanks, Mr. Kelly. That was very
thoughtful and very helpful.
Mr. Popowsky--how did you get the name ``Sonny''?
TESTIMONY OF IRWIN ``SONNY'' A. POPOWSKY,\1\ PENNSYLVANIA
CONSUMER ADVOCATE, ON BEHALF OF THE NATIONAL ASSOCIATION OF
STATE UTILITY CONSUMER ADVOCATES (NASUCA)
Mr. Popowsky. I think it is because the first two children
born to my parents were both daughters, and my father was
determined that the next child would be a son and was
determined to call me ``Sonny'' regardless.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Popowsky appears in the Appendix
on page 545.
---------------------------------------------------------------------------
Chairman Lieberman. That is a good reason.
Mr. Popowsky. The other reason it stuck is because my real
name is ``Irwin'' and that speaks for itself. [Laughter.]
Chairman Lieberman. Understood. Well, ``Sonny'' seems like
a good name to have for someone in your line of work.
Thanks for being here.
Mr. Popowsky. Thank you, Chairman Lieberman.
I am the Consumer Advocate of Pennsylvania. I am also past
President of the National Association of State Utility Consumer
Advocates, or NASUCA. From 1997 until earlier this year, I also
served as the representative of small utility consumers on the
board of trustees of the North American Electric Reliability
Council. I am testifying today on behalf of NASUCA.
NASUCA is an organization comprised of offices from 40
States and the District of Columbia, charged by our respective
State laws to represent utility consumers before Federal and
State regulatory commissions and the courts. Our members'
primary interest is the protection of residential and other
small utility consumers.
In your letter of invitation, you asked NASUCA to address
``the challenges to electric system reliability resulting from
the restructuring of the electric industry and its increasing
reliance on competitive markets.''
In my opinion, there is no more important issue facing the
electric industry and its consumers today. There remains great
disagreement across the Nation regarding the relative costs and
benefits of electric restructuring, but I believe there is
little disagreement that if the road to restructuring leads us
down the path of severely deteriorated reliability, then we
will have accomplished little as a Nation and will indeed have
set ourselves back, both economically and in terms of basic
human welfare.
Today, I would like to discuss the role of the States, the
NERC, the FERC, and the Regional Transmission Organizations in
ensuring that the American public will continue to receive
reliable electric service.
In my view, each State must continue to play an important
role in ensuring reliability for its consumers. In practice,
most day-to-day outages and reliability problems that affect
retail consumers occur on the local distribution system, which
has been and remains under State jurisdiction. States have long
experience addressing these issues, and Federal involvement
here would be duplicative and less effective than the current
State efforts.
Nevertheless, it is obvious that electric reliability
problems can affect more than one State. Indeed, NERC itself
was formed in response to the blackout of 1965 that cascaded
across the Northeast with no respect for State boundaries.
In my opinion, NERC and its member Regional Reliability
Councils have done an outstanding job of developing standards
and tools to operate an extremely reliable electric network.
But as you have already heard, NERC is a voluntary
organization that has traditionally had no ability to enforce
its rules through anything more than peer pressure. To its
credit, I believe that NERC has done almost everything that it
can do, first, to open its doors to organizations like NASUCA
that are outside the traditional utility industry, and more
recently, to establish a fully independent board of trustees.
NERC and some of its regional councils have also attempted
to develop contractual enforcement mechanisms to put more force
behind their rules and standards.
But NASUCA agrees with NERC that more is needed, and we
fully support the legislation that would establish a self-
regulatory industry organization that would continue to develop
reliability standards but whose standards would be fully
enforceable and ultimately subject to the review of the FERC. I
believe this proposal is essential in a world of increased
competition. The players in this game can no longer also serve
as the referees, and the referees must be able to do more than
just issue warnings to the players who violate the rules.
What else can FERC do? I hope that FERC will turn its
attention as soon as possible to completing the task of
establishing a set of Regional Transmission Organizations
across the United States. These organizations will play a vital
role in the reliable operation and planning of the electric
network. These RTOs in turn must coordinate their activities
closely with their respective Regional Reliability
Organizations and with any new national reliability
organization.
Ultimately, every reliability standard will have effects on
the economics of many transactions, and any economic
transaction could have an effect on reliability. RTOs and
reliability organizations must work together on wholesale bulk
power issues, but ultimately, they must both answer to a single
entity, which I believe for interstate purposes must be FERC.
I would like to close with a personal observation if I may
about the electric restructuring experiences in California and
my own experience in Pennsylvania.
Viewing the California situation from 3,000 miles away, I
would have to say that even if wholesale prices had not spiked
to absurd levels, and even if major utilities had not been
thrown into financial disarray, the reliability impacts alone
of the recent electricity crisis in California were totally
unacceptable.
I never thought I would see the day when such a large
segment of the American public could not be confident that
their lights would stay on from 1 day to the next.
A few years ago, some people questioned whether there would
be adequate generation supplies at reasonable prices in a
restructured electric industry, but they were assured that
``the market would provide.'' Well, the market did not provide
in California.
The question our Nation must face is whether the past
year's failure of the California market was the result of a
``perfect storm'' of events in which everything that could go
wrong, including the weather, did go wrong or whether
California was the ``canary in the mine shaft,'' giving the
rest of the Nation a warning that we should turn back from this
path as soon as possible.
In contrast, when I look in Pennsylvania at the current PJM
market, I generally see reliable service, supply keeping up
with demand, and prices that, at least most hours of the year,
are close to what one would expect in a competitive market. The
PJM market still has several flaws and is far from perfect, but
at least the staff and independent board of PJM, as well as
many PJM members, recognize these flaws and are taking steps to
try to remedy them.
In closing, I am hopeful that our experience in PJM to date
will turn out to be closer to the rule and that the recent
California experience will turn out to be the exception. But I
think we first need to ensure that entities such as the newly
reconstituted North American reliability organization, the
FERC, and the hopefully independent RTOs will have the tools to
create enforceable reliability rules and market structures
where the benefits of competition can be secured for all
Americans in a reliable and economic manner. Thank you.
Chairman Lieberman. Thanks, Mr. Popowsky, for your very
interesting testimony.
Let me begin my questions by following up on the questions
that you raised at the end of your testimony. They join the
first two hearings, that we held on the California crisis, to
this hearing.
How do you--and you have had some experience in this--
answer the questions that you raised? In other words, how do
you explain why reliability of electricity has become in doubt
for this summer; and even though the prices are now,
fortunately, moderating, there is still concern about
blackouts. How do you explain why it happened?
Mr. Popowsky. It is easier for me to try to explain why it
has not happened in PJM, so if I could start with that, I think
that if you have rational market rules where people can come in
and build power plants and know they can be interconnected to
the system in a rational manner and that they will participate
in a market that actually works, you do not need ridiculously
high prices in order to get people to build power plants and
have the supply meet demand.
I think again, from afar, in California, it appears that
for whatever reasons, generators whom one would think should
have been flocking to California to build needed generation did
not do so, and there was a fundamental mismatch of supply and
demand.
As I said, I do not see that happening in PJM, but I think
you have to have the market structure and the rules in place,
and they have to be understood in order for the market to have
any chance of working.
Chairman Lieberman. So if a big part of the problem was
simply that the industry was not building new generating
facilities, looking back at it, who should have done what to
avoid the crisis that has occurred in California? That is a big
question, but I am curious whether you see that there was a
role for the government here. This part of reliability is the
adequacy of supply, really, and what is coming onto the grid,
if I hear you correctly, as opposed to whether the grid can
handle it and whether it is being policed adequately.
Mr. Popowsky. Yes, I think that that is right, and that is
why I raised the question, which is in theory, the market
should provide the incentives to build the adequate generation.
In PJM, the theory gets a little thumb on the scale. If you
would agree, Mr. Harris--there is a requirement in PJM that the
parties which are called ``load-serving entities,'' the parties
or companies that serve load, have to have enough generation to
serve their load plus a reserve margin in terms of capacity
that they must have in addition to what they think they might
need in their peak hour.
So there is actually a requirement within PJM that requires
participants in the market to have additional capacity over and
above what they think they will need.
Chairman Lieberman. Who sets that requirement? What is its
origin?
Mr. Popowsky. I believe it is set by PJM in cooperation
with the Regional Reliability Council, the Mid-Atlantic
reliability council.
Chairman Lieberman. Mr. Harris.
Mr. Harris. I have just a couple things to add to Sonny's
comments. I think we get back to some very elemental things
here. In the Mid-Atlantic region, the questions you are asking
were considered so important that we insisted that we had to
have a regional planning protocol before we began commercial
operations in our competitive marketplace.
We spent the years 1994 to 1996 negotiating with five
States and the District of Columbia, consumer advocate groups--
Sonny's group participated--and environmentalists to come up
with a regional planning protocol. So we are the only area that
has a regional planning protocol in place before we begin
competitive marketplaces. This is absolutely crucial to ensure
that you will have capacity to meet demand.
Chairman Lieberman. Was that one pursuant to some
governmental authority or requirement, or was it just done
voluntarily within the industry?
Mr. Harris. No, sir. To credit the political and other
leadership in the Mid-Atlantic region, the States, they
determined that this was such a crucial point that they wanted
to have this in place. It took us 2 years to negotiate the
protocol so that all five States and the District of Columbia,
consumer advocates, environmentalists and others joined in this
process. We filed that to begin operation as an independent
system operator.
The second thing is a point which you made, that prices are
important, and it is important to get prices right. So we
developed a system that would make public transparent spot
prices. We publish prices, every 5 minutes, on the electrical
grid, and everyone can see the price, and transparent spot
prices enable you to have appropriate competitive behaviors and
enable people to determine when and if they want to build
generation.
Chairman Lieberman. Just talk a little more about that.
That is very interesting. So that every 5 minutes, you are
publishing the prices in that period of time from the various
sources of electricity coming onto the grid.
Mr. Harris. That is correct. And if you want it, we can
give it to you every few seconds. As a matter of fact,
information transparency is so important to having a
competitive energy marketplace that we have created a program
which we call ``E-data,'' and your staff and yourself can get
on that program, and you can see these prices. Any individual
can see what the prices are at any point in time, and then you
can make your decisions based on that price transparency.
Chairman Lieberman. Do people actually buy--what is the
smallest unit of time that you can buy? In other words, how
quickly can you change your purchases?
Mr. Harris. You can change with 30 minutes' notice,
actually. We have hundreds of traders in any given hour. On hot
days where the system is getting tighter, we have actually had
400 to 500 changes an hour in the marketplace. So another thing
you need to have in your market is many buyers and sellers,
which gets you back to the importance of having regional
solutions when you move forward.
Chairman Lieberman. Let me step back a little bit and go
back to what the problem is and see if you can illustrate it
before we get to some of the solutions.
As I hear you, and understand from what I have read and
studied, part of the problem, or a big part of it, is the
significant transition we have made to deregulated electricity
markets, and the fact that the electricity grid, which was
largely local or regional in the old model of a particular
local utility building a power plant, arranging for the lines
to get to its customers, creating some backup possibility where
it connected a transmission line to neighboring utilities--now
you have a very active deregulated market in which every 5
minutes, even every couple of seconds if you want, buying and
selling is occurring over this grid, which was for the most
part not built for this kind of traffic, so there are both
congestion and reliability problems.
I cited two examples that we found as we were going over
this. One was the Cinergy case, where they basically took some
power which they were not entitled to; and the second was the
California case where the backup units did not fulfill their
obligation to come on in time of need.
I would just like to ask all four of you if there are other
examples that you have of the problems which have come with the
transition we have made to deregulated markets, just as a way
of illustrating what we are dealing with here. Mr. Cook.
Mr. Cook. Another kind of situation--I think the congestion
issue that you mentioned, with the limits on how much power we
can transfer from one part of the country to another, is a very
critical one.
Chairman Lieberman. And of course, once that happens, it
then goes to the very heart of deregulation, because it limits
competition.
Mr. Cook. It can limit competition. It means that power
cannot move into an area that might be less expensive, so
people need to resort to more expensive generation, and in some
instances, transactions need to be curtailed, because there
simply is not enough ability to serve that load. That is one of
the things that we are seeing, and it gives rise to the need
that we have talked about to have a more robust transmission
system.
Chairman Lieberman. Mr. Harris.
Mr. Harris. Thank you, Mr. Chairman.
First of all, the two problems that you elucidated could
not have happened in the Mid-Atlantic region simply because we
are administered by an independent entity that has no financial
interest in the marketplace. We have 10 different transmission-
owning companies and hundreds of traders, and it is
independently administered so it would not have occurred.
Chairman Lieberman. Take those two cases and tell us how
your region would have prevented them from occurring, or why
they would not have happened.
Mr. Harris. It would not have happened because the
operation of the power grid is done by an independent entity
that has no financial interest in the marketplace. We have many
companies. Cinergy was one company, vertically integrated, with
everything under its control. We operate and direct the
operations of the power grid neutrally and independently from
all market participants.
Chairman Lieberman. So what would happen in the case where
Cinergy took the power off the grid that it was not entitled
to?
Mr. Harris. Well, again, it would not have happened in our
area. We saw the power change, because the frequency dropped,
because there was not enough generation to serve load, and we
were asking questions about who was not playing by the rules.
That is how it came about.
Chairman Lieberman. OK.
Mr. Harris. Two things that I think are problematic and
symptomatic that this Committee could certainly look into are,
first, the fact that electricity does get consumed the instant
it is produced. It does not say this is only wholesale. It does
not say it is only retail. It does not say it is just in this
State. It travels at the speed of light. So the solutions that
FERC needs to have need to be ``end'' umbrella solutions where
you look at the whole thing. As Sonny was saying, things are
not pure--pure reliability or pure economics--they blend. So it
is extremely important to have a holistic view of the problem.
The second thing is in the way that institutions are
getting approved. We have institutions now that have spot
market authority. There are certain RTOs that do not administer
spot markets, and that creates difficulties, as you saw. We
need to come to the national energy market with common designs
so that we can solve these problems much more quickly and
robustly as we move forward.
There are other things coming out--the gas industry
recently proposed an energy industry standards board. Some of
the things that they proposed are interesting. They recognize
that there is a nexus between natural gas and electricity, and
there must be ways to resolve those issues as we move to the
future.
So we are learning, and the process we have followed, we
call ``little steps, little feet.'' It is very complicated. We
take little steps. We learn, pilot, take the next step, learn,
and increment our way to the future.
Chairman Lieberman. Thanks.
Mr. Kelly, do you have any examples of reliability problems
on the grid that might help illustrate the problem that we are
trying to solve?
Mr. Kelly. There are many, but let me give you two--one,
illustrating difficulties with incentives to build generation,
and one with difficulties in incentives to build transmission.
You were asking Mr. Popowsky about California earlier. One
thing that is rarely mentioned that I think is very important
is that the West Coast is heavily dependent on hydro power. You
have the Cascade Mountains down through Washington and Oregon,
and the Sierra Nevadas through California; and starting around
the time of World War I, they started developing the hydro
resources there heavily. I think California is about 30 percent
dependent on hydro. They had unusually heavy rainfalls in 1998
and 1999, that created a surplus of electric energy in the
West, which created a disincentive for people to come in and
build generation right away. And then, they had 2 years of
drought.
It is my personal belief that with or without deregulation
in California, the West would have been stressed over the last
2 years. With the old world of regulation, however, there were
reserve margin requirements, as Mr. Harris has talked about.
The California market design chose not to have such a
requirement, at least of the old sort. It was not built into
their system as it is built into the East Coast systems.
The FERC asked the California ISO and the California
parties last November to consider having such a requirement. It
is my personal belief that a reserve requirement of some sort
is needed to incent generation construction in a market
environment and to prevent the cyclical boom and bust of
inadequate and surplus generation that can cause price swings.
Let me turn to a transmission story. We are seeing a lot of
gas-fired generation being sited along the Gulf Coast right now
in Mississippi, Louisiana, and Texas, probably much more than
can be consumed in the area. Many of those generators, I am
told, intend to sell up in the Upper Midwest, Chicago, and
States to the east and west of that. There really is just not
enough transmission capacity to move the power up there, and it
is not being built, in part because many of the traditional
utilities that own generation and transmission, I think, see
themselves getting out of the transmission business--they would
rather put their money into generation--but in part because
there are old, antiquated grid rules that make things
difficult.
Just for example, somebody who wants to move power from,
say, Louisiana up to Chicago is likely to look at a path going
through Tennessee and find that there is no capacity available.
So it will look for an alternate path and find one that exists
on paper that goes up through Arkansas and Missouri and gets
into Illinois through that route, and it will reserve that
path. But unfortunately, the electrons still flow through
Tennessee, tending to overload the grid in Tennessee.
You might say, well, the solution is for the utilities in
and around Tennessee, primarily TVA, to build more
transmission. The trouble is they do not have a transmission
customer. The utilities that have the customers are the
utilities in the Arkansas-Missouri area.
So those are two examples, Senator.
Chairman Lieberman. Those are very interesting examples. I
don't want to break the trend here, but it leads me to ask for
the record for those who are watching, just to help us
understand--in the normal course, who decides whether
additional transmission capacity will be built? Is that totally
a market judgment where somebody has to come along and see an
opportunity and decide to build--because that is a fascinating
example. Plants are being built in Louisiana, more generation
than the region needs, big markets up North, and how do you get
the electricity there?
Mr. Kelly. In the old world, it was the individual utility
that was building transmission primarily to distribute its own
power around its own area, and it built some interconnection
with its neighbors for reliability purposes.
In the new world that I have just described, I do not think
that model will work. You need a large regional organization
that encompasses all the utilities along all the flow paths
from Mississippi to Chicago to decide when and where
transmission should be built to meet the aggregate needs of the
region. Hence the RTO.
Chairman Lieberman. OK. So the vision that FERC has of the
RTOs is that the RTOs would play that role.
Mr. Kelly. Yes.
Chairman Lieberman. And how would they do it? Would they
actually do the building of the transmission lines themselves?
Mr. Kelly. They would certainly do the planning and come
out with a plan that meets the needs of a large region and have
some role in either directing or carrying out the building.
In our rules, we allowed some flexibility to how an RTO
would do that, because there are different flavors of RTOs.
One, for example, might be a pure transmission company that
would build and own it itself. But in another region, you might
have utilities that are owned by government. TVA is one
example, and the cooperative utilities in Missouri, for
example, who feel that they cannot turn their transmission
over, either by law or custom, to another entity. There could
be protocols where those utilities could build transmission in
response to a plan by the RTO and a compensation scheme devised
by the RTO and subject to FERC approval.
Chairman Lieberman. Mr. Cook, does NERC play a role, the
reliability councils, in trying to make sure that there is
enough transmission capacity to handle the electricity that
wants to move?
Mr. Cook. Not in actually building the systems. NERC does
do an assessment on a regular basis of the generation adequacy
and transmission adequacy so that information is available
about where the problem spots are and the kind of things that
need to be taken on.
Chairman Lieberman. Mr. Harris, what about PJM; what are
you doing with regard to the need for new transmission liens?
Mr. Harris. As I mentioned, we do have a regional planning
process which is independently administered. We believe that
the person who is doing the planning should not own the
transmission; it should be those who are in the transmission
business.
We look at things regionally and ask what is the least-cost
solution to ensure that generation will meet load over all five
States. That is why we have approved and now have $700 million
worth of transmission under construction.
Chairman Lieberman. Who is doing that?
Mr. Harris. My office is doing that.
Chairman Lieberman. I mean, who is actually building the
lines?
Mr. Harris. Each individual utility is building the lines
that go through their particular territories.
Chairman Lieberman. And how did you get to that point? In
other words, you saw the need, and you planned, but how did you
make sure they would go ahead and build the lines that were
needed?
Mr. Harris. I think it was the maturity and the development
of our marketplace. The companies got together and said this is
going to be the reality of the future, and if we have a neutral
and independently derived plan from somebody with no financial
interest in the outcome, we will obligate ourselves to build
and construct in accordance with that plan. That is what they
agreed to back in 1996, and that is what we are following
today.
Chairman Lieberman. In the new deregulated market, are
those generating companies, or what I used to call the
utilities that are actually selling to the customers, who are
building the lines?
Mr. Harris. They are the utilities. In our market, someone
could come in in a merchant capability if they so desired and
do it if they wanted to; they are not precluded.
The intriguing question that Mr. Kelly raised does bring up
an interesting point as to how you get the broad interregional
needs. With RTOs that have the planning functions, the key is
making information available to those who have a commercial
interest and can achieve an appropriate economic solution. In
many instances, transmission is competing with generation to
come up with the same solution. The problem they all have is
how do I get the information so that I can make an informed
decision.
Chairman Lieberman. Mr. Popowsky, let me come back to the
earlier question about whether you had in your work, either in
Pennsylvania or information from your colleagues, illustrations
of what the problem is with the grid now as a result of
deregulation.
Mr. Popowsky. Again, in our area, we have not seen the kind
of reliability problems arising as a result of market failure.
I do think, however, that we have seen some instances where it
would have been a lot better if we had had more and different
generating companies on the system.
For example, the market for capacity--as I said, capacity
is very important in PJM to make sure we have enough available.
On the other hand, it is not a very liquid market, and if we
look at the prices this past winter, they went from zero to
$177 a kilowatt-day and stayed at $177 for 2 months. And two
summers ago when we had a heat wave, the energy price actually
went up as high as $900, which is really unprecedented and,
fortunately, I do not think has happened again.
But as I said, in PJM, we are making strides so that when
things like that happen, the PJM Market Monitoring Unit and the
PJM board can look at those things and either try to reach a
resolution itself or come to the FERC with resolutions, as they
have done over the last few months, to try to correct these
remaining market flaws.
If I could just mention one other thing about the Cinergy
example, as Mr. Harris indicated, it is not a question of what
PJM would have done at that point if that happened; it is that
if you have a truly independent system operator who is
operating the system, that will not happen. And my recollection
is that when it did happen, I think the NERC board and the
regional council were able to basically send a nasty letter
saying ``Do not do that again.'' That is why we need the
legislation so that FERC can follow up on that nasty letter
with a little more authority.
Chairman Lieberman. ``Strong action to follow.''
Mr. Popowsky. Yes.
Chairman Lieberman. Just to summarize what you have said,
as I recall in the statements you submitted, Mr. Kelly and Mr.
Cook, you both indicated that the number of violations of
reliability rules are increasing in the deregulated market
nationally, and I assume nobody on the panel would disagree
with that.
Mr. Cook, did you want to add something?
Mr. Cook. Just to reaffirm that statement, that we are
seeing more of that as the system is being stressed more; yes.
Chairman Lieberman. Let us talk now about what to do about
it. As I listened to the first two witnesses, Mr. Cook and Mr.
Harris, I thought that I heard a difference of approach, and
please correct me if I am wrong. I thought, Mr. Cook, that you
were talking about the desirable answer here being to establish
independent authority through NERC, through the North American
Electric Reliability Council, with some oversight from the
Federal Energy Regulatory Commission.
But I thought, Mr. Harris, that you were focusing more on
having FERC do this themselves, without a separate, independent
group overseeing. Did I hear it correctly, and if so, can I
invite the two of you not to get into a crossfire here, but to
elucidate your points of view.
Mr. Cook. The first point is that the panel report that you
quoted from in your opening statement--NERC had an independent
panel of experts come in about the same time to look at how
ought we be treating reliability as we go forward. Both of
those groups came to two conclusions. One was that we needed to
have the rules be mandatory and enforceable. Then the question
is what is the best way to accomplish that? Both the Secretary
of Energy's panel that you quoted from and NERC's own panel of
experts came to the conclusion that the best way to do that was
to use an industry self-regulatory organization modeled after
the SROs that are presently in operation in the securities
industry. That is a way to have the industry expertise brought
together and have government oversight there to make sure the
process is fair and open. It is also a way to deal with the
international character of the grid.
As Mr. Harris said, the interconnection is one big machine.
The map that I attached to my testimony indicates the scope of
that machine, including the provinces in Canada as well. It is
necessary for that machine to operate under a single common set
of rules. If FERC was to set the rules for that, in effect they
would be dictating what the rules would be in Canada as well.
Having the international organization set those rules,
Canadians participate now extensively in NERC activities, and
that would carry forward into this new organization. That is a
way to deal with that international issue as well.
Chairman Lieberman. I was going to ask you if there is a
model existing for what you propose, and from what you are
saying, I gather that it is in securities regulation.
Mr. Cook. In the securities regulation area, where you have
the stock exchange and the NASD take on the role of setting
rules for their marketplaces and how the broker-dealers are to
be handled, under oversight by the SEC. The exchanges develop
their rules, they are filed with SEC, and that gives them the
legal authority to enforce them. SEC has independent authority
to carry out its own enforcement activities if it sees a need
to do that.
Those features are really built into the legislation that
is before you now. It is the same model that we have used.
Chairman Lieberman. Mr. Harris, what is wrong with that?
Mr. Harris. What we have learned over 4 years of looking at
how do you get to competitive marketplaces and ensure you have
the reliability necessary is that it is a learning curve. I
also served on the NERC board of trustees, and I am the
regional manager of the Mid-Atlantic Council, so I am very
close to these issues and the genesis and the development of
them.
But we have made over 110 changes to our rules since we
started by incrementally learning and growing. What we are
seeing now in this industry is that we really need to deal with
the realities. I think you said it very well--we have to
address all the needs. There are environmental needs, there are
State needs, there are local needs. And how we develop those is
going to be extremely important to ensure that we do not have
any more huge unintended consequences and missteps.
So as we look at what is necessary to make sure those
things happen, it should definitely be this Committee's
oversight of the Federal Energy Regulatory Commission to ensure
that the total holistic solutions are met, and met reliably.
FERC has to have oversight.
We are also finding the convergence of industries. Gas is
important to what happens in electricity, as you have heard
today. We were somewhat intrigued by the gas industry's
proposal to solve this problem with an energy industry
standards board where the current NERC would have a meaningful
role in that process. This needs to have more thought, and it
needs to be looked through.
So our suggestion is that it needs to have FERC oversight,
and the simplest way to do it would be to have the Federal
Energy Regulatory Commission determine what is a necessary
reliability organization and have the Federal Energy Regulatory
Commission determine the scope and extent of that organization.
Then we can get into the details without bothering the
Committee. But I think this Committee should ensure that the
Federal Energy Regulatory Commission puts forth some
organization that allows that to take place, and we should
learn from our experiences as we grow.
Chairman Lieberman. Interesting. So if I am hearing you
correctly, you are saying that the Federal Energy Regulatory
Commission ought to make this decision, and not to presume that
NERC is going to play that role, but obviously, that would be
one of the options that FERC would consider.
Mr. Harris. Yes, sir, that is correct.
Chairman Lieberman. Mr. Cook.
Mr. Cook. I was just going to say that under the
legislation, the Federal Energy Regulatory Commission would be
making that decision. That is, FERC would make the decision on
what organization is going to carry forward once that
legislation passes. The organization would submit a proposal to
FERC saying ``We propose to take on that function and here is
how we propose to meet it, and here is what we would do.'' So
that feature really is built into the legislation.
Chairman Lieberman. Mr. Kelly, what is your reaction on the
FERC to this question of how to best organize a legislative
response?
Mr. Kelly. In terms of the differences that Messrs. Harris
and Cook have expressed, if there are real differences, I do
not see them as 180 degrees apart; to me, they are 5 or 10
degrees apart. Mr. Harris wants to put a greater emphasis on
the coming RTOs than he perceives NERC is placing. NERC has
drafted a bill that puts emphasis on NERC and regional
councils.
In my personal view, when we get right-sized RTOs and
right-sized regional councils, the councils will be coincident
with the RTOs, and most of the differences that they may think
they have will disappear.
Chairman Lieberman. Mr. Popowsky.
Mr. Popowsky. I would agree, and I think that is what the
legislation is intended to do. There is a discussion of what
the role of the States is through a savings clause. There is a
discussion of coordination with Regional Transmission
Organizations.
I think, though, the bottom line is that both of the final
decisions should come down to FERC. But that does not mean that
FERC staff have to be sitting there, trying to develop
reliability standards. That is better done by the new NERC or
NAERO group, I think. Even today, they have a tremendous staff
who focus on reliability. That is their area of expertise, and
they should be working with the RTOs, coordinating their
activities, and then, ultimately, it should be up to FERC to
make those tough calls as to how much to emphasize reliability
versus economics and how to reconcile those.
Chairman Lieberman. Do any of you want to add anything
about the legislation that is before us? We have both the
Murkowski and the Bingaman proposals.
Mr. Cook. On the reliability piece, Mr. Chairman, those
bills are the same.
Chairman Lieberman. Right. So that, basically, your request
would be to get one of them adopted, but certainly that part of
them adopted, and there is no real difference between them on
reliability.
Mr. Cook. That is correct.
Chairman Lieberman. Mr. Popowsky, the National Association
of State Utility Consumer Advocates which you represent here
today filed comments with the Department of Energy, as I
believe you know, that argue quite forcefully that FERC needs
to act on reliability whether or not Congress passes additional
legislation, and also argue that FERC has the authority to do
so.
I wonder if you are in a position to talk a little bit more
about that now and if so, prior to the legislation, since we
know that is hard to predict around here, what would you like
to see FERC do?
Mr. Popowsky. In light of what has happened over the last
several months starting with the realignment--in other words,
in February 2001, NERC did turn over its trusteeship to the new
independent board of trustees. In addition, they began to
establish contractual enforcement activities.
Our first preference is certainly to pass legislation. If
legislation is not passed, then FERC can certainly go back and
try to eke out whatever authority it does have to address
reliability matters.
I personally think that is by far a second-best or much
worse solution to giving FERC the actual authority to review
reliability rules that would apply to all actors in the market
and not just those who are under FERC's jurisdiction already.
So that would still be by far the lower priority, and as I
look at it, a better use of FERC's resources now would be to
really get the RTOs in place, because the RTOs also have a
reliability role, and to make sure that we have a national set,
a complete set of RTOs that also have reliability authority,
and that, clearly, the FERC has the ability to do. That would
certainly be my preference at this point.
Chairman Lieberman. You kind of anticipated my next
question. Mr. Kelly, one of the points you made in your
statement is that FERC does not have jurisdiction over a number
of the utilities that control parts of the transmission grid,
such as Federal power administrations or municipally owned
utilities.
I was interested in the fact that the recent order that
FERC set regarding the Western power markets includes
conditions on every utility that sells into the federally-
regulated transmission system out West, including the Federal
power administrations and the municipally owned generators. So
I wonder, prior to the legislation, if it is possible for FERC
to act on reliability concerns throughout the system, including
both the Federal and municipal parts of the system.
Mr. Kelly. I suppose it would be possible, Senator, with a
great stretch on our authority, but there are difficulties. The
California situation, I think, caused the Commission to desire
to act quickly and forcefully and to put a solution in place,
by interpreting its jurisdiction just about as broadly as it
could, probably more broadly than it would going into a new
area.
There is a real question, I think, if you are building
reliability for the future--such an important topic that
affects all 50 States and our neighbors in Canada and portions
of Mexico--if you would want to build such an important
enterprise on what might be an untested legal foundation.
In addition, I might add, we were imposing conditions on
generators who were using the transmission system that was
jurisdictional to us, and imposing those generation pricing
conditions as a condition of using the grid that was
jurisdictional to us--I am not sure we could quite use the same
rationale to impose conditions on transmission systems that
were not jurisdictional to us. And one-third of the
transmission in the United States is not FERC jurisdictional.
Chairman Lieberman. Say the last sentence again, please.
Mr. Kelly. One-third of the transmission in the United
States is not FERC jurisdictional. When you look at TVA,
Bonneville, the Western Area Power Administration, and add in
the State-owned systems like the New York Power Authority, the
whole State of Nebraska, which has publicly-owned transmission
and utility systems, and all the major municipalities, and then
add in the large cooperative utilities that are financed by the
rural utility service and hence, when so financed, are not
subject to FERC jurisdiction, it is fully one-third of the
transmission lines.
Chairman Lieberman. That is interesting.
Does everyone on the panel agree that one of the most
important parts of legislation would be to make sure that there
would be one set of standards and one enforcement mechanism
since, if there is anything that I have learned from this
hearing, it is that everything is interconnected. Do you agree?
Mr. Cook. Yes, sir. The letter that I attached to the
testimony that we sent to the members of the Senate Energy and
Natural Resources Committee included a long list of folks who
are supporting the legislation, and on that list are the coops,
the public power people, folks that, normally, you would not
think would be suggesting that jurisdiction be extended over
their members. But for purposes of the reliability bill, they
have all signed on, if you will, and are supporting that
effort.
Chairman Lieberman. Are there any other responses? Mr.
Kelly.
Mr. Kelly. Well, I would agree, maybe adding a footnote
that NERC's rules themselves do recognize there may be regional
differences; for example, some of the rules as applied in a
hydro-dependent region might be different from the rules in a
wholly coal-fired region.
So NERC has a standard rule, but the rule itself allows for
variation. So with that footnote, I would agree with the
statement.
Chairman Lieberman. Mr. Harris.
Mr. Harris. One additional footnote is that we just cannot
ignore the physics. It is consumed the instant it is produced;
it is a speed-of-light product; it does not know State
boundaries; it is the consumer from the generating plant and
the fuel behind it. So we cannot just carve out the wholesale
business from the retail business. You cannot just carve out
the States. You cannot carve out the environmental. It is a
separate problem.
The Federal Energy Regulatory Commission needs to have
holistic authority to ensure that this thing will work together
as a single, synchronized motor.
Chairman Lieberman. It is really quite remarkable, and I do
not know that I fully understand it--one of you referred to it
before--about the example of the Louisiana utility trying to
get its power to Chicago. But in a regulated market where
utilities, conceptually, should be able to buy from generators
anywhere on the national grid--at one point, I remember having
a conversation where it was suggested that customers actually
might--that is, business customers or even residential,
ideally--would be able to choose where they wanted their power
to come from based on a competitive model. The conceptual
difficulty is in visualizing how this happens. It is one thing,
as I said to my staff the other day, for me to understand that
if I want to buy shirts from a particular mail order house, I
have a series of choices to make, and then I know that they are
going to find their way, either by airline or by truck, to
Federal Express or UPS or whatever, to my house. But how does
one envision how those units of electricity get instantaneously
from a generator that may be halfway around the country to my
utility in Connecticut, let alone to me?
What I have been told is that they do not--is that right?
In other words, somebody is adding to the pool, and what my
utility is taking out is probably not part of that even though
I am paying at a rate based on what that generator has added to
the transmission grid.
Mr. Harris. I appreciate your comment. That is the
beautiful thing about moving to competitive electricity
marketplaces. We now have over 100 different companies trading
on the market in any given hour, from Florida, Texas, and
Canada, all trading into the PJM marketplace.
The Federal Energy Regulatory Commission has approved a
pilot program this summer where we have economic incentives for
individual customers to buy and make choices based on the spot
price of electricity.
Chairman Lieberman. Not utility companies--but customers.
Mr. Harris. No, sir. Individual customers to make economic
decisions based on that spot price. What we are seeing is the
beautiful things about network information technology--the
power and speed of processors, the broad bandwidth capabilities
that will enable competitive enterprise to work down to the
individual level. While it may be complex in administration,
one of the things that we have found, again through these
technologies, is that we can actually make the life of the
customer more simple and more convenient through the use of
these technologies.
It is also something, I might add, that the Committee might
want to ensure that the Federal Energy Regulatory Commission
has, and that is the appropriate technology and tools to have
oversight over this vast network of process. That can happen;
they can understand what is going on in prices to see if it is
an anomaly over a broad scope, and technology will enable that
today.
Chairman Lieberman. And the truth is that without
technology, you could not do it; you could not monitor it. Too
much is happening too quickly.
Mr. Harris. That is correct. We can do things now that were
impossible a year ago, and the technology keeps growing rapidly
so that we can take this speed-of-light product and really
simplify the life of the consumer and add value to the economy
in these ways.
Chairman Lieberman. Now that we are on this fascinating
subject, just very briefly, how is the individual customer
going to tap into the information that will allow him or her to
decide where they will buy the electricity to their--are we
talking about to their house, or to their office building, or--
--
Mr. Harris. If the individual customer wanted to do that to
their house, they could. Remember that we are developing our
program ``little steps by little feet,'' so we have a pilot
program that we are running that we call an ``economic
program.'' It is interesting--we filed the program, and the
Federal Energy Regulatory Commission approved it for this next
season, and in that program, we negotiate a way where
individuals, customers or small businesses, can see that spot
price and then make decisions on whether they want to isolate
to the grid, i.e., buy megawatts, or where you would actually
pay them to come off the grid at their choice----
Chairman Lieberman. And they see it on their personal
computers, for instance?
Mr. Harris. It is seen through some type of networking tool
that would allow that information to be there. Again, this is a
pilot program, but what it shows is the promise of the future.
I think that one of the sad things about the California
situation is that it masks the wonderful opportunities that we
now have in a networked information economy, and somehow, we
need to get back to that.
Chairman Lieberman. Yes. Mr. Popowsky.
Mr. Popowsky. In terms of residential consumers, I think
most of the participants will be larger commercial and
industrial customers, at least initially.
Mr. Harris. Yes, we have some small commercial, but there
is nothing that precludes a residential if they wanted to play.
Mr. Popowsky. But there are other things that can be done.
To get back to your first example, I think one of the positive
developments in Pennsylvania is that consumers who wish to do
so can buy green power, that is, power developed from renewable
resources. Now, as you indicated, it is not that you can get
the power all the way from the windmill, two States away, into
your toaster oven; but by patronizing with that market or with
that company, that company will put more of the wind power onto
the grid. So it is not that you get those kilowatt hours, it is
that you contribute.
Chairman Lieberman. People feel good about it?
Mr. Popowsky. We found in Pennsylvania that people are even
willing to pay more, like they buy recycled paper goods at the
supermarket. They are willing to pay more, and I believe they
understand that they are not literally getting those kilowatt
hours, but they are contributing to getting more of those
kilowatt hours onto the grid.
Chairman Lieberman. Very interesting and very exciting. I
thank all of you.
From the testimony that you have offered, I would conclude
that dramatic changes have occurred, both in the markets, in
the deregulation of electricity markets around the country, and
of course in the increasing demand generally as our economy has
grown, and as a result of the extraordinarily developments in
technology, the grid as it exists now has reliability
vulnerabilities to it and that the market and government and
private groups have tried to react to those. But the general
feeling I get from listening to you is that the current
approach does not adequately fit the new reality of competitive
markets and technology. Also, there seems to be general
agreement by one path or another that the buck has to stop at
FERC, that this is an area in which FERC has to receive new
authority, that the ideal is if Congress were to clarify FERC's
role here.
There are details that still need to be resolved about how
the actual organizational structure will be built and will
operate, and it is not clear, as I hear from you, in the
absence of legislation, although some would argue on one side
or another, what steps FERC should take except to continue to
pursue its vision of the RTOs.
So I think some things are happening here. I think we do
have a problem, and California is obviously the extreme example
of it for a lot of reasons. But it is also clear that unless we
act to improve the national electricity grid, consumers will
not be able to achieve the maximum benefit from deregulation,
and at worst, the lights will go off occasionally, or there
will be unfair practices along the grid because there is
inadequate monitoring and policing.
So I think it is critically important that we act on this
legislation on which there seems to be general agreement. And
Members of this Committee will do our part to make sure that is
so, and we will continue to monitor FERC's oversight of these
matters.
For me, it has been a very informative hearing. I will
continue to be interested in it. As Senator Thompson said at
the beginning, it is not quite as controversial or dramatic as
the current crisis in California, yet this is all about
prevention. This is all about taking the steps necessary to
make sure that we do not have more Californias, more blackouts,
and more pricing of electricity that is higher than it would be
if we had a grid that was up to handling the generating
capacity that will be coming on and to the opportunities that
technology provides.
We will leave the record of this hearing open for a week if
any of you want to submit additional testimony or if any
Members of the Committee who could not be here today want to
submit questions for you. But in the meantime, I thank you all,
not only for your testimony, but for what each of you is doing
to assure the reliability of the national electricity grid.
I thank you. The hearing is adjourned.
[Whereupon, at 11:40 a.m., the Committee was adjourned.]
A P P E N D I X
----------
[GRAPHIC] [TIFF OMITTED] T5477.001
[GRAPHIC] [TIFF OMITTED] T5477.002
[GRAPHIC] [TIFF OMITTED] T5477.003
[GRAPHIC] [TIFF OMITTED] T5477.004
[GRAPHIC] [TIFF OMITTED] T5477.005
[GRAPHIC] [TIFF OMITTED] T5477.006
[GRAPHIC] [TIFF OMITTED] T5477.007
[GRAPHIC] [TIFF OMITTED] T5477.008
[GRAPHIC] [TIFF OMITTED] T5477.009
[GRAPHIC] [TIFF OMITTED] T5477.010
[GRAPHIC] [TIFF OMITTED] T5477.011
[GRAPHIC] [TIFF OMITTED] T5477.012
[GRAPHIC] [TIFF OMITTED] T5477.013
[GRAPHIC] [TIFF OMITTED] T5477.014
[GRAPHIC] [TIFF OMITTED] T5477.015
[GRAPHIC] [TIFF OMITTED] T5477.016
[GRAPHIC] [TIFF OMITTED] T5477.017
[GRAPHIC] [TIFF OMITTED] T5477.018
[GRAPHIC] [TIFF OMITTED] T5477.019
[GRAPHIC] [TIFF OMITTED] T5477.020
[GRAPHIC] [TIFF OMITTED] T5477.021
[GRAPHIC] [TIFF OMITTED] T5477.022
[GRAPHIC] [TIFF OMITTED] T5477.023
[GRAPHIC] [TIFF OMITTED] T5477.024
[GRAPHIC] [TIFF OMITTED] T5477.025
[GRAPHIC] [TIFF OMITTED] T5477.026
[GRAPHIC] [TIFF OMITTED] T5477.027
[GRAPHIC] [TIFF OMITTED] T5477.028
[GRAPHIC] [TIFF OMITTED] T5477.029
[GRAPHIC] [TIFF OMITTED] T5477.030
[GRAPHIC] [TIFF OMITTED] T5477.031
[GRAPHIC] [TIFF OMITTED] T5477.032
[GRAPHIC] [TIFF OMITTED] T5477.033
[GRAPHIC] [TIFF OMITTED] T5477.034
[GRAPHIC] [TIFF OMITTED] T5477.035
[GRAPHIC] [TIFF OMITTED] T5477.036
[GRAPHIC] [TIFF OMITTED] T5477.037
[GRAPHIC] [TIFF OMITTED] T5477.038
[GRAPHIC] [TIFF OMITTED] T5477.039
[GRAPHIC] [TIFF OMITTED] T5477.040
[GRAPHIC] [TIFF OMITTED] T5477.041
[GRAPHIC] [TIFF OMITTED] T5477.042
[GRAPHIC] [TIFF OMITTED] T5477.043
[GRAPHIC] [TIFF OMITTED] T5477.044
[GRAPHIC] [TIFF OMITTED] T5477.045
[GRAPHIC] [TIFF OMITTED] T5477.046
[GRAPHIC] [TIFF OMITTED] T5477.047
[GRAPHIC] [TIFF OMITTED] T5477.048
[GRAPHIC] [TIFF OMITTED] T5477.049
[GRAPHIC] [TIFF OMITTED] T5477.050
[GRAPHIC] [TIFF OMITTED] T5477.051
[GRAPHIC] [TIFF OMITTED] T5477.052
[GRAPHIC] [TIFF OMITTED] T5477.053
[GRAPHIC] [TIFF OMITTED] T5477.054
[GRAPHIC] [TIFF OMITTED] T5477.055
[GRAPHIC] [TIFF OMITTED] T5477.056
[GRAPHIC] [TIFF OMITTED] T5477.057
[GRAPHIC] [TIFF OMITTED] T5477.058
[GRAPHIC] [TIFF OMITTED] T5477.059
[GRAPHIC] [TIFF OMITTED] T5477.060
[GRAPHIC] [TIFF OMITTED] T5477.061
[GRAPHIC] [TIFF OMITTED] T5477.062
[GRAPHIC] [TIFF OMITTED] T5477.063
[GRAPHIC] [TIFF OMITTED] T5477.064
[GRAPHIC] [TIFF OMITTED] T5477.065
[GRAPHIC] [TIFF OMITTED] T5477.066
[GRAPHIC] [TIFF OMITTED] T5477.067
[GRAPHIC] [TIFF OMITTED] T5477.068
[GRAPHIC] [TIFF OMITTED] T5477.069
[GRAPHIC] [TIFF OMITTED] T5477.070
[GRAPHIC] [TIFF OMITTED] T5477.071
[GRAPHIC] [TIFF OMITTED] T5477.072
[GRAPHIC] [TIFF OMITTED] T5477.073
[GRAPHIC] [TIFF OMITTED] T5477.074
[GRAPHIC] [TIFF OMITTED] T5477.075
[GRAPHIC] [TIFF OMITTED] T5477.076
[GRAPHIC] [TIFF OMITTED] T5477.077
[GRAPHIC] [TIFF OMITTED] T5477.078
[GRAPHIC] [TIFF OMITTED] T5477.079
[GRAPHIC] [TIFF OMITTED] T5477.080
[GRAPHIC] [TIFF OMITTED] T5477.081
[GRAPHIC] [TIFF OMITTED] T5477.082
[GRAPHIC] [TIFF OMITTED] T5477.083
[GRAPHIC] [TIFF OMITTED] T5477.084
[GRAPHIC] [TIFF OMITTED] T5477.085
[GRAPHIC] [TIFF OMITTED] T5477.086
[GRAPHIC] [TIFF OMITTED] T5477.087
[GRAPHIC] [TIFF OMITTED] T5477.088
[GRAPHIC] [TIFF OMITTED] T5477.089
[GRAPHIC] [TIFF OMITTED] T5477.090
[GRAPHIC] [TIFF OMITTED] T5477.091
[GRAPHIC] [TIFF OMITTED] T5477.092
[GRAPHIC] [TIFF OMITTED] T5477.093
[GRAPHIC] [TIFF OMITTED] T5477.094
[GRAPHIC] [TIFF OMITTED] T5477.095
[GRAPHIC] [TIFF OMITTED] T5477.096
[GRAPHIC] [TIFF OMITTED] T5477.097
[GRAPHIC] [TIFF OMITTED] T5477.098
[GRAPHIC] [TIFF OMITTED] T5477.099
[GRAPHIC] [TIFF OMITTED] T5477.100
[GRAPHIC] [TIFF OMITTED] T5477.101
[GRAPHIC] [TIFF OMITTED] T5477.102
[GRAPHIC] [TIFF OMITTED] T5477.103
[GRAPHIC] [TIFF OMITTED] T5477.104
[GRAPHIC] [TIFF OMITTED] T5477.105
[GRAPHIC] [TIFF OMITTED] T5477.106
[GRAPHIC] [TIFF OMITTED] T5477.107
[GRAPHIC] [TIFF OMITTED] T5477.108
[GRAPHIC] [TIFF OMITTED] T5477.109
[GRAPHIC] [TIFF OMITTED] T5477.110
[GRAPHIC] [TIFF OMITTED] T5477.111
[GRAPHIC] [TIFF OMITTED] T5477.112
[GRAPHIC] [TIFF OMITTED] T5477.113
[GRAPHIC] [TIFF OMITTED] T5477.114
[GRAPHIC] [TIFF OMITTED] T5477.115
[GRAPHIC] [TIFF OMITTED] T5477.116
[GRAPHIC] [TIFF OMITTED] T5477.117
[GRAPHIC] [TIFF OMITTED] T5477.118
[GRAPHIC] [TIFF OMITTED] T5477.119
[GRAPHIC] [TIFF OMITTED] T5477.120
[GRAPHIC] [TIFF OMITTED] T5477.121
[GRAPHIC] [TIFF OMITTED] T5477.122
[GRAPHIC] [TIFF OMITTED] T5477.123
[GRAPHIC] [TIFF OMITTED] T5477.124
[GRAPHIC] [TIFF OMITTED] T5477.125
[GRAPHIC] [TIFF OMITTED] T5477.126
[GRAPHIC] [TIFF OMITTED] T5477.127
[GRAPHIC] [TIFF OMITTED] T5477.128
[GRAPHIC] [TIFF OMITTED] T5477.129
[GRAPHIC] [TIFF OMITTED] T5477.130
[GRAPHIC] [TIFF OMITTED] T5477.131
[GRAPHIC] [TIFF OMITTED] T5477.132
[GRAPHIC] [TIFF OMITTED] T5477.133
[GRAPHIC] [TIFF OMITTED] T5477.134
[GRAPHIC] [TIFF OMITTED] T5477.135
[GRAPHIC] [TIFF OMITTED] T5477.136
[GRAPHIC] [TIFF OMITTED] T5477.137
[GRAPHIC] [TIFF OMITTED] T5477.138
[GRAPHIC] [TIFF OMITTED] T5477.139
[GRAPHIC] [TIFF OMITTED] T5477.140
[GRAPHIC] [TIFF OMITTED] T5477.141
[GRAPHIC] [TIFF OMITTED] T5477.142
[GRAPHIC] [TIFF OMITTED] T5477.143
[GRAPHIC] [TIFF OMITTED] T5477.144
[GRAPHIC] [TIFF OMITTED] T5477.145
[GRAPHIC] [TIFF OMITTED] T5477.146
[GRAPHIC] [TIFF OMITTED] T5477.147
[GRAPHIC] [TIFF OMITTED] T5477.148
[GRAPHIC] [TIFF OMITTED] T5477.149
[GRAPHIC] [TIFF OMITTED] T5477.150
[GRAPHIC] [TIFF OMITTED] T5477.151
[GRAPHIC] [TIFF OMITTED] T5477.152
[GRAPHIC] [TIFF OMITTED] T5477.153
[GRAPHIC] [TIFF OMITTED] T5477.154
[GRAPHIC] [TIFF OMITTED] T5477.155
[GRAPHIC] [TIFF OMITTED] T5477.156
[GRAPHIC] [TIFF OMITTED] T5477.157
[GRAPHIC] [TIFF OMITTED] T5477.158
[GRAPHIC] [TIFF OMITTED] T5477.159
[GRAPHIC] [TIFF OMITTED] T5477.160
[GRAPHIC] [TIFF OMITTED] T5477.161
[GRAPHIC] [TIFF OMITTED] T5477.162
[GRAPHIC] [TIFF OMITTED] T5477.163
[GRAPHIC] [TIFF OMITTED] T5477.164
[GRAPHIC] [TIFF OMITTED] T5477.165
[GRAPHIC] [TIFF OMITTED] T5477.166
[GRAPHIC] [TIFF OMITTED] T5477.167
[GRAPHIC] [TIFF OMITTED] T5477.168
[GRAPHIC] [TIFF OMITTED] T5477.169
[GRAPHIC] [TIFF OMITTED] T5477.170
[GRAPHIC] [TIFF OMITTED] T5477.171
[GRAPHIC] [TIFF OMITTED] T5477.172
[GRAPHIC] [TIFF OMITTED] T5477.173
[GRAPHIC] [TIFF OMITTED] T5477.174
[GRAPHIC] [TIFF OMITTED] T5477.175
[GRAPHIC] [TIFF OMITTED] T5477.176
[GRAPHIC] [TIFF OMITTED] T5477.177
[GRAPHIC] [TIFF OMITTED] T5477.178
[GRAPHIC] [TIFF OMITTED] T5477.179
[GRAPHIC] [TIFF OMITTED] T5477.180
[GRAPHIC] [TIFF OMITTED] T5477.181
[GRAPHIC] [TIFF OMITTED] T5477.182
[GRAPHIC] [TIFF OMITTED] T5477.183
[GRAPHIC] [TIFF OMITTED] T5477.184
[GRAPHIC] [TIFF OMITTED] T5477.185
[GRAPHIC] [TIFF OMITTED] T5477.186
[GRAPHIC] [TIFF OMITTED] T5477.187
[GRAPHIC] [TIFF OMITTED] T5477.188
[GRAPHIC] [TIFF OMITTED] T5477.189
[GRAPHIC] [TIFF OMITTED] T5477.190
[GRAPHIC] [TIFF OMITTED] T5477.191
[GRAPHIC] [TIFF OMITTED] T5477.192
[GRAPHIC] [TIFF OMITTED] T5477.193
[GRAPHIC] [TIFF OMITTED] T5477.194
[GRAPHIC] [TIFF OMITTED] T5477.195
[GRAPHIC] [TIFF OMITTED] T5477.196
[GRAPHIC] [TIFF OMITTED] T5477.197
[GRAPHIC] [TIFF OMITTED] T5477.198
[GRAPHIC] [TIFF OMITTED] T5477.199
[GRAPHIC] [TIFF OMITTED] T5477.200
[GRAPHIC] [TIFF OMITTED] T5477.201
[GRAPHIC] [TIFF OMITTED] T5477.202
[GRAPHIC] [TIFF OMITTED] T5477.203
[GRAPHIC] [TIFF OMITTED] T5477.204
[GRAPHIC] [TIFF OMITTED] T5477.205
[GRAPHIC] [TIFF OMITTED] T5477.206
[GRAPHIC] [TIFF OMITTED] T5477.207
[GRAPHIC] [TIFF OMITTED] T5477.208
[GRAPHIC] [TIFF OMITTED] T5477.209
[GRAPHIC] [TIFF OMITTED] T5477.210
[GRAPHIC] [TIFF OMITTED] T5477.211
[GRAPHIC] [TIFF OMITTED] T5477.212
[GRAPHIC] [TIFF OMITTED] T5477.213
[GRAPHIC] [TIFF OMITTED] T5477.214
[GRAPHIC] [TIFF OMITTED] T5477.215
[GRAPHIC] [TIFF OMITTED] T5477.216
[GRAPHIC] [TIFF OMITTED] T5477.217
[GRAPHIC] [TIFF OMITTED] T5477.218
[GRAPHIC] [TIFF OMITTED] T5477.219
[GRAPHIC] [TIFF OMITTED] T5477.220
[GRAPHIC] [TIFF OMITTED] T5477.221
[GRAPHIC] [TIFF OMITTED] T5477.222
[GRAPHIC] [TIFF OMITTED] T5477.223
[GRAPHIC] [TIFF OMITTED] T5477.224
[GRAPHIC] [TIFF OMITTED] T5477.225
[GRAPHIC] [TIFF OMITTED] T5477.226
[GRAPHIC] [TIFF OMITTED] T5477.227
[GRAPHIC] [TIFF OMITTED] T5477.228
[GRAPHIC] [TIFF OMITTED] T5477.229
[GRAPHIC] [TIFF OMITTED] T5477.230
[GRAPHIC] [TIFF OMITTED] T5477.231
[GRAPHIC] [TIFF OMITTED] T5477.232
[GRAPHIC] [TIFF OMITTED] T5477.233
[GRAPHIC] [TIFF OMITTED] T5477.234
[GRAPHIC] [TIFF OMITTED] T5477.235
[GRAPHIC] [TIFF OMITTED] T5477.236
[GRAPHIC] [TIFF OMITTED] T5477.237
[GRAPHIC] [TIFF OMITTED] T5477.238
[GRAPHIC] [TIFF OMITTED] T5477.239
[GRAPHIC] [TIFF OMITTED] T5477.240
[GRAPHIC] [TIFF OMITTED] T5477.241
[GRAPHIC] [TIFF OMITTED] T5477.242
[GRAPHIC] [TIFF OMITTED] T5477.243
[GRAPHIC] [TIFF OMITTED] T5477.244
[GRAPHIC] [TIFF OMITTED] T5477.245
[GRAPHIC] [TIFF OMITTED] T5477.246
[GRAPHIC] [TIFF OMITTED] T5477.247
[GRAPHIC] [TIFF OMITTED] T5477.248
[GRAPHIC] [TIFF OMITTED] T5477.249
[GRAPHIC] [TIFF OMITTED] T5477.250
[GRAPHIC] [TIFF OMITTED] T5477.251
[GRAPHIC] [TIFF OMITTED] T5477.252
[GRAPHIC] [TIFF OMITTED] T5477.253
[GRAPHIC] [TIFF OMITTED] T5477.254
[GRAPHIC] [TIFF OMITTED] T5477.255
[GRAPHIC] [TIFF OMITTED] T5477.256
[GRAPHIC] [TIFF OMITTED] T5477.257
[GRAPHIC] [TIFF OMITTED] T5477.258
[GRAPHIC] [TIFF OMITTED] T5477.259
[GRAPHIC] [TIFF OMITTED] T5477.260
[GRAPHIC] [TIFF OMITTED] T5477.261
[GRAPHIC] [TIFF OMITTED] T5477.262
[GRAPHIC] [TIFF OMITTED] T5477.263
[GRAPHIC] [TIFF OMITTED] T5477.264
[GRAPHIC] [TIFF OMITTED] T5477.265
[GRAPHIC] [TIFF OMITTED] T5477.266
[GRAPHIC] [TIFF OMITTED] T5477.267
[GRAPHIC] [TIFF OMITTED] T5477.268
[GRAPHIC] [TIFF OMITTED] T5477.269
[GRAPHIC] [TIFF OMITTED] T5477.270
[GRAPHIC] [TIFF OMITTED] T5477.271
[GRAPHIC] [TIFF OMITTED] T5477.272
[GRAPHIC] [TIFF OMITTED] T5477.273
[GRAPHIC] [TIFF OMITTED] T5477.274
[GRAPHIC] [TIFF OMITTED] T5477.275
[GRAPHIC] [TIFF OMITTED] T5477.276
[GRAPHIC] [TIFF OMITTED] T5477.277
[GRAPHIC] [TIFF OMITTED] T5477.278
[GRAPHIC] [TIFF OMITTED] T5477.279
[GRAPHIC] [TIFF OMITTED] T5477.280
[GRAPHIC] [TIFF OMITTED] T5477.281
[GRAPHIC] [TIFF OMITTED] T5477.282
[GRAPHIC] [TIFF OMITTED] T5477.283
[GRAPHIC] [TIFF OMITTED] T5477.284
[GRAPHIC] [TIFF OMITTED] T5477.285
[GRAPHIC] [TIFF OMITTED] T5477.286
[GRAPHIC] [TIFF OMITTED] T5477.287
[GRAPHIC] [TIFF OMITTED] T5477.288
[GRAPHIC] [TIFF OMITTED] T5477.289
[GRAPHIC] [TIFF OMITTED] T5477.290
[GRAPHIC] [TIFF OMITTED] T5477.291
[GRAPHIC] [TIFF OMITTED] T5477.292
[GRAPHIC] [TIFF OMITTED] T5477.293
[GRAPHIC] [TIFF OMITTED] T5477.294
[GRAPHIC] [TIFF OMITTED] T5477.295
[GRAPHIC] [TIFF OMITTED] T5477.296
[GRAPHIC] [TIFF OMITTED] T5477.297
[GRAPHIC] [TIFF OMITTED] T5477.298
[GRAPHIC] [TIFF OMITTED] T5477.299
[GRAPHIC] [TIFF OMITTED] T5477.300
[GRAPHIC] [TIFF OMITTED] T5477.301
[GRAPHIC] [TIFF OMITTED] T5477.302
[GRAPHIC] [TIFF OMITTED] T5477.303
[GRAPHIC] [TIFF OMITTED] T5477.304
[GRAPHIC] [TIFF OMITTED] T5477.305
[GRAPHIC] [TIFF OMITTED] T5477.306
[GRAPHIC] [TIFF OMITTED] T5477.307
[GRAPHIC] [TIFF OMITTED] T5477.308
[GRAPHIC] [TIFF OMITTED] T5477.309
[GRAPHIC] [TIFF OMITTED] T5477.310
[GRAPHIC] [TIFF OMITTED] T5477.311
[GRAPHIC] [TIFF OMITTED] T5477.312
[GRAPHIC] [TIFF OMITTED] T5477.313
[GRAPHIC] [TIFF OMITTED] T5477.314
[GRAPHIC] [TIFF OMITTED] T5477.315
[GRAPHIC] [TIFF OMITTED] T5477.316
[GRAPHIC] [TIFF OMITTED] T5477.317
[GRAPHIC] [TIFF OMITTED] T5477.318
[GRAPHIC] [TIFF OMITTED] T5477.319
[GRAPHIC] [TIFF OMITTED] T5477.320
[GRAPHIC] [TIFF OMITTED] T5477.321
[GRAPHIC] [TIFF OMITTED] T5477.322
[GRAPHIC] [TIFF OMITTED] T5477.323
[GRAPHIC] [TIFF OMITTED] T5477.324
[GRAPHIC] [TIFF OMITTED] T5477.325
[GRAPHIC] [TIFF OMITTED] T5477.326
[GRAPHIC] [TIFF OMITTED] T5477.327
[GRAPHIC] [TIFF OMITTED] T5477.328
[GRAPHIC] [TIFF OMITTED] T5477.329
[GRAPHIC] [TIFF OMITTED] T5477.330
[GRAPHIC] [TIFF OMITTED] T5477.331
[GRAPHIC] [TIFF OMITTED] T5477.332
[GRAPHIC] [TIFF OMITTED] T5477.333
[GRAPHIC] [TIFF OMITTED] T5477.334
[GRAPHIC] [TIFF OMITTED] T5477.335
[GRAPHIC] [TIFF OMITTED] T5477.336
[GRAPHIC] [TIFF OMITTED] T5477.337
[GRAPHIC] [TIFF OMITTED] T5477.338
[GRAPHIC] [TIFF OMITTED] T5477.339
[GRAPHIC] [TIFF OMITTED] T5477.340
[GRAPHIC] [TIFF OMITTED] T5477.341
[GRAPHIC] [TIFF OMITTED] T5477.342
[GRAPHIC] [TIFF OMITTED] T5477.343
[GRAPHIC] [TIFF OMITTED] T5477.344
[GRAPHIC] [TIFF OMITTED] T5477.345
[GRAPHIC] [TIFF OMITTED] T5477.346
[GRAPHIC] [TIFF OMITTED] T5477.347
[GRAPHIC] [TIFF OMITTED] T5477.348
[GRAPHIC] [TIFF OMITTED] T5477.349
[GRAPHIC] [TIFF OMITTED] T5477.350
[GRAPHIC] [TIFF OMITTED] T5477.351
[GRAPHIC] [TIFF OMITTED] T5477.352
[GRAPHIC] [TIFF OMITTED] T5477.353
[GRAPHIC] [TIFF OMITTED] T5477.354
[GRAPHIC] [TIFF OMITTED] T5477.355
[GRAPHIC] [TIFF OMITTED] T5477.356
[GRAPHIC] [TIFF OMITTED] T5477.357
[GRAPHIC] [TIFF OMITTED] T5477.358
[GRAPHIC] [TIFF OMITTED] T5477.359
[GRAPHIC] [TIFF OMITTED] T5477.360
[GRAPHIC] [TIFF OMITTED] T5477.361
[GRAPHIC] [TIFF OMITTED] T5477.362
[GRAPHIC] [TIFF OMITTED] T5477.363
[GRAPHIC] [TIFF OMITTED] T5477.364
[GRAPHIC] [TIFF OMITTED] T5477.365
[GRAPHIC] [TIFF OMITTED] T5477.366
[GRAPHIC] [TIFF OMITTED] T5477.367
[GRAPHIC] [TIFF OMITTED] T5477.368
[GRAPHIC] [TIFF OMITTED] T5477.369
[GRAPHIC] [TIFF OMITTED] T5477.370
[GRAPHIC] [TIFF OMITTED] T5477.371
[GRAPHIC] [TIFF OMITTED] T5477.372
[GRAPHIC] [TIFF OMITTED] T5477.373
[GRAPHIC] [TIFF OMITTED] T5477.374
[GRAPHIC] [TIFF OMITTED] T5477.375
[GRAPHIC] [TIFF OMITTED] T5477.376
[GRAPHIC] [TIFF OMITTED] T5477.377
[GRAPHIC] [TIFF OMITTED] T5477.378
[GRAPHIC] [TIFF OMITTED] T5477.379
[GRAPHIC] [TIFF OMITTED] T5477.380
[GRAPHIC] [TIFF OMITTED] T5477.381
[GRAPHIC] [TIFF OMITTED] T5477.382
[GRAPHIC] [TIFF OMITTED] T5477.383
[GRAPHIC] [TIFF OMITTED] T5477.384
[GRAPHIC] [TIFF OMITTED] T5477.385
[GRAPHIC] [TIFF OMITTED] T5477.386
[GRAPHIC] [TIFF OMITTED] T5477.387
[GRAPHIC] [TIFF OMITTED] T5477.388
[GRAPHIC] [TIFF OMITTED] T5477.389
[GRAPHIC] [TIFF OMITTED] T5477.390
[GRAPHIC] [TIFF OMITTED] T5477.391
[GRAPHIC] [TIFF OMITTED] T5477.392
[GRAPHIC] [TIFF OMITTED] T5477.393
[GRAPHIC] [TIFF OMITTED] T5477.394
[GRAPHIC] [TIFF OMITTED] T5477.395
[GRAPHIC] [TIFF OMITTED] T5477.396
[GRAPHIC] [TIFF OMITTED] T5477.397
[GRAPHIC] [TIFF OMITTED] T5477.398
[GRAPHIC] [TIFF OMITTED] T5477.399
[GRAPHIC] [TIFF OMITTED] T5477.400
[GRAPHIC] [TIFF OMITTED] T5477.401
[GRAPHIC] [TIFF OMITTED] T5477.402
[GRAPHIC] [TIFF OMITTED] T5477.403
[GRAPHIC] [TIFF OMITTED] T5477.404
[GRAPHIC] [TIFF OMITTED] T5477.405
[GRAPHIC] [TIFF OMITTED] T5477.406
[GRAPHIC] [TIFF OMITTED] T5477.407
[GRAPHIC] [TIFF OMITTED] T5477.408
[GRAPHIC] [TIFF OMITTED] T5477.409
[GRAPHIC] [TIFF OMITTED] T5477.410
[GRAPHIC] [TIFF OMITTED] T5477.411
[GRAPHIC] [TIFF OMITTED] T5477.412
[GRAPHIC] [TIFF OMITTED] T5477.413
[GRAPHIC] [TIFF OMITTED] T5477.414
[GRAPHIC] [TIFF OMITTED] T5477.415
[GRAPHIC] [TIFF OMITTED] T5477.416
[GRAPHIC] [TIFF OMITTED] T5477.417
[GRAPHIC] [TIFF OMITTED] T5477.418
[GRAPHIC] [TIFF OMITTED] T5477.419
[GRAPHIC] [TIFF OMITTED] T5477.420
[GRAPHIC] [TIFF OMITTED] T5477.421
[GRAPHIC] [TIFF OMITTED] T5477.422
[GRAPHIC] [TIFF OMITTED] T5477.423
[GRAPHIC] [TIFF OMITTED] T5477.424
[GRAPHIC] [TIFF OMITTED] T5477.425
[GRAPHIC] [TIFF OMITTED] T5477.426
[GRAPHIC] [TIFF OMITTED] T5477.427
[GRAPHIC] [TIFF OMITTED] T5477.428
[GRAPHIC] [TIFF OMITTED] T5477.429
[GRAPHIC] [TIFF OMITTED] T5477.430
[GRAPHIC] [TIFF OMITTED] T5477.431
[GRAPHIC] [TIFF OMITTED] T5477.432
[GRAPHIC] [TIFF OMITTED] T5477.433
[GRAPHIC] [TIFF OMITTED] T5477.434
[GRAPHIC] [TIFF OMITTED] T5477.435
[GRAPHIC] [TIFF OMITTED] T5477.436
[GRAPHIC] [TIFF OMITTED] T5477.437
[GRAPHIC] [TIFF OMITTED] T5477.438
[GRAPHIC] [TIFF OMITTED] T5477.439
[GRAPHIC] [TIFF OMITTED] T5477.440
[GRAPHIC] [TIFF OMITTED] T5477.441
[GRAPHIC] [TIFF OMITTED] T5477.442
[GRAPHIC] [TIFF OMITTED] T5477.443
[GRAPHIC] [TIFF OMITTED] T5477.444
[GRAPHIC] [TIFF OMITTED] T5477.445
[GRAPHIC] [TIFF OMITTED] T5477.446
[GRAPHIC] [TIFF OMITTED] T5477.447
[GRAPHIC] [TIFF OMITTED] T5477.448
[GRAPHIC] [TIFF OMITTED] T5477.449
[GRAPHIC] [TIFF OMITTED] T5477.450
[GRAPHIC] [TIFF OMITTED] T5477.451
[GRAPHIC] [TIFF OMITTED] T5477.452
[GRAPHIC] [TIFF OMITTED] T5477.453
[GRAPHIC] [TIFF OMITTED] T5477.454
[GRAPHIC] [TIFF OMITTED] T5477.455
[GRAPHIC] [TIFF OMITTED] T5477.456
[GRAPHIC] [TIFF OMITTED] T5477.457
[GRAPHIC] [TIFF OMITTED] T5477.458
[GRAPHIC] [TIFF OMITTED] T5477.459
[GRAPHIC] [TIFF OMITTED] T5477.460
[GRAPHIC] [TIFF OMITTED] T5477.461
[GRAPHIC] [TIFF OMITTED] T5477.462
[GRAPHIC] [TIFF OMITTED] T5477.463
[GRAPHIC] [TIFF OMITTED] T5477.464
[GRAPHIC] [TIFF OMITTED] T5477.465
[GRAPHIC] [TIFF OMITTED] T5477.466
[GRAPHIC] [TIFF OMITTED] T5477.467
[GRAPHIC] [TIFF OMITTED] T5477.468
[GRAPHIC] [TIFF OMITTED] T5477.469
[GRAPHIC] [TIFF OMITTED] T5477.470
[GRAPHIC] [TIFF OMITTED] T5477.471
[GRAPHIC] [TIFF OMITTED] T5477.472
[GRAPHIC] [TIFF OMITTED] T5477.473
[GRAPHIC] [TIFF OMITTED] T5477.474
[GRAPHIC] [TIFF OMITTED] T5477.475
[GRAPHIC] [TIFF OMITTED] T5477.476
[GRAPHIC] [TIFF OMITTED] T5477.477
[GRAPHIC] [TIFF OMITTED] T5477.478
[GRAPHIC] [TIFF OMITTED] T5477.479
[GRAPHIC] [TIFF OMITTED] T5477.480
[GRAPHIC] [TIFF OMITTED] T5477.481
[GRAPHIC] [TIFF OMITTED] T5477.482
[GRAPHIC] [TIFF OMITTED] T5477.483
[GRAPHIC] [TIFF OMITTED] T5477.484
[GRAPHIC] [TIFF OMITTED] T5477.485
[GRAPHIC] [TIFF OMITTED] T5477.486
[GRAPHIC] [TIFF OMITTED] T5477.487
[GRAPHIC] [TIFF OMITTED] T5477.488
[GRAPHIC] [TIFF OMITTED] T5477.489
[GRAPHIC] [TIFF OMITTED] T5477.490
[GRAPHIC] [TIFF OMITTED] T5477.491
[GRAPHIC] [TIFF OMITTED] T5477.492
[GRAPHIC] [TIFF OMITTED] T5477.493
[GRAPHIC] [TIFF OMITTED] T5477.494
[GRAPHIC] [TIFF OMITTED] T5477.495
[GRAPHIC] [TIFF OMITTED] T5477.496
[GRAPHIC] [TIFF OMITTED] T5477.497
[GRAPHIC] [TIFF OMITTED] T5477.498
[GRAPHIC] [TIFF OMITTED] T5477.499
[GRAPHIC] [TIFF OMITTED] T5477.500
[GRAPHIC] [TIFF OMITTED] T5477.501
[GRAPHIC] [TIFF OMITTED] T5477.502
[GRAPHIC] [TIFF OMITTED] T5477.503
[GRAPHIC] [TIFF OMITTED] T5477.504
[GRAPHIC] [TIFF OMITTED] T5477.505
[GRAPHIC] [TIFF OMITTED] T5477.506
[GRAPHIC] [TIFF OMITTED] T5477.507
[GRAPHIC] [TIFF OMITTED] T5477.508
[GRAPHIC] [TIFF OMITTED] T5477.509
[GRAPHIC] [TIFF OMITTED] T5477.510
[GRAPHIC] [TIFF OMITTED] T5477.511
[GRAPHIC] [TIFF OMITTED] T5477.512
[GRAPHIC] [TIFF OMITTED] T5477.513
[GRAPHIC] [TIFF OMITTED] T5477.514
[GRAPHIC] [TIFF OMITTED] T5477.515
[GRAPHIC] [TIFF OMITTED] T5477.516
[GRAPHIC] [TIFF OMITTED] T5477.517
[GRAPHIC] [TIFF OMITTED] T5477.518
[GRAPHIC] [TIFF OMITTED] T5477.519
[GRAPHIC] [TIFF OMITTED] T5477.520
[GRAPHIC] [TIFF OMITTED] T5477.521
[GRAPHIC] [TIFF OMITTED] T5477.522
[GRAPHIC] [TIFF OMITTED] T5477.523
[GRAPHIC] [TIFF OMITTED] T5477.524
[GRAPHIC] [TIFF OMITTED] T5477.525
[GRAPHIC] [TIFF OMITTED] T5477.526
[GRAPHIC] [TIFF OMITTED] T5477.527
[GRAPHIC] [TIFF OMITTED] T5477.528
[GRAPHIC] [TIFF OMITTED] T5477.529
[GRAPHIC] [TIFF OMITTED] T5477.530
[GRAPHIC] [TIFF OMITTED] T5477.531
[GRAPHIC] [TIFF OMITTED] T5477.532
[GRAPHIC] [TIFF OMITTED] T5477.533
[GRAPHIC] [TIFF OMITTED] T5477.534
[GRAPHIC] [TIFF OMITTED] T5477.535
[GRAPHIC] [TIFF OMITTED] T5477.536
[GRAPHIC] [TIFF OMITTED] T5477.537
[GRAPHIC] [TIFF OMITTED] T5477.538
[GRAPHIC] [TIFF OMITTED] T5477.539
[GRAPHIC] [TIFF OMITTED] T5477.540
[GRAPHIC] [TIFF OMITTED] T5477.541
[GRAPHIC] [TIFF OMITTED] T5477.542
[GRAPHIC] [TIFF OMITTED] T5477.543
[GRAPHIC] [TIFF OMITTED] T5477.544
[GRAPHIC] [TIFF OMITTED] T5477.545
[GRAPHIC] [TIFF OMITTED] T5477.546
[GRAPHIC] [TIFF OMITTED] T5477.547
[GRAPHIC] [TIFF OMITTED] T5477.548
[GRAPHIC] [TIFF OMITTED] T5477.549
[GRAPHIC] [TIFF OMITTED] T5477.550
[GRAPHIC] [TIFF OMITTED] T5477.551
[GRAPHIC] [TIFF OMITTED] T5477.552
[GRAPHIC] [TIFF OMITTED] T5477.553
[GRAPHIC] [TIFF OMITTED] T5477.554
[GRAPHIC] [TIFF OMITTED] T5477.555
[GRAPHIC] [TIFF OMITTED] T5477.556
[GRAPHIC] [TIFF OMITTED] T5477.557
[GRAPHIC] [TIFF OMITTED] T5477.558
[GRAPHIC] [TIFF OMITTED] T5477.559
[GRAPHIC] [TIFF OMITTED] T5477.560
[GRAPHIC] [TIFF OMITTED] T5477.561
[GRAPHIC] [TIFF OMITTED] T5477.562
[GRAPHIC] [TIFF OMITTED] T5477.563
[GRAPHIC] [TIFF OMITTED] T5477.564
[GRAPHIC] [TIFF OMITTED] T5477.565
[GRAPHIC] [TIFF OMITTED] T5477.566
[GRAPHIC] [TIFF OMITTED] T5477.567
[GRAPHIC] [TIFF OMITTED] T5477.568
[GRAPHIC] [TIFF OMITTED] T5477.569
[GRAPHIC] [TIFF OMITTED] T5477.570
[GRAPHIC] [TIFF OMITTED] T5477.571
[GRAPHIC] [TIFF OMITTED] T5477.572
[GRAPHIC] [TIFF OMITTED] T5477.573
[GRAPHIC] [TIFF OMITTED] T5477.574
[GRAPHIC] [TIFF OMITTED] T5477.575
[GRAPHIC] [TIFF OMITTED] T5477.576
[GRAPHIC] [TIFF OMITTED] T5477.577
[GRAPHIC] [TIFF OMITTED] T5477.578
[GRAPHIC] [TIFF OMITTED] T5477.579
[GRAPHIC] [TIFF OMITTED] T5477.580
[GRAPHIC] [TIFF OMITTED] T5477.581
[GRAPHIC] [TIFF OMITTED] T5477.582
[GRAPHIC] [TIFF OMITTED] T5477.583
[GRAPHIC] [TIFF OMITTED] T5477.584
[GRAPHIC] [TIFF OMITTED] T5477.585
[GRAPHIC] [TIFF OMITTED] T5477.586
[GRAPHIC] [TIFF OMITTED] T5477.587
[GRAPHIC] [TIFF OMITTED] T5477.588
[GRAPHIC] [TIFF OMITTED] T5477.589
[GRAPHIC] [TIFF OMITTED] T5477.590
[GRAPHIC] [TIFF OMITTED] T5477.591
[GRAPHIC] [TIFF OMITTED] T5477.592
[GRAPHIC] [TIFF OMITTED] T5477.593
[GRAPHIC] [TIFF OMITTED] T5477.594
[GRAPHIC] [TIFF OMITTED] T5477.595
[GRAPHIC] [TIFF OMITTED] T5477.596
[GRAPHIC] [TIFF OMITTED] T5477.597
[GRAPHIC] [TIFF OMITTED] T5477.598
[GRAPHIC] [TIFF OMITTED] T5477.599
[GRAPHIC] [TIFF OMITTED] T5477.600
[GRAPHIC] [TIFF OMITTED] T5477.601
[GRAPHIC] [TIFF OMITTED] T5477.602
[GRAPHIC] [TIFF OMITTED] T5477.603
[GRAPHIC] [TIFF OMITTED] T5477.604
[GRAPHIC] [TIFF OMITTED] T5477.605
[GRAPHIC] [TIFF OMITTED] T5477.606
[GRAPHIC] [TIFF OMITTED] T5477.607
[GRAPHIC] [TIFF OMITTED] T5477.608
[GRAPHIC] [TIFF OMITTED] T5477.609
[GRAPHIC] [TIFF OMITTED] T5477.610
[GRAPHIC] [TIFF OMITTED] T5477.611
[GRAPHIC] [TIFF OMITTED] T5477.612
[GRAPHIC] [TIFF OMITTED] T5477.613
[GRAPHIC] [TIFF OMITTED] T5477.614
[GRAPHIC] [TIFF OMITTED] T5477.615
[GRAPHIC] [TIFF OMITTED] T5477.616
[GRAPHIC] [TIFF OMITTED] T5477.617
[GRAPHIC] [TIFF OMITTED] T5477.618
[GRAPHIC] [TIFF OMITTED] T5477.619
[GRAPHIC] [TIFF OMITTED] T5477.620
[GRAPHIC] [TIFF OMITTED] T5477.621
[GRAPHIC] [TIFF OMITTED] T5477.622
[GRAPHIC] [TIFF OMITTED] T5477.623
[GRAPHIC] [TIFF OMITTED] T5477.624
[GRAPHIC] [TIFF OMITTED] T5477.625
[GRAPHIC] [TIFF OMITTED] T5477.626
[GRAPHIC] [TIFF OMITTED] T5477.627
[GRAPHIC] [TIFF OMITTED] T5477.628
[GRAPHIC] [TIFF OMITTED] T5477.629
[GRAPHIC] [TIFF OMITTED] T5477.630
[GRAPHIC] [TIFF OMITTED] T5477.631
[GRAPHIC] [TIFF OMITTED] T5477.632
[GRAPHIC] [TIFF OMITTED] T5477.633
[GRAPHIC] [TIFF OMITTED] T5477.634
[GRAPHIC] [TIFF OMITTED] T5477.635
[GRAPHIC] [TIFF OMITTED] T5477.636
[GRAPHIC] [TIFF OMITTED] T5477.637
[GRAPHIC] [TIFF OMITTED] T5477.638
[GRAPHIC] [TIFF OMITTED] T5477.639
[GRAPHIC] [TIFF OMITTED] T5477.640