[Senate Hearing 108-57]
[From the U.S. Government Publishing Office]
S. Hrg. 108-57
ELECTRICITY PROPOSALS AND ELECTRIC TRANSMISSION AND RELIABILITY
ENHANCEMENT ACT OF 2003
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
TO RECEIVE TESTIMONY ON VARIOUS ELECTRICITY PROPOSALS
INCLUDING, BUT NOT LIMITED TO, S. 475, THE ELECTRIC TRANSMISSION AND
RELIABILITY ENHANCEMENT ACT OF 2003
__________
MARCH 27, 2003
Printed for the use of the
Committee on Energy and Natural Resources
______
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
PETE V. DOMENICI, New Mexico, Chairman
DON NICKLES, Oklahoma JEFF BINGAMAN, New Mexico
LARRY E. CRAIG, Idaho DANIEL K. AKAKA, Hawaii
BEN NIGHTHORSE CAMPBELL, Colorado BYRON L. DORGAN, North Dakota
CRAIG THOMAS, Wyoming BOB GRAHAM, Florida
LAMAR ALEXANDER, Tennessee RON WYDEN, Oregon
LISA MURKOWSKI, Alaska TIM JOHNSON, South Dakota
JAMES M. TALENT, Missouri MARY L. LANDRIEU, Louisiana
CONRAD BURNS, Montana EVAN BAYH, Indiana
GORDON SMITH, Oregon DIANNE FEINSTEIN, California
JIM BUNNING, Kentucky CHARLES E. SCHUMER, New York
JON KYL, Arizona MARIA CANTWELL, Washington
Alex Flint, Staff Director
James P. Beirne, Chief Counsel
Robert M. Simon, Democratic Staff Director
Sam E. Fowler, Democratic Chief Counsel
Lisa Epifani, Counsel
Leon Lowery, Democratic Professional Staff Member
C O N T E N T S
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STATEMENTS
Page
Anderson, John, Executive Director, Electricity Consumers
Resources Council.............................................. 31
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 9
Brownell, Nora Mead, Commissioner, Federal Energy Regulatory
Commission..................................................... 135
Burns, Hon. Conrad, U.S. Senator from Montana.................... 162
Campbell, Hon. Ben Nighthorse, U.S. Senator From Colorado........ 11
Cantwell, Hon. Maria, U.S. Senator from Washington............... 150
Craig, Hon. Larry E., U.S. Senator From Idaho....................3, 142
Domenici, Hon. Pete V., U.S. Senator From New Mexico............. 1
Dorgan, Hon. Byron L., U.S. Senator From North Dakota............ 10
English, Glenn, CEO, National Rural Electric Cooperative
Association.................................................... 82
Franklin, H. Allen, Chairman, President, and CEO, Southern
Company, on behalf of Edison Electric Institute................ 71
Gifford, Raymond L., President, The Progress and Freedom
Foundation..................................................... 18
Glazer, Craig, Vice President of Government Policy, PJM
Interconnection, L.L.C......................................... 47
Kyl, Hon. Jon, U.S. Senator From Arizona......................... 5
Landrieu, Hon. Mary L., U.S. Senator From Louisiana.............. 5
Massey, William L., Commissioner, Federal Energy Regulatory
Commission..................................................... 131
Moler, Elizabeth A., Executive Vice President, Government and
Environmental Affairs and Public Policy, Exelon Corporation, on
behalf of Electric Power Supply Corporation.................... 109
Murkowski, Hon. Lisa, U.S. Senator From Alaska................... 8
Norlander, Gerald, Chairman, Electricity Committee, National
Association of State Utility Consumer Advocates, and Executive
Director, Public Utility Law Project of New York, Inc.......... 23
Para, P.G. ``Bud'', Director, Legislative Affairs, Jacksonville
Electric Authority, on behalf of the SeTrans RTO Sponsors...... 54
Richardson, Alan H., President and CEO, American Public Power
Association.................................................... 93
Svanda, David A., President, National Association of Regulatory
Utility Commissioners, and Commissioner, Michigan Public
Service Commission............................................. 12
Tollefson, Phil, CEO, Colorado Springs Utilities, on behalf of
Large Public Power Council..................................... 102
Torgerson, James P., President and CEO, Midwest Independent
Transmission System Operator, Inc.............................. 60
Wood, Pat III, Chairman, Federal Energy Regulatory Commission.... 126
APPENDIXES
Appendix I
Responses to additional questions................................ 175
Appendix II
Additional material submitted for the record..................... 207
ELECTRICITY PROPOSALS AND THE ELECTRIC TRANSMISSION AND RELIABILITY
ENHANCEMENT ACT OF 2003
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THURSDAY, MARCH 27, 2003
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:34 a.m., in
room SD-366, Dirksen Senate Office Building, Hon. Pete V.
Domenici, chairman, presiding.
OPENING STATEMENT OF HON. PETE V. DOMENICI,
U.S. SENATOR FROM NEW MEXICO
The Chairman. Good morning, everyone. It is obvious that we
have a very difficult subject and one of great importance here
today, and a number of Senators who will participate will also
have to come in and out because of a hearing on Armed Services
appropriations and an important Judiciary Committee. But I will
try my best to maintain the schedule, and Senator Bingaman,
from your side, you will have somebody here, more or less, for
the witnesses during the day?
Senator Bingaman. Probably, right.
The Chairman. Good morning again.
Next week the committee is going to begin, if I can
possibly get it done, 2 weeks of markup on a comprehensive
energy bill. I think that is possible because a great deal of
the work was done last year, and much of it will be carried
forward. While there will be changes proposed in the chairman's
mark, a substantial portion of the work has been done. It is my
intention that on April 9--that is the end of those markup
days--we will consider the electricity title.
Today's hearing will consider four legislative proposals
and obviously anything constructive that witnesses care to
share with us.
S. 475, introduced by Senator Thomas on February 27. I
compliment Senator Thomas. A lot of work went into this. I am
sure he spent a great deal of time with varying views, and the
bill is before us showing a great deal of effort, work, and
obvious compromise.
The second one is title VII from the House Energy and Power
Subcommittee chaired by Congressman Barton.
The third is a Senate October 16 offer from last year's
energy bill conference, which Senator Bingaman participated in
and he and his staff had a great deal to do with.
And the fourth is the staff draft circulated from last
week, which I have participated in, but is principally a work
of the majority staff. I thank them for their effort. It
obviously shows a great deal of ingenuity, innovation, and hard
work.
After reading most of the prepared testimony submitted for
today's hearing, it is clear that the witnesses are essentially
divided into two camps, those who support open access to
transmission and generally support SMD and want the committee
to approve Senator Thomas' proposal that would expand FERC's
authority to ensure market access. On the other hand, those
with serious concerns about SMD, in particular public power,
prefer that the committee do nothing out of fear that including
anything creates an unacceptable risk that we will include,
either now or at some point down the legislative path,
provisions that expand FERC's authority.
Both sides make good cases, and from talking to individuals
from the industry and from institutions, it is obvious that
positions have been very well thought out.
On the one hand, even though both sides make good cases,
competition in the market is generally a good notion and the
underpinning of our economy.
On the other hand, I do believe that FERC's SMD proposal
failed to sufficiently consider the fact that this country does
not have a single market for the generation and transmission of
electricity. In fact, it has a series of regional markets that,
particularly in the West and South, are structured and operate
differently than the markets in the Northeast and Mid-Atlantic
regions.
It is in this insensitivity to regional disparities and the
fact that the current FERC has an expansive view of its
authority that exceeds that vision by Congress, at least in my
opinion, when we last amended the Federal Power Act in 1992
that has caused many of my colleagues who understandably
suggest that Congress should curtail FERC's SMD.
While I share those concerns, SMD is a single rulemaking.
If Congress were to simply curtail that rulemaking, it seems to
me that the current FERC would remain free to implement the
same policies through other rulemaking or proceedings.
On the other hand, if we attempt a wholesale rewrite the
Federal Power Act to remove the discretion of FERC to make
permanent limitations on FERC's authority and to truly block
SMD-like regulation, I believe that Congress would be deeply
divided, as our witnesses are today, as their interests are
represented.
Finally, I do not see fundamental problems with the Federal
Power act, at least as I have reviewed it. I believe the
regulatory entities need discretion to address matters
unforeseen to Congress.
On the other hand, I believe that this FERC in particular
sought to so expand its authorities so far beyond those that
Congress anticipated, that those concerned about SMD have some
very legitimate reasons to be skeptical about assurances made
by the commission and its chairman.
It was my view that the Federal Power Act itself is not
fundamentally flawed, but that the current FERC has ignored
real regional issues that must be considered in the regulation
of generation of electricity and its transmission that has
caused the committee staff to develop this regional energy
services proposal, RESC.
This proposal would authorize States to come together to
implement part of the Federal Power Act themselves. The RESC's
would permit regions to develop their own policies for market
design and transmission, including rulemaking authority,
reliability, efficiency, and infrastructure investment matters
without FERC preemption.
I know, from reading the prepared testimony that many of
the witnesses have concerns about parts of this proposal.
Clearly those who support FERC's SMD proposals object to the
notion of regional markets, and they raise all sorts of
concerns about adding another layer of regulation.
But I do not believe that RESC has to be an additional
layer, and I say that to my good friend, Senator Thomas, who
has great concerns about that. I believe that RESC can assume
as much power and authority under part II of the Federal Power
Act as it desires and make its own determination as to whether
there would be an appeals process from within the RESC to FERC.
Ideally, I believe FERC's role would be limited to States that
prefer not to enter a RESC and to issues among RESC's, much
like Congress originally envisioned FERC's authority to be
limited to interstate matters originally.
After reading the proposals, some have approached me and
recommended that instead of creating regional authorities,
Congress should, instead, force FERC to give differences to
regional matters in the form of regional transmission
organizations, RTOs. I can imagine a system by which we give
RTOs much greater authority than they currently possess would
go a long way in addressing regional issues, but those would
have to be real authorities over key issues or the RTOs would
remain beholden to FERC where the matter starts in its sense of
consternation today.
Finally, the staff draft includes a provision for
transportation development certificates to facilitate the
construction of new transmission lines. I believe lack of
transmission is one of the principal reasons for the mess we
have today. I know that providing even limited authority to
obtain right-of-way is strongly opposed by some of my
colleagues on this committee. However, Congress has already
provided authority for pipelines, and I think we just cannot
ignore the fact that it is now virtually impossible to build a
new transmission line.
So with that, from somebody who used to read statements on
budgets, I find it almost difficult to read this kind of
statement.
[Laughter.]
The Chairman. But I am trying.
I yield now to Senator Bingaman.
[The prepared statements of Senators Craig, Kyl, Landrieu,
and Murkowski follow:]
Prepared Statement of Hon. Larry E. Craig, U.S. Senator From Idaho
Over a decade ago, Congress passed legislation that cautiously
moved the electric industry away from its historically regulated
framework toward a new competitive market approach for the sale and
resale of wholesale electricity.
Some believe it is time for Congress to take bolder action. Most of
these advocates represent a class in the industry known as merchant
traders and merchant generators that I understand is suffering
financial distress.
It is instructive to me that most public power, coops, and investor
owned utilities are not clamoring for bold change.
It is also instructive that the pressure for bold action is coming
primarily from electric system geographical corridors located in the
Northeast and parts of the Midwest.
Apparently, Middle Atlantic, Southeast, and Western electric system
entities are content with the pace of the electric industry's
evolution.
They obviously don't rely on merchant traders and merchant
generators the way the Northeast region did. And it appears that those
regions did not fall prey to the over-regulation experienced in the
Northeast.
It certainly explains the outrage expressed by the South and West
regions about the Commission's proposed Standard Market Design (SMD)
rule.
Chairman Domenici has aptly characterized the Commission's action
on SMD as a serious overreaching of its authority. I and many others on
this Committee agree.
But what is equally troubling to me is the confusion created by
Commission action since 2001. For example, the Commission's Order 2000
set-out a voluntary incentive-based approach to restructuring that is
clearly in conflict with the prescriptive approach set-out in its
proposed SMD. The industry spent about $100 million to form Regional
Transmission Organizations (RTOs) under Order 2000 that now appears to
be money not well spent in light of SMD.
Moreover, the Commission placed utility companies in settlement
proceedings to form RTOs, only to disavow the results when the new
Commission took over in 2001.
This happened most dramatically in the Midwest, where parties
negotiated and the Commission approved two RTOs, one for-profit and one
not-for-profit in May 2001.
In December, the Commission ignored its previous final action. In
fact, the Commission questioned whether for-profit companies could
become RTOs.
In the Northeast and the Southeast, the Commission opened marathon
mediation efforts, only to ignore the results.
In the Northeast, the Commission originally required three RTOs to
merge, then reduced the number to two and acquiesced when the parties
to the merger that would have established the two RTOs canceled their
plans.
It seems to me that the Commission's policy lacks direction. Since
2001, there has been too much lurching forward in provocative ways and
then retraction once it becomes clear that the Commission went too far.
It would be far better for the industry and consumers alike if the
Commission would propose reasonable rules in the first place, rather
than announce ambitious programs that require later modifications.
I believe it far more prudent for this Committee to exercise much
closer oversight of the Commission's administration of its current
authority rather than contemplate the value of giving the Commission
more authority, which in my opinion would only give the Commission more
opportunity to create uncertainty in the marketplace.
I have made no secret of my preference for Congress to go slow in
determining whether electricity legislation is needed.
During the last six years, Congress has struggled to find consensus
on what to do on this issue. That consensus, to put it bluntly, has
been illusive.
We once again find ourselves on the eve of another effort to find
consensus. The Chairman is working hard to make it happen. I want to
express my appreciation to the Chairman for his efforts to accommodate
the many Western concerns that have been expressed by me and other
colleagues on this Committee. I am grateful for his willingness to
think ``outside-the-box'' to ensure that the traditional role of the
States in this area is not compromised.
However, the draft legislation distributed by the Chairman
introduces a rather novel idea for regional control of electricity
regulation.
Although it raises many attractive concepts for regional and local
control, it demands more thought and careful analysis. Put simply--it
needs more time to mature.
Electricity regulation is, by nature, complex. In the short time I
have had to review the proposal I have developed many questions about
the concepts in the Chairman's proposal.
I would be much more comfortable about proceeding with the analysis
if I was not confronted with the very short time line that has been set
to complete the energy bill.
I continue to be confounded by the enormous pressure to include an
electricity title in this bill. Such pressure contributed greatly to
the demise of a similar energy bill in the last Congress. I hope our
efforts in this Congress to pass such important legislation is not met
with a similar fate.
______
Prepared Statement of Hon. Jon Kyl, U.S. Senator From Arizona
Mr. Chairman, as the Senior Senator from New Mexico, you understand
the issues that are unique to the Western power markets and have
endeavored to bring new perspective and new ideas to the table in order
to promote workable competitive markets. I appreciate the leadership
you have shown on this issue and look forward to working with you on
these provisions in the bill. Obviously, we want to develop a bill that
will do no harm to the electric utility industry and that will restore
the faith of consumers and investors in our energy markets.
The proposals on the table for an electricity title present a
number of interesting concepts, with Regional Energy Services
Commission the most recent. We must shift power from FERC to the
States, so I appreciate this regional idea. A number of questions have
been raised about details of the proposal, and I do think it needs
further consideration and development before we mark-up the bill.
But my principal concern is that we seem to be ignoring the
elephant in the middle of the room--FERC's Standard Market Design
proposal. FERC's SMD proposal represents a dramatic overreaching by
FERC for jurisdiction and control over electricity issues traditionally
dealt with by the States. Yet, much of the legislation on the table,
including the Regional Energy Services Commission proposal, appears to
accept, through silence, that the Standard Market Design proposal will
move forward. This, despite the fact that the Northwestern,
Southwestern, and Southeastern regulators, governors, and utilities are
overwhelmingly against the proposal.
It is beyond dispute that there is a lack of consensus across the
Nation that SMD is the way to go. And, as I said, there is outright
hostility to the idea by many. So, I think we should deal with SMD
directly, and not just try to find a way to work with or around it.
In the meantime, to maintain the confidence of retail consumers and
investors, Congress should protect the retail service obligations of
jurisdictional and non-jurisdictional utilities to provide needed
regulatory certainty. I would have preferred to see this issue nailed
down in the Chairman's draft. You have indicated, however, Mr. Chairman
that you will work with me and other Senators who are interested in
this to address this concern as the committee moves to markup.
As a final matter, I must address federal siting. Nothing in these
bills strikes more at the heart of federalism, nor seems to be more of
a solution looking for a problem than the consistent attempts to
preempt state authority over the siting of transmission lines. This
Committee has heard from witnesses who testified unequivocally that
States are denying permits for interstate transmission lines. However,
these accusations have been devoid of factual evidence to back up the
claims. It is clear that there are areas where transmission congestion
is a problem, however I have not heard any evidence to suggest that
State inaction on siting is the cause. The case has not been made,
therefore, to justify centralizing these land-use decisions in
Washington, D.C. And, we certainly do not want to speed up the process
of siting transmission lines on private lands to the point that it
provides an incentive to site an private rather than federal lands.
Indeed, in the West, federal agencies control a large percentage of
the land. In my home State of Arizona federal and tribal lands comprise
74 percent of the total land base. If a siting problem in Arizona can
be identified it is on federal lands because of the large number of
environmental restrictions. Therefore, I support efforts in these
proposals to streamline the federal process, but do not support efforts
to preempt state authority.
In sum, while I support the development of competitive markets to
allocate resources efficiently, I believe that before we federally
legislate any new market model (or allow FERC to force western
utilities into a new market model) we should move with appropriate
caution and deliberation. Only in this way can we ensure that we do not
create another California-type scenario that provides an opportunity
for unscrupulous market participants to game the system at the expense
of consumers. We can, at this time, however, quell concerns about SMD
by clarifying state jurisdiction and making sure that our local
utilities are able to provide for their local customers first.
I thank the Chairman for convening this hearing and look forward to
hearing from our witnesses.
______
Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator
From Louisiana
Mr. Chairman, today our country is at a critical juncture with
respect to the need for affordable and reliable electricity. It is for
these reasons that I have introduced the ``Federal Power Act Amendments
of 2003.'' This bill is intended to ensure affordable and reliable
electricity to all electricity customers in a fair and equitable
manner.
Electricity users, my constituents and your constituents, Mr.
Chairman, wake up in the morning, flip a switch and expect their lights
to turn on. They also expect that each month when their electricity
bill arrives in the mail that they'll pay a reasonable price for that
service. Customers don't care where the electrons come from or what new
scheme the Federal Energy Regulatory Commission (FERC) has in mind for
the electricity industry or really much of anything else. And frankly,
as a representative of nearly four and a half million people in my home
State of Louisiana, affordable and reliable electricity are my primary
concerns when it comes to electricity policy, and that is the purpose
for which I offered my legislation.
Electricity prices in Louisiana, and throughout the Southeast for
that matter, are some of the lowest in the nation. According to the
North American Electric Reliability Council's most recent reliability
assessment report, the Southeast region is expected to enjoy, at least
for the near term, ``adequate delivery capacity to support forecast
demand and energy requirements under normal and contingency
conditions.'' In other words, electricity customers in the Southeast
should expect to continue to enjoy reliable electric service over the
short run. My concern, however, is about the future of retail
electricity service in my State.
There are several specific areas of concern that I have and that I
attempt to address in my legislation being offered.
First, the current balance between State and federal jurisdiction,
which has worked exceedingly well in my home State to provide low-cost
and reliable electric service, is in jeopardy. Retail transactions,
regulated by State public utility commissions, have historically
comprised 90 percent of most utilities' transactions and continue to do
so in a majority of States that have not restructured their electricity
markets. In fact, there is not a single State in the Southeast with the
exception of Virginia that has authorized retail competition. Yet,
customers in our region of the country enjoy some of the lowest priced
electricity service.
The FERC, however, has issued a proposed rule that would strip
States of much of their current jurisdiction over retail electric
service, including the transmission component of bundled retail sales.
In so doing, FERC would dramatically impair the ability of States to
use retail ratemaking to attain local policy goals and to continue to
ensure low costs for retail customers. It would also prohibit States
from ensuring that retail customers are given a priority for
electricity service. As a result, in the event that supplies are tight,
retail customers could lose the right to priority service.
FERC's proposed plan is a one-size-fits-all scheme on the entire
country based on a model that closely resembles the one in place in New
Jersey, much of Pennsylvania and Maryland. This model may work well in
the Northeast, but it has never been tested or proven viable in any
other part of the country. In fact, in a study performed by the
consulting firm, Charles River Associates, it was concluded that there
is ``considerable uncertainty as to whether the FERC's proposed
Standard Market Design would provide greater benefits to the southeast
than the implementation costs.'' In Louisiana, and I'm sure in many
other States throughout the Southeast and across the country, customers
are happy with their electric service. So I ask Mr. Chairman, what's
wrong with the current jurisdictional division between the State and
federal government? If a State or region wants to adopt a new approach,
they should be free to do so. But we should not allow a federal agency
to make fundamental policy decisions that are best left to State
officials who are accountable to local interests. We know what happened
out West when California regulators attempted to institute a sweeping,
new plan for its electricity markets. I hope to avoid importing those
problems into Louisiana.
To address this jurisdictional concern, Section 2 of my bill would
clarify the federal-State arrangement under the Federal Power Act by
explicitly stating that States shall have jurisdiction over the retail
sale of electric energy, including all component parts of a bundled
retail sale. In addition, Section 7 would enable States to continue to
allow utilities to reserve transmission capacity for retail customers.
This is current law and the current practice in a large number of
States, including States with some of the lowest average retail rates
and the best history of reliability. As contemplated by Congress when
the Federal Power Act was enacted, FERC will retain jurisdiction over
the wholesale sales of electric energy and States will retain
jurisdiction over retail.
My second concern for retail customers is the potential for
increased rates caused by the costs of accommodating the ``merchant
generation'' that, over the past several years, have been seeking to
connect to the electric grid in the Southeast. Though new generation is
important to wholesale competition, it is a strain on the transmission
system. To accommodate the new generation, new transmission facilities
and upgrades to existing facilities are needed. However, customers in
Louisiana would be forced to pay for the facilities needed to
accommodate the merchant generators, even though most of their
customers are out-of-region customers. State regulatory commissioners,
understandably, are reluctant to pass transmission construction and
upgrade costs off to local customers who are not benefiting form the
electricity. Meanwhile energy dependent regions of the country are
denied cheap and reliable electricity.
A reason they choose to site in Louisiana is because we are blessed
with abundant reserves of natural gas--the currently favored fuel
source for electric generation. Merchant generators are siting their
facilities to gain access to these resources as cheaply as possible,
and then are delivering electricity to regions where they can sell
electricity at a higher cost. If enough transmission is built to export
just a portion of the new generation that is planned to come on-line in
Louisiana--10,000 megawatts--the estimated cost would impose a retail
rate increase of 5 to 11 percent.
Surely, there must be a more equitable way to allocate cost while
simultaneously enhancing our transmission capacity. It is not fair to
expect customers in energy generating States to keep paying for
transmission expansion when this increased transmission is primarily
being developed for out-of-region use. In Section 3 and 4 of this bill,
I have attempted to provide a more equitable system. Section 3 would
allow for ``voluntary participant-funding'' in which a regional
transmission organization may choose to establish a system in which
market participants pay for expansions to the transmission network in
return for the transmission rights created by the expansion investment.
This approach gives proper economic incentives for new generator
location and transmission expansion decisions.
Similarly, Section 4 of my bill would require the FERC to initiate
a proceeding to establish rules for interconnecting new generation to
transmission facilities. As in Section 3, any costs made necessary by
the interconnecting generator would be funded by the generator, or
cost-causer, in return for a right to use such facilities funded by the
investment.
The third problem that I see is the lack of new investment in
transmission facilities. FERC noted in its Electric Transmission
Constraint study that transmission congestion costs retail customers
across the country millions of dollars every year. Over the past 10
years, demand for electricity has increased by 17 percent while
transmission investment during the same period has continuously
declined about 45 percent.
What is even more troubling is that current demand for electricity
is projected to increase by 25 percent over the next 10 years with only
a modest increase in transmission capacity. In the short term, this
lack of transmission investment and the corresponding lack of
transmission capacity, adversely affects the ability of retail
customers to realize the benefits of wholesale competition. Over the
long term, and if this trend continues, the reliability of the bulk
power system could be compromised. In the summer of 2000, transmission
constraints limited the ability to sell low-cost power from the Midwest
to the South during a period of peak demand, causing higher costs for
customers. In the summer of 2001 during the California electricity
crisis, transmission constraints along the Path 15 transmission route
were a significant cause of the blackouts experienced by customers in
the northern parts of that State.
To help spur this needed investment in the transmission sector,
Section 5 of the legislation would provide further guidance to FERC in
establishing transmission rates in two ways. First, Section 5 would
amend Section 205 of the Federal Power Act to clarify that the cost
causer is responsible for paying the costs of new transmission
investment and that all users of the transmission facilities are
required to pay an equitable share of the costs such facilities. These
provisions will help ensure that users of the transmission system have
proper economic price signals and encourage investment where it is
needed most. Second, Section 5 would add a new section to the Federal
Power Act, Section 215, that would require the FERC to initiate a
rulemaking to establish transmission pricing policies and standards to
promote investment in transmission facilities. Although the Commission
may have sufficient authority under current law to initiate such
policies, our nation's transmission system has been neglected too long
and I believe that the FERC could benefit from more specific guidance
from Congress.
Finally, Mr. Chairman, customers are not realizing all of the
potential benefits of wholesale electricity markets because of its
balkanization. The likely result is higher electricity prices. In
different parts of the country, electric utilities are in various
stages of joining together to form large regional markets, or in the
terms used by FERC--regional transmission organizations. In addition,
public power entities, including municipal utilities, cooperatives, and
federal and State power marketing associations have been willing or
resisting, to varying degrees, to contribute to the efforts to
establish regional markets. Exacerbating this problem is the underlying
fact that FERC does not have the same jurisdiction over public power
utilities as it does over electric utilities.
Properly functioning regional markets for electricity can bring
about significant benefits to customers in all parts of the country.
More competitive wholesale generation, for example, will allow retail
sellers greater opportunities to purchase generation from independent
power producers. Improperly functioning markets, or one-size-fits all
proposals that do not take into consideration regional differences, can
be devastating. Current law and policy at FERC has been insufficient in
achieving the proper balance between the need for robust regional
markets, the reality of regional differences and the legitimate efforts
of utilities.
Therefore, in Section 6 of the bill, the FERC would be required to
convene regional discussions with State regulatory commissions to
consider the development and progress of regional transmission
organizations. It would further provide for specific topics of
discussion between FERC and the States including the need for regional
organizations, the planning process for facilities, the protection of
retail customers, and the establishment of proper price signals to
ensure the efficient expansion of the transmission grid. Section 6
would also help reduce the balkanization of the electric grid by
authorizing the federal utilities such as the Tennessee Valley
Authority and the Bonneville Power Administration to join regional
transmission organizations. Also, in an attempt to help expand
wholesale markets, Section 8 would provide for FERC to require that
public power entities provide a limited form of access to their
transmission facilities. This provision would give wholesale generators
increased access to markets and ensure that competitors pay only the
fair and reasonable price to use the transmission grid owned by public
power.
In conclusion, Mr. Chairman, I ask my colleagues to support this
legislation and consider its affect on retail electricity customers in
the States. Affordable and reliable electricity should be our objective
for customers, in all parts of the country.
______
Prepared Statement of Hon. Lisa Murkowski, U.S. Senator From Alaska
Mr. Chairman, thank you for calling this hearing today to review a
variety of legislative proposals regarding electricity. As I have
stated earlier, this nation needs a comprehensive national energy
policy. I commend the Chairman for taking the lead on this important
issue, and setting an aggressive schedule for reporting out a
comprehensive energy bill.
I understand that the Majority Leader would like to have energy
legislation on the Senate floor following the April recess.
The Electricity Title will undoubtedly be a controversial part of
energy bill. I hope the many interested parties will be able to reach
consensus on this issue.
Many problems exist in the electricity market in the United States.
These problems, for the most part, have been felt most notably in the
Western Lower 48 States.
As we are all aware, Alaska is unique. My State is not adjacent to
any other state. It borders only Canada. The electric grid of my state
is not interconnected to the electric grid Lower 48 States. Thus,
careful review of the applicability of a number of the provisions of
the Electricity title to Alaska is necessary.
In this regard, I am pleased to note that the Energy Committee
Staff Draft exempts the State of Alaska, as well as Hawaii, from the
Regional Energy Services Commissions (RESC) and the Reliability
Subtitle of the Electricity title.
As we consider these proposals, I would like to point out some of
my goals. We need to seek to lower energy prices for consumers in my
State and the rest of the United States.
We also need to restore confidence and stability to the energy
marketplace. Without this, the investment capital needed to assure an
adequate supply of reasonably priced energy and the infrastructure
investment we need will not occur.
We must also keep in mind the many far reaching effects the
Electricity Title will have on the demand for fossil fuels,
particularly natural gas. It will be important to construct the Alaska
Natural Gas Pipeline, as the demand for natural gas rises, and no doubt
will continue to rise. In addition to providing well paying jobs,
construction of the Alaska Natural Gas Pipeline will provide a secure,
domestic source of energy for our nation.
The Staff Draft also has several provisions aimed at updating our
nation's electricity policy to reflect current realities in the energy
marketplace. These include the repeal of the 1935 Public Utility
Holding Company Act (PUHCA) and reform of the Public Utility Regulatory
Policies Act (PURPA). Careful consideration should be given to these
proposals. Any repeal of the PUHCA should include appropriate consumer
safeguards. Reform of PURPA may also be appropriate if properly
conditioned. Together, these can be important steps toward the
modernization of our nation's electricity policy.
I look forward to working with Chairman, Senator Bingaman, and the
other members of this committee as we push forward on this legislation.
I am also eager to hear the testimony of today's witnesses.
Thank you Mr. Chairman.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
Senator Bingaman. Thank you very much, Mr. Chairman, for
having the hearing.
I have supported, as you know, moving legislation to deal
with electricity issues for several years now. Last year we
came close to enacting a comprehensive energy bill with an
electricity title in it. Senator Thomas worked very hard on
that. I worked very hard on that. Other members of the
committee did as well.
And it was not easy to get as far as we were able to get in
the last Congress. I do not think it has gotten any easier. The
path forward on electricity legislation is not clear to me at
this point.
Some issues that were fairly settled or seemed to be
settled last year, FERC-lite for example, do not seem to be
enjoying the same kind of consensus now that they did then.
There also seems to be more uncertainty about the wisdom of
repealing the Holding Company Act than before. In general, I
think that many who supported an electricity title in the bill
last year have great reservations about doing so this year.
I continue to believe that PUHCA can be repealed, but only
if the loss of essential consumer protections is offset by
increasing FERC's merger review authority, as we did in the
bill last year. I have long believed that many issues should be
dealt with on a regional basis rather than at the State or
Federal level. Such issues might be the siting of transmission
lines, planning for both transmission and generation.
The proposal that is contained in the Republican staff
draft before us today goes, in my view, far beyond that and
gives essentially all Federal electricity authority to regional
bodies to be appointed by the Governors. This would raise
serious constitutional questions, as well as questions about
the practicality of how it would work and I think, as I
presently read the proposal, it might well add to the
regulatory uncertainty in the market.
I look forward to hearing from the witnesses on their views
on the proposal. I look forward to learning more about it.
I also believe it is important to encourage renewable
generation. That is an issue that we discussed and debated
extensively in the last Congress. I think it is important to
diversify our resource mix to get a head start on actions that
are going to be necessary to address the issue of climate
change. A portfolio standard is the best way to do that in a
market-friendly way, and such a provision in my view is
essential in an electricity title.
I have a couple of items of testimony, one from the Utility
Coalition advocating renewable energy. I would ask that that be
included in the record, although they are not testifying.
The Chairman. It will be admitted in the record.
Senator Bingaman. Thank you.
And let me just say in closing that clearly we have very
few days before the markup that you have scheduled. I hope that
we can resolve differences that exist on the committee about
this issue of electricity in that period. I hope the witnesses
today can help us do that. But clearly there are many
differences and I think we need to recognize the complexity of
this issue as we move forward.
The Chairman. Senator, I am very grateful for at least the
implication of your last statement. We will work together and
hopefully we will try. This is, from what I can tell, as I have
reviewed the entire agenda, the most difficult provision to
reach consensus. Obviously, the House is having the same
difficulty. That is why I said at last I was hoping that we
would get some momentum and learning how to work together and
get some things done.
On the other hand, I do believe that we could also delay
incessantly over an issue such as this, and I do not intend to
do that because we have three more episodes before we arrive at
a conclusion. We have the floor and we have a conference
besides this markup. So that will all be a great learning
exercise from what I have experienced in the legislative
process. Some who think one way today will probably think
differently when we finish a conference. So we will continue
with that.
I have one observation regarding renewables and then we
will call the witnesses.
Senator, there are many of us who look with favor upon
pursuing renewables, and I think you will find in the proposals
from this Senator that I intend to offer as many and more
incentives than ever before for renewables. I believe major
incentives is the best way to bring renewables into the
marketplace rather than forcing them. But that issue will be
taken up another time, and we will discuss it at length.
Senator Dorgan. Mr. Chairman?
The Chairman. Yes, Senator.
Senator Dorgan. Because the Appropriations Committee and
the Defense Approps Subcommittee is holding a hearing at 10
o'clock, I will not be able to stay for the entire hearing this
morning. That is on the supplemental which is moving on a very
fast track and I think will require a lot of effort.
But might I make one comment?
The Chairman. Yes, sir. Can you make it brief?
Senator Dorgan. Yes, of course.
The Chairman. Everybody will want to, and we have four
Senators who want to go to that committee.
STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR
FROM NORTH DAKOTA
Senator Dorgan. I understand.
I think it is very important we move forward and move
forward aggressively, but I am concerned, especially having
chaired hearings last year about what happened in California
which we now understand was in part grand theft. I am very
concerned that we not only move forward with some dispatch, but
we get this done and done right.
The electricity title I think is very complicated. As I
listened to your statement, I was thinking about it is almost a
foreign language that we speak here with RESC, MISO, SMD, RPS,
PURPA, PUHCA, RTOs. I mean, it is almost a foreign language, it
is so god-awful complicated. I just hope that as we set dates
here for markups and so on that we have enough flexibility to
be able to make sure that as we sort through all of this, we
are going to get it done right. That is my only concern.
The Chairman. You can be assured of that. I have come to
the conclusion, having been here a long time, that if we have
good will and hard work, we will make as good a judgment in 3
or 4 weeks as we will in 3 or 4 months because 3 or 4 months--
we will do all that work the last week anyway.
[Laughter.]
The Chairman. So we are going to move with some degree of
dispatch with your concerns fully in mind.
Now, the other Senators who are here, I know some are going
to stay, some must leave. Senator Campbell, you are going to
leave for appropriations. Would you care to make a comment?
Senator Campbell. Mr. Chairman, with your permission, I
would like to just include something in the record, because I
had hoped we would be able to listen to the testimony of at
least a couple of witnesses before we had to run to the next
hearing. So thank you.
[The prepared statement of Senator Campbell follows:]
Prepared Statement of Hon. Ben Nighthorse Campbell,
U.S. Senator From Colorado
Mr. Chairman, thank you for holding this hearing on electricity
issues in moving forward on crafting a comprehensive energy bill. I
would also like to applaud you for your proposed draft establishing
Regional Energy Service Commissions (RESC). I'd also like to welcome
Mr. Phil Tollefson from Colorado Springs Utilities and Ray Gifford, who
recently head Colorado's PUC and who is now going to testify on behalf
of the Progress & Freedom Foundation.
Many members of this Committee, myself included, have been highly
critical of FERC's proposed Standard Market Design Rule because it
fails to consider regional differences and instead applies a one-size-
fits-all approach to our nation. Your proposal, on the other hand,
picks up where FERC left off and is designed specifically to address
regional distinctions.
I am troubled that the Regional proposal is a direct answer to
FERC's SIVID. In fact, as worded, the RESC draft requires states to
choose between regulated by a Regional Commission or the Federal
Commission--a choice some states may find objectionable.
The strength of the RESC's novel and innovative approach is also
its principle drawback. Your regional vision allows FERC and the state
to retain certain levels of jurisdiction, but where do those lines of
jurisdiction begin and end? Is this not just a third layer of
regulatory bureaucracy that will cost states? How are the regions
established, and can one state comprise a region?
Regarding that last question, my state of Colorado is in a unique
circumstance. Colorado borders the eastern interconnect at Kansas.
Therefore, there is no west to east transmission. Colorado's demand for
electricity is localized to the front range, and we have coal-fired
plants to meet that demand, and any excess is imported from Wyoming.
14,000 ft. peaks divide Colorado in half, making transmission across
the state prohibitive, and people living on the west slope are
principally served by public power.
Therefore, although Colorado is in the middle of the nation, it is
more akin to an island like Hawaii than an eastern state like Virginia.
That said, the state of Colorado's electricity costs are in the
lowest quarter of the nation. Denver is one of the five cheapest cities
for ratepayers. As we proceed, we must ensure that states like Colorado
retain their efficient, reliable, and inexpensive electricity while
crafting national policy. We must make sure that ``flexibility'' does
not result in price shifting that may benefit some states, while
detrimentally affecting others.
I look forward to working with you, Mr. Chairman, and the other
members of the Committee, on a reasonable and balanced approach.
The Chairman. Senator Craig.
Senator Craig. Mr. Chairman, I do have an opening
statement. I will make it in my first questioning period. I am
interested in hearing the witnesses. I think I am more
interested in listening today than I am in questioning, unless
somebody comes up with something uniquely novel, but I have sat
through a good number of--well, maybe 100 hours of testimony on
this issue before. My guess is nothing novel, but all of you
hold strong and very important opinions. Thank you.
The Chairman. I hope you are wrong.
[Laughter.]
The Chairman. We will start with the witnesses. The
witnesses are listed here. David Svanda, Ray Gifford, Gerald
Norlander, and John Anderson, would you please come up?
Senator Thomas, would you like to make some opening
remarks?
Senator Thomas. Mr. Chairman, I had a very insightful
comment to make, but I will withhold because I would like to
hear from the witnesses. Thank you.
The Chairman. Thank you very much.
Okay. We are going to start on this slide, please.
STATEMENT OF DAVID A. SVANDA, PRESIDENT, NATIONAL ASSOCIATION
OF REGULATORY UTILITY COMMISSIONERS, AND COMMISSIONER, MICHIGAN
PUBLIC SERVICE COMMISSION
Mr. Svanda. Mr. Chairman and members of the committee,
thank you so much for this opportunity to share my thinking
with you on the Senate draft energy legislation. I am
presenting the views of NARUC, and when I so indicate, I will
also be injecting some of my own thinking. My comments will
follow the suggested template and will highlight the content of
my written testimony.
With respect to regional energy services commissions, NARUC
supports legislation allowing States to form voluntary regional
bodies to address multistate issues, including transmission
siting. However, the RESC proposal in this draft legislation is
significantly different than the models that NARUC and others
have been working with, such as joint boards, compacts, and
informal coordination. The proposal to create RESCs is a new
attempt to build on the momentum I think already developing
toward cooperative and voluntary regional regulatory bodies to
oversee those regional markets that many of you have spoken
about. It needs to be carefully considered.
A great deal of work has already been done by the affected
parties to develop logical and efficient regulatory constructs
that allow the electric industry to move forward in a reliable
and cost effective way. The work has been public and it has
been painful, but critical knowledge and shared insights have
been gained. Many parties have helped move us to the important
juncture at which we now collectively find ourselves.
Under the Energy Policy Act of 1992, the States, through
the NGA, various regional governors associations and entities,
and NARUC, have been working to develop wholesale power markets
and regional mechanisms for the coordination of State efforts
including siting responsibilities. Progress continues to be
made in these areas driven by the NGA, its regional affiliates,
NARUC, FERC, the Department of Energy, currently approved RTOs,
and numerous other industry stakeholder groups.
All parties are now preparing to hear how FERC synthesizes
the ideas that have surfaced to this point when its white paper
is issued later this spring. The conclusions of the white paper
can inform the discussion on this RESC proposal. NARUC has
taken no position on the issuance of the white paper, nor on
the underlying SMD proposal.
As you know, all regions of the country are not on the same
page with regard to the standard market design. The standard
market design proposal has, however, acted as a catalyst to
focus our attention on achieving the objectives of the National
Energy Policy Act.
That is why we offer our hard-won experience to you as you
consider, review, and analyze the RESC proposal in this draft
legislation. The RESC proposal would be a significant step
beyond current proposals and therefore does warrant additional
considerable work.
There are provisions such as section 402 requirements that
narrowly define the options open to States considering the RESC
and also section 1222 which usurp State siting authority, and
that is something that we would certainly want to work with you
on.
Any proposal contemplating a multistate approach should
explicitly include representation by State regulatory bodies.
The requirement that States cannot be in more than one RESC
does not work, as we know that some States are bisected and
even trisected by RTOs, and that simply creates problems.
The provision also creates great uncertainty in States like
mine where transmission is owned by third party independent
providers of transmission services.
Authorizing swift release of funding to help the States
with the logistics of regional coordination would certainly
help the States and regions move forward.
We know that you recognize how long and hard we have worked
on these issues and would love the opportunity to continue to
work with you and your staff in helping to create systems that
we can all live with.
Reliability standards. NARUC has staked out positions, and
you know them and we will continue on those, as well as on
transmission siting. We at NARUC need to respectfully oppose
section 1222 based on the FERC backstop provision that is
included.
With regard to incentives--and I will go quickly to the
point here with the remaining time that I have--energy markets
need clear rules and certainty. Right now the investment
community, as you have heard in previous hearings, views the
energy industry as being in constant flux, including even the
implementation of existing rules. The parties can work together
to create a stable environment where investment can happen.
However, new institution-building, while it may be necessary in
other venues, would tend to retard the supply of investment
capital in this sector by pushing off horizons.
In my testimony, I have provided a number of suggestions
for incenting investment, and those include focusing on
customer needs, focusing on technological advancement, focusing
on balancing this country's fuel portfolio and demand response
mechanisms, focusing on maintaining America's competitive
advantages and fostering wise North American energy
utilization, and finally, focusing on enhancing homeland
security. I think that those options can be accommodated in a
balanced investment incentive program that this committee could
craft that would give equal weight and value to all of those
categories.
I have commented on a number of other areas within the
draft, and would be happy to respond to any questions about
those comments that you may have. Thank you very much.
[The prepared statement of Mr. Svanda follows:]
Prepared Statement of David S. Svanda, President, National Association
of Regulatory Utility Commissioners, Commissioner, and Michigan Public
Service Commission
Mr. Chairman and members of the Committee, thank you so much for
this opportunity to share my thinking with you on the Senate Staff
draft energy legislation. I am David A. Svanda, President of the
National Association of Regulatory Utility Commissioners (NARUC) and a
commissioner on the Michigan Public Service Commission. I am presenting
the views of NARUC, and when I so indicate, my own views on the draft
legislation at issue.
NARUC is a quasi-governmental, nonprofit organization founded in
1889. Its membership includes the state public utility commissions for
all states and territories. NARUC's mission is to serve the public
interest by improving the quality and effectiveness of public utility
regulation. NARUC's members regulate the retail rates and services of
electric, gas, water and telephone utilities. We have the obligation
under state law to ensure the establishment and maintenance of such
energy utility services as may be required by the public convenience
and necessity, and to ensure that such services are provided at rates
and conditions that are just, reasonable and nondiscriminatory for all
consumers.
I especially appreciate the fact that it is your collective concern
with the energy needs of this country that is providing this
opportunity. Your sensitivity to the regulatory concerns we have, your
desire to help the regions of the U.S. achieve efficient wholesale
energy markets, and your willingness to hear what we, the affected
parties, have to say about the draft legislation, has brought us here
today. My comments will follow the prescribed outline.
regional energy services commissions
NARUC supports legislation allowing states to form voluntary
regional bodies to address multistate issues, including transmission
siting. However, the Regional Energy Services Commissions (RESC)
proposal in this draft legislation is significantly different than the
models NARUC has examined in the past, such as joint boards, compacts,
and informal coordination. The proposal to create RESCs is a new
attempt to build on the momentum already developing toward cooperative
and voluntary regional regulatory bodies to oversee regional electric
markets. It needs to be carefully considered.
A great deal of work has been done in recent years by affected
parties to develop a logical and efficient regulatory construct that
allows the electric industry to move forward in a reliable and cost-
effective way. The work has been public and painful, but critical
knowledge and shared insights have been gained. Many parties have
helped move us to the important juncture at which we now collectively
find ourselves.
The NGA's Task Force on Electricity Infrastructure issued a report
in July 2002, entitled, ``Interstate Strategies for Transmission
Planning and Expansion''. This report recommends the creation of Multi-
State Entities (MSEs) ``to facilitate state coordination on
transmission planning, certification, and siting at the regional
level.'' In July of last year, both NARUC through its resolution on
interstate transmission planning and expansion, and the FERC in its
market design proposal, acknowledged the MSE concept as worth
developing.
Under the Energy Policy Act of 1992, the states, through the NGA,
various regional governors associations and entities, and NARUC, have
been working to develop wholesale power markets and regional mechanisms
for the coordination of state efforts, including siting
responsibilities. Progress continues to be made in these areas, driven
by the NGA and its regional affiliates, NARUC, FERC, U.S. DOE,
currently approved RTOs, and numerous industry stakeholder groups.
All parties are now preparing to hear how the FERC synthesizes the
ideas that have surfaced to this point when its white paper is issued
later this spring. The conclusions of the white paper can inform the
discussion on this RESC proposal. NARUC has taken no position on the
issuance of the white paper, nor has it taken a position on the
underlying SMD proposal. As you know, not all regions of the country
support FERC's direction to this point. The SMD proposal has, however,
acted as a catalyst to focus our attention on achieving the objectives
of the Energy Policy Act.
That is why we offer our hard-won experience to you as you
consider, review, and analyze the RESC proposal in this draft
legislation. The RESC proposal would be a significant step beyond
current proposals and warrants very careful examination before the
Committee commits to this concept.
Specifically, preliminary analyses suggest that the intent of the
provision is to allow contiguous states in a region to come together
and reclaim from the FERC much jurisdiction over the form, function and
operation of regional wholesale electric markets. In cases where states
set up an RESC, FERC jurisdiction would be largely limited to resolving
conflicts among states in that region or addressing inter-regional
complaints. This idea may have some appeal to some states on its
surface. However, other provisions of the bill such as the Sec. 402
requirements that narrowly define the options open to states
considering an RESC combined with the Sec. 1222 provisions which usurp
state siting authority unless states form an RESC that meets certain
criteria, are likely to yield unintended results.
Similarly, it is NARUC's position that any proposal contemplating a
multi-state approach, must explicitly include representatives from each
of the regions state's public utility regulatory bodies. Additionally,
we do not support provisions that permit the RESC or FERC to preempt
individual state commission decisions. Further, the requirement that
states cannot be in more than one RESC would be logical if the electric
grid and the regional transmission organization (RTO) borders conformed
to state boundaries. However, several states are in the unenviable
position of being bisected (or trisected) by more than one RTO. It is
not reasonable to limit those states to membership in one RESC. This
would force such an unlucky state to choose favorites among its
jurisdictional utilities and consumers. If a state declined to favor
one group of its jurisdictional constituents over another, under the
proposal currently before the Committee, it would be required to
sacrifice its siting jurisdiction. This provision also creates great
uncertainty where transmission is owned by third-party independent
providers of transmission service.
Also, a statement of support encouraging states to proceed
expeditiously with regional initiatives to coordinate reviews of multi-
state transmission siting proposals might be welcome. Authorizing and
directing swift release of funding to assist with the logistics of
regional coordination would be helpful in enabling states to move ahead
quickly. Given the momentum that has been developing on this issue, any
attempt to introduce a federal backstop or federal pre-emption of the
state transmission siting jurisdiction could be counterproductive.
We know this Committee recognizes how long and hard the parties
have been laboring on creating workable wholesale energy markets. We
have consolidated and defined issues that have elevated the status of
this debate. These foundations can be built upon and incorporated into
this draft legislation. Please let NARUC work with you and the
Committee as you debate, vet, and develop the RESC concept. We would
like to give you the benefit of the lessons we have learned.
reliability standards
NARUC has consistently held that reliability should be addressed in
any federal energy legislation. NARUC has been a strong and consistent
supporter of legislation that establishes a more robust, mandatory
model for the enforcement of compliance with mandatory technical
reliability standards. This is provided that states are not preempted
on resource, adequacy, and planning issues and can form voluntary
regional bodies to advise FERC on implementation of the standards
within their regions. Accordingly, NARUC supports the electric
reliability provision in S. 475 introduced by Senator Thomas.
NARUC believes that Congress should mandate compliance with
industry-developed reliability standards on the transmission system
that include adequate reserve margins and preserve the authority of the
states to set more rigorous standards when in the public interest. The
reliability section of the staff draft is complicated by the RESC
proposal, which puts standards development and enforcement
responsibility with the RESC, rather than the NERC collaborative
effort. There is also some confusion as to whether the Electric
Reliability Organization needs to file with both the FERC and the RESC.
transmission siting
We appreciate the efforts that have been made in an attempt to
alleviate the concerns raised by NARUC and other state and local
government organizations with regard to the siting proposals floated
during the last Congress. However, NARUC must respectfully oppose Sec.
1222 based on the FERC backstop provision that is included. Although
efforts have been made to produce a more moderate backstop proposal,
the result is the same: the FERC will have authority to override state
decision processes on transmission siting, if that state is not in an
RESC.
NARUC finds this provision to be unacceptable. States should retain
authority to site electric facilities. Congress should support the
states' authority to negotiate and enter into cooperative agreements or
compacts with federal agencies and other states to facilitate the
siting and construction of electric transmission facilities as well as
to consider alternative solutions to such facilities, such as
distributed generation and energy efficiency. NARUC has strongly
opposed any role (direct or backstop) for FERC in authorizing or siting
transmission lines.
Looking to the future, this committee also needs to be aware of the
growing debate concerning central station power plants versus
distributed resources. At one extreme are those who believe that the
U.S. needs huge new investments in transmission, to allow competitive
markets to gain access to central station generation assets. At the
other extreme are those, including a utility in Michigan, who believe
that distributed resources may make both central generation stations
and transmission redundant and obsolete.
transmission investment incentives
Helping to stabilize and reinvigorate interest in investing in
America's infrastructure is one of the goals I have set for my term as
President of NARUC.
Energy markets need clear rules and certainty. Both are needed
sooner rather than later. Right now, the investment community views the
energy industry as being in constant flux, including even the
implementation of existing rules. Together, the FERC, the regions, and
the states need to set market rules that have staying power and can be
relied upon when making investments. New institution building may be
necessary in other venues, but in this sector of the economy it will
retard the supply of infrastructure investment capital because it
creates confusion rather than clarity, and pushes out the decision
horizon.
The energy industry does not operate in a vacuum. Contributing to
sector uncertainty are a laundry list of issues: the general health of
the American and global economy, adjustments of an industry that had
been unchanged for over half a century, attempts to encourage
alternative fuel sources, California's restructuring problems, serious
(even criminal) lapses in corporate ethics and business practices, wash
trades and market manipulation, the September 11 tragedy, homeland
security and war concerns, lack of liquidity in markets, and the
current regulatory debate about electricity market restructuring.
Even though there are current uncertainties, there are ways to open
closed investment wallets and we must get those wallets opened again.
Electric transmission systems in this country have been on a starvation
diet for nearly two decades, with actual transfer capacity having
peaked in the 1980's. We need to upgrade the dumb system of the last
century with an internet-speed and internet-smart grid for this
century. The policies pursued should entice investment that helps
accomplish other major national objectives.
In my opinion, this Committee could help to bring considerable
stability to the energy related investment climate by:
1. Focusing on customer needs by incenting;
a. Investment to enhance reliability to support the
information, manufacturing and lifestyle expectations
of today
b. Investment for removing bottlenecks wherever they
exist in the transmission system. Investment incentives
could be given for the removal of bottlenecks, while
penalties could be applied for maintaining bottlenecks,
2. Focusing on technological advancement by incenting;
Investment in new smart-grid technology
The export of this new technology for our economic
benefit and for global fuel efficiency and
environmental purposes,
3. Focusing on balancing this country's fuel portfolio and
demand/response mechanisms;
4. Focusing on maintaining America's competitive advantages
and fostering wise North American energy utilization;
5. Focusing on enhancing Homeland Security.
Future investment options will generally fall into four categories.
They are 1) traditional public and investor-owned utilities; 2)
unbundled-asset utilities; 3) independent power producers; and 4)
independent transmission owners. These all have their place, and are
all right for particular circumstances. A balanced investment incentive
program crafted by this Committee would give equal weight and value to
each of these categories.
transmission cost allocation (participant funding)
NARUC is supportive of transmission cost allocation proposals
however, the provision found in Subtitle E falls short of our policy on
this issue. NARUC supports a pricing policy which allocates
transmission costs in two ways. One, the cost of investments that have
been demonstrated; through an even-handed assessment of transmission,
generation and efficiency alternatives; to be needed to maintain the
reliability of the existing transmission system, is recoverable through
rates paid by all transmission customers. Two, the cost of upgrades and
expansions that are necessary to support incremental new loads or
demands on the transmission system is borne by those causing the
upgrade or expansion to be undertaken. Additionally, any cost
allocation proposal should not preclude the assignment of
interconnection cost to the general body of ratepayers within a state
when that state's regulatory body determines that such allocation is in
the public interest.
puhca
Congress should reform PUHCA, but in doing so, should allow the
states to protect the public through effective oversight of holding
company practices and increased state access to holding company books
and records. This should be independent of any similar authorities
granted to federal regulatory bodies.
The draft legislation requires a state to begin a proceeding to get
access to books and records. NARUC believes a written request from a
state should be sufficient, and that no proceeding is required.
purpa
NARUC supports legislation to repeal the PURPA ``must purchase''
requirement if a state determines that the generating markets are
competitive or that the public interest in resource acquisition is
protected. However, NARUC opposes the language found in the Senate
draft that preempts state jurisdiction by granting FERC authority over
the recovery of costs in retail rates or to otherwise limit state
authority to require mitigation of PURPA contract costs. States that
have already approved these contracts are better able to address this
issue than FERC.
I think it is important for the federal government to remove
barriers to the adoption of new and improved energy technology
infrastructure. It is also appropriate to open up opportunities for
cogenerators and small power producers to interconnect and gain access
to competitive wholesale and/or retail markets, with the details of
those policies clearly reserved for the appropriate regulatory agency.
net metering and real-time pricing
NARUC believes that net metering, real-time pricing, and
distributed generation are retail in nature and subject to state, not
federal legislation. The draft legislation provides that each state has
the ability to determine if such services are appropriate for state
implementation. NARUC's interpretation of this language is that no
state would be required to implement these provisions without the state
determining that they are appropriate for that state. However, we
prefer the language currently found in PURPA that allows states to
consider but may adopt or reject, rather than mandatory federal
standards.
NARUC is supportive of these provisions, but the draft language
needs to be clarified consistent with our understanding. Such revision
may also help the distributed generation and distribution
interconnection provisions because they are retail in nature, and
therefore within the jurisdiction of the states.
market transparency, anti-manipulation, enforcement
There is an increased need for oversight of the energy markets in
order to protect against market abuse. Electricity price volatility has
raised concerns about the integrity of wholesale markets, suggesting a
much greater need for monitoring of these markets by regulatory bodies.
The draft legislation does not address a critical concern, the state
regulatory role in market monitoring. States can provide a ``first
responders'' view of energy markets.
However, in order to be an effective market monitor, the state
regulators must have access to all necessary data. These data include
generating plant production, fuel sources, heat rates, and both
scheduled and actual transmission path flows. State regulators must
have the ability to review this type of data to be able to detect
market gaming as well as attempts to obtain and exercise unlawful
market power.
There is a real concern that the energy markets are vulnerable to
manipulation and there needs to be an improvement in the reliability of
the indices used. A minimum set of standards should be established for
how price reporting occurs. Regulatory oversight of price reporting and
the ability to impose penalties on traders that don't comply with the
rules should help ensure that energy companies follow the rules.
The energy industry must adopt a set of practices and benchmarks to
increase market transparency and to help restore public confidence in
the US energy markets. If the goal of legislation is to ensure that the
market participants do not manipulate the market, the policies ought to
provide for more transparency, not less. Claims that data reporting to
state regulators will result in competitive disadvantages to those
reporting are spurious. To the extent the necessary data are
commercially sensitive, state regulators can provide appropriate
protections. States routinely and frequently handle such information
without compromising parties' interests.
consumer protections
NARUC's members have a long-standing commitment to consumer
protection. Indeed, state utility commissions were established to
ensure that consumers received essential services without fear of
predatory practices and pricing. However, while we favor strong
consumer protection measures, NARUC does not believe that preempting
the states by federally legislating retail consumer protections is the
way to go.
The states are more capable in dealing with abuses that occur at
the retail level, and in fact many, if not most, of the states that
have moved to restructure and unbundled their retail electric markets
have in place regulations or laws that address the consumer issues
found in the staff draft. In short, Congress should not limit state
authority to prescribe and enforce laws, regulations or procedures
regarding consumer protection. We believe legislation should include a
state authority section, such as that found in the Senate energy
legislation from the last Congress so that states are not precluded
from imposing their own consumer protection requirements.
Thank you for your attention. NARUC would welcome the opportunity
to work with the committee to address the concerns raised here today. I
would be happy to answer any questions you may have.
The Chairman. Mr. Svanda, thank you so much for your
testimony and your observations.
All of your testimony will be made a part of the record. We
will have some questions.
Ray Gifford, president of The Progress and Freedom
Foundation.
STATEMENT OF RAYMOND L. GIFFORD, PRESIDENT,
THE PROGRESS AND FREEDOM FOUNDATION
Mr. Gifford. Thank you, Mr. Chairman.
The Chairman. Thank you.
Mr. Gifford. Mr. Chairman, members of the committee, thank
you for the opportunity to testify. My name is Ray Gifford. I
am president of The Progress and Freedom Foundation and
immediate past chairman of the Colorado Public Utilities
Commission.
Each of us here today shares the same goal: to benefit
consumers through a reliable, efficient, affordable system that
accommodates technological change and meets consumers' needs.
But to get there, we need to confront the twin pillars of
human behavior: mistakes and opportunism. Everyone knows what a
mistake is. It means that we do not know everything about the
electric industry, how it works, how it will evolve, and what
it will look like in the future. Even if we did, we might make
the wrong policy choices. Opportunism is the reality that
people will often act to elevate a narrow interest above one
that is broader.
We should strive to minimize mistakes and make sure they do
not become permanent. Similarly opportunism, be it the
opportunism of companies, regulators, or, I even dare say,
legislators must be channeled to work for consumers.
With that in mind, I turn to a few topics on the table
today.
The RESC is a sound theoretical idea that, if executed
properly, could help solve some problems that are larger than
just State problems but smaller than a Federal problem.
However, in execution, I fear that it will simply introduce a
new layer of regulation that will be even less accountable than
our current regulatory scheme.
As I read it in the draft, the RESC is a new regulatory
body raising a few concerns.
First, its accountability is highly questionable. Flying
below the Federal radar but above State accountability, the
RESC will become a prime target for regulatory opportunism. Our
current State-Federal jurisdiction ultimately makes the
regulators accountable to some political body. The RESC, in
contrast, will operate in a murky middle ground. This presents
great risk for regulatory capture, the perversion of the
regulatory process toward parochial ends.
Second, the RESC does not appear to displace old regulatory
structures, but rather adds a new layer of regulation. This
will add to the regulatory costs and burden with no clear
identifiable benefit to consumers. If you are at all inclined
to create this new regulatory body, the jurisdiction of both
FERC and the State commissions must be pared back to make the
RESC the sole preeminent regulatory body for electricity, and
that body must bring within its scope all players public and
private. That is the only way to have a coherent and fair
regulatory scheme.
The elephant in the room that no one is talking about is
FERC's proposal to alter national utility regulation through
standard market design. Congress should block it or at least
mandate a dramatic change of course in its regulatory
direction. We should minimize the effects of a potential grand
national regulatory mistake and shrink the space for
opportunism that will pervert outcomes.
The major premise of SMD is to further split operation and
control over the transmission system and to reside control over
the system in a barely accountable entity, the independent
transmission provider. This new entity I fear will have
accountability problems similar to the RESC.
Next, SMD does not solve the most pressing problems of
adequate transmission investment. While the pricing mechanisms
of SMD solve short-term allocation issues, FERC admits that it
does not give the right long-term price signal to spur
efficient investment. Accordingly, the long-term investment
decisions are thrown into what will become a hyper-political
planning process.
Finally, SMD imposes a regulatory vision on the national
grid that will lock in the current paradigm for electricity
generation, transmission, and distribution for years to come.
There are exciting technological developments that may change
the way electricity is generated, transmitted, and metered. I
would hate to see the regulatory regime stifle that innovation.
I would urge FERC and this committee to be modest in how far
and how fast we want to change the regulatory paradigm for
electricity.
Finally, I will add briefly I think one omission in the
current markups is that section 203 and FERC merger review
authority remains. I think this merger review authority is
duplicative and unnecessary. The Department of Justice
Antitrust Division does a most capable and efficient job of
that, and you may want to look seriously at eliminating that
FERC jurisdiction.
I thank you again for the opportunity to appear here today.
I hope my presentation will help you in your deliberations.
Thank you.
[The prepared statement of Mr. Gifford follows:]
Prepared Statement of Raymond L. Gifford, President,
The Progress & Freedom Foundation
Mr. Chairman, members of the Committee, thank you for the
opportunity to testify. My name is Ray Gifford. I am president of the
Progress and Freedom Foundation, a think-tank devoted to studying the
law and regulation of network industries, including this most
fundamental network industry, electricity. Also relevant to my
testimony here today is that I am the immediate past-Chairman of the
Colorado Public Utilities Commission, so immediate, in fact, that I
only left less than two months ago. I hope therefore my comments offer
you some insight of a dispassionate, academic observer, tempered with
the experience of having been an actual state regulator.
Debates over regulation of the electric industry too often play
according to the following script: proponents of markets and
restructuring describe the abstract, theoretical benefits of
competition, therefore claiming to illustrate the superiority of
markets over close regulation. In rebuttal, defenders of a more
regulatory approach, describe the theoretical benefits of properly
focused, all-knowing administrative regulation, which when done right
mimics the outcomes of a market. You thus get an impasse over which
abstract, theoretical way of ordering an industry will produce the most
abstract, theoretical benefits. This is perhaps interesting in a
classroom, but sterile and fruitless to you as policymakers.
Any debate over the right policy for electricity must start by
setting a goal. I think that we can all agree that the goal is to
benefit consumers through a reliable, efficient, affordable system that
accommodates technological change and meets individual consumers'
needs.
However, getting back to that false debate over competition versus
regulation, we must forge our views over which regulatory system most
benefits consumers by acknowledging the twin pillars of human behavior:
mistakes and opportunism. The theoretical superiority of markets or
regulation is swamped by these practical concerns of how people
actually behave. Now, mistakes are something we all know well my wife
is particularly good at pointing mine out to me but they simply reflect
that we cannot know all there is possible to know about electric
industry and, even if we did, we might make the wrong policy choices.
Opportunism, meanwhile, is the reality that people will often act to
elevate their own, narrow interest above that of some broader interest.
Our goal therefore in making policy must be to minimize the
possibility of mistakes and make sure that our system does not make
those mistakes a permanent, irreversible feature of the landscape.
Similarly, opportunism be it the opportunism of companies, regulators,
legislators, whom have you must be channeled to work for consumers, not
against them. Focusing, then, on minimizing mistake and opportunism, I
turn to a few topics on the table for today: Regional Energy Services
Commissions
The Regional Energy Service Commission (RESC) notion strikes me as
a perfectly sound theoretical idea that, if executed properly, could
have some merit in solving some of the problems that we confront that
are larger than just state problems, but smaller than a federal
problem. However, in execution I fear that the RESC will simply become
engrafted on the current system of federal and state electricity
jurisdiction. As such, the RESC will introduce a new layer of
regulation and be even less accountable if that's possible than our
current dual-layered regulatory scheme.
As I read it in the draft, the RESC is a new regulatory body to be
authorized, I presume, under the commerce and interstate compact
clauses of the Constitution. The RESC will not affect traditional state
jurisdiction, but will be shunted in below FERC's current national
jurisdiction. Again, in the abstract this idea has some merit, but I
fear it will go wrong rather quickly.
First, the RESC's accountability is highly questionable. Flying
below the federal radar, but above state accountability, the RESC will
become a prime target for regulatory opportunism. Our current state-
federal dual jurisdiction while highly imperfect, to be sure ultimately
makes the regulators' accountable to some political body. In the
states, that is the voters, the governor or the legislature. With FERC,
the Commission is ultimately accountable to both the executive branch
and you here in Congress.
The RESC, in contrast, will operate in the murky middle ground
between state and federal regulation, beyond state accountability and
below federal scrutiny. To me, this presents great risk for regulatory
capture; that is, perversion of the regulatory process toward parochial
ends. I am not sure who will be able to capture the RESC it could be a
company, it could be a regulatory staff with a particular agenda,
indeed, I daresay, it could even be a powerful senator in the given
region whose interests may reflect an agenda to benefit his state or
his preferred vision of the electric industry. None of this potential
for opportunism will be good for consumers.
Second, the RESC does not appear to displace old regulatory
structures but rather adds a new layer of regulation. While in the
draft the FERC's role recedes somewhat, FERC is still there, the state
commissions are still there and the RESC is added to the mix. This
addition of a regulatory body threatens to be a mistake, I think,
because it will inevitably add to the regulatory cost and burden, with
no clear, identifiable benefit to consumers. One thing we know about
regulation is that it is nearly impossible to get rid of once
established. Therefore, before creating a new regulatory body, you need
to be sure, based on clear and convincing evidence, that a real benefit
will come from it. Right now, the RESC has a ``this might be a good
idea'' brainstorming quality to it, but the case has not been made that
it will actually be beneficial to consumers.
I would therefore be very cautious before you legislate the
creation of a new entity hovering in the frontier between state and
federal jurisdiction. If you are at all inclined to create this new
regulatory body, you must, I submit, categorically, unambiguously,
clearly, definitively I am out of adverbs pare back the jurisdiction of
both FERC and the state commissions to make the RESC the sole,
preeminent regulatory body for electricity, and that body must bring
within its scope all players, public and private. That is the only way
to have a coherent and fair regulatory scheme.
standard market design
The elephant in the room that no one is talking about in this
electricity title is FERC's bold proposal to alter national utility
regulation through Standard Market Design, or SMD. I submit that you in
Congress must go on record about your desire to authorize this dramatic
experiment with our national electric system, or to block it. I would
urge you to block it, or at least mandate a dramatic change of course
to its regulatory direction.
On SMD, the sides quickly retreat into the sterile debate between
theoretical competition and theoretical regulation. These are not the
questions you should ask. The questions should again be motivated from
a desire to minimize the effects of a potential grand, national
regulatory mistake, and shrink the space for opportunism to pervert
outcomes.
One thing we know in an economy is that the last thing you want to
ever do, unless you absolutely have to, is split ownership and control
of a firm or asset. This is because when you divide ownership from
control, your risk of mistake and opportunism skyrocket. Mistakes are
easier to make and more enduring because the effects of errors are not
internalized when ownership and control are split. Meanwhile, the
potential for opportunism runs rampant because entities managers,
regulators, and politicians have the incentive to run the firm in their
own interests.
Now we tolerate separating ownership from control with traditional
public utility regulation, to an extent, by giving partial control over
the utility to political bodies the FERC and state commissions. We do
this because of the natural monopoly character of the electric system,
but recognize the imperfections and trade-offs inherent in such a
regulatory solution.
The major premise of SMD is to further split operation and control
over the transmission system, and to reside control over the system in
a barely accountable entity, the Independent Transmission Provider
(ITP). Now this new entity, I fear, will have accountability problems
similar to the RESC. Which master does it serve? Toward what ends is it
managed? The possibilities for mistake and opportunism are replete.
Next, SMD does not even solve the most pressing problem of adequate
transmission investment. While the pricing mechanisms of SMD solve
short-term allocation of transmission issues, FERC admits that it does
not give the right long-term price signal to spur efficient investment.
Accordingly, the long-term investment decisions the keystone to the
robust wholesale markets we all presumably support are thrown into what
will become a hyper-political, planning process. And when that happens,
economic rationality is the first thing that will be thrown out.
Finally, SMD imposes a regulatory vision on the national grid that
will lock-in the current paradigm of electricity generation,
transmission and distribution for years to come. Given the exciting
innovations and cost reductions in technologies from the distributed
generation side, to the superconductivity advances in the transmission
area to the real-time and time-of- use metering in distribution it
would be premature to cement the current industry structure in place
through regulation, rather than allowing technology and know-how to
transform how consumers are served.
Our understanding of how complex, network markets like electricity
work is primitive, at best. Electric markets are interdependent and
require some degree of public control. Requirements for open and equal
access seem sensible and necessary, and after the fact policing of
those requirements is certainly a legitimate regulatory goal. However,
I would urge FERC and this Committee to be modest in how far and how
fast we want to change the regulatory paradigm for electricity.
ferc merger review, section 203 \1\
One omission from the draft bill, as well as a change from the
original Barton bill coming over to you from the House, is the
retention of FERC's merger review authority under Section 203. I would
urge you to use your bill to eliminate this duplicative and costly
layer of regulatory review.
---------------------------------------------------------------------------
\1\ 16 U.S.C. Sec. 824b.
---------------------------------------------------------------------------
As it stands now, the Department of Justice Antitrust Division
reviews any merger in the electric industry for its potential to harm
consumer welfare. FERC, meanwhile, now reviews those same mergers under
Sec. 203 using the vague and undefined ``public interest'' standard. At
best, this review duplicates the antitrust review and adds costs that
ultimately must be borne by consumers. I do not think that Congress
wants to affect a net wealth transfer from American consumers to
Washington regulatory lawyers.
At worst, the merger review authority presents the opportunity and
temptation for a regulatory shakedown by FERC or interested outside
parties. The breadth of the review standard is simply too open an
invitation for opportunistic behavior by other players in the industry
and by regulators themselves, who may seek to accomplish through
mergers what they have not been otherwise authorized to do by you here
in Congress.
purpa and puhca
Legislative and regulatory mistakes endure whereas market mistakes
are corrected relatively quickly and often remorselessly, as the
Internet bubble showed our 401(k) accounts. Nevertheless, with this
electricity title, Congress has the opportunity to correct two enduring
regulatory mistakes that are inhibiting investment and innovation in
this sector specifically, I urge you to take the opportunity to repeal
both the Public Utility Holding Company Act (PUHCA) and the Public
Utility Regulatory Policy Act (PURPA).
Both PUHCA and PURPA are outmoded pieces of legislation that stifle
innovation, misallocate investment and mandate regulatory solutions
that harm consumers.
I have spoken today about how mistakes and opportunism, and how
those considerations should influence your deliberations. I generally
prefer privately-ordered markets over legislation or regulation because
markets correct mistakes more quickly than regulatory mistakes can be
undone. Likewise, markets real markets, not ``markets'' jury-rigged
through regulation take opportunistic behavior and channel it for
consumers benefit. I therefore urge you to approach all your
legislative work with a deregulatory bent minimize regulation, allow
markets organically to emerge and work where they can. In the end, that
will benefit consumers most.
The Chairman. Thank you very much, Mr. Gifford. Many of the
things you have said with reference to attempting to regulate
nationally I agreed with in my opening remarks. I thank you for
it and for the constructive ideas and criticisms today.
Let us now proceed. Mr. Norlander, chairman of the National
Association of State Consumer Advocates; executive director of
Public Utility Law Project of New York, Inc. Please proceed.
STATEMENT OF GERALD NORLANDER, CHAIRMAN, ELECTRICITY COMMITTEE,
NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER ADVOCATES, AND
EXECUTIVE DIRECTOR, PUBLIC UTILITY LAW PROJECT OF NEW YORK,
INC.
Mr. Norlander. Thank you, Senator Domenici and committee
members. First, I would like to make a minor correction. I am
the chairman of the Electricity Committee of NASUCA, the
National Association of State Utility Consumer Advocates.
The Chairman. All right.
Mr. Norlander. And I speak here today on behalf of NASUCA,
except at some points where we have not had an opportunity to
take a position where I will be speaking for the Public Utility
Law Project and myself.
NASUCA is an organization of consumer advocate offices with
members in 42 States and the District of Columbia. Some of our
members are from States that restructured their utility
industries. Others are from States that plan to do so but since
2000 have either slowed their plans or in some aspects reversed
them. Yet, other members are from States that have no plans at
this point to restructure their utility industries and they
retain the traditional, vertically integrated models. Thus, on
issues such as SMD and so forth, NASUCA has not taken a uniform
position on it, but instead, depending on the region, we have
had a regional spokesman participating over at the FERC on
these issues.
But today I am speaking on behalf of all NASUCA members in
opposition to changes in the Federal Power Act that we believe
would weaken the statutory scheme for regulation of
electricity.
I would point out from our point of view, the Federal Power
Act is a consumer protection statute. The purpose of the
Federal Power Act is to protect consumers. And we believe that
changes to the Federal Power Act should be a value proposition
for consumers.
There is great risk for consumers, as we have seen in
California and from less well-publicized events in the New York
City area where mistakes have been made and consumers have
suffered. We all recognize when there is a flood or a fire or a
hurricane or other event that creates utility outages that we
have a humanitarian crisis, but there is a crisis going on
every day in the homes of low income families throughout this
country who cannot afford their electricity and who are shut
off. So the things that are done here, that are done in the
wholesale markets, that are done to affect the infrastructure
of the electric industry have a great impact on people. And the
original intent of the Federal Power Act was, we believe, to
protect customers by requiring a comprehensive regulatory
scheme at the Federal level.
Some of the provisions that have been out there, NASUCA has
supported for a number of years. Among them, I would mention
the reliability provisions that would provide a firmer ground
for setting reliability standards that heretofore have been
voluntarily done. As there has been a transition to a more
competitive industry, some of the cooperative structures for
maintaining the reliability of the grid need to be shored up,
and we think that those provisions have merit.
Likewise, there has been a proposal for a national consumer
advocate to participate in Federal agency proceedings. Again,
NASUCA thinks that that is in concept a very good idea if we
could have a function at the Federal level to intervene in
cases like market-based rate applications or some of the
generic proceedings where individual States and State consumer
advocates have difficulty participating. Of course, such a
function needs to be independent, needs to be able to take
positions at variance from the agencies in which it is
participating, and it needs to be sufficiently funded.
Again, I would point out some of the features in several of
these proposals that we are very strongly opposed to. One of
those is the transmission incentive proposals. There are
several of them out there. We have at NASUCA taken a position
recently with the FERC opposing those as being unnecessary. The
FERC proposal would reward companies for doing things they have
already done such as joining an RTO and so forth.
We also think that the repeal of PUHCA and the elimination
of FERC merger authority should not be done, as has been
proposed, and we think there is a function for the FERC to
review electricity market mergers.
Thank you.
[The prepared statement of Mr. Norlander follows:]
Prepared Statement of Gerald Norlander, Chairman, Electricity
Committee, National Association of State Utility Consumer Advocates,
and Executive Director, Public Utility Law Project of New York, Inc.
summary of testimony
The National Association of State Utility Consumer Advocates
(NASUCA) represents state utility consumer advocates from 42 states and
the District of Columbia. A Senate Bill (S. 475), a recent House
committee draft bill, and related staff proposals all would
significantly alter the existing statutory paradigm for federal and
state regulation of electricity, the primary purpose of which is to
protect consumers. NASUCA opposes these proposals because they
eliminate existing protections and add new risks without a clear
demonstration of overriding benefit to electricity consumers. While we
support the reliability provisions of S. 475, NASUCA generally opposes
the broader proposals.
Some proposals under consideration would authorize unnecessary and
costly new federal financial incentives to encourage investment in
transmission facilities, beyond the level of return on investors'
equity normally sufficient to achieve reliable service and just and
reasonable rates. A transmission incentives proposal now under
consideration by the FERC could unnecessarily add $13 billion to
consumers' bills, and should not be ratified by new legislation.
The need for consumer protection against market power and
prevention of utility holding company abuses remains. Yet some recent
legislative proposals would have eliminated FERC merger review
authority, and some current proposals would repeal the Public Utility
Holding Company Act of 1935 (PUHCA). Despite unenthusiastic
enforcement, PUHCA and FERC merger review authority are prophylactic
measures discouraging the exercise of market power and re-creation of
interstate utility holding company empires. Accordingly, NASUCA has
concluded that passage of electricity legislation along these lines
would not be in the overall interests of utility consumers.
statement
Chairman Domenici, and Members of the United States Senate
Committee on Energy and Natural Resources, thank you for inviting me to
testify today for the National Association of State Utility Consumer
Advocates (NASUCA). My name is Gerald Norlander I am the Chairman of
the Electricity Committee of NASUCA, and I am the Executive Director of
the Public Utility Law Project of New York, Inc. (PULP).\1\ NASUCA is a
national association of consumer advocate offices, with members in 42
states and the District of Columbia. NASUCA members are charged by
their respective state laws with the responsibility to represent
consumers in utility proceedings before state and federal regulatory
commissions and courts. NASUCA members have considered many of the
issues addressed in the proposed Electric Transmission and Reliability
Enhancement Act of 2003 (S. 475) and related proposals including in a
draft House bill to amend the Electricity Title of the Federal Power
Act.
---------------------------------------------------------------------------
\1\ PULP, a non profit organization representing the interests of
low income utility consumers, is an Associate Member of NASUCA, with
offices at 90 State Street, Suite 601, Albany, New York 12207.
---------------------------------------------------------------------------
NASUCA includes members from states that in the past five or six
years restructured their wholesale and retail electricity industries;
others are from states that planned to restructure, but have slowed or
reversed that course since 2000; and still other NASUCA members are
from states with the traditional vertically integrated utility industry
structure. Today, I am speaking on behalf of all NASUCA members in
opposition to measures we believe would weaken the statutory scheme for
regulation of electricity, and unnecessarily create new risks for
consumers without sufficient consumer benefits. This unified opposition
reflects a national consensus of state consumer advocates that, despite
the merit of some items, such as the reliability provisions in S. 475,
the broader proposals, if enacted, would be detrimental to the public
interest and interests of retail electricity consumers.
NASUCA is particularly concerned about proposals to authorize
unnecessary and costly transmission investment incentives, and
proposals that would weaken consumer protections against market power
and holding company abuses. I will now address the issues in the order
suggested by the Committee.
regional energy services commissions
Draft Senate Staff amendments to the Federal Power Act would
authorize states to create new interstate regional energy services
commissions (RESCs) to operate under FERC jurisdiction to address
regional, interstate aspects of the electricity grid.\2\ The Staff
Draft would give the RESC ``primary jurisdiction over energy services''
\3\ in an interstate region, which would include the power to form and
approve RTOs in the region, establish markets to set rates, and decide
``rate design and revenue requirements for transmission and wholesale
sales in the RESC region,'' \4\ without clearly requiring all rates and
charges demanded or received be just and reasonable, as is now required
by Section 205 of the FPA. While the draft would give the RESC
jurisdiction over ``market power review and market monitoring efforts
in the RESC region,'' \5\ apparently it would lack authority to remedy
market power and market manipulation problems.
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\2\ Staff Draft, Section 1211.
\3\ Staff Draft, Section 403(a).
\4\ Staff Draft, Section 403(b)(3).
\5\ Staff Draft, Section 403(b)(4).
---------------------------------------------------------------------------
NASUCA has not yet had an opportunity to develop a position on this
issue, but in my view, these newly proposed entities may add further
confusion to the picture in areas of the country that now have RTOs or
are considering their formation. For example, in some regions,
geographic and electric grid characteristics may not coincide with
state lines, but under proposed Section 1211, a state apparently could
be a member of only one RESC. Also, underlying issues of FERC
jurisdiction and FERC-approved market rates still troubling some states
and areas of the country are not resolved. Accordingly, it is not clear
that the proposed RESC entities would meaningfully add to consumer
benefits available under existing law.
reliability standards
S. 475 addresses the issue of system reliability by allowing the
FERC to recognize a standards-setting Electric Reliability
Organization. At the present time, reliability standards for the bulk
electric grid system are set by a voluntary organization, the North
American Electric Reliability Council (NERC). In 1998, in recognition
that the cooperative and voluntary underpinnings of NERC standards need
strengthening, particularly in areas of the country where competitive
concerns may weaken traditional cooperation among utilities, and thus
threaten reliability, NASUCA adopted the following resolution:
NASUCA supports efforts to develop a national reliability
organization that will continue the vital functions now
performed by NERC, and will do so in a manner that is
competitively neutral and recognizes the paramount concerns of
consumers in a reliable electric system;
NASUCA supports efforts to establish an independent Board of
Directors that will govern NERC (or any successor national
organization) in a competitively neutral manner that will
benefit all consumers and that will not be dominated or
controlled by any particular industry participant or segment;
NASUCA supports federal legislation that would clarify FERC
authority to review the reliability requirements imposed by
NERC (or any successor national organization) and to ensure
that such requirements are adopted and implemented in a manner
that benefits all consumers. . . .\6\
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\6\ NASUCA Resolution 1998-07, Urging the Establishment of an
Independent Board to Govern Electric Reliability Matters and the
Enactment of Federal Legislation of Ensure FERC Jurisdiction Over the
Actions of Such a Board in the Future.
Consequently, placing the development and review of electric system
reliability on firmer statutory ground has been supported by NASUCA as
an independent legislative reform in recent years. The enactment of
reliability legislation, such as contained in S. 475 is supported by
NASUCA.
open access (ferc-lite)
It has been proposed that public power entities not now under FERC
jurisdiction under the Federal Power Act (FPA) would be required to
open their transmission systems and come under limited FERC
jurisdiction (FERC-Lite). In numerous areas of the country, residential
consumers receive the benefits of low cost power from federal dams and
hydro power projects, often transmitted over the lines of public power
entities currently exempt from FERC regulation. I have no objection to
extra capacity of those public power transmission facilities being open
to carry energy for other entities and other customers, so long as it
does not interfere with longstanding statutory, regulatory and
contractual commitments of public power to retail consumers at the
lowest possible cost. There is a concern, however, that the benefits of
low cost power from federal projects would be compromised if the
transmission component of rates were set by the methods proposed by the
FERC in its pending Standard Market Design (SMD) rulemaking.\7\ This
concern for the continued provision of valuable public power benefits
intended to be provided for the benefit of consumers is not
sufficiently addressed in the legislative ``FERC Lite'' proposals.
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\7\ Notice of Proposed Rulemaking, Remedying Undue Discrimination
Through Open Access Transmission Service and Standard Electricity
Market Design 67 Fed. Reg. 55,452 (proposed August 29, 2002.
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transmission siting
Under state laws, utilities typically have the continued obligation
to provide reliable and adequate service upon demand to all retail
customers. State regulators have the ability to address the need for
new facilities, and to determine the appropriate mix of solutions,
whether they be transmission, generation, demand side, distributed
generation, or other means. The proposed Staff draft would allow the
Secretary of Energy to designate transmission congestion zones and
gives FERC ultimate authority to issue certificates for siting new
facilities. The states and a RESC would have the right to comment but
apparently there would be no full hearing on the appropriateness of a
FERC-proposed transmission siting plan.\8\ The House draft would give
the FERC authority to grant transmission facility permits with eminent
domain power.
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\8\ Section 1221(d) of the Staff draft would give parties ``a
reasonable opportunity to present their views and recommendations with
respect for the need for and impact of a facility coverted by the
transmission development certificate.'' This suggests a written comment
type of proceeding. Thus, there is no assurance of a hearing with an
opportunity to present evidence and confront proponents before an
impartial decision maker.
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Meanwhile, authority to make other transmission siting decisions,
and decisions about the location of power generating plants, would
still remain under state jurisdiction, and so it may prove to be even
more difficult to evaluate the cost effectiveness of long term
additions, improvements, and investments in either generation or
transmission if siting responsibility is fragmented as proposed.
Accordingly, NASUCA does not support federal eminent domain power for
siting of transmission facilities.
transmission investment incentives
NASUCA believes that rate incentives to promote capital investment
in new transmission facilities beyond the just and reasonable standard
of the FPA are unnecessary, and the added costs of such incentives are
not justified.\9\ A very broad proposal of the FERC, now pending, would
increase interstate electricity transmission rate allowances to provide
financial incentives.\10\ The pending FERC proposal, made without the
benefit of any enabling legislation to change the way electricity
transmission rates are set under the FPA, is to allow automatic
increases in the return on equity (ROE) for transmission investments,
well beyond the level normally allowed in the development of just and
reasonable rates. These ROE ``adders'' are intended to reward utilities
for divesting control over their transmission assets to regional
transmission organizations (RTOs), for outright divestiture of these
assets to newly created ``Independent Transmission Companies (ITCs)''
utilities, and for construction of new transmission facilities. Control
and ownership of the facilities would shift to regional transmission
organizations and the new transmission service utilities which would
operate new and expanded transmission service spot markets. Cooperating
utilities will receive ROE bonuses, well above the normally calculated
reasonable rate of return on equity invested, of 200 basis points--2%--
for existing transmission facilities, and 300 basis points--3%--for new
investments in transmission. Nothing in the proposed FERC rule requires
any showing that these bonus-conferring actions are cost effective, and
nothing in the proposed bill places any upper limit on the rate making
incentives.
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\9\ Section 7011 of the proposed House Energy Policy Act of 2003
bill would add a new Section 215 of the Federal Power Act requiring the
Federal Energy Regulatory Commission (FERC) within one year to
establish new rules for ``incentive-based and performance-based rate
treatments to promote capital investment'' by electricity transmission
utilities, ``to support economically efficient markets for the sale of
electricity at wholesale.'' The Senate Staff Draft, Section 1242, would
also authorize the FERC to promote transmission solutions through
``proper price signals'' and an ``adequate return on investment.''
\10\ Proposed Pricing Policy for Efficient Operation and Expansion
of the Transmission Grid, FERC Docket No. PL03-1-000.
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In response to the FERC proposals for ROE ``adders,'' NASUCA
commissioned an examination of the cost and policy implications, and
recently filed comments in the pending FERC proceeding.\11\ I would
like to highlight several conclusions of that study:
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\11\ The NASUCA comments on the FERC transmission incentives
proposal are available at www.nasuca.org
NASUCA calculates the cost of the current FERC initiative,
if fully utilized by transmission owners, will cost consumers
over $13 billion, or approximately $711 million per year for
the 19 year time horizon in the FERC proposal. This is a
conservative estimate of the potential cost of these investment
incentives, and it virtually offsets the putative $725 million
per year benefit of forming Regional Transmission
Organizations, a benefit estimate that is controversial for its
optimism.
The $13 billion incentive is unnecessary and will provide no
incremental benefit in many areas where transmission owners
previously agreed to turn over control of their systems to
regional transmission organizations (RTOs) or independent
system operators (ISOs). There is no reason to provide new
``incentives'' to reward actions previously taken.
If Congress seeks to encourage national adoption of the
system proposed by FERC, such ROE incentives may only impede
that result. States that have not approved divestiture of
transmission facilities owned by state-regulated utilities may
be more reluctant to do so if automatic cost increases are the
result, without any clear, offsetting benefits.
There has been no showing that the existing just and reasonable
standard for ratemaking needs alteration. For these reasons, NASUCA
opposes extraordinary financial incentives to stimulate transmission
investment.
transmission cost allocation (participant funding)
The cost of transmission investments and other procedures needed
for reliability purposes should be allocated fairly to the persons or
entities benefitting from the added reliability. Transmission
investments for purposes other than reliability, for example, to
facilitate energy trading or performance under long term supply
contracts, should be borne by the participants. These principles are
already generally recognized.\12\
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\12\ See New York Independent System Operator, Inc., FERC Docket
Nos. ER97-1523-071, OA97-470-066ER97-4234-064, Order on Compliance
Filing, 102 FERC para.61,284 (March 13, 2003). ``[T]he Commission finds
that the current allocation of [Con Edison's Thunder Storm Alert]--
related costs is unjust and unreasonable. These procedures are mandated
by a local reliability rule designed to prevent a recurrence of a major
blackout in New York City, and which were, prior to the formation of
the NYISO, the sole responsibility of Con Edison. The specific
reliability benefits from these procedures inure solely to the benefit
New York City load, so that the costs should be allocated solely to
that load. . . . Neither the NYISO nor Con Edison make any convincing
arguments justifying the continued statewide socialization of TSA-
related costs.'' Id.
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transmission organizations/rtos
In recognition that voluntary regional transmission organizations
(RTOs) have been formed in many areas of the country, and without
endorsing their nationwide implementation, NASUCA adopted a resolution
addressing its key concerns about RTOs.\13\ These concerns include
reliability standards, independent governance, just and reasonable RTO
costs, price transparency, prevention of the exercise of market power
and anti-trust violations. The proposed legislation does not fully
address these concerns and the need for added consumer protections in
these areas.
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\13\ NASUCA Resolution on Regional Transmission Organizations,
August 1999. www.nasuca.org. Click Resolutions.
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puhca
The Public Utility Holding Company Act of 1935 (PUHCA) should not
be repealed, as proposed in several of the legislative proposals. For
example, Section 7043 of the draft House energy bill would repeal it.
PUHCA remains as a statutory bulwark against reassembly of vast utility
holding company empires. Even if not vigorously enforced, its very
existence is a deterrent to abuse of captive ratepayers and
inappropriate transactions between regulated utilities and unregulated
affiliates. NASUCA has adopted the following resolution on this
subject:
``in considering action affecting regulation or the structure
of the electric industry, including PUHCA repeal or reform,
Congress should require federal regulatory agencies to: 1)
prevent abusive or preferential affiliate transactions, 2)
continue oversight and protection over corporate and market
structure to prevent abuses to consumers and competition, 3)
disallow costs which are not prudent and reasonable from
wholesale rates, 4) exercise sufficient regulatory authority to
prevent ratepayers from bearing any risk of utility
diversification and to prohibit cross-subsidies between
regulated and nonregulated subsidiaries. . . .'' \14\
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\14\ NASUCA Resolution 1996-04, Urging the Congress and Federal
Agencies to Address Market Power as a Component of Any Federal
Restructuring Action.
Recent events reveal the recurring tendency of holding companies in
financial trouble to look to regulated affiliates as a source of
credit, cash, or other resources, all at the expense of captive utility
consumers. The bill would eliminate current PUHCA ownership
restrictions on non geographically contiguous utilities, would limit
state and federal regulatory agency and intervenor access to books and
records of the holding company to the costs of regulated entities,
would require a showing of necessity for regulators to examine holding
company books, and could make information regarding holding company
records and affiliate transactions, obtained in state regulatory
proceedings, confidential. PUHCA remains an essential consumer
protection. In light of recent utility holding company problems, it
should be more vigilantly enforced, not repealed. A copy of NASUCA's
resolution on PUHCA is attached.
purpa
No comment.
net metering & real-time pricing
NASUCA is not opposed to net metering or to voluntary real-time
pricing options. At the wholesale level, all rates and charges made,
demanded or received must be just and reasonable under the Federal
Power Act and FERC regulation. At the retail level, traditionally not
an area of federal concern, states are experimenting with a variety of
net metering and time of use pricing methodologies for retail rates.
Federal measures to require or encourage states to address these
issues, such as contained in the House Draft and the Staff Draft, are
unnecessary.
NASUCA is opposed to federal mandates for real-time pricing of
electricity for residential consumers, and opposes the incorporation of
volatile wholesale real-time price determinants into retail rates in
states that ``unbundled'' their rates for generation. NASUCA adopted a
resolution favoring rate methodologies that promote price stability and
predictability of the ``default'' rates for customers, urging each
jurisdiction which introduces competitive markets for the provision of
elements of electric or natural gas service to design default service
rates so that:
The Default Service Provider is equipped and able to assure
that the rates, terms and conditions, reliability and quality
of customer service offered to such customer are no worse with
such service than they would be with traditional utility
service;
The rates charged by such Default Service Provider are stable
and predictable over the long term and that the rates or
formulas to determine such rates are approved only after
appropriate notice to the public, consumers, and adequate
administrative review;
The Default Service Provider shall not simply pass through
wholesale spot market rates for the energy or gas commodity
portion of Default Service, and shall be required to take
prudent measures to provide least cost service and assure long
term rate stability, through various means including but not
limited to competitive bid, bilateral contract, or provider-
owned generation or supplies. . . .\15\
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\15\ NASUCA Resolution 02-02, Urging Jurisdiction Introducing the
Competitive Provision of Electricity or Natural Gas Service to Assure
the Continued Availability of Reliable Service to Customers from a
Default Service Provider at Just and Reasonable Rates, at
www.nasuca.org.
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renewable energy
States are already making major efforts to increase the portion of
renewable energy used by consumers and to foster the development of new
technologies to make renewable energy sources more economically viable.
I would agree that a federal role in this area is appropriate.
market transparency, anti-manipulation, enforcement
NASUCA is concerned that electricity rates at the wholesale level
may at times be vulnerable to the exercise of market power, without
effective remedies for consumers. There is a widespread concern that
the FERC may lack certain powers needed to supervise markets
effectively and to effectuate full remedies for consumers injured by
the exercise of market power.\16\ In 2002, NASUCA adopted a detailed
resolution supporting effective monitoring of such markets where they
have been approved by the FERC.\17\
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\16\ A recent GAO report questions whether the FERC's capabilities
and enforcement powers, originally designed for the traditional rate
setting paradigm, are sufficient tools for an effective market
overseer. Energy Markets: Concerted Actions Needed by FERC to Confront
Challenges That Impede Effective Oversight, GAO-02-656, Table 4, 69
(June 2002), Available at http://www.Gao.gov/new.items/d02656.pdf.
\17\ NASUCA Resolution, Promoting Market Monitoring Functions
Within Regional Transmission Organizations (Rtos) Whenever Such
Regional Entities Are Created, June 2002, available at www.nasuca.org.
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The Staff Draft would authorize the FERC to implement an electronic
rate filing system, in which rates demanded by sellers (except for the
spot market clearing price actually received) might not be made public.
This is apparently a less ``transparent'' substitute for existing
sunshine principles long embodied in the FPA, such as those regarding
public rate filing, notice of rate changes, and public inspection of
all rate schedules.
The proposed House Draft and Staff Draft include provisions to
outlaw the specific abuse of ``round-trip'' trading, but they are not
comprehensive enough to reach new market manipulation strategies that
may not be expressly covered in the statute. For example, the bar of
``round-trip'' trading seems to apply only to bilateral strategies, and
might not cover a triangular trading gambit. The refund remedy would be
broadened, but would be prospective from the date of a complaint, so
there may be no real refund remedy in situations where rates change
every hour or day.\18\
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\18\ In just one day, June 26, 2000 ``[a]ccording to the NYISO,
consumers bore over $100 million in excess costs before bid mitigation
could be applied. As a result, and in light of FERC's unwillingness to
allow retroactive price corrections, the NYISO subsequently implemented
an automated mechanism for mitigating bids prior to setting the market-
clearing price'' Best Practices in Market Monitoring, Synapse Energy
Economics, et al., p. 18-19 (Nov. 9, 2001) (citing NYISO, Exigent
Circumstances Filing of the [NYISO], p. 8 (May 17, 2001)).
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consumer protections
NASUCA does not view customer protections as a separate item within
the overall statutory framework for federal oversight of the
electricity industry. Rather, the fundamental purpose of the entire
Federal Power Act of 1935 (FPA) is to protect customers and to assure
reasonableness in the provision of a service essential to life in
modern society.\19\ Accordingly, any effort to amend the FPA must
address whether the proposed modifications assure real benefit to
consumers, or at least maintain and not jeopardize the existing level
of customer protection. From this broad perspective, the pending
legislative proposals do not, in NASUCA's view, increase overall
customer protection, and some measures may erode existing protections.
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\19\ ``The Federal Power Act's primary purpose [is] protecting the
utility's customers.'' Electrical Dist. No. 1 v. FERC, 774 F.2d 490,
493 (D.C. Cir. 1985) (Scalia, J).
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Some of the specific consumer remedies really add nothing to
existing state measures. For example, states that allow retail utility
competition quickly and effectively addressed the ``slamming'' issue--
the unauthorized switching of providers. Accordingly, there is no need
for federal legislation in this area of traditional state jurisdiction,
especially when many states have not adopted retail energy competition
models.
On the other hand, several of the proposals would repeal PUHCA or
and some would still urge repeal of existing FERC merger review
authority, provisions intended to protect customers from holding
company abuse and market power. For example, Section 7101 of the
original House Draft bill would have repealed Section 203 of the
Federal Power Act, which includes FERC review of proposed utility
mergers. The rationale for the repeal is that review of a merger of
electricity utilities is performed by other agencies and that any
further review by FERC would be redundant. FERC review of mergers of
electricity utilities under its jurisdiction, however, should be
preserved. There is a growing understanding that the nature of
electricity and evolving electricity markets may permit the subtle
exercise of market power, even without overt collusion, by entities
having market shares typically allowed by the FTC and regulators in
other industries. Many of the benefits projected by the FERC in its
efforts to create broader geographic markets for electricity, at
significant expense, rest upon the assumption that flaws in existing
markets will be mitigated if buyers can find more sellers in expanded
regional trading areas. If, however, industry mergers and consolidation
are allowed to occur simultaneously with costly transmission expansions
to facilitate larger geographic marketing areas, the mergers could
result in a shrinkage of the number of sellers, and a corresponding re-
concentration and reappearance of market power. FERC should have
continued authority to scrutinize and reject proposed electric industry
mergers, under evolving standards for measuring market power in
electricity markets, and Section 203 of the FPA should not be repealed.
conclusion
In conclusion, while some individual provisions, such as the
reliability measures of S. 475, have merit, the various proposals
before the Committee to amend the Federal Power Act of 1935 and to
repeal the Public Utility holding Company Act of 1935 do not assure
demonstrable benefits or added protection that would make their
enactment a value proposition for consumers. Some proposals may
increase consumer rates by allowing unwarranted rate increases for
owners of electricity transmission lines and facilities, beyond the
level that is just and reasonable. Some proposals would eliminate
longstanding protections of the Public Utility Holding Company Act
(PUHCA) intended to protect consumers from utility holding company
abuses. Other proposals would for the first time provide explicit
statutory authorization for the use of market mechanisms, but without
providing adequate enforcement powers to the FERC to oversee the
markets and market participants, and without the tools to provide full
remedies to consumers. In light of recent instances of energy market
manipulation, holding company abuses, and the possibility of further
industry consolidation in the aftermath of major losses incurred by
energy generation and trading companies, it is clear the consumers need
greater, not less, protection from the exercise of market power in the
electricity markets under FERC jurisdiction. For these reasons, NASUCA
has concluded that the proposals to modify the Electricity title of the
FPA now under consideration are not in the interests of utility
consumers.
I want to thank Chairman Domenici and the committee again for
permitting me to share NASUCA's views on these important issues. I
would be pleased to address any questions you may have at this time.
The Chairman. Thank you very much. Did you have prepared
remarks that you wanted admitted in the record?
Mr. Norlander. Yes, we have submitted those.
The Chairman. That will be done.
John Anderson, executive director of the Electricity
Consumers Resource Council. Thank you for coming.
STATEMENT OF JOHN ANDERSON, EXECUTIVE DIRECTOR, ELECTRICITY
CONSUMERS RESOURCES COUNCIL
Mr. Anderson. Thank you, Mr. Chairman, and I appreciate the
opportunity to be here.
ELCON is the national association of large industrial
consumers of electricity. Our members come from virtually every
segment of the manufacturing community and have operations in
every State. We, along with other consumers, are the ones that
pay the bills, and we care very much about these issues and we
know that you do too.
ELCON members compete in free and open markets, both here
in the United States and abroad. We support competition, and
accordingly, for well over 10 years, ELCON and ELCON members
have sought free and open electricity markets both at the
wholesale and retail levels.
At present we find that progress toward competition is
being made. It is slow, to be sure, but there is progress
nonetheless. At the wholesale level especially, more power is
being bought and sold than ever before. There are independent
generators, marketers, and other participants buying and
selling low cost electricity that we believe is beneficial to
all consumers, industrial, commercial, and residential.
I hasten to add that regarding wholesale markets, progress
must be made at the national, rather than the State or regional
level. Our grid is interconnected. Electrons cross State and
regional boundaries with impunity. The Federal Energy
Regulatory Commission is the regulatory body necessary to deal
with Federal issues.
Before I address the individual issues before this
committee, I would like to state that while we as industrial
customers do not oppose the eventual enactment of an
electricity title, we do not encourage one either at this time.
My fear, as I have observed in several States that have
adopted so-called electricity restructuring plans, is that
legislative solutions, almost by necessity, involve political
compromises. And all too often, these compromises create market
problems without providing market solutions.
Unless we are sure of what will, in fact, make electricity
markets more competitive, I urge the committee to take no
action on electricity at this time.
Let me now touch on couple of the subjects that you put
before us today.
The Holding Company Act, or PUHCA. ELCON members, as large
industrial electricity users, have identified market power and
market power abuse by utilities as the greatest issue they face
in the electricity marketplace. Legislatively that issue is
embodied in repeal of the Public Utility Holding Company Act. I
emphasize no bona fide consumer group supports PUHCA repeal.
PUHCA is the primary Federal statute available to address the
abuse of market power by utilities today. I argue that PUHCA is
needed at least as much today as it was when it was enacted in
1935. In fact, in some ways, PUHCA should be strengthened. For
the reasons set forth in our more detailed written testimony,
we urge you not to repeal PUHCA at this time.
RTOs. The transmission grid is the linchpin to the creation
of truly competitive wholesale electricity markets. We will
never see truly competitive electricity markets as long as
monopoly utilities continue to use the transmission grid to
benefit their own generation and deny access to power generated
by others.
ELCON strongly supports FERC's efforts to make the grid
more open and less discriminatory. We strongly recommend that
Congress does not restrict these efforts.
As far as incentives, contrary to some assertions, lots of
transmission, both new and upgrades, is being constructed
today. In spite of this, there certainly are some critical
areas where additional transmission investment is needed.
However, the incentive provisions in both the House and Senate
proposals are unnecessary, unneeded, and unwarranted the way we
look at them. If FERC believes that incentive rates are
necessary, a decision that can and should be made on a case-by-
case basis, FERC has sufficient authority to order such rates
under current law.
Incentives certainly should not be offered in areas where
new transmission is not needed. In areas where new transmission
is needed and cost recovery is guaranteed, it should be
recognized that there is very little risk. If the risk is low,
the rate of return must also be low. Perhaps TEBO rates today.
I emphasize the potential cost of these so-called
incentives may be very large, billions and billions of dollars
that consumers will be required to pay. Consumers must be
assured they will actually receive benefits if they are going
to have to pay these.
Regional energy services corporations. I join with several
with my other colleagues today to raise some problems with
this. The proposal in the draft legislation truly amazes me. It
barely has been discussed, and yet it is the central part of
the legislation. I find it hard to believe that this committee
is going to begin markup next week on a legislative proposal
that has only been in the public domain for a couple of weeks.
At a minimum, the creation of RESCs would create yet another
layer of unnecessary and unwise bureaucracy. We urge the
committee not to adopt this proposal, at least until it can be
studied in full.
The so-called reliability language is often referred to as
consensus language. We do not believe it is a true consensus.
We, along with everybody else, support reliability, but we do
not believe that the language will serve its purpose. It is too
long and prescriptive. It balkanizes the markets and it ignores
commercial implications.
And finally, last but not least, let me mention PURPA, the
Public Utility Regulatory Policy Act. Although PUHCA and PURPA
are different statutes, they are similar in that each gets a
bad rap because of constant utility criticism, and each has
been the subject of extensive lobbying by utilities to achieve
its repeal. The utilities claim that they are mandated under
PURPA to purchase power from co-generators and other renewable
energy resources, though they do not tell you that the rates
that are out there have been approved by the appropriate State
commissions. They do not state that the cost of wholesale
electricity has gone down since PURPA has been affirmed, and
they do not tell you that qualifying facilities which sell
power under PURPA are far more energy efficient and
environmentally beneficial.
Last year, the Senate approved Carper-Collins, and I hope
that if you do anything with PURPA, you will do the same thing
today.
As I said at the outset, we support competitive markets.
However, many of the proposals put forth in the Senate draft
and other legislation would not only make the market less
competitive, it would stifle the buds of competition that we
have seen emerging.
Thank you for the opportunity to be before you today.
[The prepared statement of Mr. Anderson follows:]
Prepared Statement of John Anderson, Executive Director,
Electricity Consumers Resource Council
summary
ELCON is the national association representing large industrial
users of electricity. ELCON members seek competitive wholesale and
retail competitive markets. ELCON supports including electricity
provisions in a comprehensive energy bill only if such provisions
clearly will advance the cause of competitive markets.
Regional Energy Services Commission: This proposal is
untested and could hinder, not facilitate, the flow of power.
Reliability Standards: The ``consensus'' legislation could
balkanize the market (by granting deference, or providing a
rebuttable presumption to certain groups); it also does not
take into account the intrinsic inter-relationship between
reliability standards and their commercial impact.
Open Access (FERC-Lite): Optimally, at some point, the
entire grid, regardless of ownership, will be open and subject
to uniform rules and regulations.
Transmission Siting: Granting FERC a ``fallback'' right of
eminent domain, as provided in the House draft, while rarely
used, would provide a motivation to ensure that state inaction
does not occur.
Transmission Investment Incentives: Investment incentives
will be costly to consumers. Investment incentives can already
be offered by FERC on a case-by-case basis; there is no
demonstrated need to utilize investment incentives in all
instances.
Transmission Cost Allocation (Participant Funding): This
should be considered as a regulatory issues, not a legislative
one. Under current law, FERC can allocate the cost of new
transmission in any way it deems appropriate--one approach,
i.e., participant funding, should not be locked into statute.
Transmission Organizations/RTOs: ELCON supports large RTOs
with independent governance; legislation is not needed on this
issue.
PUHCA: Given recent turmoil in electricity markets, repeal
of PUHCA--which protects both consumers and investors--seems
unwise.
PURPA: PURPA guarantees to cogenerators regarding purchase
of electricity and the availability of back-up power should be
retained until functioning competitive markets are established.
Net Metering and Real-Time Pricing: ELCON members support
the concept of net metering; if real-time pricing is required,
a utility's risk is reduced and, we believe, its potential rate
of return should be reduced as well.
Market Transparency, Anti-Manipulation, Enforcement: The
suggested language seems minimal considering the abuses that
have been revealed in electricity markets.
statement
Good morning. My name is John Anderson. I am the executive director
of the Electricity Consumers Resource Council, or ELCON. ELCON was
established in 1976 and is the national association of large industrial
consumers of electricity. Our members come from virtually every segment
of the manufacturing community and have operations in every state.
ELCON members compete in free and open markets here in the U.S. and
abroad. We support competition, and, accordingly, for over ten years,
ELCON and ELCON members have sought free and open electricity markets
at the wholesale and retail levels. We have testified to that purpose
before this Committee on several occasions.
At present we find that progress toward competition is being made--
slow progress to be sure, but progress nevertheless. At the wholesale
level especially, more power is being bought and sold than ever before.
There are independent generators, marketers and other participants
trading electricity that we believe is beneficial to all consumers,
industrial, commercial and residential.
The evolution to a truly competitive wholesale market is far from
complete. That market is very much in transition. It is changing
partially in response to the pro-competition directives of the Energy
Policy Act of 1992 and from FERC, specifically Orders 888 and 2000, and
partially in response to market developments.
I hasten to add that, regarding wholesale markets, progress must be
made at the national, rather than state or regional, level. Our grid is
interconnected; electrons cross state and regional boundaries with
impunity. The Federal Energy Regulatory Commission (FERC) is the
plenary regulatory body with the statutory authority necessary to deal
with interstate electricity issues. Last year's Supreme Court case
affirmed FERC's jurisdiction over interstate transmission. We urge
Congress and this Committee not to tamper or try to modify the basic
holdings of that decision.
Before I address the individual issues before this Committee, I
would like to state that while we as industrial consumers do not oppose
the eventual enactment of an electricity title, we do not encourage one
either. Markets are rapidly evolving. Participants are aware of the
rules and are responding to market forces. Legislation is not necessary
at this point in time.
My fear, and I have observed this in several states that adopted
so-called electricity restructuring plans, is that legislative
solutions, almost by necessity, involve political compromises. And too
often those compromises create costly market problems without providing
market solutions.
So if this Committee is certain that it is crafting legislation
that will make markets more competitive, that will remove the barriers
that monopoly utilities have hidden behind for decades, and will
provide more options and lower prices for consumers, I say go ahead and
ELCON will support you.
But if instead you are drafting legislation that you hope addresses
one company's problems, one region's uniqueness, or one Senator's
political needs, I urge you to go slow. In fact, unless we are sure of
what will, in fact, make electricity markets more competitive, I would
urge the Committee to take no action on electricity at this time.
I will now elaborate on the various sub-issues that are part of the
legislative proposals before the Committee today. Given the complexity
of each issue, I have tried to state our objectives somewhat simply. In
all cases, we are striving for more competitive markets.
Regional Energy Services Commission (RESCs)
From a personal perspective, let me say that I have worked on
electricity policy issues for over twenty-five years. Although some
claim that the issues rarely change, every now and then there emerges a
completely new proposal. Today that proposal, as contained in the
Senate staff draft, is for the creation of Regional Energy Services
Commissions, an idea I never encountered before last week.
I have heard this proposal called innovative. I have heard it
called radical. Regardless, it is certainly untested--in fact it has
barely been discussed as to its potential impact on markets and
competition. I find it hard to believe that this Committee is going to
begin markup next week on a legislative proposal that has only been in
the public domain for two weeks.
We oppose the concept of RESCs as outlined in the Committee draft.
We do so because we believe that a primary component of achieving more
competitive wholesale markets is uniform rules that make it easier for
buyers and sellers of electricity to meet and do commerce. From the
perspective of industrial users who have multiple electricity-consuming
facilities across the country, we envision an eventual market that
facilitates the purchasing of power for numerous facilities from one
source. Such a market would provide lower cost power, reduce
administrative costs, and make American manufacturing facilities more
competitive.
We base this position on the fact that the interstate transmission
grid is divided into three interconnections, one in the East, one in
the West, and one comprised of most of Texas. Within each
interconnection, power is synchronized and flows without regard to
state or regional boundaries. We believe consumers would benefit if
access to power within any one interconnection were made easier, not
more difficult. We believe the creation of RESCs as described in the
Senate draft would hinder, not facilitate, the flow of power.
Accordingly we support the concept of a standard market design,
though we certainly do not endorse every provision of the proposal FERC
put forth last year. We want to make markets more consumer friendly.
Allowing each region's transmission infrastructure and tariff rate
design to be governed by an RESC rather than by FERC would balkanize
the market and, as we see it, benefit nobody--certainly not consumers.
The creation of RESCs would create yet another layer of
bureaucracy. Consumers, even if they are the largest corporations in
the country, have limited staff time and money to participate in
proceedings such as envisioned by the creation of RESCs. Utilities, on
the other hand, have endless human and financial resources because,
unlike corporations in competitive markets, they can pass those costs
on to captive customers.
I have tried, without success, to find the creator of this radical,
new, and untested proposal. Although I have been unable to locate its
progenitor, I can be reasonably certain that it is no one in the
consumer community. We urge the Committee not to adopt this proposal,
at least until it can be studied in greater detail.
Reliability Standards
All of the bills under discussion, with minimal degree of
variation, contain what is commonly referred to as ``consensus
reliability'' language. Though we recognize that many disparate
stakeholders have endorsed this section in one form or another, we do
not believe that it is a true consensus document and we do not believe
that it will, in fact, enhance reliability.
By way of background, ELCON was part of the process that developed,
and endorsed, the original ``consensus reliability'' language roughly
seven years ago. That language was unfortunately the result of a
Christmas tree effort, as every stakeholder representative (including
us) tried to add language to advantage their own particular group.
Since then, when we have looked at that end product and subsequent
revisions, we see that they all have similar flaws.
We recognize that this is an issue in which few Members have an
interest. All Members--and all industry stakeholders--support increased
reliability. Certainly we do. But we do not believe that this language
will serve that purpose.
First, not one of the ``reliability'' proposals actually increases
reliability--rather each establishes a regulatory process which is
designed to authorize one organization to set standards that are
supposed to maintain reliability. Although promoters of this language
purport to model it on the securities industry, that model fails under
scrutiny. For example, violators of rules promulgated by the National
Association of Securities Dealers can be denied the ability to trade.
It is unclear how violations and violators would be sanctioned or
punished in the electricity industry. Clearly, removal from market
activities would be difficult if not impossible when dealing with
owners of interstate transmission lines. And, since electricity
functions in ``real time,'' violations of reliability rules would cause
real, possible irremediable, damage before any action could be taken in
response.
Second, the language in the four proposals grants deference (or
provides a rebuttable presumption) to regional groups founded on an
interconnection-wide basis. This is in response to demands from western
officials that ``the West is different.'' This may be, and in fact
reliability rules recognizing these regional differences can be
developed without granting statutory deference in the standard-setting
process to any regional group. If the facts support a regional
standard, that regional standard should be adopted. But by granting
deference to one group, this language opens the door for deference to
be granted to other groups (perhaps to one organized on an RTO-wide
basis; perhaps to consumers who actually pay the bills). Creating
deference of any kind will encourage the development of a regional,
rather than a national, standard, and generally make it more difficult
for power to move from one region to another. In essence, what is
supposed to be a ``standard'' is no longer a ``standard.''
And third, for those truly interested in making wholesale markets
more competitive, reliability should not be considered in a vacuum. The
issues of reliability and commercial impact are inextricably
intertwined. One would be hard pressed to imagine a reliability issue
that did not have commercial implications, and vice versa. Reliability
standards should not be developed without an examination of their
impact on commercial practices. To do so is to invite the development
of ``reliability standards'' that are in fact new trade barriers or
disguised mechanisms for discrimination. Ideally the preparation of
reliability standards and so-called commercial practices would be done
by the same organization. This would ensure compatibility between the
two and maximize the benefits of both reliability and markets to
consumers. The current bifurcation of duties between the North American
Electric Reliability Council (NERC) and the North American Energy
Standards Board (NAESB) has a number of problems. For consumers and new
entrants to the market, participation in NERC and NAESB standard-
setting processes entails a considerable outlay of staff and other
resources. Moreover, the fact that reliability and commercial practices
will be made by two different organizations will lead to all sorts of
complications and inefficiencies. We continue to believe that one
organization, tasked with both standard-setting responsibilities,
should consider both reliability and commercial practices.
In conclusion, we support a clear and short statement that FERC has
the responsibility and authority to assure reliability and to consider
the commercial impact as well. Everyone wants reliability. We believe
it is worth the time to develop the legislative language that will
truly achieve it. The legislative proposals before the Committee today
will not accomplish what we are seeking.
Open Access (FERC-Lite)
FERC jurisdiction or the equivalent over currently non-
jurisdictional utilities is an important issue if the transmission grid
is to be operated in a truly open matter. We are pleased that over the
past several years non-jurisdictional utilities have seen fit to agree
to many concessions. Optimally, at some point, the entire grid,
regardless of its ownership, will in fact be open and subject to
uniform rules and regulations.
Transmission Siting
Generally speaking, ELCON supports giving FERC a right of eminent
domain for siting of electricity transmission lines similar to that
enjoyed for the siting of natural gas pipelines. That having been said,
we certainly recognize the political problems with such a position and
find the language in the House draft to be a reasonable approach. We
understand that in fact states have not been the principal reason for
delay in siting and building new transmission lines. But having a
``fallback'' right of eminent domain, as laid out in the House draft,
while perhaps rarely used, would provide a motivation to ensure that
state inaction does not occur.
Transmission Investment Incentives
The Senate staff draft, as well as the House draft and last year's
October 16 draft, all address the need for new transmission. We believe
that there is a need for new transmission in some regions, but not in
all. The directive in these pieces of legislation that FERC implement
and utilize incentive rates for the construction of all new
transmission seems unnecessary and overly restrictive. If FERC believes
that incentive rates are necessary--a decision that can and should be
made on a case-by-case basis--they have sufficient authority to order
such rates under present law. In House hearings, witnesses from both
Goldman Sachs and for-profit transmission companies testified that such
incentives are not needed in every case.
There certainly is no reason to provide incentives in areas where
new transmission is not needed. Such efforts would merely reward
monopoly transmission owners and increase costs for consumers.
In areas where new transmission is needed and cost recovery is
assured, it is intuitive that the risk involved is very low. Utilities
enjoy an almost ironclad guarantee that they will receive both a return
``of'' and a return ``on'' their transmission investments. If the risk
is low, i.e., the new transmission will be fully utilized, presumably a
just and reasonable rate of return, not an incented one, is
appropriate.
A recent study undertaken at the request of the National
Association of State Utility Consumer Advocates attempted to quantify
what these incentive rates would mean to consumers. According to an
affidavit filed at FERC, consumers would pay $711 million per year, or
$13.5 billion over the next 19 years, if incentive rates were to be the
norm just to build transmission that would be built anyway. Looked at
another way, that would be $13.5 billion of ratepayer money that would
not be invested in new transmission infrastructure. On behalf of all
consumers, industrial, commercial and residential, I find that
objectionable, especially since the North American Electric Reliability
Council has stated that significant new transmission will be built
regardless.
transmission cost allocation (participant funding)
The House bill's language on participant funding is less
restrictive than language in the Senate draft and the language
circulated last year. But participant funding ought to be a regulatory
issue, not a legislative one. FERC has--and frequently uses--the
authority to order such funding on a case-by-case basis. There is no
reason to lock into statute an inflexible plan that mandates how
transmission costs are to be assigned now and forever.
As a practical matter, it is nearly impossible to determine who
will benefit from transmission upgrades, and it is inevitable that such
beneficiaries will change over time. In addition, since nearly all
stakeholders agree that new transmission is necessary in some areas, I
question why Congress would adopt a plan such as participant funding
that will likely retard the growth of new transmission. All consumer
groups and all non-utility generators--the groups most likely to suffer
if new transmission is not built--believe that mandating participant
funding will hinder, rather than help, the construction of new
transmission. If there is an electricity title in legislation, we hope
Congress will be silent on this issue.
Transmission Organizations/RTOs
Industrial users know from experience that the transmission grid is
the lynchpin to the creation of truly competitive wholesale electricity
markets. If monopoly utilities can continue to use the transmission
grid to benefit their own generation and deny access to power generated
by others, we will never see wholesale competition in any real way.
ELCON has supported FERC's efforts to make the grid more open for
many years. We support large, independent Regional Transmission
Organizations (RTOs) with the day-to-day responsibility of running the
grid (under FERC oversight). In order for an RTO to operate
effectively, it needs independent governance so that monopoly
transmission owners cannot develop self-serving rules and regulations.
We are, in fact, a little disappointed that FERC now seems more
positively disposed to smaller RTOs than those originally envisioned.
The greater the number of RTOs, the more important the ``seams'' issues
become. ``Seams'' is just another word for barriers. How power goes
from one RTO to another--through the seams, so to speak--is an issue
that can greatly effect whether consumers have access to low-cost power
or not. The proposal to create RESCs could make that ``seams'' issue
into a ``walls'' issue.
Ideally an RTO would have administrative responsibility over all
transmission, regardless of whether it is publicly or privately owned.
It would also be responsible for the economic dispatch of merchant
utility-owned generation within the RTO footprint. We believe the
language in the House draft provides a positive first step toward
ensuring that federally owned transmission does not become the hole in
the doughnut.
Although its efforts have not been perfect, we hope that Congress
does not restrict FERC in its efforts to make the grid open and non-
discriminatory. Legislation is not needed on this issue, other than
perhaps to reaffirm FERC's authority to act.
PUHCA
Let me begin my comments on PUHCA by stating that I understand all
too well why investor owned utilities have spent literally millions of
dollars in lobbying and communication efforts over the last ten or so
years to repeal PUHCA. It should be equally understandable why no bona
fide consumer group supports PUHCA repeal. PUHCA is the primary federal
statute available to address the abuse of market power by utilities
that operate in more than one state.
Proponents of PUHCA repeal argue that the statute is outdated--an
anachronistic law that no longer applies to today's utility markets. I
argue that it is needed at least as much today as it was when it was
enacted, in conjunction with the Federal Power Act, in 1935. In fact,
in some ways PUHCA should be strengthened.
Indeed the current market structure, with so many regulated
utilities having unregulated subsidiaries, provides a situation ripe
for abuse. In fact no less a pro-business newspaper than the Wall
Street Journal ran an article last December describing how utilities
were taking debt from their unregulated enterprises and shifting it to
their regulated entities so that ratepayers, rather than shareholders,
were assessed the costs. PUHCA's language on cross-subsidization ought
to be strengthened, rather than repealed, to protect consumers.
Similarly, taped conversations between energy traders of a major
company dramatically depict how consumers were gouged during the
Western power crisis. Congress should not repeal PUHCA but rather enact
needed legislation to make it unlawful for any entity, directly or
indirectly, to undertake fraudulent, manipulative, or deceptive actions
in wholesale energy markets. Such language was included in HR 5614 last
Congress; it is not included in any of the four bills before this
Committee today.
A discussion of PUHCA is not complete without a discussion of
mergers. Retaining FERC's merger review authority is essential given
the number of recent utility mergers and the consolidation of the
industry into a few large regional (and multi-regional) players. States
and the federal antitrust agencies cannot do this--FERC therefore must
be the fallback for this essential consumer protection. FERC also adds
special expertise to the examination of these mergers.
Finally I would add that maintaining PUHCA as a federal statute is
necessary not just to protect consumers but to protect investors. At
present roughly forty percent of all power companies are listed on
Standard & Poor's CreditWatch as having a negative outlook. More than
13 percent of all energy firm's have non-investment grade securities.
On behalf of all consumers, we ask that you not repeal PUHCA at this
time.
PURPA
Although PUHCA and PURPA are very different statutes, they are
similar in that each gets a bad rap because of constant utility
criticisms. And each has been the subject of extensive lobbying by
utilities to achieve its repeal.
Utilities claim that they are mandated, under PURPA, to purchase
power from cogenerators and other renewable energy resources. They
claim that such power is often available at a costly price. But they
don't tell you that rates were approved by each state utility
commission. They don't say that the cost of wholesale electricity has
gone down since PURPA was affirmed by the Supreme Court in 1982. And
they don't tell you that Qualifying Facilities which sell power under
PURPA are far more energy efficient and environmentally beneficial than
the conventional base load power plants owned by utilities.
The Administration has recognized the benefits of cogeneration and
combined heat and power (CHP) and has established a national goal of
doubling our CHP output by 2010. It is totally inconsistent to endorse
this objective and then repeal the mandatory purchase and sale
requirements of PURPA.
ELCON addresses this issue from two perspectives. First, many of
our members cogenerate power on-site, sometimes for their own use,
sometimes to sell, most often a combination of the two. They know that
the mandatory purchase requirement of PURPA is necessary until there
are truly open wholesale markets for cogenerators to sell into.
Otherwise utilities--who routinely obstruct the development of
customer-owned generation--will not buy cogenerated power or will use
their market power to keep such electricity off the grid. Until that
time, PURPA guarantees are not just desirable, they are essential.
Similarly, the PURPA requirement that monopoly utilities supply
back-up power to cogenerators at just and reasonable prices is
necessary until there is a competitive retail market in which to
purchase that power. Without a guarantee of back-up power, cogenerators
cannot operate and the manufacturing facilities connected to it become
useless.
Second, all of our members are consumers--and big consumers at
that. It is noteworthy that those companies that pay the largest
electric bills in the nation recognize that PURPA was the first federal
statute to inject any competition into the electricity marketplace.
PURPA is at least partially responsible for the decrease in electricity
rates over the years. Industrial consumers believe it would be both
shortsighted and harmful to repeal in any way the guarantees available
to cogenerators under Section 210 of PURPA.
The language that the full Senate approved last year, in the
Carper-Collins amendment, demonstrated the support that cogeneration
enjoys. Similarly, the House Subcommittee on Energy and Power approved
by voice vote the language now in the House draft. Both Carper-Collins
and the House language recognize that PURPA protections should stay in
place until working, competitive markets are available. We hope this
Committee adopts a similar approach should it approve legislation.
Retaining present law would also be acceptable if the Committee chooses
not to act on electricity issues.
Net Metering and Real-Time Pricing
As I stated earlier, many ELCON members are cogenerators utilizing
a combined heat and power system, often fueled by a renewable resource.
Our members strongly support the concept of net metering as long as it
does not require the disclosure of proprietary information or intrude
upon the internal operations of a company's generation activities.
Real-time pricing is a much more complicated issue than generally
considered. Utilization of real-time pricing is a necessary but not
sufficient condition to ensure that there is a functioning demand
market (in contrast to demand programs as is generally the case in
demand side management). All end users, and especially large end users,
can assist in times of peak demand and congestion by reducing
consumption. In real terms, a kilowatt hour of reduced consumption has
the same effect as a kilowatt hour of increased generation. Many large
industrial users are willing to play such a role assuming that
compensation is appropriate. Real time pricing would be helpful in
determining those levels, but only sophisticated consumers can assume
the high risk of such actions. Hence, it is extremely important that
real-time pricing is voluntary and not mandated on any customer class.
Finally, it should be noted that requiring end use customers to
purchase power under only real-time prices transfers all risk from the
utility to the customer. If a utility requires real-time pricing, its
risk is lowered and, we believe, its potential rate of return should be
reduced as well.
ELCON does not recommend that legislation address the issue of
real-time pricing.
Market Transparency, Anti-Manipulation, Enforcement
The language in the Senate draft on information availability,
disclosure requirements and the prohibition of round-trip trading are
all good as far they go. But they don't go to the heart of the problem
which is each utility's ability to exercise market power, the ability
of a utility to manipulate markets, and the lack of significant market
enforcement by any federal agency. These issues are related to the
PUHCA issues discussed above. If Congress is to address this issue, it
should take large steps, not small ones, and the steps should make
markets more competitive and remover barriers to entry by new
participants.
Consumer Protections
The issues found in the Senate draft and other pieces of
legislation regarding slamming and cramming affect residential
consumers far more than industrial. They are valid concerns and should
be addressed.
Other Issues
An issue that has been the subject of much recent dialogue,
including discussion at the recent House Subcommittee markup, is
``economic dispatch.'' The basic question is whether utilities should
dispatch (put on the grid) the lowest cost power available, even if it
is not from their own generating facilities. Many utilities refuse to
do so, claiming that they are protecting their customers or ``native
load.'' However, this claim fails. As a witness representing some of
the largest customers in America, I can assert that we would certainly
prefer to see the lowest cost power be made available whenever
possible. Although I can understand why utilities try to protect their
own generation, this practice is not beneficial to consumers and also
discriminates against non-utility generators.
Conclusion
As I stated at the outset, we support competitive electricity
markets. However, many of the proposals put forth in the Senate draft
and in other legislation would not only make the market less
competitive, it would stifle the buds of competition that we have seen
emerging in recent year. We support positive legislation that
encourages markets to develop and removes barriers to new entrants. But
quite honestly, we do not see that emerging from this Congress. That is
why we believe that no electricity language may well be the preferable
option, and that no electricity language may in fact be the most
positive way to promote competition.
The Chairman. Thank you very much for your testimony.
First, I want to compliment all of you for helping us stay
on time.
Now we will proceed to some questions. I can save mine
until last. I will yield first to Senator Bingaman, then
Senator Thomas, Senator Craig, Senator Alexander, in that
order.
Senator Bingaman. We had an earlier hearing with some
people from the financial community--I think, Mr. Svanda, you
testified at that hearing as well--and one of the main issues
that was raised was the need for us to get to a point of
regulatory stability as quickly as possible so that this
industry could obtain and attract the capital it needed to make
the investments that were needed.
Frankly, one of the concerns that I have with the new
proposal for regional energy services commissions is that, if
that were adopted by the Congress, it would take a substantial
period before it could be implemented, before Governors could
gear up to appoint people, and it could be sorted out as to
which States were grouping with which States. There is a lot of
regulatory instability that I think might result, putting aside
other problems with the proposal.
I would be interested in Mr. Svanda's view as to whether
that is a valid concern or one that he shares.
Mr. Svanda. Thank you, Senator. It is a concern that I
share and those very concerns are woven through my written
testimony to you.
The concern is I come from an area of the country in
Michigan where we generally are working as a region to
implement region-wide organizations for electricity markets. We
have been doing that for quite a while and we have been doing
it with States that are squarely behind restructuring the
industry, such as Michigan, with States that are squarely not
behind restructuring the industry, such as our immediate
neighbor to the south, Indiana.
But Indiana and Michigan agree completely with regard to
how we structure the wholesale regional market. We have rolled
up our sleeves, along with most of the rest of the States in
the region, to make the MISO a living, breathing, and reliable
entity both from a physical reliability and an economic
reliability sense.
To move away from those concepts that we have all been
working on, to introduce the new RESC type of thinking and have
each of the States in that region, multiplied times 50 across
the country, evaluate how we can fit into the new structure, I
think moves the horizon out considerably, and it is that
horizon that is so important to creating investor confidence,
that they can understand what types of investments are going to
make sense, mid, short, long term.
Senator Bingaman. Let me ask Mr. Anderson. I understand
your testimony to the effect that PUHCA should not be repealed.
If PUHCA were repealed by the Congress--we went to great
lengths in the last Congress to try to strengthen FERC's merger
authority in order to compensate for the repeal of PUHCA--do
you think that is an important way to proceed if PUHCA were to
be repealed, or do you have any thoughts on that?
Mr. Anderson. Senator, we certainly do have thoughts on
that, and we appreciate the efforts that you did last year
working in this area. We compliment you on it very highly.
But I think it is even more than just merger authority. I
think it is also broader and the whole concept of market power.
And I think there are a whole set of provisions that we
support, and I will be glad to provide them for the record for
you. But it is access to books and records and the idea of
monitoring to make sure that the exercise of market power--let
us be the first to recognize that a law that was created in
1935 is probably one that is not perfectly tuned for today's
times, and we think that there could be some modifications to
it. At the same time, it is a very valuable consumer protection
act in the market power area, and we urge the mergers and
access to books and records and market power monitoring, things
along that line, go along with it.
Senator Bingaman. Mr. Gifford has suggested that the
antitrust laws adequately meet these needs. Mr. Anderson, would
you want to comment as to your view on that?
Mr. Anderson. Thank you, Senator. The antitrust laws are
very cumbersome and time consuming and expensive to use. They
are extremely difficult to use. Besides it is a matter in the
Holding Company Act, once a merger has gone together, it is
very, very difficult to unscramble that egg, if you like. So it
is a situation we have to be very careful up front on. The
antitrust laws represent a tool that should be relied on at
appropriate times. We would like to see the market power issue
dealt with up front and directly and not after the fact when it
is very difficult to come up with remedies.
Senator Bingaman. My time is up. Mr. Chairman, thank you.
The Chairman. Thank you very much, Senator.
Senator Thomas.
Senator Thomas. Thank you, Mr. Chairman. I am going to take
just a second, since I did not make an opening statement, to
comment just a little bit.
Thank you, certainly all of you, for being here.
This is an issue that is very important I think to all of
us. I believe any comprehensive energy bill has to have an
electric title. There is nothing that touches more people in
energy than electricity. It seems to me we are at a crossroads.
One path is based on opening competition, being able to
compete, the way things have changed, the consumer to decide.
The other is more Federal regulation, more command and control.
I certainly am not interested in that. I am interested in
letting the marketplace work.
So it just seems to me that clearly we need to make some
decisions. We can sit there and say, well, things are
happening, but the fact is there are a lot of changes taking
place in this country with respect to energy and with respect
to electricity. It has to do with the investment. It has to do
with organization. There is just no question about how it is
happening.
We had some folks here a while back that talked about the
plans and how much investment there has been in generation
recently. It is damn little, and the same is true with
transmission. As demand goes up, our ability to fill that
demand has not. So we need to make some decisions, it seems to
me.
Generation has changed. It used to be, of course, when you
had a distribution system, why, you generated for yourself, and
that was it, very easy. Now we have market generators. There is
a movement of market generation around the country and you have
to be prepared to handle that.
We have regional differences. I am one who is not at all
interested in SMD. I do not think that is the way to resolve it
because there are differences. We see them very much in the
West, as a matter of fact. But nevertheless, it moves
nationally and so there has to be an element of national
movement so that you can move those things.
So reliability. We have had some experience with the lack
of reliability. We need to be sure we strengthen that.
Transparency into the deals that are being made in this
market generation. You just mentioned that being open.
I happen to think PUHCA can sufficiently be covered by SEC
and Justice, and that is an out-of-date thing, and PURPA can be
handled as well.
So as you can see, I have my prejudices fairly well
arranged on what we need to do. Now, how we do it is quite a
different thing. It is interesting. One of our members said do
it the right way. Well, if we ask everybody in this room which
is the right way, I do not suppose we would come out with a
consensus necessarily.
In any event, let me ask Mr. Svanda. Do you think RTOs
could be organized in such a way to do the job to represent the
differences in needs in various areas?
Mr. Svanda. I do believe that they can be, but I am also a
strong advocate for large recognition, large respect for
regional differences as they occur.
Senator Thomas. Is that not what RTOs are for?
Mr. Svanda. Absolutely, and that is why the RTOs should not
be a cookie-cutter, prescribed type of organization. They
should develop freely and voluntarily within the regions as
they are necessary. But they are an organization that will
work, and that is being proven out in many parts of the
country.
Senator Thomas. Hopefully that is something that can
happen.
Mr. Anderson, you suggest no action. How do you deal then
with the clear problems that lie ahead in terms of adequate
generation, in terms of movement of market wholesale power, and
so on?
Mr. Anderson. Senator, first of all, as far as generation
goes, the numbers that I look at say that we have plenty of
generation. I do not think that is the problem for the
foreseeable future.
Senator Thomas. You look at different numbers than I do, I
am afraid.
Mr. Anderson. Well, I would like to compare some numbers
with you sometime, Senator.
But I think that there are some problems in certain areas
of transmission. That is a different one.
If I could come back to the RTO issue just a minute and say
that the RTOs are very useful, very important, necessary
entities. But the RTOs cannot do everything. We have to have, I
think, also some things that are done in an interconnection-
wide basis, in a broader basis than this. All too often to us
there are regional differences because there are regions, not
because there are real differences. And if all we are going to
do is codify the differences that are out there today, we are
going to end up with balkanized markets.
We would like to see Federal legislation that encourages
competition. We would like to see Federal legislation that
reduces barriers to entry and makes it where customers have
more options in the purchasing of power.
What my message today is is that we have not seen in
legislation that looks likely to be enacted that it would
achieve these kind of goals. We see legislation that, instead,
would make it more difficult to have large, nondiscriminatory,
seamless electricity markets. And that is why I said our
recommendation is not to have legislation at this time.
Senator Thomas. Very well. But if you cannot move power--we
generate more power in the West, you do not generate much power
in New England. You have got to get it there somehow if you
want to have some choices. If you are going to put a throttle
on the movement of power, then you are not going to have
choices I believe.
Thank you, sir.
The Chairman. Thank you very much.
Senator Alexander.
Senator Alexander. I do not have any questions right now,
Mr. Chairman.
The Chairman. I thank you very much and thank you for
coming.
Let me just take a little bit of time. First of all, I
thank all of you for your testimony, and there will be a lot
more before we finish here today.
I do want to suggest that it is extremely difficult. I
think it is good that I am a new chairman and come in just
brand new because I begin to understand the complexity of
trying to put something together. There is a lot of concern
about this new idea, the transition to something like RESCs,
but the same kind of transition concerns plague the SMD or the
RTO development. The RESCs may be a new concept, but regional
solutions are not. Everybody has suggested there are. In fact,
your testimony is eloquent with reference to it. Great progress
is being made, even on a voluntary basis.
There are obviously many regional things that are taking
place, and I hope, as we move through--people are saying to me,
we do not want things done nationally. We want them done
regionally. We want the protection more of States' kinds of
rights. Yet, we do not want SMD because we do not think they
will do that.
So from my standpoint, what I would like you to do, if you
can, is to make some constructive recommendations in writing as
to how you think we can facilitate the transition to more
regional regimes that would be binding, not a set of voluntary
joining up of organizations.
The RESCs are not intended to be voluntary, nor are they to
be without authority. They have a problem of how do you get
them into existence, but they are intended to have the same
kind of authority ultimately as FERC. They are regional FERCs,
to put it in its simplest terms, with the Federal Power Act as
its underpinning of authority.
With that, let me just ask some general questions. Do all
of you assume that there are regional markets, or are there
single markets? Can we just go down the line?
Mr. Svanda. There are regional markets, but there are very
important interfaces between those regional markets that need
particular attention too.
The Chairman. Mr. Gifford.
Mr. Gifford. Yes, there are most certainly regional
markets. Your biggest challenges come out West where the
distances are greater and the terrain is tougher. To say that
there are regional markets in the West may be an ambitious
overreach, but you have regional markets.
Mr. Norlander. With the possible exception of Texas, I
think that most of the contiguous States trade energy across
State lines.
The Chairman. And they were in to see me yesterday saying
that they have what might be considered their own regional
market.
Mr. Norlander. For example, New York has its own system
operator, and it does import energy from Canada. It exports a
bit, although there are always inter-ties, but much of the
energy is within the State.
The Chairman. Let us get you, John, Mr. Anderson.
Mr. Anderson. Mr. Chairman, yes, I think there are regional
markets. But I think it is the definition of the region that we
should look at, and I have quite a different definition. To me
the United States is divided by the Rocky Mountains and by the
sovereign Nation of Texas, which has decided to turn its
electricity from AC to DC and then back into AC. The western
interconnect is a market. The eastern interconnect is a market,
and there are little flows across the Rockies.
What I am concerned about is if we then start talking about
subregional markets within those regions, we have artificially
created and therefore balkanized and made the market smaller.
And that is what we need to avoid.
The Chairman. Just hypothetically, what do you think,
starting on this end, the effect of FERC's proposed SMD
rulemaking would have been if the RESCs had been an available
option to the States?
Mr. Svanda. I believe that many of the concerns that I have
raised would have been a part of the discussion, and so some of
the weaknesses that I highlighted would have been dealt with. I
think that is true also of the SMD proposal by FERC. As my
testimony indicated, we have all learned a great deal from the
focused discussion, and I think that is beneficial. It has been
painful, but nonetheless, the regional concepts that I have
espoused and others have talked about in this panel have really
come to the surface as an outgrowth of that standard market
design discussion that FERC has fostered, and that is very
beneficial for all of us.
We do understand that the West is the hydro West and it is
the fossil West. We understand that there are other components
within Michigan and the Midwest that look very different from
those aspects of the western region. So those can be
accommodated and only on a regional basis and only by
interacting regionally and understanding each other can we get
to a solution that respects and yet moves us forward.
The Chairman. Let us go quickly.
Mr. Gifford. Yes. I think if it was an either/or, an RESC
or the SMD, you would probably still have a lot of States and a
lot of regions saying neither. As the Senator is very well
aware, out West you have a big hole in the jurisdictional donut
with large public power presence that is not FERC
jurisdictional. And that problem would have to be solved to
have anything resembling a coherent and fair regional market.
The Chairman. Right.
Mr. Norlander. I think the fundamental rift, if there is
one, is between those who would adhere to the filed rate, cost-
based system of setting wholesale rates, as the original Power
Act provided, and those who would go to a market system. Those
of our members who are participating in regional activities
probably would be working on the same kinds of concerns of
market design, market power, and market concentration.
Thank you.
The Chairman. Mr. Anderson.
Mr. Anderson. I think the big difference between the RESC
and the SMD is the ``S'' and that is called standardization. If
you have a series of RESCs that are different, then you have
balkanized the market. You have created seams around it. You
have made smaller markets. If you standardize the market, if
you had a series of RESCs that were all identical, they all had
precisely the same rules and regulations and that sort of
stuff, then we have the larger markets again, and that is what
we think is very good. We need the large markets to be able to
have real competition in electricity.
Mr. Svanda. May I react to that?
The Chairman. Yes, sure.
Mr. Svanda. I agree in an ideal world with Mr. Anderson's
comments, but we do not live in an ideal world. We also are not
creating this system from scratch. We in fact have to recognize
where we are coming from and move from there as opposed to an
idealized type of beginning.
I agree completely. Standardization not just across this
country, but across this continent would be beneficial, but we
need to move forward, and the reasonable way to move forward is
working with the regions as they exist today.
The Chairman. I have one last question, but I will make an
observation. I would assume that all of the concerns that have
been expressed will be harmonized when we hear from the
Chairman of the FERC. I assume he will say everything you have
said is so, and I will take care of them all. Just let me do
it. That is what I assume SMD is all about. I think he is going
to start by saying he thinks regionalization has great merit.
In fact, I know he will. And then he will proceed to suggest
that he will take care of it. And I know he has such authority,
but I have so many Senators saying we do not want to let him do
it. So everybody is looking for another way.
One last rather technical thing. There are some who
advocate legislating a jurisdictional delineation between
bundled and unbundled transmission. Who feels expert enough to
tell us the advantages and disadvantages to those kinds of
proposals?
Mr. Gifford.
Mr. Gifford. I will take a shot, Mr. Chairman. I would
think defining a regulatory category when we are not really
quite sure if that is an actual product that a consumer or an
end user would be interested in, be that end user an industrial
or a retail customer, would be one of those instances of a
potential regulatory mistake where we create an artificial
legal category that creates a whole bunch of distortions
throughout the market and inhibits kind of the organic
organization of a really competitive market as opposed to kind
of a fake, bounded competitive market.
The Chairman. Would you want to answer that, Mr. Svanda?
Mr. Svanda. I would be happy to. Thank you. There are great
legal minds working on either side of the jurisdictional issue,
and so I will not go there.
I guess my answer is more from the practical aspect of
this, and that is a recognition of the laws of physics that
apply to electricity, that in fact much of transmission
operates in interstate commerce, which squares with our
principles in that regard. And the institutions that we create
need to respect those and work with them.
The Chairman. Yes, Mr. Anderson.
Mr. Anderson. I would like to pick up on what my good
friend Commissioner Svanda just said, which I agree with
completely, but I would like to also say that all too often the
difference between bundled and unbundled comes down to an idea
that one entity, usually an investor-owned utility or its
regulator, wants to protect its native load customers and say
we have a duty and a responsibility to protect our native load
customers. Therefore, we should control bundled service.
A very wise FERC Commissioner roughly 10 years ago made the
statement once that everybody is somebody's native load, and
that is very, very true. So just because a customer is not the
native load of that utility, that customer is the native load
of somebody else's utility. So it is extremely important that
transmission be treated in a nondiscriminatory way for every
customer. That to me requires a single transmission tariff for
all customers, whether they are bundled or unbundled.
Thank you.
The Chairman. All right. Yes, sir. You are last.
Mr. Norlander. Well, I think the issue that kind of cropped
up with the FERC-lite I think illustrates a bit of this
problem. Much of public power is required by statutes or long-
term contract to be provided for the benefit of customers. I
know in New York residential customers get an allocation, as do
industrial customers. And those allocations generally involve
extremely low cost hydropower and, generally speaking, there is
a transmission component of that price that is a cost-based
component and the transmission is carried by the public power
entity.
The moment that the FERC jurisdiction comes in and says now
we are going to perhaps auction off the transmission line to
those who value it the most on a hot day, it destabilizes that
price and makes it volatile, unpredictable. I think it is that
nervousness that likewise affect State regulators in other
areas of the country that still have bundled rates. I think
from what I have heard at least, their objection is not so much
to open access but as to the pricing and loss of control and
lost of stability and predictability of the transmission
component of rates.
The Chairman. Senator Bingaman, do you have any further
questions?
Senator Bingaman. No. You have several others panels. I
appreciate these witnesses.
The Chairman. Let us move on. We thank you all very much.
We are glad we stayed on time and you helped contribute to
that.
The next group of panelists, please. Mr. Phillip Harris,
president and CEO of PJM Interconnection; James P. Torgerson,
president and CEO of Midwest Independent Transmission System;
and P.G. ``Bud'' Para, director of legislative affairs,
Jacksonville Electric Authority.
Mr. Harris, would you like to start please? Thank you very
much for coming.
Mr. Glazer. Mr. Chairman and members of the committee, the
bad news is I am not Phil Harris. He is on his way here.
The Chairman. You are not. Okay.
Mr. Glazer. But if you wish, I will be happy to start out.
The Chairman. What is your name?
Mr. Glazer. My name is Craig, C-r-a-i-g, Glazer, G-l-a-z-e-
r.
The Chairman. G-l-a-z-e-r?
Mr. Glazer. Yes.
The Chairman. And why do you feel like you can take his
place? Who are you?
[Laughter.]
Mr. Glazer. I do not feel like I can take his place. I am
very humbled by this whole thing. I am the vice president of
government policy for PJM Interconnection.
The Chairman. We will tell him that you were all they had.
[Laughter.]
The Chairman. Go ahead.
STATEMENT OF CRAIG GLAZER, VICE PRESIDENT OF GOVERNMENT POLICY,
PJM INTERCONNECTION, L.L.C.
Mr. Glazer. Thank you, Mr. Chairman and members of the
committee. I am Craig Glazer, vice president of government
policy for PJM. Prior to serving in that role, I was for 10
years a member, along with Dave Svanda, of the regulatory
commission. I was chairman of the Ohio Public Utilities
Commission and appeared before this committee in that role as
well. So I have been around these issues for some time,
including Federal-State issues.
My basic message today is, as you deal with these complex
issues, I have some good news for you and that is that the
present system is working. It is working well in our region,
and I think our region in many ways could potentially set a
model for other regions. I am not saying, therefore, our region
is the answer to all the rest of the Nation. I am not saying
that at all. But I am saying that before we create new
institutions, I would ask you to take a look at some of the
lessons of experience, and the facts actually speak for
themselves. Let me give you just some examples.
In our region, we are the independent system operator,
basically the air traffic controller, the grid operator, for a
five-State region that includes Pennsylvania, New Jersey,
Maryland, Delaware, Virginia, and the District of Columbia. It
actually serves this building, among other things. We have had
other companies join us and we are soon to be serving a seven-
State region that will go out to Chicago, Illinois and
encompass even more of the State of Virginia, as well as
Indiana and parts of Tennessee.
The good news story is that the market has really worked,
and the lesson from that is these things can work I think with
appropriate Federal-State partnerships and a lot of hard work.
It is not to say that it is easy, but I think the facts speak
for themselves.
In the Mid-Atlantic region, we have seen improvements in
generator performance, actually the efficiency being driven by
competitive forces, with an increase of 35 percent in generator
performance over the last 5 years. Prices in our marketplace
have remained both stable and competitive. Although 2002 was 25
percent warmer than 2001, the average load weighted price in
PJM actually dropped by 13.8 percent. So the weather got
hotter, but the prices got lower. And that is an example of
more generators wanting to come in providing service in the
region.
Infrastructure investment. We have got more than 6,000
megawatts of new generation that has gone on line, another
24,000 megawatts in the queue, and over $725 million in
transmission infrastructure investment since the year 2000.
How has this worked? It has not been easy. The lessons that
we have learned are this.
One is--and Phil Harris would say this better than I--but
little steps for little feet. Take an incremental approach. We
worked with our State commissions. We introduced markets one at
a time. We did not do the big bang theory like California did,
and we made sure we cemented those relationships with the State
commissions up front. We entered into a memorandum of
understanding with our State commissions and worked with them
on planning issues, as well as capacity and related issues. So
lesson one was sort of take an incremental approach.
Lesson two was that the system really can work, and it can
work if in fact we do not get wrapped around the axle on
Federal-State jurisdictional issues but we try to work through
it. And let me take the siting issue as a good example.
We have not run into the siting problems. We understand the
issues in the West are far different with regard to siting. But
we get the States involved in our regional transmission
planning process up front. It ferrets out what are the siting
issues, what are the siting problems, what is the best
solution, be it transmission, generation, or demand side, up
front. As a result of that, everyone has a seat at the table.
It is an open and transparent process, and that has been very,
very helpful to our processes.
Just a couple of comments on the legislation itself. We do
not think that the committee ought to divest FERC of
jurisdiction over RTOs and RTO formation. We are concerned with
some language in the staff draft that seems to say that an RTO
can be basically any form or any shape that a particular entity
proposes. These things have to make sense. They have to fit
with regard to natural markets. So that is one of our concerns.
The additional concern with the language is that, again, we
have been able to work through these issues with our States. We
are afraid we are going to get another entity that the industry
has to deal with, and I am not sure this is the time to create
new bureaucracies.
The same with regard to transmission siting and the
reliability issues that I had mentioned previously.
Finally, let me touch on participant funding. We actually
support participant funding. We have been doing participant
funding in PJM from the beginning, basically that the person
who causes the cost of the upgrades should pay for it. That
being said, some of the language I think may take away
flexibility. We have a system where if an upgrade is needed
here in the Washington, D.C. area, the customers in that area
pay for it. We do not want to have that cost transferred to
Erie, Pennsylvania or customers in California paying for costs
in Oregon, et cetera. So we think some more flexibility with
regard to that might be helpful.
On transmission incentives, we think the committee is going
in the right direction. We think we need incentives to build
transmission, and the kind of flexible language with policy
direction from Congress has been very helpful.
Let me close by saying the bottom line is the systems can
work. Federal-State relationships in our region have been good.
Our State commissions will attest to a good working
relationship with FERC and with us. It does not mean we do not
have issues and problems. We do. But there is an element of
trust there. I think as we build that trust in other parts of
the country, I think that rather than new institutions may be
the way to move forward with these markets.
Thank you very much.
[The prepared statement of Mr. Harris follows:]
Prepared Statement of Phillip G. Harris, President & CEO,
PJM Interconnection, LLC
summary
``. . . (M)arkets don't always operate efficiently because
buyers and sellers don't always have access to the information
they need to make optimal choices.''
Akerlof, Spence & Stiglitz, Nobel prize
winners for economics
Mr. Harris urges that Congress both do no harm to markets and
regions that have been successful and look to actual facts from regions
that have been successful as it considers legislative solutions. In his
testimony, Phillip Harris notes that with five years of operating
experience, the successes in the Mid-Atlantic region underscore the
fact that competitive wholesale markets can work and do provide real
value to consumers both in bundled and unbundled states. He points out
critical facts that have proven the success of the Mid-Atlantic
competitive model:
Performance: In the Mid-Atlantic region, generator
performance has improved by nearly 35% over the last five
years;
Prices: Prices in PJM remain both stable and competitive.
Although 2002 was 25% warmer than 2001, the average load
weighted price in the PJM market dropped by 13.8%;
Infrastructure Investment: More than 6000 MW of new
generation have gone on line in the region with another 24,500
MW in the interconnection queue. Over $725 million in
transmission infrastructure has been committed since 2000;
New Markets: PJM operates nine separate voluntary wholesale
markets and recently successfully instituted new markets for
regulation and spinning reserves.
In commenting on the Staff March 20, 2003 draft, Mr. Harris details
that there are existing institutions and processes presently in place
in the Mid-Atlantic region which obviate the need for creation of a
Regional Energy Services Commission. He argues against depriving FERC
of authority to review the size and functions of RTOs. In addition he
said that transmission planning and siting to relieve congestion should
remain a collaborative effort between FERC, the states and the RTO
rather than being assigned to the Secretary of Energy or exclusively to
FERC or an RESC. He raises concerns with the lack of flexibility in the
proposed Participant Funding language and the lack of a specific call
for RTOs to administer competitive wholesale markets. Mr. Harris
embraces the legislative language regarding transmission rate
incentives both for its flexibility and its strong policy direction.
He promises PJM's pledge to work with the Committee to ensure
balanced legislation that identifies the real need to restore trust in
the marketplace.
statement
This observation from these Nobel laureates highlights exactly the
conundrum we face today. We are faced with a crisis of confidence in
this industry. Our collective task must be to restore the trust and
confidence which is so critical to fund and manage this essential
product. By working together, providing real time information that
makes markets work and by building institutions that can earn the trust
of the public, we can restore the awe and respect for this industry
that was first earned almost 100 years ago by Thomas Edison and his
colleagues. We have begun down that road in the Mid-Atlantic region.
With five years of operating history, we have proven that markets can
work and do provide real value to consumers both in bundled and
unbundled states.
My name is Phillip Harris and I am the CEO and President of PJM
Interconnection, L.L.C. PJM operates the world's largest competitive
wholesale electricity market. We serve seven states, including the
District of Columbia (including this building) and will soon be
expanding our market to a 14-state region. Large systems such as those
of American Electric Power and Commonwealth Edison have expressed their
intent to voluntarily join our markets. We are working closely with our
sister entity, the Midwest ISO, to develop a joint and common market
that will provide the benefits of a transparent voluntary wholesale
energy market to a region covering 27 state and a Canadian province and
reaches 33 million customers. This market has been independently
estimated to provide savings to customers of over $7 billion over the
next ten years.\1\
---------------------------------------------------------------------------
\1\ ``Impact of the Creation of a Single MISO-PJM-SPP Power
Market'', July 2002 by Energy Security Analysis, Inc.
---------------------------------------------------------------------------
As you struggle with these difficult issues, I urge you to look
closely at the lessons of history. In the Mid-Atlantic region, we faced
many of the same issues that other regions are facing today--federal/
state jurisdictional disputes, the role of municipals and cooperatives
in the marketplace, siting concerns etc. Although I am not here to
indicate I have all the answers to these issues, I am here to urge that
in drafting legislation you do no harm to markets and regions that have
been successful. Moreover, I urge you not to reach snap judgments based
on fiery speeches from various industry segments without looking at the
actual facts from regions that have gone through many of the
transformations you are considering today.
The Mid-Atlantic Story: The critical test is the test of use. Our
five years of history as a fully functioning Regional Transmission
Organization (RTO) can provide critical lessons for what can work.
Back in 1992, this Congress enacted the Energy Policy Act which
made wholesale competition in electricity the law of the land. This was
a natural consequence of other Congressional action including passage
of the Natural Gas Policy Act of 1978 and orders from the Federal
Energy Regulatory Commission (FERC) in both the gas and electric
arenas.
In the Mid-Atlantic, we made this Congressional mandate work. And
although many say that the PJM model is different because we arose from
a tight power pool, in April of last year we extended the concept once
again to a service area that was never part of the original power pool
and showed that one can develop a successful market over multiple
states, including bundled states and over multiple reliability councils
and regions. The expansion of PJM to encompass the Allegheny Power
system alone has lead to a $100 million annual savings to entities
serving customers in the overall region. And for this reason, new
entrants such as American Electric Power, Commonwealth Edison, Dayton
Power & Light, and Dominion Virginia Power which together comprise over
64,000 MWs, have sought to join these markets.
The facts speak for themselves:
The market model has worked both in the original power pool area
and in the broader region. Just a few real life statistics prove the
point:
Size: Size does matter. The eastern interconnection is one
large 650,000 MW synchronous motor. With our expansion we will
total over 130,000 MWs representing 20% of the entire eastern
interconnection. We have over 215 members actively trading
every day in our marketplace. In 2002 we cleared over 178,000
transactions which have totaled over $15 billion in energy
trades since the opening of the markets in 1997. Market
participants come from every state including the southeastern
part of the United States and the Canadian provinces;
Performance: The performance record of generators has
improved by nearly 35% since 1997. This improved performance
translates into $1.2 million in savings on a hot summer day;
Prices: Prices are both stable and competitive. Although
2002 was 25% warmer than 2001, the average load-weighted
wholesale price in PJM dropped by 13.8%;
Generation Infrastructure: More than 6000 MW of new
generation have come on line in the region, another 6500 MW are
under construction with another 24,500 MW in our
interconnection queue;
Reduced Congestion: The total hours of transmission
congestion actually decreased in 2002 from 2001 despite greater
imports.
New Markets Instituted: PJM currently operates over nine
different markets that ensure both the delivery of energy,
capacity and ancillary services to customers. We have most
recently implemented successful markets for regulation and
spinning, two ancillary services that traditionally were
supplied through command and control processes. These new
markets have performed extremely well. We continue to look for
additional market-based solutions to the provision of key
services associated with the delivery of electricity.
This is not to say that our market is perfect--it isn't. We need to
do a better job in areas such as achieving true demand response and
finding market-based solutions to ensure reliability. Nevertheless,
with the right mix of transparency, independence and trust, wholesale
competition in our region has spurred the very sought of efficiency
that has made Congress' 1992 vision a reality.
With this backdrop, let me address each of the issues you raised
through the Staff draft of March 20, 2003. I appreciate that this is a
Staff draft intended to drive discussion on these critical issues. The
staff should be applauded for framing the issues for debate and
discussion.
i. formation of a regional energy services commission
You will undoubtedly hear much testimony, pro and con, on the
minutiae of this proposal--who sits on the Commission, what is its
relation to state PUCs, is it a creature of federal or state statute,
what constitutes a region etc. Rather than becoming embroiled in the
minutiae, I would like to go through each of the goals outlined for the
Regional Energy Services Commission (RESC) in the Staff draft. I would
suggest to you that there are institutions and processes presently in
place that are already addressing these issues and that can meet these
goals and the needs of the states without requiring the creation of yet
another regulatory institution.
The Staff draft allows the RESC to perform the following tasks:
undertaking transmission infrastructure planning,
certification and siting;
identifying resource needs;
setting rate design and revenue requirements;
monitoring markets for the abuse of market power;
promoting demand response, distributed generation and
advanced technologies;
cooperating with federal land agencies;
promoting reliability standards; and
undertaking enforcement.
Within our region, each of these tasks is being accomplished
collaboratively through close cooperation among ourselves as the RTO,
the state and federal regulators. In short, the system is working, not
because we have created new institutions but rather because we have
worked hard to build trust among the existing institutions. As a
result, although not without controversy on any given day, we believe
the Mid-Atlantic/Midwest PJM region is a model of the appropriate
balance between state and federal authority. And you should not take
our word for it--rather look at the statements made by our own state
commissions in numerous public filings.
From its very inception, the PJM Board collaboratively developed a
Memorandum of Understanding with the state commissions in our region.
The MOU commits the RTO to work with the state commissions on these and
other critical issues. We have subsequently built on the MOU to provide
a key state role in each of the areas listed above. Specifically:
Transmission Planning and Siting: We have the first approved
regional transmission planning process. The states participate actively
in that process to ensure that state needs are identified and
addressed. Moreover, should there be difficulties in siting a
particular upgrade, these issues are identified early on in the
regional transmission planning process rather than at the end of the
line after critical time has been lost or resources expended. Under
this regional process, over $725 million of transmission investment has
been undertaken since 2000 alone.
Most recently, PJM has submitted to FERC a revised planning process
that takes regional planning to the next level by addressing the need
to plan to relieve congestion. Our proposal calls for a critical
balancing between the role of the marketplace and the role of the
regulator in economic planning and provides an active role for the
states in addressing the particular needs of customers in load pockets
where traditional market forces may not always provide adequate market-
based solutions. These processes are either in place or proposed and
all work under the existing structure of federal and state regulation;
Identification of Resource Needs--The RTO independent Board
presently sets the reserve margin for the region as part of its
fiduciary duty to maintain the reliability of the system. We have begun
discussion with our states on the concepts proposed by FERC for a
Regional State Advisory Commission which would, among other things,
provide critical input or even set the reserve margin for the region.
At the end of the day, someone needs to be able to set this margin and
meet the resource needs promptly and clearly without questions as to
accountability or endless litigation. Nevertheless, the state role in
this area is extremely important and one that we embrace. We are
working to accommodate the state role under our existing model. No
additional bureaucracies are needed to address this issue--simply hard
work and trust between the RTO, the state commissions and the market
participants;
Rate Design and Revenue Requirements--This issue is one which
involves the resolution of difficult equity and cost shifting issues.
We embrace the elimination of pancaking of rates. But as we have seen,
somewhere there is a border and a revenue stream which will be affected
through rate pancaking elimination. In short, it is difficult to solve
this issue merely by focusing on the needs of one region. Rather than
creating a new institution, we need clear regulatory guidance on how
these lost revenue and cost shifting issues should be addressed.
Market Power Review--This too is an issue that is already being
addressed both at the state and federal level in our region. Although
more work is clearly needed, the answer here too is not to create
another institution which will require its own staff and technical
expertise that could duplicate the resources already available at FERC,
the state level and within the RTOs.
At the end of the day, someone needs to weigh the facts and
determine whether market power has been abused. It does no good for a
regional entity to find no market power in its region when an entity in
an adjoining region finds that very same action has caused market power
abuses in its own marketplace. Even within a region, the industry is
entitled to some parameters to determine what constitutes acceptable
and unacceptable practices as marketers make split second decisions.
The PJM Market Monitoring Plan calls for the PJM Market Monitor to
respond to state requests and perform analyses at the request of
states. We have done this on a number of occasions. The lessons from
our region demonstrate that we need proactive and prompt leadership
from the Market Monitor, quick action from the regulator and state
attention to the issue. What we do not need is to create yet another
entity to address the critical dual role of FERC and the states in this
area;
Demand Side Response, Distributed Generation, Fuel Diversity and
New Technology--In our region, the states rather than the FERC already
dominate in these areas. The states worked with and supported before
FERC adoption of our demand side response program. We have appointed
individuals specifically assigned to these tasks to ensure that these
programs are receiving the attention they deserve.
More demand side response is needed. The key role here is for the
states not for a Congressional mandate and new institutions that may
interfere with appropriate state prerogatives.
RTO Formation--Depriving FERC of authority in this area may be a
solution in search of a problem. The states have played an extremely
active role in addressing the appropriate borders of RTOs,\2\ whether
RTO mergers should occur \3\ and RTO governance issues. In short, the
states have held our feet and FERC's feet to the fire by appropriately
demanding cost/benefit analyses and independent governance before
lending their support. And history shows that the FERC has responded to
state demands in each of the regions in the country. The track record
of FERC/state collaboration in this area is a good one both in the
Midwest and Northeast regions. Congress should avoid inadvertently
setting this progress back by assigning the difficult task of drawing
RTO borders to a new institution.
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\2\ Alliance Cos. 97 FERC 61,327 (2001).
\3\ PJM Interconnection, 101 FERC para.61345 (2003).
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In short, we urge the Committee to look at models that have worked.
They have worked well with minimal Congressional intrusion because the
parties worked to build trust and confidence rather than resorting to
political battles. We think that you should look at models such as
ours, which are accomplishing the goals the Staff envisions for the
Regional Energy Services Commission, before you enshrine yet another
institution for this industry and for consumers to have to interface
with.
ii. reliability standards
We had raised considerable concerns with prior drafts of this
legislation which, among other problems, lacked a definition of
reliability. Prior drafts also did not reflect recent changes in the
marketplace such as the development of RTOs. We worked with Committee
Staff and stakeholders to improve the language and are pleased that it
is much shorter and better drafted. Furthermore, it now contains a
recognized definition of reliable operation, a conflict resolution
provision, a requirement for FERC guidance on implementation and better
consumer protection. We still remain concerned that we are creating yet
another institution which, at least for the eastern interconnection,
could move us towards a command and control approach to enforcement and
away from using the market to extract far more appropriate penalties
for non-compliance. The language is better than it was and for that we
thank the Committee staff, both in the House and Senate for their work
at improving this proposed legislation;
iii. transmission siting
The staff draft removes siting authority from the states and places
it in the hands of the Secretary of Energy and FERC (or, if applicable,
a RESC) in those cases where the Secretary finds there to be congestion
``at a level that affects reliability or economic security.''
Quite simply, the decision as to whether a particular area is
congested is an extremely complex task--in PJM, we have found that the
slightest changes in power flows can cause an area that is congested
one day to not be congested the next. Moreover, not all congestion is
bad--one need weigh, through an appropriate cost/benefit analysis,
whether the cost to clear congestion that is causing increased costs
but does not threaten reliability is outweighed by the cost to remedy
that congestion. To automatically require that all congestion that
``affects economic security'' be relieved runs the risk of ``gold
plating'' the network and not allowing new technologies in the areas of
demand response and generation to compete with transmission solutions.
In short, the decision as to whether or not an area is congested and
needs relief should be determined by the marketplace relying on
technical information provided by the regional transmission
organization or the system operator. This highly complex issue should
not be concentrated in a Washington agency far removed from the
technical, minute-by-minute performance of the grid. By implementing
regional planning as a first step combined with incentives for new
construction and regional cooperation on siting issues, we can solve
this issue without creating a new bureaucratic hurdle for the industry.
iv. transmission investment incentives
The incentive language in the Staff Working Draft provides an
appropriate level of flexibility while setting forth a broad
Congressional principle. PJM is committed through its model to ensuring
that proper information is provided in the marketplace so that
generation, transmission and demand response solutions can all compete
against one another.
This language, although already reflecting actions that FERC has
underway, appropriately reinforces the sense of Congress on these
critical issues.
v. transmission cost allocation (participant funding)
PJM has long employed the principle of participant funding. We have
turned it from an abstract concept to a working tool for the proper
assignment of cost responsibility associated with network upgrades. PJM
employs a ``but for'' analysis--but for the action of a particular
generator, would the upgrade have been needed? If the action were
otherwise needed in the future but the addition of a generator has
accelerated the need for the upgrade, then the generator bears that
cost but is entitled to a credit for the fact that the upgrade would
otherwise have been needed. That being said, even if it is determined
that the cost should be borne by the general class of ratepayers, those
costs are borne by that particular zone--namely the service territory
of the transmission provider. It would be no more fair for customers in
Erie, PA. to pay for an upgrade needed in Northern New Jersey than it
would be for customers in Oregon to pay for reliability upgrades needed
in Los Angeles. In short, the language, although seemingly embracing
participant funding, would rather have the effect of straitjacketing
the FERC or RTOs from applying more tailored remedies to be funded by
the local zone rather than throughout the system. By so doing, the
language would decide by Congressional fiat critical judgments that
need to be made on a regional level based on specific facts and
circumstances.
vi. market transparency/anti-manipulation enforcement
This language would require that FERC establish ``electronic
information systems'' to provide necessary price transparency. Although
the language is well-intentioned, it focuses on the tool rather than
the key ingredient that will make the tool work. In our market, we
operate a transparent voluntary spot market for electricity. Making
that market work requires the kind of information this proposed
legislation calls for. However, since under the staff draft RTOs are
not required to operate spot markets, there is no assurance that the
tool will provide the kind of day ahead and real time open trading
platform that an RTO can offer. In short, without a market-based system
that works hand in hand between the financial market and the physical
market, there will be little meaningful information to report. This
would be the equivalent of disbanding the New York Stock Exchange but
still requiring brokers to report individual bilateral transactions.
One would still not have the organized marketplace that provides open,
transparent prices that are verifiable. One need only look at the
problems found recently in bilateral trader reporting of natural gas
prices in trade publications to see why an approach without an actual
exchange is problematic. We believe that RTOs should operate day ahead
and real time spot markets which are voluntary. Through the operation
of such markets, the kind of reporting called for in this language
would be automatic and not require separate Congressional action.
We feel the Staff draft is asking the right questions. We think the
answer is in strengthening our existing institutions and learning from
the incremental approach we have embraced in the mid-Atlantic in order
to restore needed trust and confidence in the industry. We stand ready
to work with the Committee on this pressing task.
The Chairman. Thank you very much, Mr. Glazer.
Now we are going to have Bud Para. If you will testify,
please. Thank you for coming.
STATEMENT OF P.G. ``BUD'' PARA, DIRECTOR, LEGISLATIVE AFFAIRS,
JACKSONVILLE ELECTRIC AUTHORITY, ON BEHALF OF THE SETRANS RTO
SPONSORS
Mr. Para. Thank you, Mr. Chairman and members of the
committee. I want to thank you for this opportunity to be
involved in this process.
I am with JEA. JEA is the largest municipal electric
utility in Florida. We provide electric, water, and sewer
services to more than 1 million people in the city of
Jacksonville, Florida.
I am here today testifying on behalf of the SeTrans
Sponsors. That is nine utilities in the Southeast that are
currently developing the SeTrans RTO for the Southeastern
United States. The SeTrans Sponsors include a diverse group of
transmission owners. We have three investor-owned utilities:
Cleco Power, Southern Company, and Entergy. We have three
municipal utilities representing the city of Tallahassee,
Florida, the city of Dalton, Georgia, and JEA. We have two
electric cooperatives: the Georgia Transmission Company and the
Sam Rayburn G&T Cooperative. And we have one municipal joint
action agency, MEAG Power in Georgia.
The SeTrans RTO would be one of the largest RTOs with
electric systems in seven States: Alabama, Arkansas, Florida,
Georgia, Louisiana, Mississippi and Texas.
The SeTrans Sponsors support open access to the
transmission system. We do not believe it is necessary, and we
think that it may be inadvisable to make sweeping legislative
or regulatory changes to the electric industry at this time.
The electric system in the Southeast works today.
The SeTrans Sponsors are working with other stakeholders,
customers, generators, and State commissions, to develop an RTO
that will work in the Southeast and that meets the FERCs
requirements, but also one that will not cause tremendous harm
to the electric industry, which is crucial to the Southeast.
We do not now understand what happened to cause the energy
crisis in California and the Northwest, and we feel that we
must understand what went wrong there before we change the
electric industry in the Southeast. We do not want to make that
same mistake twice.
The SeTrans Sponsors believe that to be successful in the
Southeast, an RTO must be voluntary. It must be designed to
recognize regional flexibility and that there must be no
standard market design, no SMD. Non-FERC jurisdictional
utilities like JEA must be able to join the RTO without
becoming FERC jurisdictional. Non-jurisdictional utilities
would, of course, comply with their contractual obligations to
the RTO, when and if they voluntarily join the RTO.
And that is why JEA is involved in developing the SeTrans
RTO. We want an RTO in the Southeast that will work for us and
that will benefit our customers. If we join the SeTrans RTO,
JEA will live up to its contractual obligations and we will
participate in the market according to the RTO rules.
Joining the SeTrans RTO, however, should not make JEA
subject to FERC jurisdiction, particularly not such that FERC
can come in and change the rules, effectively change our
contract unilaterally without our agreement. If FERC changes
the rules, then JEA should be able to leave the RTO and get out
of this changed contract.
There are at least three impediments to completion of the
proposed SeTrans RTO and to the continued participation of the
current SeTrans Sponsors.
First, there is the lack of regional flexibility. We must
have regional flexibility in order to get our State and local
approvals, without which there will be no RTO. Without the
flexibility to structure the SeTrans RTO in a manner that meets
our needs and the needs of the Southeast and that benefits the
Southeast, we will not get the approvals from our State and
local regulators that we must have for SeTrans to be
successful.
I ask you to read the letter from SEARUC to FERC which was
attached to my testimony. It explains the views of the
Southeastern Regulatory Commissioners quite well.
The second impediment is the standard market design. The
FERC SMD rulemaking is a distraction. It undermines regional
flexibility and it cannot be right for every region no matter
what is in the SMD because the regions are not standard.
Congress, if it does anything, should direct FERC to abandon
its SMD efforts.
The third impediment to development of the SeTrans RTO is
the recent FERC attempts to expand its jurisdiction. FERC has
recently issued decisions in which it attempts to expand its
jurisdiction over retail activities historically subject to
State and local authority. FERC is also attempting to expand
its jurisdiction over non-jurisdictional utilities that
voluntarily join RTOs. These actions by the FERC discourage JEA
from participating in RTOs.
In conclusion, Mr. Chairman, members of the committee, the
SeTrans Sponsors do not believe we need electricity legislation
today. The time is not right. We do not yet understand what
happened in the West, and there is no crisis to be fixed in
Southeast.
I thank you for your attention and welcome any questions.
[The prepared statement of Mr. Para follows:]
Prepared Statement of P.G. Para, Director, Legislative Affairs,
Jacksonville Electric Authority, on Behalf of the SeTrans RTO Sponsors
Mr. Chairman, Members of the Committee, my name is P.G. (Bud) Para,
and I am the Director, Legislative Affairs for JEA, the largest
municipal electricity utility in Florida. I am testifying today on
behalf of the transmission owners that are developing a Regional
Transmission Organization (RTO) in the Southeast, the SeTrans RTO. I
will refer to this group of transmission owners throughout my testimony
as the SeTrans Sponsors. The SeTrans Sponsors include the following:
Cleco Power LLC; Dalton Utilities (acting as agent for the City of
Dalton, Georgia); Entergy Services, Inc. (acting as agent for Entergy
Arkansas, Inc., Entergy Gulf States, Inc., Entergy Louisiana, Inc.,
Entergy Mississippi, Inc., and Entergy New Orleans, Inc.); Georgia
Transmission Corporation; JEA (formerly Jacksonville Electric
Authority); MEAG Power; Sam Rayburn G&T Electric Cooperative, Inc.;
Southern Company Services, Inc. (acting as agent for Alabama Power
Company, Georgia Power Company, Gulf Power Company, Mississippi Power
Company, and Savannah Electric and Power Company); and the City of
Tallahassee, Florida.
We appreciate the opportunity to share with you our views on the
proposed electricity legislation.
The SeTrans Sponsors represent a diverse group of transmission
owners in the Southeastern region of the United States. The SeTrans
Sponsors' cumulative transmission investment is approximately $9.0
billion, and our systems include approximately 48,000 miles of
transmission lines rated 40 kV or higher. The SeTrans RTO would include
electric systems in seven states: Alabama, Arkansas, Florida, Georgia,
Louisiana, Mississippi and Texas. The proposed SeTrans RTO would be one
of the largest RTOs in the nation.
Mr. Chairman and Members of the Committee, the SeTrans Sponsors
appreciate your efforts and the attention that you are giving to our
industry. As a group, we join you in supporting a competitive, reliable
wholesale power market to benefit consumers. Nonetheless, we believe it
is not necessary at this time to make sweeping legislative or
regulatory changes in the regulatory structure of the electric industry
across the United States.
Importantly for the SeTrans Sponsors, the existing regulatory
structure performs well in the Southeast and there is no need for broad
changes to the electric regulatory structure in the Southeast. We do
not believe the electric industry in the Southeastern United States is
broken, and we therefore see no need to fix it. The SeTrans Sponsors
include a broad cross-section of transmission owners--electric
cooperatives, municipalities, municipal joint-action agencies and
investor-owned utilities. Three of the sponsors are public utilities
subject to the general jurisdiction of the Federal Energy Regulatory
Commission, but six are not. These utilities have co-existed in the
Southeast for a long time and we believe our region enjoys a vibrant
wholesale electricity market. Moreover, the SeTrans Sponsors are
working together today to develop an RTO model that serves the needs of
the wholesale market in the Southeast, as well as those of the
investor-owned, publicly-owned, and cooperatively-owned utilities in
the Southeast.
In addition, we have serious reservations with regard to efforts to
significantly restructure the electric industry across the nation.
There is not yet a clear understanding of what went wrong in
California, nor how or why those problems then spread across
electricity markets in the Northwest. Until we know more and better
understand the reasons that underlie the problems experienced in the
electric industry in California and the Northwest, we should not
promote comprehensive national restructuring of the electric industry.
Although there may be a need for legislation to address discreet issues
faced by certain segments of the electric industry or unique
circumstances in certain regions of the United States, the SeTrans
Sponsors as a group do not support legislation that would mandate any
particular industry structure or that would change the way electric
service is provided in our region. We appreciate, however, the
opportunity to be involved in the legislative debate and are willing to
assist in crafting targeted legislation. There are some areas for which
clarification by Congress would be useful and I will describe those
further.
I would now like to comment more specifically on the issues that
are the focus of the Committee's attention today. We are providing
comments here on only those issues with which we have agreement as a
group, and more specifically, in order to support and advance a process
that would allow further, expeditious development of the proposed
SeTrans RTO. In that vein, I will begin my comments with a discussion
of ``Transmission Organizations/RTOs''.
transmission organizations/rtos
The SeTrans Sponsors support the voluntary formation of regional
transmission organizations, or RTOs, as is evidenced by our active
participation, and the consequent time and resources we are spending on
the development of the proposed SeTrans RTO. It is important to note
that if RTOs are to go forward and succeed, they must be proven to
provide benefits to all the stakeholders involved. At JEA, we have an
efficient and cost-effective electric system of which we are very
proud. We are working hard on the development of the proposed SeTrans
RTO in order to make sure it will meet our customers' needs and provide
benefits for our system, as well as work for and secure benefits for
the entire Southeastern region. Every one of the SeTrans Sponsors is
doing the same thing.
The proposed SeTrans RTO is organized around the key governance
concept of an independent, incentive-driven, third party operator, the
SeTrans Independent System Administrator (ISA), that will manage, but
not own, the transmission facilities dedicated to the RTO. The SeTrans
Sponsors are currently negotiating with the preferred ISA candidate, a
team made up of ESB International, Ltd. and Accenture, LLP. The ISA
model provides a platform for the formation of, and a role for,
independent transmission companies (ITCs), as well as individual
participating transmission owners. The proposed SeTrans RTO offers a
common market design for the Southeast that includes in ``Day 2'' a
broad, seamless market for energy and ancillary services, a congestion
management model based on Locational Marginal Pricing (LMP), tradable
Financial Transmission Rights (FTRs) to hedge against the impact of
congestion costs, and Participant Funding of certain new transmission
facilities. The SeTrans Sponsors believe our proposed market design
would minimize seams issues, support a robust competitive wholesale
market, and encourage market-driven planning and expansion, while
protecting native load customers.
As I stated before, the SeTrans Sponsors are trying to develop an
RTO that will meet the needs of the competitive wholesale market, as
well as those of the investor-owned, publicly-owned, and cooperatively-
owned utilities in the Southeast. This is a difficult task given the
disparate types of utilities in the Southeast and the fact that
substantial portions of the region's transmission facilities are owned
by state and federal authorities, municipalities and electric
cooperatives. In developing the proposed SeTrans RTO, the SeTrans
Sponsors have identified a number of concepts that are critical to
demonstrate that the RTO will provide benefits to everyone and ensure
the voluntary participation of the Sponsors. Those concepts include:
the ability of non-jurisdictional entities to withdraw from
participation due to tax concerns;
the Participant Funding concept;
the ability to avoid cost shifting by utilizing a zonal rate
structure through at least 2012;
the ability to charge for power being exported from the
SeTrans region, as a way of recovering revenues lost through
the elimination of multiple transmission rates across the RTO
footprint;
the ability to honor grandfathered agreements;
the ability to ensure that native load continues to get
priority in use of the transmission system;
the concept of installed capacity requirements; and
the ability for state regulators, local authorities (in the
case of municipals), or governing boards (in the case of
cooperatives) to set rates for retail electric service,
including retail transmission rates.
The SeTrans Sponsors believe the proposed SeTrans RTO, which
includes these concepts and contemplates voluntary participation by
transmission owners, can and will support a robust competitive
wholesale market.
I must point out, however, that there are impediments to completion
of the proposed SeTrans RTO, and to the continued participation of all
current SeTrans Sponsors. First, although it is not clear the
Commission will approve a proposed RTO that includes certain of the
critical concepts outlined above, the Southeast Association of
Regulatory Utility Commissioners (SEARUC) has made clear that FERC must
accept regional flexibility in its efforts to develop electricity
markets in the Southeast. I draw your attention to an attachment to my
testimony, a February 21, 2003, letter from SEARUC to Pat Wood, the
Chairman of the Federal Energy Regulatory Commission.* In its February
21 letter, SEARUC listed the following commitments that were necessary
``as a foundation for cooperatively developing appropriate
modifications to the structure of the electric industry in the
Southeast'':
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* The letter has been retained in committee files.
retention of state jurisdiction over the transmission
component of bundled retail rates and service;
protection of native load customers from increased costs;
avoidance of cost shifting between regions or between
consumers within the region;
voluntary RTOs and recognition of joint jurisdiction over
RTO formation; and
a SMD in the form of broad guidelines with substantial
regional flexibility.
The SeTrans Sponsors believe it would be helpful for the Congress
to clarify for the Federal Energy Regulatory Commission the need to
recognize regional flexibility in order to ensure that the RTO
proposals currently underway are completed, and that the proposed
SeTrans RTO will have a chance to be granted necessary state approvals.
A second potential impediment to RTO formation is the Federal
Energy Regulatory Commission's recent rulemaking on Standard Market
Design (SMD). In the proposed rule on SMD, the Commission proposes to
order FERC-jurisdictional utilities to either become Independent
Transmission Providers (ITPs), or to join an approved RTO. This mandate
to become an ITP or join an RTO is extremely counter-productive at this
time. Indeed, the SeTrans Sponsors have made great progress on a
voluntary basis toward developing the proposed SeTrans RTO, and in the
middle of their efforts, along comes a rulemaking that eliminates the
voluntary nature of RTO participation for jurisdictional utilities. I
would point again to the February 21 SEARUC letter that is attached to
my testimony and note that state public service commissions are more
likely to approve participation in a voluntary organization. The
SeTrans Sponsors believe that if the Congress were to direct the
Federal Energy Regulatory Commission to abandon its SMD efforts, or
make significant modifications to the SMD rule to accommodate regional
differences and allow voluntary participation, it would greatly enhance
the chances for the proposed SeTrans RTO to become a reality and
succeed in meeting FERC and the Congress' objectives for a competitive
wholesale electricity market.
regional energy services commissions
The SeTrans Sponsors have not studied this new concept in detail
and cannot offer comments on its substantive provisions. It is
encouraging to see a proposal that allows for regional differences.
However, there are many important components left undefined, including
the relationships between RESCs and with FERC and overlapping RTOs. The
SeTrans Sponsors believe that this concept deserves full consideration
by stakeholders and this cannot be resolved before the Committee's
mark-up that is scheduled for next week. We therefore encourage the
Committee to focus on what needs to be done to ensure efficient and
reliable wholesale markets under the existing regulatory scheme.
reliability standards
The SeTrans Sponsors believe that participation by transmission
owners in RTOs, like the proposed SeTrans RTO, may provide additional
administration and more uniform enforcement of reliability standards.
We do not support the reliability provisions contained in the staff
discussion draft dated March 25, 2003. Assigning reliability
enforcement authority to regional energy service commissions (RESCs),
as does the March 25 draft, substitutes a brand new governmental
entity, with no technical competence or experience whatever, for the
industry-led enforcement, subject to government oversight, that is the
essence of the S. 475 reliability provisions. Introduction of the
concept of regional energy service commissions into the reliability
context also raises a host of unanswered questions concerning the
intended relationship between the existing electric reliability
organization and RESCs.
open access (ferc-lite)
The FERC-lite language in Section 2071 of Congressman Barton's
bill, as marked by the subcommittee, gives FERC sufficient authority to
ensure that non-jurisdictional utilities provide open access, non-
discriminatory transmission service.
The individual SeTrans Sponsors have supported various moves toward
open, non-discriminatory transmission systems as have been developing
in the electricity industry over the past few years. As a group, the
SeTrans Sponsors agree that development of RTOs must provide for
participation of utilities that are not subject to the general
jurisdiction of the Federal Energy Regulatory Commission without those
utilities becoming, in effect, jurisdictional.
In the proposed SeTrans RTO, the SeTrans ISA will be a FERC-
jurisdictional electric utility. Each participating transmission owner
will enter into a contractual relationship (the Transmission Operating
Agreement (TOA)) with the SeTrans ISA, providing the SeTrans ISA the
right to use its transmission facilities to provide service under the
SeTrans open access transmission tariff (OATT). We intend that a TOA
between the SeTrans ISA and a non-FERC-jurisdictional transmission
owner will not be a jurisdictional contract. Therefore, a non-
jurisdictional utility that joins the SeTrans RTO will not subject
itself to the jurisdiction of the Federal Energy Regulatory Commission
simply by virtue of joining the RTO.
The SeTrans Sponsors believe this proposal strikes a reasonable
balance between the goals of the FERC and the Congress to establish
efficient, reliable and competitive wholesale markets and the goal of
non-jurisdictional utilities to retain their current status. The
SeTrans Sponsors ask the Congress to direct FERC to accept that non-
jurisdictional utilities that voluntarily join an RTO do not subject
themselves to FERC jurisdiction and to approve RTO proposals that
include provisions to achieve such a result.
transmission siting
The SeTrans Sponsors do not believe that transmission siting is a
major problem in the Southeastern region of the United States. Unless
specific problems are demonstrated, we believe Federal pre-emption for
purposes of transmission siting is not required.
service obligation
The SeTrans Sponsors support legislation to ensure that a utility
which reserves transmission service to meet its service obligations
will not be considered as engaging in undue discrimination or
preference.
participant funding
In developing the proposed SeTrans RTO, the SeTrans Sponsors have
included Participant Funding of certain new transmission investment.
For purposes of the proposed SeTrans RTO, Participant Funding refers to
a mechanism whereby a party or parties seeking the economic expansion
of the transmission network, as compared to an upgrade that is required
to maintain existing reliability levels, will be responsible for
funding the cost of the expansion. In return for funding the expansion,
the funding parties will receive the net incremental financial
transmission rights, FTRs, created by the expansion for a 30-year term.
Participant Funding is important in the Southeast. Over the past
few years, a lot more new generation capacity has been announced than
is needed to serve the load in the region. Since this excess planned
growth in generation appears to be caused by the abundant natural
resources in the Southeast, including proximity to natural gas, water
and available land, the region may continue to attract more generation
than is needed to serve the load. This issue did not emerge when
utilities planned both generation and transmission in an integrated
manner. Today, however, much of the new generation is to be built by
independent power producers. If all transmission upgrades needed to add
these generators to the grid are ``rolled-in,'' generators will not see
a transparent and accurate signal as to the cost their locational
decisions are imposing. The SeTrans Sponsors proposed the Participant
Funding concept to provide a transparent and accurate price signal, and
to act as a market surrogate for the integrated planning traditionally
employed by utilities.
Participant Funding in the proposed SeTrans RTO is part of the Day
2 market and is consistent with the broad principles outlined in the
Infrastructure Cost Allocation Principles in Subtitle E, Section 33 of
the Discussion Draft. However, the SeTrans Sponsors are concerned that
the proposed language may require the Federal Energy Regulatory
Commission to socialize costs even in cases where the transmission
improvements are made that would not have been required absent a
specific request for transmission service. Any transmission investment
may have system-wide reliability benefits. However, if the transmission
investment would not have been made in the region absent a specific
request, then it should be paid for by the party that benefits from the
investment. Otherwise, existing customers are paying for system
improvements that they did not need.
I would note that forms of participant funding have been adopted in
PJM and the New York Independent System Operator. In addition,
Participant Funding is a critical component of the market in the
proposed SeTrans RTO. Therefore, the SeTrans Sponsors request that if
this Committee addresses transmission pricing in energy or electricity
legislation, it ensures that Participant Funding is not precluded.
conclusion
I appreciate the opportunity to testify before this Committee and
to provide the views of the SeTrans Sponsors on these important issues.
Our first obligation is to our native load customers. We believe that
we must be able to continue to fulfill our obligation to serve those
customers and provide them with reasonably priced, reliable electric
service. As a group, we believe that one way we can continue to meet
this obligation under the existing electricity statutory scheme is by
further developing, and then participating on a voluntarily basis in,
the proposed SeTrans RTO. We do not believe that the Congress or FERC
should mandate wide ranging changes to the electricity market before we
understand what caused the western energy crisis.
At the same time, we believe it would be extremely helpful as we
continue our RTO development efforts if the Congress would direct the
Federal Energy Regulatory Commission to:
recognize the need for regional flexibility in the
development of RTOs;
abandon its SMD efforts or modify the rule to accommodate
regional differences;
allow voluntary RTO participation; and
approve RTO proposals that allow non-jurisdictional entities
to join an RTO without becoming subject to FERC jurisdiction.
In addition, we ask the Congress to support Participant Funding if
FERC itself does not adequately address transmission pricing.
I will be happy to answer any questions you have.
The Chairman. Thank you very much.
We will proceed now with Mr. Torgerson. Thank you for
coming.
STATEMENT OF JAMES P. TORGERSON, PRESIDENT AND CEO, MIDWEST
INDEPENDENT TRANSMISSION SYSTEM OPERATOR, INC.
Mr. Torgerson. Good morning, Mr. Chairman and members of
the committee. I am Jim Torgerson, president and CEO of the
Midwest Independent Transmission System Operator, the Midwest
ISO, the Nation's first FERC-approved RTO. I want to thank you
for this opportunity to discuss energy legislation before the
Congress.
Headquartered in Carmel, Indiana, the Midwest ISO serves
over 16 million customers in 15 States and controls more than
$13 billion in installed assets. This hearing comes at an
important time for us, our customers, and the Nation as a
whole. The task before us is significant.
The Midwest ISO believes that it is correct to analyze
transmission and energy markets regionally. Electrons cross
borders. Power lines cross State lines. Actions in one State
can significantly affect customers in another.
A properly organized region energy market offers benefits
to all users of the grid.
Nonetheless, competitive markets continue to face
challenges.
Mr. Chairman, let me first state that none of the bills
which are the subject of the hearing this morning would unduly
interfere with the voluntary arrangements that the Midwest ISO
has reached among its members and Federal and State regulators
under existing Federal and State statutes and regulations.
However, the staff draft presents us with the most significant
questions. Obviously, the members of the Midwest ISO would like
to retain the benefits that we have achieved to date. We are
anxious to work with this committee to ensure that, where
appropriate, legislation permits Midwest ISO to maintain
current arrangements.
As a general proposition, we believe that consistent
Federal and State policies that encourage participation in
stable, rationally sized and transparent transmission and
electric energy markets will go a long way in attracting much-
needed capital to our electric utilities, which in turn can
strengthen our infrastructure. Midwest ISO would like to
continue to be able to assist in the attraction of much-needed
capital for critical infrastructure improvements.
I will now turn to two of the specific issues on which the
committee has requested comment.
Section 1211 of the staff draft would create RESCs as a
means of resolving jurisdictional disputes between State and
Federal authorities. I am pleased to note that the States
within which the Midwest ISO operates have set forth a proposal
that will advance development of wholesale markets and promote
efficient Federal and State interaction. Specifically, these
States have proposed to form a Midwest multistate committee
which would coordinate State expertise and inputs on matters
related to RTO implementation, systems operation, planning, and
transmission siting. I have every reason to believe that the
MMSC will be successful and highly effective.
At this time for our region, the Midwest ISO would support
further encouragement of voluntary associations between Federal
and State authorities and RTOs. Appropriate regional
differences should be respected and States have critical
interests in the protection of retail customers. The MMSC
approach offers a promising vehicle by which basic national
consistency and flexibility to meet regional needs may both be
addressed.
I should also point out that under the definition section
of the bill, a transmission organization is defined as being
approved by either the FERC or an RESC. It might be helpful to
clarify that for consistency the approval should be based on
the same standards and criteria to be applied by either body.
It is also critically important for the Midwest that those
transmission organizations, already unconditionally approved by
the FERC, do not need further approvals.
The Midwest ISO is in agreement with the legislative
requirements for a viable and workable RTO.
In addition, while we certainly agree with the policies set
out that RTOs should provide for the elimination of pancaked
transmission rates within the RTO's region, we would suggest
that the committee might use this legislation to also eliminate
pancaked rates between RTOs.
We are also in full agreement with the sense of the
Congress provisions contained in the Senate counteroffer and
the House Energy and Air Quality Subcommittee bill indicating
that all transmitting utilities should voluntarily become
members of RTOs and that the FERC should provide any
transmitting utility that becomes a member of an RTO a return
on equity sufficient to attract new investment capital for
expansion of transmission capacity.
We believe it is particularly helpful that RTOs be provided
with tools to identify and manage congestion on the wholesale
grid.
In conclusion, Mr. Chairman, the Midwest ISO believes that
the legislation being considered by Congress can bring
significant benefits to energy consumers. The Midwest ISO has
been on the forefront of RTO development, regional oversight of
transmission and electricity markets between States and the
Federal Government, regional planning, attracting crucial
investment to our electricity infrastructure, planning for grid
enhancements necessary to utilize wind resources, and vigilant
monitoring of our energy markets.
The Midwest ISO looks forward to continuing to build on its
activities to date in these and other areas and to working with
you, Mr. Chairman, and this committee on these important
matters.
Thank you.
[The prepared statement of Mr. Torgerson follows:]
Prepared Statement of James P. Torgerson, President & CEO,
Midwest Independent Transmission System Operator, Inc.
Good morning, Mr. Chairman and members of the Committee. I am James
P. Torgerson, president and CEO of the Midwest Independent Transmission
System Operator--or Midwest ISO.
I want to thank Chairman Domenici, Senator Bingaman and the entire
Committee for this opportunity to discuss energy legislation before the
Congress. Headquartered in Carmel, Indiana the Midwest ISO serves over
16 million customers in fifteen states and controls more than $13
billion dollars in installed assets. This hearing comes at an important
time for us, for our customers, and the nation as a whole. The task
before us is significant.
After the Federal Energy Regulatory Commission (FERC) issued its
Order Nos. 888 and 2000 creating Regional Transmission Organizations
(RTOs), the transmission owners of the Midwest were the first to step
to the plate, voluntarily creating Midwest ISO and becoming the
nation's first FERC-approved RTO.
The Midwest ISO believes that it is correct to analyze transmission
and energy markets regionally. Electrons cross borders. Power lines
cross state lines. Actions in one state can significantly affect
customers in another.
A properly organized regional energy market offers benefits to all
users of the grid. It offers transparent pricing. It offers improved
peak resource management. It offers more options and more flexibility
for market participants to meet their needs. It offers the increased
efficiency of an interconnected transmission system. Finally, markets
offer enhanced reliability.
Nonetheless, competitive markets continue to face challenges. I
would like to address some of those issues now and would then be
pleased to answer your questions.
Mr. Chairman, let me first state that none of the bills which are
the subject of the hearing this morning would unduly interfere with the
voluntary arrangements the Midwest ISO has reached among its members
and federal and state regulators under existing federal and state
statutes and regulations. However, the Staff Draft presents us with the
most significant questions. Obviously, the members of the Midwest ISO
would like to retain the benefits that we have achieved to date. We are
anxious to work with this Committee to ensure that, where appropriate,
legislation permits Midwest ISO to maintain current arrangements.
As a general proposition, we believe that consistent federal and
state policies that encourage participation in stable, rationally sized
and transparent transmission and electric energy markets will go a long
way in attracting much needed capital to our electric utilities, which
in turn can strengthen our infrastructure. At this Committee's recent
hearing on March 4th on the financial condition of the electricity
market, the President of the National Association of Regulatory Utility
Commissioners, Mr. David Svanda, pointed to two recent transactions in
his home state of Michigan that resulted in a substantial infusion of
new investment dollars in the transmission sector. Mr. Svanda said:
``It is interesting to note that both of these transmission
sales, almost one billion dollars of new investment, were made
possible in part because of consistent state and federal
policies that encourage participation in the new regional
Midwest Independent Transmission System Operator (MISO). The
stability of regional open access rules and the promise of
transparent and vibrant midwest transmission markets no doubt
encourage investors to commit substantial capital to an
otherwise stagnant utilities sector.''
I not only share in these observations but would also add that
stable markets with transparent rules continue to be actively sought
out for investments of the type described above. Midwest ISO would like
to continue to be able to assist in the attraction of much needed
capital for critical infrastructure improvements.
Given this general background, I would now like to turn to the
specific issues on which the Committee has requested comment.
regional energy services commission
Section 1211 of the Staff Draft would create Regional Energy
Service Commissions (RESCs) as a means of resolving jurisdictional
disputes between state and federal authorities. The Midwest ISO
believes that addressing this issue is very important. Both federal and
state authorities have serious issues at stake in how the electric
service industry is restructured to bring the benefits of competitive
wholesale markets to consumers. In some areas of the country, the
debate over the jurisdictional divide has slowed progress toward robust
wholesale markets.
I am pleased to note, however, that the states within which the
Midwest ISO operates have set forth a proposal that will advance
development of wholesale markets and promote efficient federal and
state interaction. Specifically, these states have proposed to form a
Midwest Multi-State Committee (MMSC), which would be a regional
organization designed to achieve a flexible approach to energy market
design and transmission infrastructure enhancement. Membership in the
MMSC would be open to all state regulatory authorities that have
jurisdiction over the retail electric or distribution rates of
transmission-owning members of the Midwest ISO and regulatory
authorities in states in which transmission-owning members of the
Midwest ISO or independent transmission companies associated with the
Midwest ISO own transmission facilities. The MMSC will coordinate state
expertise and input on matters related to RTO implementation, systems
operation, planning and transmission siting.
I have every reason to believe that the MMSC will be successful and
highly effective. The Midwest ISO has been fortunate to work with state
authorities that have strongly supported its creation and who have
contributed significantly to its development. Representatives of state
utility commissions serve on the Advisory Committee of the Midwest ISO
and have provided invaluable insights concerning the integrated
provision of transmission service over a large geographic area.
Guidance from states will continue to be of paramount importance to
the Midwest ISO. The MMSC structure should facilitate the development
of comprehensive, state-supported approaches to the challenges facing
the Midwest ISO and should allow it to more effectively provide the
wholesale service that benefits the retail activities that the state
commissions regulate. Even more importantly, the Midwest ISO recognizes
that, in many instances, the guidance it seeks from the states will be
provided based on a regional perspective. The bulk power grid is
regional and the market for electricity, just like the physical flow of
electricity, does not always respect state or utility boundaries. At
certain points the states will consider regional solutions to secure
maximum benefits in their individual states. The MMSC, where
appropriate, should facilitate regional solutions to regional
challenges. Regional solutions for transmission upgrades and siting
issues are particularly important. Cooperation among the interested
parties rather than coercion, is key to the success of this effort.
Nevertheless, there should be a consistent framework within which
regional state authorities act. The staff suggests that a regional
approach based upon the Colorado River Compact, which I understand to
be a blend of regional state control and residual federal supervision,
may be useful here. While the apportionment of water rights and uses,
such as the management of the Colorado River, may lend itself to a
governance structure in which regional and federal authorities are
separated, it is the Midwest ISO's view that the wholesale electric
energy market, in order to succeed, requires basic national
consistency. As we have seen, and continue to see, in many areas of the
United States, electric energy conformity among regions is desirable to
relieve congestion, diminish opportunities for market manipulation and
maintain reliability efficiently.
At this time, for our region, the Midwest ISO would support further
encouragement of voluntary associations between federal and state
authorities and RTOs. Our experience shows that the concept can work
and that it is not necessary that there be recurrent jurisdictional
disputes. At the federal level, it is important that there be a
comprehensive and compatible structure to the wholesale market. Such an
approach will lower transaction costs in sales between states and
regions, and will promote larger and liquid markets for electricity at
the wholesale level. Appropriate regional differences should be
respected and states have critical interests in the protection of
retail customers. The MMSC approach offers a promising vehicle by which
basic national consistency and flexibility to meet regional needs may
both be addressed.
As I mentioned, these issues are similar in nature to the issues
which the proposed Regional Energy Services Commission would have under
the proposed new Sec. 402 of the Federal Power Act. In that sense, we
would prefer that the MMSC be allowed to proceed with its efforts until
such time as the states in our region choose to form a RESC and it
becomes operational.
I should also point out that under the definition section of the
bill at Sec. 1201 a ``Transmission Organization'' is defined in
subparagraph (26) as being approved by either the FERC or a RESC. It
might be helpful to clarify that for consistency the approval should be
based on the same standards and criteria to be applied by either body.
It is also critically important for the Midwest that those Transmission
Organizations already unconditionally approved by the FERC do not need
to seek further approvals.
reliability standards
The Midwest ISO generally supports the establishment of a self-
regulating Electric Reliability Organization (ERO) to be approved by
the FERC as contemplated by Subtitle D of the Staff Draft. Similar
provisions can be found in Sec. 206 of the Proposed Senate
Counteroffer, Sec. 104 of Senator Thomas' Electric Transmission and
Reliability Enhancement Act of 2003 and Sec. 7031 of the House Energy
and Air Quality Subcommittee bill. However, I would note that under the
new proposed Sec. 215 (e)(4) of the Staff Draft the ERO would delegate
its authority to a RESC for purposes of proposing reliability standards
to the ERO and enforcing those standards. This delegation to regional
authorities could result in varying reliability standards across the
country.
open access
The Midwest ISO generally supports the Open Access provisions in
Subtitle E of the Senate Discussion Draft as a way to ensure that all
transmission operates under the same rules at comparable rates while
being used in interstate commerce. Similar provisions are contained in
Sec. 101 of the Thomas bill, in Sec. 205 of the Senate Counteroffer and
Sec. 7021 of the House Energy and Air Quality Subcommittee bill.
transmission investment incentive
The Midwest ISO supports reasonable investment incentives such as
those found in Subtitle E of the Discussion Draft, Sec. 219 of the
Senate Counteroffer and in Sec. 7011 of the House Energy and Air
Quality Subcommittee bill. We believe these provisions would encourage
investments to expand transmission facilities that may not otherwise be
undertaken. The Midwest ISO would also support a forum whereby affected
states would have the opportunity to evaluate the impact of these
incentives on their retail customers.
transmission cost allocation
The Midwest ISO supports transmission cost allocation principles
which recognize that the entity seeking to interconnect with the
transmission grid should pay the cost for that transaction, as
currently proscribed. Also, where the addition to the grid can be shown
to provide benefits to existing load, those consumers with their
state's concurrence, should pay a portion of these transaction's costs.
Under all circumstances, the identification of these costs and benefits
must be made by an independent transmission organization. Subtitle E of
the Senate Staff Discussion Draft and Sec. 219 of the Senate
Counteroffer that directs FERC to undertake a rulemaking in this regard
to ensure that all the costs are shared by all users that benefit from
the expansion, appears to support this position.
transmission organizations (rtos)
The Midwest ISO is in agreement with the legislative requirements
for a viable and workable RTO as set out in the proposed new Sec. 407
of the Federal Power Act contained in the Staff Draft. The Midwest ISO
has already undertaken the process for recovery of legitimate,
verifiable and prudently incurred costs of forming the RTO as
contemplated by subparagraph (10) of that section. FERC has provided
reasonable assurances that transmission owners that participate in the
Midwest ISO will have an opportunity to recover operation and
development costs incurred by the Midwest ISO. By order dated November
22, 2002, FERC conditionally accepted Schedules 16 and 17 of the
Midwest ISO's Open Access Transmission Tariff, which provide for the
recovery of costs associated with the creation of an energy market and
Financial Transmission Rights (``FTR''). Midwest Independent
Transmission System Operator, Inc., 101 FERC para. 61,221 (2002). Under
existing law, utilities are entitled to recover wholesale costs that
have been approved by FERC. On February 24, 2003, FERC issued a
Declaratory Order approving the general direction that the Midwest ISO
is taking to develop energy markets and FTRs. Midwest Independent
Transmission System Operator, Inc., 102 FERC para. 61,196 (2003). This
order provides greater certainty to transmission owners that the costs
incurred for these efforts are prudent and reasonable. And finally, on
March 12, 2003, FERC issued a Declaratory Order stating that any
transmission owner may file with FERC pursuant to Section 205 of the
Federal Power Act in the event that they cannot otherwise recover the
administrative costs billed to them by the Midwest ISO. Midwest
Independent Transmission System Operator, Inc., 102 FERC para. 61,279
(2003).
In addition, while we certainly agree with the policy as set out in
subparagraph (11) that RTOs should provide for the elimination of
``pancaked'' transmission rates within the RTOs region, we would
suggest that the Committee might use this legislation to also eliminate
``pancaked'' rates between RTOs.
We are also in full agreement with the sense of the Congress
provisions contained in Sec. 212 of the Senate Counteroffer and
Sec. 7022 of the House Energy and Air Quality Subcommittee bill
indicating that all transmitting utilities should voluntarily become
members of RTOs and that the FERC should provide any transmitting
utility that becomes a member of a RTO a return on equity sufficient to
attract new investment capital for expansion of transmission capacity.
I should also note that while Senator Thomas' proposed Electric
Transmission and Reliability Enhancement Act does not directly address
RTO issues, we would agree with the principle contained in the
Senator's Introductory Statement that RTOs encompass large regional
areas.
We believe it is particularly helpful that RTOs be provided with
the tools to identify and manage congestion on the wholesale grid.
renewable energy
In its regional planning process, the Midwest ISO has had the
opportunity to develop scenarios for Renewable Energy based on the
availability of various fuels. In the Midwest ISO operating area, the
renewable fuel source that has attracted the most interest is wind. The
Midwest ISO is currently working with officials from the Dakotas,
Kansas and Texas to identify and model sources of wind power. Earlier
this week, Midwest ISO had the opportunity to participate in Senator
Dorgan's conference on Wind Energy. Working with affected parties,
Midwest ISO is identifying transmission solutions that would allow for
up to 10,000 MW of rural wind energy to serve urban markets to the
east.
market transparency, anti-manipulation, enforcement
The Midwest ISO fully supports the efforts in all of the subject
legislation to prohibit fraudulent activities in the electricity
market. Moreover, the Midwest ISO supports the requirement that FERC
institute a proceeding to make information on availability and price of
wholesale electricity and transmission services available. We believe
such information, properly dispersed will increase the vitality of
markets.
We would also note that Midwest ISO has an Independent Market
Monitor who reports directly to its independent Board of Directors and
FERC. Additionally, we believe that enforcement of these legislative
provisions would need to be coordinated between FERC and the RESC to
ensure that potential improper behavior could be monitored across the
boundaries of regional organizations.
conclusion
In conclusion, Mr. Chairman, the Midwest ISO believes that the
legislation being considered by Congress can bring significant benefits
to energy consumers. The Midwest ISO has been on the forefront of: RTO
development; regional oversight of transmission and electricity markets
between states and the federal government; regional planning;
attracting crucial investment to our electricity infrastructure;
planning for grid enhancements necessary to utilize wind resources; and
vigilant monitoring of our energy markets.
The Midwest ISO looks forward to continuing to build on its
activities to date in these and other areas. Many people have worked
diligently forming the Midwest ISO. We look forward to continuing our
work to make available to the states the benefits of efficient
wholesale transmission and electricity markets. The states have shown
that they are in the best position to determine the method of
allocating these benefits to their retail consumers. Together with our
states we will continue to identify and capture these benefits.
The Midwest ISO looks forward to working with you, Mr. Chairman and
this Committee in these important matters.
The Chairman. Thank you very much.
Let me ask just a couple of questions and then I will yield
to you, Senator Bingaman.
Mr. Para, you suggest a congressional ban on SMD?
Mr. Para. Yes, sir.
The Chairman. Do you not think that if we did that, FERC
would continue to apply SMD-like principles on a case-by-case
basis using their authority in any event?
Mr. Para. Well, I think that would be a danger, but I think
then FERC would understand that the Congress agrees that a
single standard for the country is too far to go. I cannot
predict what FERC would do.
The Chairman. Do either of the other of you have a thought
about that? That is a suggestion, as you know, that puts
something on an appropriation bill and take away the authority,
which I assume could be done and it would pass, I assume, the
way things are now.
Mr. Glazer. Mr. Chairman, this is one of those tough
issues, sort of how much do you standardize something versus
how much do you allow regional flexibility. I know FERC--I do
not want to speak for them, but clearly they have gotten the
message loud and clear that maybe we need regional approaches.
But I sort of analogize this back to the interstate highway
system. If I go from State to State, I have got green signs
that tell me it is an exit. I have got blue signs that tell me
there is a hospital or a place to eat, et cetera. That
consistency is important when I drive from State to State. On
the other hand, there is regional flexibility. There are
different routes. There are different speed limits. There are
different number of exits, et cetera, different maintenance
practices.
I think some balance between those two is needed. An
incremental approach. That is what we have learned in our Mid-
Atlantic region and in the Midwest region: an incremental
approach is what is needed.
I think FERC is going to go there anyway, but that is sort
of our lesson. I do not think Congress ought to ban it because
then it would ban any standardization at all, and I think that
would create some of the problems that I mentioned like we
would have with the highway system.
The Chairman. Mr. Torgerson.
Mr. Torgerson. Mr. Chairman, I think it would be helpful to
have basic consistencies between the different regions, between
the RTOs. So some standardization I think is helpful from an
operational standpoint. But I think there are regional
differences that have to be respected. So I think that is what
is going to be needed throughout this.
The Chairman. So would your answer be if that happens, you
assume that FERC would proceed in any event? That was kind of
the question. Do you not think they would, on a case-by-case
basis, do what everybody is concerned about anyway? One answer
is they might, but it would not be nearly as bad or some such
effect.
Mr. Torgerson. Not speaking for FERC, but I think they
would proceed on some basis with regional differences being
addressed.
Mr. Glazer. Mr. Chairman, they respond to cases that are
before them. And we do not put proposals before them that have
not been thoroughly vetted with our own stakeholders. I would
say about 99 percent of our proposals in fact have gotten
extensive approval from all different sectors of the industry
and State utility commissions. So I do not think they would
just go off and march. In fact, they would have proposals in
front of them that already had stakeholder support or it never
would have gotten there in the first place.
The Chairman. Senator Bingaman.
Senator Bingaman. Thank you very much.
Let me just give sort of my broad perspective on this. My
impression is that this whole exercise we have been going
through here for several years of trying to enact Federal
legislation related to wholesale electricity markets is a
result of the reality on the ground, which is that we are
moving to more and more of a national transmission system and
there is, in fact, more and more interaction between the
various regions and within the regions and more groupings
taking place. So we are trying to essentially find a way to
modernize or update the legislation which was passed back in
the 1930's so that it accommodates this new reality. That is
what I have always thought, and I think you stated it very
well, Mr. Harris, when you said that that involves a balancing
of to what extent do you standardize and to what extent do you
make accommodation to regional differences. I think that is
what we are working through.
Many in Congress have felt like, by issuing this standard
market design and trying to do as much as that proposes to do,
FERC has gone too far too fast, and that should not be allowed
to happen.
At the same time, my own view is that the general direction
toward moving us to have a national system and the benefits of
competition within that system, the benefits that accrue to
consumers within that system, makes a lot of sense. So I think
that is sort of what has been driving this whole exercise.
I guess I would ask Mr. Harris first and then the other two
witnesses if you agree with that general view. You think I am
off-base with that view. I would be anxious to hear your
thoughts.
Mr. Glazer. Yes. That is Mr. Glazer substituting for Mr.
Harris who is on his way over.
Senator Bingaman. Sorry. Mr. Glazer. Excuse me.
Mr. Glazer. It is a great question, Senator.
This is the difficulty. That is why it has been so
difficult to legislate in this area. You have got a speed-of-
light product that does not respect State borders, does not
even respect national borders. Yet, you have a history of it
being regulated at the State and local level and you have each
utility sort of financed and planned its own system, almost
like silos. And the trick is to balance all of those and come
up with a solution that respects that history but moves us
forward into the future.
I think it is happening. I mean, the good news is it is
happening in the Mid-Atlantic region. We are working very
closely with Midwest ISO to have a large 27-State market that
will have it happen voluntarily. It is a voluntary market. That
is the key point.
I think the 1930's act is actually flexible enough at this
point in time to allow that to happen. I think Congress needs
to monitor it very closely, but I am not sure this is the time
to legislate. I think FERC is actually moving in the right
direction. I think they are realizing, as we realized in the
Mid-Atlantic, you have got to do it step by step. Not every
region is going to be there at the same time. But do we
eventually need some common rules of the road? Absolutely.
Senator Bingaman. Mr. Para, did you have a comment?
Mr. Para. Yes, Senator. We agree with you that we need to
continue to go forward. We also agree that it needs to be step
by step. We think the FERC has the appropriate authority and
that FERC has been listening to what people have been saying.
We look forward to seeing their white paper at the end of
April, and we expect to see where FERC can show that they have
been listening to the concerns. And we think that the movement
toward voluntary RTOs is a giant step in the direction of
dealing with the issues that you bring up.
Senator Bingaman. Mr. Torgerson.
Mr. Torgerson. Senator, I would agree. We are moving to
more of a national system. The electric system was designed
originally to bring generation to a specific load within a
utility. It was not designed originally to be the interstate
highway system. But that is where we are heading. And we are
there already with much of the trading that goes on today. So
we have to accommodate this new reality. And there are benefits
we see from the wholesale transactions. But we need new
transmission and transmission investment in order to
accommodate the new reality that you talked about.
Senator Bingaman. Let me just ask one question since I have
still got a few seconds here.
There is a lot of consolidation going on or being
discussed. The Midwest ISO has pursued consolidation with the
Southwest Power Pool, with members of PJM. PJM has tried to
negotiate consolidation with MISO, the New York ISO, and the
ISO for New England. All of that seems to me to be beneficial,
all of that discussion that is going on.
I am concerned that this proposal to establish these
regional energy service commissions might inhibit that. Is that
a valid concern?
Mr. Glazer. Senator, I think you raise a good point. One of
the concerns with the language is it does not define a region,
and a region could end up not being a natural market area. It
could be just some gerrymandered thing that people came up with
in a back room.
We are really not doing consolidation with the Midwest ISO.
I think we are actually sort of one step beyond that, and that
is we are creating a natural market that will span this large
region but we are still respecting that we are two separate
institutions. We are not looking to merge. We are two separate
companies, and we have got our own State commissions and our
own regional practices to deal with. So my compliments to the
Midwest ISO. I think we have sort of gone beyond any kind of
consolidation to let us get the real product to the customer
which is a voluntary wholesale market.
Senator Bingaman. Mr. Torgerson.
Mr. Torgerson. I think the Midwest ISO was going to merge
with the Southwest Power Pool. That has been called off. The
transmission owners just simply did not end up joining,
sufficient numbers of them.
But to answer your question, Senator, if we had the RESC in
place already, it would depend on which States were involved.
Which geographical footprint would we be looking at, and would
some States want to have a consolidation and would others not?
So it could be an impediment. It could be a help depending on
which States were actually involved.
Between us and the Southwest Power Pool, we believe there
was one market there. We still believe that is the case, and it
might have been helpful, but only if all of the States had been
involved in it, which, since it is voluntary, it is hard to
determine that could have occurred.
Senator Bingaman. Thank you, Mr. Chairman.
The Chairman. Well, Senator Bingaman, I am going to yield
to Senator Thomas in a minute. But I think your question is a
good one. It is generic to any major transition. If you are
making a major transition to a new system, there would have to
be rules that would permit the ongoing activities of mergers
and acquisitions that were in process. You could not have them
all held in abeyance or canceled, even under an SMD I would
assume. If he was doing some of that, he would provide for
that. But I think it is a genuinely valid concern.
Senator Thomas.
Senator Thomas. Thank you.
Well, thank you. I agree with the things you have said. I
think that is really the purpose of much of what we are trying
to do here, is to set up these RTOs that work, leave the
authority there to make the differential among areas. And I
think we could do that.
Mr. Glazer, you are an ISO?
Mr. Glazer. We are a regional transmission organization. We
have been certified by FERC.
Senator Thomas. You are not in the generating business.
Mr. Glazer. No. We are basically the air traffic controller
that runs the grid and we also----
Senator Thomas. If I was in the generating business in your
area and wanted to ship power out, the market power, how do I
get on the transmission outside of your area?
Mr. Glazer. Our whole market--reserving transmission is all
done over the Internet. We have tools on the Internet where
people can go on and order transmission capacity to our border.
At that point, there is a hand-off to the next entity.
Senator Thomas. Beyond your border is what I am talking
about.
Mr. Glazer. Yes, beyond our border then, what we are
working through--and this is what we are going to do with
Midwest ISO is to not have a seam between us and Midwest ISO,
for example, so that power could move with one system, that it
would be transparent to the customer.
Senator Thomas. That is what we are talking about doing
here, is it not, is to have RTOs that have local authorities
and then set up a nationwide system so that can move? And
someone has to be in charge of that, I believe, do they not?
Mr. Glazer. Well, Senator, the way we are doing it with
Midwest ISO is that for the customer it looks like it is one
system. They put in one order in one place. Behind the scenes
there in the back room, there are two different entities, one
in Carmel, one in Valley Forge, Pennsylvania, that are actually
processing that----
Senator Thomas. How about Wyoming? We want to ship some out
there.
Mr. Glazer. I am sorry?
Senator Thomas. We would like to ship some power out there.
Mr. Glazer. We would love to have it.
Senator Thomas. Well, we have to have a way to do that.
Mr. Glazer. Right.
Senator Thomas. I mean, I agree with you guys entirely, but
I do not think just doing the RTOs is going to settle this
whole change that is taking place in the country. And I think
you all said that.
Are there not some other things that we ought to be talking
about? How about reliability and how about conservation? This
is a policy. We are trying to set up an energy policy. So it
goes a little beyond what you are doing today, but rather a
view of where we want to be tomorrow in the overall, not just
transmission, not just generation.
For instance, what are we going to use for fuel? I think we
are going to find that the fuel we have the most supply of is
probably coal, but the way things are now with transmission,
why, we are doing gas-fired, small units close to the market.
Is that the policy we need to have over time? I do not know.
I guess what I am asking you, even though you seem to be
reluctant to take up anything in electric energy, would we not
be wise to have sort of oversight among these RTOs and have
some direction in where we are going, Mr. Para?
Mr. Para. Yes, sir. I would agree that you need an
oversight, and I think the FERC can provide that.
I think more important what you said was that we are
talking about an energy policy here, and we cannot think that
we can deal with one piece of it without dealing with all the
pieces. We have to think about the fuels. Indeed, we have to
think about how that fits in with the clear skies proposal. If
we know that coal is going to be a big part of our resources in
the future, we need to make sure that we deal with that
appropriately on the environmental side as well. There we look
to you, sir.
Senator Thomas. My point is I just hope we can think of it
in as broad a scope as possible because that is what this is,
is a policy. This is not a regulatory activity.
Mr. Torgerson. Senator, in the Midwest ISOs planning
process, which our initial plan will be out in the next couple
of months, we look at whether generation of electricity is the
best way to solve constraints whether you need to build new
transmission, whether a demand-side resource can help relieve
constraints and add to the resource adequacy.
We then also look at the different scenarios such as is
wind power an alternative that could be utilized. Is investing
in more coal resources, more coal generation a possibility? Or
what would happen if we do with natural gas? So we are looking
at these different scenarios and looking at the impacts it
would have on the transmission system. We are not totally
addressing the policy issue, but we are looking at the economic
impacts of these different things in our plan.
Senator Thomas. That is great. I hope you will share.
I think it is basically Congress' role to take a look at
policy and not get into the day-to-day details as much as it is
to set up a framework within which you all can work. Again, I
am very impressed with what all three of you had to say. That
is what we are seeking to do, is to set up these regional kinds
of operations. So, thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Did our questions prompt something that any of the three of
you think you ought to add here before we excuse you? Mr. Para?
Mr. Para. No, sir.
The Chairman. Mr. Glazer.
Mr. Glazer. Just a quick comment, picking up on Senator
Thomas' point. The language in the staff draft, for example, on
transmission incentives sets an appropriate--it sends a sense
of Congress. It does not try to then micro-manage and say, you
know, you have to do it this way or that way. That is, I think,
an example of Congress setting the policy, which Congress ought
to be doing. I think those are good parts of whatever we come
up with.
But the bottom line is we ask you sort of do no harm to the
markets that are working in the region, learn from those
lessons, and I think with an incremental approach, we are going
to get there and find the balance that Senator Bingaman and
you, Mr. Chairman, talked about as well.
The Chairman. Very fine. Thank you all very much.
We are going to take about a 15-minute recess, and then the
next panel will follow. That is the panel that is led by Glenn
English.
[Recess.]
The Chairman. The committee will come back to order. thank
you all for being patient.
I went down to the Armed Services Committee to see if I
could inquire of the Secretary of Defense, but there are still
a number of Senators. So I thought maybe we would try to finish
here and then I perhaps would get a chance.
We will proceed now with this panel. Why do we not start
this way with you, Mr. Franklin, then Mr. English, Mr.
Richardson, Mr. Tollefson, and Mrs. Moler? Please proceed.
STATEMENT OF H. ALLEN FRANKLIN, CHAIRMAN, PRESIDENT, AND CEO,
SOUTHERN COMPANY, ON BEHALF OF EDISON ELECTRIC INSTITUTE
Mr. Franklin. Thank you very much, Mr. Chairman. My name is
Allen Franklin. I am president and CEO of Southern Company, a
large utility in the Southeast. I am here testifying on behalf
of the Edison Electric Institute which is the trade association
that represents investor-owned utilities in this country.
As you have heard several times, this is a very difficult
and turbulent period in the history of our industry, the
electricity industry and electricity markets. But I think I
understand the views from different parts of the country. You
have to understand that the impact of these difficult times is
very, very different from one part of the country to the other.
From the west coast where both customers, investors, utilities,
and all market participants have been devastated in one way or
the other, to the Southeast, for example, where there really
are very few problems from the standpoint of consumers--the
reliability is good. Costs are low. Investors have not lost
money. Regulators are happy and customer service is high.
So when you hear comments about regional differences, they
are very real. They are not fictitious and they explain why
different parts of the country have such a different view of
sweeping changes to the regulatory scheme for this country
related to electric power.
The central issue that you have talked about and I want to
talk about also is standard market design because this is a
very important issue for this industry and all participants. I
can say, even though there are somewhat different views from
different companies in different regions on the standard market
design, I can say with confidence that every utility that we
have talked to that is a member of EEI supports and likes parts
of standard market design. Every utility we have talked to
dislikes parts of the standard market design. And I think
everyone agrees that if SMD goes forward, it must be with
changes.
Some of the things that are in standard market design that
are universally supported by EEI members is, first, the
objective; that is, to create better, more efficient wholesale
markets. And I will also say in the South, even where States
oppose standard market design, I think regulators also support
that objective.
Everyone in EEI that I have talked to also supports the
need for and value of independent control of transmission so
that no one can use transmission to favor their generation or
their power. And everyone agrees that some broad guidelines or
market rules of the road need to be applied across the country.
We agree with that.
I think where the disagreement comes, especially when you
look from region to region, are in other areas. And areas that
EEI believes that need to be addressed that are not addressed
or changed in SMD, one is native load priority. And I have
heard people give short shrift to that. It is a real issue and
a serious issue.
For example, if you are a customer in a State anywhere and
for years you have paid for transmission and it has been in
your electric rates since the transmission was built and if
there is really not enough transmission to accommodate the
retail user going forward and the new generation being built
for export, it is not a trivial issue and it is not fair in my
judgment to say just because someone located generation in that
State to export to another State, that somehow the retail
customer has to give up part of their transmission rights. And
the likelihood--and this is not again a trivial issue--or the
possibility is that lights would actually go out in that State
for retail customers so that power can be exported elsewhere.
In addition to that practical issue, the concern about
making sure native load customers' lights stay on is a huge
part of the reason you see objections to SMD among local and
State political leaders. So it is not only a technical issue,
it is also a political issue.
Other areas where we disagree with the standard market
design is in transmission pricing. We believe very strongly in
the industry that cost shifting, as a result of change in
Federal policy, should not take place. In other words, those
that cause additional transmission costs should pay, and those
costs should not be socialized and put on retail consumers.
The third area that we think is important is especially in
States that are still vertically integrated where retail access
is not in place, where States regulate the total cost of power
to retail consumers. We think, going forward, that should
continue, that FERC should not assert jurisdiction over the
transmission component of retail rates. That is a technical
issue, but it is also a very political issue in certain parts
of the country where the States do not want to lose that
jurisdiction that they have had or at least exerted forever.
There are some very difficult challenges. Given the need to
move forward nationally, but needing also to recognize these
very real and substantial regional differences, we are starting
from very different points as far as market structure, cost,
reserves. So we have to take into account the regional
differences but also hopefully, as you have pointed out, move
forward on a national basis.
Looking at the chairman's draft, it is an intriguing,
innovative, and interesting proposal. And I think it tries and
makes a good faith effort to deal with this conflict between
national effort and regional differences and I think long term
could have some potential.
But, on the other hand, I think there are many, many
difficult, unanswered questions, and I think it would take a
very, very long time to work through those. In some cases State
law will actually have to be changed to implement that
proposal. And I think we are in a position today that we need
more clarity sooner as opposed to later. As opposed to adding a
new regulatory body, which this proposal would do, and a third
level of regulation, which could turn into an even greater
bureaucracy, I think it would be much wiser for Congress to
simply clarify and instruct more clearly the existing
regulatory bodies as opposed to creating a third regulatory
body to deal with.
An approach that we think makes sense--and not the only
approach--is to reach an agreement, probably through Federal
legislation, that lays out the broad areas where every region
needs to comply to make the markets work. That would be things
like independent transmission control. It would be things such
as make sure the scope of the RTO was large enough. It would
include other broad provisions that really are needed across
the country to be sure some consistency is applied across the
country. But it should be a limited number of principles. But
reach agreement on those, maybe codify those in legislation,
and then leave it to the regions, leave it to the States to
work out the details. I believe we probably ultimately will go
that way, one way or the other, and I think Congress could help
push that issue along a bit.
A lot of other issues in my testimony and issues that you
asked us to speak to. I will answer questions, but I will not
try to address those now.
One issue that is important that I will just mention
briefly is--and referring to one of the Senator's comments
earlier--we do not have a national market. I do not think we
are moving to a national market yet. We are talking about it,
but until we have the capability and the transmission capacity
to move power between these regions--and that is very limited
now--it is going to be more talk than actual markets. So I
think we need to concentrate not just on how to divide up the
current limited transmission capacity, but also find some ways
to increase the transmission capacity so we can really take
advantage of cost differentials in different regions.
Some things that would help. I think in some cases many of
our members would support some kind of limited Federal backstop
siting authority in areas where transmission is desperately
needed for inter-regional transactions and it simply cannot get
done without it.
Improvement in the Federal permitting process where it does
not take so long to get a permit across Federal lands would be
helpful.
Financial incentives to bring capital into the market to go
into new transmission would be most helpful.
Let me just conclude, Mr. Chairman, with that, and I will
be happy to address any specific questions you have.
[The prepared statement of Mr. Franklin follows:]
Prepared Statement of H. Allen Franklin, Chairman, President,
and CEO, Southern Company
Mr. Chairman and Members of the Committee: My name is H. Allen
Franklin, and I am Chairman, President and CEO of Southern Company.
Southern Company is the parent company of Georgia Power, Alabama Power,
Savannah Electric, Gulf Power and Mississippi Power. These five
operating companies serve 4 million customers in Alabama, Florida,
Georgia and Mississippi. We are a vertically integrated utility
business with over 38,000 MW of generation, 28,000 miles of
transmission lines, and sales of 180 billion kilowatt-hours. I am
testifying on behalf of the Edison Electric Institute (EEI). EEI is the
association of U.S. shareholder-owned electric utilities and industry
affiliates and associates worldwide. We are pleased to have the
opportunity to testify today on several electricity proposals from last
Congress and this Congress.
I plan to discuss EEI's priorities in an electricity bill and
comment on specific provisions in the various electricity proposals.
But, first, I would like to provide a brief overview of the current
financial crisis affecting our industry, which serves as a critical
backdrop against which you are considering legislation.
financial challenges facing the electricity industry
The electricity industry is facing its worst financial crisis in
decades, as the aftermath of the Enron implosion, a boom and bust cycle
in generation in some areas and the economic slowdown have combined to
erode investor confidence. This has had a devastating impact on the
ability of many utilities to access capital on reasonable terms. As the
most capital-intensive industry in the country, the higher cost of
capital makes it more difficult to finance infrastructure projects to
maintain reliable electric service. EEI submitted a written statement
explaining in greater detail the financial conditions facing our
industry for this Committee's hearing on March 4 on this subject.
Utility stocks used to be the safe haven for ``widows and
orphans,'' who relied on steady utility dividends to help meet their
income needs. Now, however, the capital markets view much of the
electricity sector as high risk. Consolidation in the banking industry
and federal barriers to investment in the electricity industry increase
the difficulty of finding willing investors who are able to provide the
needed capital infusions to the electricity industry.
The last year has seen a ``return to basics'' movement in the
industry. Utilities and their customers have been painfully reminded by
the upheaval in electricity markets that electricity is not just
another commodity, but is instead an essential service for all
consumers. And, we have recognized the importance of assuring the
integrity of electricity markets to investors, customers and the public
at large.
overview of electricity legislation and eei's priorities
According to the Department of Energy, competition in wholesale
electricity markets reduces consumers' electricity bills by nearly $13
billion annually. While experience with retail competition clearly has
been mixed, wholesale competition can benefit consumers. Congress
should focus its legislative efforts on promoting the benefits of
wholesale competition, while ensuring that retail consumers continue to
receive affordable and reliable electricity.
Congress can promote a more efficient competitive wholesale
electricity market by addressing those electricity issues that only
federal legislation can resolve in a way that provides the right
incentives to increase capital investment in the nation's energy
infrastructure, ensures efficient and reliable wholesale markets, and
sets a clear direction for the future.
Many in our industry are concerned that federal electricity
legislation could add to the industry's challenges in these financially
turbulent times if legislation decreases regulatory flexibility or
increases the uncertainty and costs of providing affordable electric
service to our consumers. To put it in engineering terms, the margin
for error in our industry is significantly reduced right now.
improving wholesale electric markets
EEI supports the development of more liquid, transparent wholesale
electricity markets that provide regional flexibility for participants
to design those markets to best fit regional needs while fostering
greater efficiency. The Federal Energy Regulatory Commission (FERC)
issued last summer its proposed Standard Market Design (SMD), which was
intended to resolve some issues that the Commission believes are
impeding robust competition. EEI believes that FERC was trying to
achieve the right goals in issuing the SMD NOPR--most notably to bring
certainty and efficiency to wholesale markets. And while the SMD
proposal appeals to some EEI members more than others, and some regions
more than others, there is universal agreement that changes are needed
to the proposal. SMD must be formulated in a way that makes it workable
both in regions that have chosen to deregulate retail markets, and
those regions that have chosen to continue the vertically-integrated,
utility franchise model of electric service.
There are elements of the SMD proposal that we do agree with.
Specifically, we support the development of regional markets that have
the following characteristics:
1. Independent system control, by either not-for-profit or
for-profit regional transmission organizations (RTOs), that
have no financial ties to market participants. However, FERC
has focused too narrowly on structural divestiture as the test
for independence and has disregarded state decisions preferring
integrated utility companies. For example, FERC's proposed
policy offering an additional 150 basis points to return on
equity demonstrates its preference for transmission
divestiture. In addition, FERC is threatening to impose
standards of conduct that unnecessarily interfere with least-
cost planning and corporate governance. Integrated utilities
should not have to divest transmission or adopt extraordinary
measures beyond those in Order Number 2000 in order to
establish independence of transmission operations;
2. A role for independent transmission companies within RTOs;
3. Establishment of real-time markets;
4. The elimination of pancaked transmission rates within
regions to promote wholesale trade;
5. A means for managing congestion on transmission networks;
6. A regional approach on issues such as transmission
planning, resource adequacy and transmission siting decisions,
possibly through a multi-state entity; and
7. Finally, the same rules must apply to all transmission
facilities, including those owned or operated by entities that
are not currently subject to FERC jurisdiction.
There are, however, significant regional differences in matters
such as the extent of retail competition, generation reserves, past
organization and uses of the grid, the role of various fuel sources
such as hydro, and the extent of development of competitive markets
which affect the potential economic benefits of wholesale regional
markets to ultimate customers that have caused the SMD proposal to be
extremely controversial in many quarters. Part of this divide is simply
due to the fact that the economic benefits of wholesale markets to
ultimate customers can be much greater in regions which allow retail
competition than in states where pervasive retail regulation remains.
These regional differences cause the cost benefit of implementing a
detailed SMD to be very different in different parts of the country and
account for the vastly different views of, and political support for,
FERC's SMD.
Therefore, because there are real and legitimate regional
differences, we believe that FERC has to give much greater credence, to
and allow much more flexibility for, regional concerns. This is
particularly important with respect to the following issues:
1. Assurance that native load will continue to have priority
in use of the transmission system that was built to serve their
needs. In the case of states that have retail competition, the
transmission rights should follow the load and go to whomever
serves the retail customer.
2. Pricing of transmission expansion and interconnections,
including participant funding concepts, so that costs of new
facilities are not imposed on customers who do not benefit from
those facilities. This issue is particularly important in
regions where generation is being built far from load to take
advantage of fuel availability, siting considerations, and for
other reasons. Solving this issue will also go a long way to
assuaging state opposition to siting facilities that primarily
benefit out-of-state users and removes a hurdle to state
support for RTOs in some regions.
3. Allocation of the costs of the existing transmission
system. In regions where significant generation is being
constructed for export, or significant amounts of power are
being transmitted through the region, these wholesale users of
the transmission system should pay an equitable share of the
fixed costs of the existing system.
4. State control of rates for bundled retail transactions.
Many question whether FERC's rules and decisions will allow for
adequate regional flexibility on these issues. And while not all EEI
members agree, many believe that Congress needs to deal with these
issues in energy legislation to ensure that regional differences are
properly accounted for by the FERC. This would clearly increase
political support in some regions for moving forward with RTOs. One
approach might be to statutorily require FERC to give substantial
deference to the views of states and regional organizations in the
process of approving the formation of and changes to regional
transmission organizations, especially related to the four items listed
above. We would be pleased to work with the Committee to further
develop these concepts.
regional energy service commissions (rescs)
Clearly, one of the most controversial issues that has been raised
by the FERC SMD proposal is how to align competitive wholesale markets
that operate on a regional basis with state responsibilities over
retail sales and service. We have long advocated close cooperation
between FERC, the states and stakeholders in designing regional
institutions, and we certainly recognize the difficulties in designing
any institution that achieves the right balance between legitimate
state and federal concerns. We believe the Committee RESC proposal,
outlined in the March 20, 2003. Senate Staff Discussion Draft (``Senate
Staff Discussion Draft'') is a good faith effort to address this
problem, and we commend the Committee for floating a potential model
for addressing the tensions between state and federal regulation. But
as currently drafted, we believe the proposal raises more questions
than solutions. The proposal is much more problematic and appears to
add more uncertainty and complexity than needed.
There is the fundamental constitutional question of whether
Congress may delegate to the Department of Energy (DOE) authority to
approve a multi-state agreement. There are also questions as to what
standards DOE must apply to approve such an agreement and what criteria
DOE could apply to disapprove a RESC submission. We have major concerns
about the inability of interested parties, particularly those who own,
operate or would use regional transmission facilities. to comment on
any RESC submission.
As drafted, the RESC would add a third level of rate regulation
unless the RESC covered an entire interconnected network (an unlikely
outcome). And, it would still leave FERC with significant regulatory
authority and the last word in resolving issues. This is clear if we
look at the West. If we were to have two or more RESCs (a very likely
option), FERC would continue to regulate transactions between the
RESCs. FERC would also continue to regulate transactions between a RESC
and any state that did not join a RESC. This would create two levels of
interstate regulation--the RESC and FERC. In the West, this is very
likely to lead to a significant FERC role since so much power is
imported from or exported to different regions. If a RESC continues to
allow a state to regulate bundled retail transmission (as many would),
we would have three layers of regulation.
In addition, under the draft, FERC would resolve disputes between
states and RESCs and between RESCs. It is not clear what criteria FERC
would apply. It is also not clear whether FERC could impose new
standards or requirements on RESCs. However, it is clear that FERC
would have the ``last word,'' which ultimately provides very
significant power.
If the RESC regulates interstate transmission within the RESC, a
number of important practical, due process and transitional questions
arise. The suggestion that the RESC ``have the capability to address
rate requirements'' is very unclear. Must the RESC apply the standards
of Section 205 and 206 of the Federal Power Act, or may it apply
different standards? How is the transition to RESC-approved rates
conducted? What happens to rates that have previously been approved by
FERC and that come under RESC jurisdiction? Are those decisions
grandfathered or must every transaction be resubmitted for RESC
approval?
What is the process for judicial review and what are the rights of
parties? Will transmission owners, operators, users and other
interested stakeholders have rights to participate before the RESC and
to appeal RESC decisions? The draft is silent on this very important
issue. Are appeals by parties submitted to FERC, state court or federal
court? Can these parties participate when a state or RESC seeks FERC
resolution of a dispute? If FERC does not hear appeals of RESC
decisions, how are FERC dispute resolution decisions reconciled with
inconsistent court decisions arising from an appeal of a RESC decision?
Can a RESC decision preempt conflicting state law? If a RESC standard
conflicts with a FERC standard, how is the conflict resolved? Where
does a RESC get its enforcement authority?
The organizational structure of the RESC raises a fundamental issue
of state input. Will all states agree to have only one vote or will
populous states want a larger say? Is the RESC a governmental agency
that must comply with procedures like those in the Administrative
Procedures Act, or do references to its ``charter,'' ``protocols,'' and
``by-laws'' suggest the RESC is more of an advisory or consultative
body? And, why must a state be limited to a single RESC if it operates
in more than one electrical interconnection?
The potential breadth of RESC authority, while desirable in many
circumstances, also raises many questions. Any regional organization
should be able to assert authority over all transmission-owning
entities. However, with the exception of the provisions authorizing
federal utilities to participate in a transmission organization
approved by a RESC, there is no clarification of RESC authority over
other government-owned utilities or cooperatives. Also. the RESC's
authority over ``reliability standards and rules'' should be more
carefully defined to assure consistency with the reliability section of
the Senate Staff Discussion Draft.
While EEI supports regional flexibility in the development and
design of wholesale electricity markets, we believe that the RESC
proposal, while very well intentioned, does not achieve the proper
balance of interests between the states, the federal government, owners
and users of the grid and other affected parties. And, this proposal
threatens to add redundant regulation and far too much uncertainty to
an industry that needs more certainty, not less.
We appreciate the attempt to devise a creative solution to a
complex issue and are pleased to continue to work with the Committee,
FERC, the states and other shareholders to refine a workable regional
approach. However, an issue this complex will take time to work out. In
the interim, we believe that issues of state and federal jurisdiction
under the current regulatory framework need to be addressed, as
discussed earlier in this testimony.
improving the operation of, and investment in, transmission
infrastructure
Healthy competitive wholesale markets depend on robust transmission
systems to move power to where it is needed. Unfortunately,
transmission growth has not kept pace with electricity demand. Our
current transmission infrastructure was never built for the purpose of
moving large quantities of power across long distances. According to
the North American Electric Reliability Council (NERC), the volume of
actual transmission transactions has increased by 400 percent in the
last four years. Increased congestion on transmission lines not only
increases costs to consumers, but it also threatens the system's
reliability.
At the same time that congestion is increasing, investments in
transmission have actually been declining. Over the past 25 years,
investments in transmission have fallen at a rate of $103 million per
year compared to the investment needed just to maintain the current
level of transmission adequacy. Difficulties in siting new transmission
lines, on both private and public lands, and in raising capital are
significant obstacles that have contributed to this decline in
transmission investment.
In addition, most new transmission currently is being built to
serve local load and to connect new generation to the grid, instead of
the high-voltage wires needed to strengthen regional electricity
markets. The relative annual growth rates in lower voltage lines and
higher voltage lines have changed significantly since the early 1970s.
In the early 1970s, the annual growth rate in lower voltage line-miles
(69 kV and below) that support localized grid operations and
interconnections was 1.9 percent, while the annual growth rate for
high-voltage line-miles (115 kV and higher) was 3.2 percent. By the
latter half of the 1990s, this relationship had reversed: the higher
voltage line-miles were growing at only 0.3 percent, while lower
voltage line-miles were growing at 3.5 percent.
We were very disappointed that the electricity title being
negotiated as part of last year's energy bill appeared unlikely to
include any provisions designed to improve our transmission
infrastructure. Therefore, we are encouraged that a number of
electricity proposals being considered this year include provisions to
enhance transmission infrastructure. We strongly believe that these
issues should be addressed in any final electricity title approved by
Congress.
Reliability--Increasingly competitive wholesale electricity markets
and traditional voluntary reliability standards are no longer
compatible. We need a new reliability regime capable of developing
mandatory reliability rules that are enforceable on all users of the
transmission system.
We believe the reliability provisions in S. 475, the electricity
bill introduced by Senator Thomas, best meet this objective (the
``Thomas bill''). The Thomas bill reflects the latest consensus among
stakeholder groups that have been working on reliability legislation
for several years now. We strongly support its inclusion in the
electricity title to be considered by this Committee.
Open Access (FERC Lite)--The benefits of a robust transmission
system are threatened not only by insufficient investment in
transmission infrastructure, but also by the lack of FERC jurisdiction
over government-owned and cooperatively owned transmission facilities,
which constitute almost 30 percent of the nation's interstate
transmission system. In the Pacific Northwest, the federal Bonneville
Power Administration (BPA) alone owns and controls nearly three-
quarters of the region's high-voltage transmission capacity. The entire
state of Nebraska and most of Tennessee are served by non
jurisdictional utilities, creating huge geographical gaps in FERC's
authority.
According to a December 2002 GAO report, ``Lessons Learned From
Electricity Restructuring,'' because of this lack of jurisdiction
FERC has not been able to prescribe the same standards of
open access to the transmission system. This situation, by
limiting the degree to which market participants can make
electricity transactions across these jurisdictions, will limit
the ability of restructuring efforts to achieve a truly
national competitive electricity system and, ultimately will
reduce the potential benefits expected from restructuring.
We believe that this bifurcated regulation of interstate
transmission lines is ultimately unsustainable as the industry's
structure continues to evolve. The nation's transmission and is
physically integrated. Electrons do not recognize boundaries between
public and private transmission ownership.
We believe sound public policy to protect consumers would mean
putting all utilities participating in interstate wholesale electricity
markets under FERC's full ``just and reasonable'' requirements. At a
minimum, EEI's member companies strongly support inclusion of an
effective ``FERC lite'' provision in any electricity bill. We believe
that the March 24 version of the Senate Staff Discussion Draft meets
these objectives.
With regard to a provision in both the Thomas bill and the Senate
Staff Discussion Draft, we note that the ability of government-owned
utilities to finance transmission facilities with tax-free ``private
use'' financing no longer provides a barrier or excuse for their
failure to participate in RTOs or to offer open access upon terms
comparable to that required by FERC. Last year the Treasury Department
promulgated regulations that permit ``private use"-financed
transmission facilities to participate in FERC-approved RTOs. As a
result, the provisions referring to ``private use'' are no longer
necessary.
FERC Backstop Siting Authority--We believe that state siting
processes will continue to be adequate for the construction of most new
transmission and that limited, new FERC backstop authority will be used
only as a last resort in very limited instances. However, we believe
that the authority could be critically important in those instances.
Wholesale electricity markets are becoming increasingly regional as
power flows across multiple states and as multi-state RTOs gain
operational control of utility transmission lines. Most state siting
laws do not recognize the role new entities such as RTOs will play in
transmission planning nor do they specifically allow for the
consideration of regional, not just state benefits of new transmission
lines. If states consider only intrastate benefits and not regional
benefits, they may have little choice under state law but to reject the
proposed line, even if the benefits to the region are significant.
Regional electricity markets require a siting process that has the
ability to consider regional and even national needs. FERC has
jurisdiction over wholesale electricity markets, but it currently does
not have the authority over transmission siting to help ensure that
there is sufficient transmission capacity to support those markets. In
comparison, FERC has the authority to site interstate natural gas
pipelines. We believe the Commission should have at least limited
backstop siting authority.
We believe that the limited FERC backstop transmission siting
provisions included in both the Senate Staff Discussion Draft and the
House Energy and Commerce Committee Draft Electricity Title (``House
Committee Draft'') are intended to achieve this goal. We would be happy
to work with the Committee to fine-tune this language.
Federal Permitting of Transmission Lines--The length and
complicated nature of the federal permitting process makes it difficult
to address transmission infrastructure issues adequately and in a
timely fashion. The federal permitting process for rights-of-way when
multiple federal jurisdictions are involved is fragmented and
duplicative, with each agency working under its own deadlines and
without any coordination with the state process.
Indeed, we are finding that our member companies are going to
extraordinary lengths to avoid siting on federal land if at all
possible because of that process. This places a greater burden on
private lands and, in some cases, state lands to meet the nation's
needs for grid infrastructure enhancement. The byproduct is the
potential for more conflict with private landowners and an
underutilization of federal lands, even where those lands may be best
suited to help fulfill the nation's infrastructure needs.
The House Committee Draft generally addresses our objectives in
improving the federal permitting process, and we strongly support
including these provisions in the electricity title to be considered by
this Committee. The Thomas bill also recognizes the need to address
federal permitting issues by including provisions on federal agency
coordination and rights-of-way across federal lands, although these
provisions are not likely to be as effective as those in the House
Committee Draft because of the highly decentralized way that
transmission and distribution facilities are certificated.
The House Committee Draft provisions would provide the opportunity
for the Department of Energy to serve as a lead agency and would give
that agency the authority to develop and set deadlines for the federal
environmental review and permit process and to coordinate the process
with state siting processes.
In addition, the House Committee Draft includes helpful provisions
on interstate compacts, and we believe the House Committee on Resources
is likely to address federal corridors. We have a concern with the
application of the House Committee Draft's savings clause that we would
be happy to work with this Committee to remedy. Finally, in this area,
we would be concerned if this Committee adopted a provision that would,
intentionally or unintentionally, require a federal agency to foreclose
the opportunity to site a transmission line on land within their
jurisdiction that is presently available, albeit under considerable
restrictions. to site transmission.
Transmission Investment Incentives--While FERC has existing
authority to address transmission pricing issues, this has not been a
high priority of the Commission's. In addition, while FERC's recent
pricing initiatives appropriately provide incentives for independent
operation and control of transmission facilities, FERC has focused too
narrowly on complete divestiture of transmission facilities and has not
adequately recognized vertically integrated utilities that are turning
operational control, but not ownership, of their transmission lines
over to regional transmission organizations (RTOs). Congressional
encouragement to FERC on transmission pricing would be helpful.
Both the House Committee Draft and the Senate Staff Discussion
Draft would direct FERC to issue a transmission pricing policy rule
within one year to promote investment in new transmission and address
cost allocation issues.
Regional Transmission Organizations--We are pleased that none of
the electricity proposals being considered at this hearing include
mandatory RTO participation provisions. EEI's member companies are
moving aggressively to comply with FERC Order Number 2000 on RTOs.
We believe it is essential to eliminate any legal uncertainty about
whether federal utilities can delegate authority over their
transmission systems to a RTO. We believe the provisions in both the
Senate Staff Discussion Draft and the House Committee Draft accomplish
this goal. However, we encourage this Committee to add the House
language clarifying existing statutory obligations.
removing federal barriers to wholesale competition and investment
Among the electricity issues that only Congress can address are
repeal of the Public Utility Holding Company Act (PUHCA) and reform of
the mandatory purchase obligation under the Public Utility Regulatory
Policies Act (PURPA). The structure and regulation of electricity
markets have changed dramatically since these federal statutes were
enacted, and they are in desperate need of reform. PUHCA was enacted in
1935 during the New Deal; PURPA represents the only part of the Carter
Administration's 1978 energy plan still in effect.
PUHCA Repeal--We strongly support PUHCA repeal, which has been part
of every major electricity bill and has long been recommended by the
Securities and Exchange Commission and other federal agencies. PUHCA is
a long-standing barrier to capital investment in the utility industry,
the creation of independent regional transmission companies and the
entry of additional players in wholesale and retail electricity
markets. The current capital investment crisis in the utility industry
makes PUHCA repeal more important now than ever.
We believe that the PUHCA provisions included in the Senate Staff
Discussion Draft should be included in any electricity title considered
by this Committee. These provisions both repeal PUHCA and protect
consumers by providing FERC and the states with enhanced access to
holding company books and records.
PURPA Reform--PURPA's mandatory purchase obligation is incompatible
with competitive wholesale electricity markets. PURPA requires electric
utilities to purchase power from certain legislatively-favored
generators at government-determined prices.
These prices were supposed to ensure that consumers would pay no
more for PURPA power than for other power. Unfortunately, due to a
confluence of factors not foreseen by the authors of PURPA, FERC or
state regulators, this has not been the result. Instead, long-term
PURPA contracts generally have proven to be at rates far above
competitive market prices of electricity.
Competition in electricity generation has been unleashed by the
enactment of the Energy Policy Act of 1992 and the issuance of FERC
open-access rules in 1996 (Orders No. 888 and 889). Consequently,
electricity generators and wholesale customers have access to each
other under the same terms and conditions applicable to the utility
owning the transmission wires. QFs favored by PURPA have the right to
request transmission service and to sell power to any wholesale
customer, just like any other generator. They do not need the special
privilege of being able to sell to a purchasing utility at the
utility's ``avoided cost'' rate.
We oppose predicating repeal of PURPA's mandatory purchase
obligation on FERC findings that certain market tests have been
satisfied. For example, the test included in the October 16, 2002,
Senate Offer (``Senate Offer'') was derived directly from FERC's
proposed Standard Market Design (SMD) rulemaking. Memorializing in
legislation the specific market attributes proposed by FERC in the SMD
would codify a rigid view of what constitutes a workably competitive
electricity market. FERC, itself, subsequently has indicated that there
should be greater regional flexibility in structuring markets than this
test envisions and has already approved an RTO with a real-time but no
day-ahead market.
We strongly support the PURPA provisions contained in the Thomas
bill. These provisions should be included in any electricity title
considered by this Committee.
retail electric service issues
Net Metering--Because net metering is a retail electric service
issue, we are pleased that the net metering provisions in the Senate
Staff Discussion Draft, the Senate Offer and the House Committee Draft
are all a PURPA Section 111(d) requirement that the states consider
such a program. We oppose a federally mandated net metering program
that would preempt state decisions or existing programs.
To the extent that any state follows the net metering provisions in
these drafts as guidelines, we do have a number of concerns. The
provisions that would prohibit any standby, capacity or interconnection
charge create an uneconomic subsidy when such charges are economically
justified. In addition, the provisions that would measure net metering
``in accordance with normal metering practices'' are confusing because
net metering is not the norm at this time, and this language implicitly
prevents the use of more advanced ``smart'' metering technologies. The
better approach is to require simultaneous metering of energy sold to
and sold by an on-site generating facility.
In addition, these proposals go beyond encouraging renewable energy
resources when they endorse net metering for combined heat and power
facilities up to 500 kilowatts in size at commercial facilities. As we
have learned from PURPA, cogeneration in and of itself does not always
mean a facility that is more energy efficient or desirable.
Real-Time Pricing and other PURPA Standards--Real-time pricing and
time-of-use metering obviously are retail electric issues that should
be addressed by the states. If these issues. as well as other such
retail electric issues, are addressed in a federal electricity bill, we
believe they should be PURPA 111(d) requirements. We prefer the
provisions in the House Committee Draft to the Senate Staff Discussion
Draft with regard to the adoption of additional PURPA standards.
promoting renewable energy resources
EEI's member companies support a growing role for economically
affordable renewable energy resources in meeting our energy needs. We
support extending and expanding the Section 45 production tax credit,
as well as increased funding for renewable energy research and
development. However, because of the significant regional differences
in availability, amount and types of renewable energy resources, we
believe it is important for the states to determine whether requiring a
certain percentage of electricity to be generated from renewable energy
resources makes sense for their consumers.
States already are encouraging the development of renewable energy
resources through a variety of programs that best fit their own
circumstances. More than 90 utilities in 30 states have implemented or
announced green pricing programs to support investment in renewable
energy technologies. Forty-three states support programs that offer
incentives, grants, loans or rebates to consumers using renewable
energy resources. And, 13 states have adopted renewable portfolio
standards. Electric suppliers in nine states with competitive retail
markets are offering green power products to consumers.
maintaining market integrity
The integrity of wholesale electric markets must be restored and
maintained. The public, our investors and our customers must have
confidence in our markets. That is why EEI supports FERC's efforts to
foster transparent, liquid regional wholesale electric markets. We
believe such markets will provide the basis for price transparency and
an effective platform for market monitoring and oversight. We also
believe that FERC's authority to assure that rates are just and
reasonable gives it broad authority to prohibit fraudulent and
deceptive practices.
Anti-Manipulation and Enforcement Provisions--The three most recent
electricity proposals--the Senate Staff Discussion Draft, the Thomas
bill and the House Committee Draft--address several market manipulation
concerns. The market transparency provisions would make sure that FERC
develops appropriate price and market information. Round trip trading,
which we agree is improper, would be prohibited. The Senate Staff
Discussion Draft and the Thomas bill also appropriately prohibit the
filing of false information. In addition, all of these proposals would
beef up FERC's enforcement authorities and make the refund effective
date essentially the date that a complaint is filed. In light of events
that have occurred in electricity markets over the last several years,
we understand Congress's desire to make these changes to the Federal
Power Act.
Our biggest concern with these provisions is that they do not
extend to all participants in interstate wholesale electricity markets.
Neither the Thomas bill nor the Senate Staff Discussion Draft cover non
jurisdictional utilities because they are not a ``person'' under the
Federal Power Act and must be specifically referenced, pursuant to
Section 201(f) of the Federal Power Act in order for the section to
apply to them. Use of the word ``entity'' alone is insufficient.
consumer protections
FERC Refund Authority--We strongly urge the Senate to include
language in its electricity title that would give FERC authority to
order refunds from government-owned utilities and electric cooperatives
that it determines have charged unjust and unreasonable rates. We
believe this provision is essential to protect consumers from any
electricity supplier that overcharges consumers. The House Committee
Draft takes a first step in this direction, although that provision is
too narrowly drafted and has so many qualifications as to be virtually
ineffective.
No market participant in interstate wholesale electric markets
should be immune from FERC's investigative and remedial authority.
Recent news accounts make it clear that alleged improper activities in
electricity markets are not limited to jurisdictional utilities. The
state of California and other parties recently submitted a massive
filing to FERC that, according to news stories, alleges that California
municipal utilities engaged in a number of Enron-type manipulative
market strategies. These alleged market schemes include municipal
utilities engaging in ``Ricochet'' trades, involving selling power out
of state and then back into the state to avoid price caps, and ``Death
Star,'' in which companies created false congestion on the transmission
system and then were paid a premium to remedy the problem. We note that
the alleged ``Death Star'' activities were facilitated because the
California Independent System Operator does not operationally control
government-owned utilities' transmission systems.
We firmly believe that all participants in competitive interstate
wholesale markets, including government-owned utilities, should be
subject to the same rules and requirements and to FERC's full rate
refund authority. As California's electricity crisis painfully
demonstrated, retail consumers desperately need the consumer
protections offered by FERC's ``just and reasonable'' rate standard and
refund authority applied to all electricity suppliers.
Consumer Privacy/Unfair Trade Practices--The provisions relating to
consumer privacy and unfair trade practices (prohibiting slamming and
cramming) are essentially identical in both the House Committee Draft
and the Senate Staff Discussion Draft. We support these provisions.
Information Disclosure--The Senate Staff Discussion Draft includes
provisions requiring the Federal Trade Commission (FTC) to issue rules
proscribing what type of information must be provided to electricity
consumers. While we believe the FTC already has the authority to issue
``truth-in-advertising'' rules, we are concerned about forcing
utilities to track and report the share of electricity generated from
each type of energy resource and the generation emissions
characteristics of electricity.
conclusion
As we have stated, only Congress can address a number of critically
important electricity issues. We hope our comments on these electricity
proposals are useful to the Committee as it prepares to mark up a
comprehensive energy bill. We look forward to working with you to
produce the first comprehensive energy bill since the passage of the
Energy Policy Act of 1992.
The Chairman. Thank you very much.
Mr. English, a former member of Congress. Glad to have you
here.
STATEMENT OF GLENN ENGLISH, CEO,
NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION
Mr. English. Thank you very much, Mr. Chairman. I
appreciate it. I am Glenn English, the chief executive officer
of the National Rural Electric Cooperative Association. We
represent nearly 1,000 electric cooperatives in 47 States,
which is privately owned by some 35 million consumers. And I am
very pleased to be here, Mr. Chairman.
Mr. Chairman, much of the discussion that we have heard
today both from members of the committee, as well as from those
who are testifying, have alluded in one way or another to the
whole question of instability, talked about instability in the
electric utility industry. And there is no question we have
seen tremendous instability in recent months, and from what we
are told by those who are analysts and experts in the industry,
we are probably going to see even more in the not too distant
future.
Mr. Chairman, I think we have got to look to the causes of
much of the difficulty that is coming about in the electric
utility industry, and not all of it I think can be pointed to
from a standpoint of legislation or change within the industry.
We have also got to take a hard look at the actions of the
people within the industry. We have had scandals and we have
had some very bad business decisions by those who are involved
in this industry that have brought about much of this
uncertainty, this insecurity.
If you talk to the financial markets, you find that there
is no single answer other than the fact that the whole electric
utility industry seems to be unstable, and there is not a
willingness to invest money. I know in the discussions that we
have had--and certainly the testimony we have heard before this
committee and the other body--have really focused on the
question, well, is the answer incentive rates? We simply have
to put more money in to build more transmission.
Is that the only answer? What we are told by those who are
in the business of investing that money, you can reach the same
kind of destination if you reduce the risk if you bring about
more stability.
I think that Senator Thomas certainly put his finger on it
that it is the job of the Congress to establish policy.
Certainly there is a need for the Congress to bring about some
stability in the electric utility industry at this time, to
bring some common sense to this business so people have some
kind of certainty, some kind of expectation.
I would suggest to you, Mr. Chairman, that as we look at
the four pieces of legislation that you asked each of us to
examine, we endorsed the legislation that came forth from this
body last year, H.R. 4. If we were required to make a decision
today, would we endorse H.R. 4 as it stands? I think we would
have to say no. The reason we would have to say no is because
H.R. 4 was based on the assumption that we were going to be
operating under FERC Order 888, but we cannot say today we are
going to be operating under FERC Order 888. And this completely
changes everything as to whether or not electric cooperatives
would find that they could carry out their responsibilities.
Standard market design is a very uncertain thing, and I
would suggest that all the elements of the various pieces of
legislation that are going to be affected by standard market
design or in some way related to standard market design really
should be withheld until we know for certain what we are
dealing with.
It is true from a policy standpoint, the Congress may need
to address these issues again when the Federal Energy
Regulatory Commission finally works its way and completes the
rules and regulations. True, we will have the white paper next
month, but until we see those final rules and regulations, we
do not know for certain what we are dealing with and we do not
know what kind of changes need to be brought about.
Certainly, as we look at this issue of taking a time out on
those kind of SMD-related issues, does not mean that Congress
could not move forward with regard to other pieces of
legislation. Reliability, many other elements may need to be
advanced and included in any kind of an energy bill. We are not
suggesting an energy bill be held up, but we would feel much
more comfortable if we knew that the Congress intended to act
on electricity legislation after we knew what the final rules
and regulations are.
Mr. Chairman, that may be a result of my experience as a
legislator, and far too often I have seen legislation that I
have been a part of crafting go to regulators and see it
changed and implemented in ways that I never intended. So
perhaps I am being a little too cautious, but I think not.
Let me also suggest, Mr. Chairman, that what has taken
place in the last few months, what we are learning about this
industry, the scandal and the bad management that has taken
place, I think also urges the Congress to include consumer
protection as one of the elements that they have as their
policy. Certainly merger review is very important, but it has
been suggested and contained in virtually every one of the
proposed pieces of legislation that the Public Utility Holding
Company Act be removed. We would much prefer to see that
modernized and updated to fit the situation we are dealing
with, but that does not seem to be an option that the Congress
is considering.
As a result of that, we would certainly urge that it be
replaced with consumer protection. We do not think that you can
simply trust that everyone will do the right thing, and
certainly that is not true in the electric utility industry
anymore than it is true anywhere else in the country. We need
rules and regulations to deal with wrongdoing.
Let me also say, Mr. Chairman, that small utilities should
be considered. I know in the proposed legislation over on the
House side as it originated, we had small electric cooperatives
that would be having to report to the Federal energy regulatory
agency. In one case we had one cooperative that only had five
employees that was going to have to deal with the same
regulatory hurdles as some of the largest electric utilities in
this country. That simply does not make sense. We would hope
that the Congress would include, as a part of its policy, the
fact that these resources, very limited and scarce resources,
be focused on where the problem lies, be focused on the area in
which we have come to recognize the most abuse is taking place,
to come to recognize that it would be focused on the area where
they would have the greatest return.
I would be happy to answer your questions, Mr. Chairman.
[The prepared statement of Mr. English follows:]
Prepared Statement of Glenn English, Chief Executive Officer,
National Rural Electric Cooperative Association
executive summary
Congress should take a ``time out'' on comprehensive electricity
legislation. The forces underlying the current industry turmoil are not
clearly understood by the industry or the public.
Many elements of electricity legislation are inextricably
tied to the Federal Energy Regulatory Commission's proposed
Standard Market Design. It is important to give FERC time to
more fully explain its implications. The White Paper from FERC
requested by Senator Domenici is an important step in informing
Congress for how they should approach the SMD proposal
legislatively.
Legislation should not impose burdensome new regulatory obligations
on electric cooperatives. FERC Chairman Wood says that new regulations
on cooperatives are unnecessary.
A critical statutory duty of FERC is to establish ``just and
reasonable'' policies. Therefore proposals to restrict FERC's current
ability to protect consumers by narrowing their options to respond to
evolving markets and regional differences should not be codified. Such
harmful provisions include mandates for particular forms of
transmissions pricing, transmission structures, and transmission
functions.
The laws that are designed to protect consumers in the electric
utility industry have never been more important particularly as we
transition to a competitive market place. This is not the time to
repeal the Public Utility Holding Company Act (PUHCA) without careful
thought and replacement of consumer protections or undermine FERC's
current merger review authority.
The federal Power Marketing Administrations' and TVA's statutory
and contractual obligations to their consumers and their regions must
not be overridden.
When Congress considers an electricity title, it should enhance
FERC's existing authority to protect consumers without limiting FERC's
discretion and flexibility or distracting it from its core mission of
ensuring just and reasonable rates, terms, and conditions of interstate
transmission and wholesale electricity sales, by:
Giving FERC clearer authority to ensure that utility mergers
are in the public interest;
Encouraging FERC to review the standards under which it
approves market based rates;
Providing for limited federal siting authority for
facilities determined by a regional planning process to serve
consumers in the region;
Creating an industry-based national self-regulating
reliability organization;
Providing for greater market transparency;
Prohibiting round trip trading;
Enhancing criminal and civil penalties for violations of the
Federal Power Act; and,
Moving up the refund effective date under Federal Power Act
Sec. 206 to the date that a complaint is filed at FERC.
introduction
Chairman Domenici and Members of the Committee, I appreciate this
opportunity to continue our dialogue on the restructuring of the
electric utility industry. For the record, I am Glenn English, CEO of
the National Rural Electric Cooperative Association, the Washington-
based association of the nation's nearly 1,000 consumer-owned, not-for-
profit electric cooperatives.
These cooperatives are locally governed by boards elected by their
consumer owners, are based in the communities they serve and provide
electric service in 47 states. The more than 35 million consumers
served by these community-based systems continue to have a strong
interest in the Committee's activities with regard to restructuring of
the industry.
Electric cooperatives comprise a unique component of the industry.
Consumer-owned, consumer-directed electric cooperatives provide their
member-consumers the opportunity to exercise control over their own
energy destiny. As the electric utility industry restructures, the
electric cooperative will be an increasingly important option for
consumers seeking to protect themselves from the uncertainties and
risks of the market. I would like to thank you, Mr. Chairman, and
Members of the Committee for your receptiveness to the concerns and
viewpoints of electric cooperatives.
time out on electricity
Congress should take a time-out on comprehensive electricity
restructuring. It should take time to review the failed deregulation
schemes of recent years before it acts. Further, because many elements
of the electricity title are closely tied to the Federal Energy
Regulatory Commission's proposed standard market design, Congress
should wait on electricity legislation until FERC has completed that
broad rulemaking process. And, Congress should avoid bogging down
important energy legislation with a controversial electricity title.
The electricity industry is in a state of turmoil and rapid change.
In some parts of the country, the competitive wholesale power
marketplace is rapidly developing. In other regions, wholesale
competition is developing at a more deliberate pace. Retail competition
continues forward in a few states, has stalled in many, and is in full
retreat in some others. Wall Street, FERC, and the industry are all
still trying to determine what lessons we should take from the disaster
in California's market, Enron's bankruptcy, and the rapid decline of
many power marketers, independent power producers, and investor-owned
utilities. Investors, the Commission, and the industry are still
working to piece together the causes of this turmoil.
Now, therefore, is not the time for Congress to act on
comprehensive electricity restructuring. If Congress moves now, and
enacts electricity legislation before the causes of the turmoil have
been thoroughly analyzed, Congress risks codifying the very problems
that it seeks to solve.
Just as important, the Federal Energy Regulatory Commission is in
the process of drafting its dramatic new standard market design
proposal. While NRECA believes that rule needs significant changes if
it is to bring consumers the promised benefits of robust wholesale
markets, NRECA believes that FERC should be given the time to
reconsider, refine, and remake its standard market design proposal
before Congress acts on electricity legislation. Many elements of
proposed electricity legislation are closely intertwined with SMD. For
example, legislative proposals with respect to incentive rates,
participant funding, FERC's jurisdictional reach, and even PUHCA repeal
have the potential to undermine FERC's ability to promote a robust
wholesale electric market and protect consumers.
If, after FERC has completed its SMD, Congress concludes that FERC
has erred, that would be the time for this Committee to hold hearings
and call the Commissioners back to their task. And if that fails, the
time will be ripe for Congress to enact an electricity title that
corrects the Commission's failures. But we are not yet at that point.
By acting now, Congress risks denying FERC the resources and
flexibility it needs during this time of change. While the Commission
has the authority today to respond quickly to evolving conditions and
the expertise to anticipate the consequences of its actions, the same
cannot be said of any rigid congressional mandate. Given the rapid pace
of change and the existence of enormous regional differences in power
markets, a policy that might make sense today in one part of the
country may not make sense tomorrow or in another part of the country.
the competing electricity bills
The Committee asked that witnesses address the provisions of four
bills, the Senator Thomas' electricity bill S. 475, Staff Discussion
Draft, the House draft that was marked up on March 19, and the 2002
Senate Counteroffer.
As I've noted, NRECA does not believe that this is the time for a
comprehensive energy title. Nevertheless, I'm pleased to discuss these
proposals with the Committee.
First, in light of our belief that Congress should take a time-out
on electricity legislation, we believe that Senator Thomas' more
minimalist approach is the wisest. Senator Thomas does not restrict
FERC's flexibility with respect to Regional Transmission Organizations,
transmission pricing, and transmission cost recovery; does not repeal
FERC's merger review authority; and does not address any retail
electric issues. His bill does, however, properly include the NERC
reliability legislation and repealing prospectively the mandatory
purchase and sale requirements. We are concerned, however, that S. 475
repeals PUHCA without enacting sufficient market power and consumer
protections to replace the Holding Company Act.
In the 107th Congress, NRECA supported the Senate Energy title.
That bill contained many admirable provisions. It included NERC's
reliability title, PURPA reform, and several critical market and
consumer protections, including enhanced FERC merger review authority.
NRECA was also pleased that it lacked provisions restricting FERC's
flexibility with respect to transmission pricing, transmission cost
recovery, and Regional Transmission Organizations.
This year's Staff discussion draft includes some interesting ideas.
However, as discussed in detail in the written comments, NRECA believes
it requires a great deal more discussion. The important details of
scope, jurisdiction, and authorities of regional energy services
commissions do not yet appear to have been adequately worked out.
NRECA would like to see the reliability provisions revised to be
consistent with the NERC proposal. Due to changes in FERC regulation,
NRECA believes that the so-called ``FERC-lite'' provisions need to be
revised and updated.
And, because the bill repeals PUHCA, NRECA would like to see more
market and consumer protections included in the bill as well.
specific issues within the competing bills
Regional Energy Services Commissions
NRECA certainly understands the problems that underlie the desire
to develop something like RESCs. Along with many others, NRECA has
called on the FERC to be more sensitive to regional differences. We
understand as well as anyone that what works in PJM will not work in
the Northwest. Nevertheless, NRECA believes that the concept of a
Regional Energy Services Commission found in the Staff Discussion Draft
needs more discussion and development before Congress should adopt it.
As we read the Staff Discussion Draft, the RESC would be a mini-
FERC, but with much broader jurisdiction and nearly unlimited authority
with respect to interstate transmission and wholesale markets.
Unlike FERC, RESCs would apparently have full jurisdiction over
municipal utilities, Federal power agencies, and cooperatives with
financing from the Rural Utilities Service. The RESCs could adopt
regulations that conflict with the PMAs' statutory obligations or RUS
regulations, apparently without any process for resolving disputes.
Unlike FERC, it also appears that RESC's would not be required to
follow the ``just and reasonable'' standard or the decades of
jurisprudence defining it. In fact, the draft appears to lack standards
governing the RESC's decisions with respect to rate design, open
access, reliability, or it's other functions.
Unlike FERC, it also appears that RESC's would not be subject to
the Administrative Procedures Act. It is unclear whether RESCs would
have to follow any particular procedures, provide hearings, or
otherwise ensure procedural due process. It is even unclear whether the
decisions of RESCs could be appealed to federal court.
Finally, while the Staff Discussion Draft includes processes for
resolving disputes between RESCs and states, or between RESCs, there
does not appear to be a procedure to help those multi-state utilities
that might serve consumers in more than one RESC, or in an RESC and a
state that is not in an RESC. Utilities could find themselves subject
to numerous conflicting obligations that increase the cost of service
and decrease reliability.
Reliability Standards
NRECA supports the North American Electric Reliability Council's
legislative proposal to create the North American Electric Reliability
Organization as a single national self-regulating reliability
organization with the authority to set mandatory reliability standards
applicable to all users of the bulk transmission system. That proposal
is critical to the continued reliability of the interstate transmission
grid in a competitive environment. For that reason, NRECA supports the
language in the House draft of the bill.
Open Access (FERC-lite)
NRECA opposes any expansion of FERC jurisdiction over cooperatives.
Such expansion is unnecessary, as cooperatives have not denied third
parties access to their transmission systems. Provisions subjecting
cooperatives with RUS financing to additional FERC jurisdiction are
simply a solution in search of a problem.
Even had cooperatives not provided open access to their systems,
FERC already has adequate authority to protect other market
participants. Under Sections 211 and 212 of the Federal Power Act, as
amended and expanded by the Energy Policy Act of 1992, FERC has the
direct and explicit authority to require transmission-owning
cooperatives to provide transmission service to third parties at just
and reasonable rates. Under the principle of reciprocity, FERC has also
required cooperatives to provide transmission service to public
utilities pursuant to terms and conditions comparable to those FERC
imposes on those public utilities.
Even the Chairman of the FERC has stated that the Commission does
not require any additional jurisdiction over cooperatives. Speaking to
reporters in January, Chairman Wood stated ``FERC would not seek
congressional authority over municipals and co-ops, preferring
voluntary approach to entice such utilities into the marketplace.''
``Wood Says He Wants Munis, Co-ops To Want To Be Part Of SMD, But Won't
Force Them,'' Platts, Electric Power Daily, Thursday, January 30, 2003.
NRECA recognizes that it supported the 2002 Senate Counteroffer
even though it included a ``FERC-lite'' provision. That was because
when the idea of ``FERC-lite'' first appeared, the ``Commission rules''
referenced and applied to cooperatives by the provision were Order 888
and its progeny. Since Order 888's reciprocity provisions already
required to some degree that cooperatives provide service comparable to
that imposed on public utilities by Order 888, ``FERC-lite'' did little
more than codify an existing regulation with which cooperatives were
already complying.
Today, however, the ``Commission rules'' that would be incorporated
into the statute are in FERC's standard market design requiring
transfer of operational control over transmission facilities that they
built to serve their own member owners. This would require electric
cooperatives that are not now subject to FERC jurisdiction to:
Incur the substantial transaction costs required to
establish an ITP that operates their transmission facilities, a
day-ahead energy market, a real-time energy market, and any
other mandates that are part of a final SMD rule.
Incur costs required to schedule service for member-owners
in the SMD markets.
Pay congestion charges for use of their own facilities,
built to serve their own member-owners.
Participate in auctions to obtain congestion revenue rights
for use of the transmission facilities that they built to serve
their own member owners.
Permit third parties to take transmission service out of, or
across their transmission facilities without making any
contribution to the fixed costs of the system.
Be subjected to market monitoring and mitigation procedures
and the associated costs.
These obligations go far beyond the requirements to which
cooperatives are currently subject, and far beyond what could possibly
be necessary to ensure third parties fair open access to the limited
transmission facilities owned by rural electric cooperatives with RUS
financing. These obligations could deny cooperatives control over and
reasonable access to the very facilities that their members own, paid
for, and built to serve their own needs. Such a broad expansion of FERC
authority over these facilities threatens cooperatives' ability to meet
their core purpose: to bring reliable, affordable electric service to
their member-owners.
For these reasons, NRECA is far more concerned by the language in
the 2002 Senate Counteroffer, Thomas bill, and Staff Discussion Draft,
than it is by new language in the House draft that would require
cooperatives to provide transmission service ``on terms and conditions
(not relating to rates) that are comparable to those under which such
unregulated transmitting utility provides transmission services to
itself. . . .'' This language would not subject cooperatives to the
broad burdens of SMD.
On the other hand, NRECA prefers the small distribution utility
exemption found in Senator Thomas' bill and the 2002 Senate
Counteroffer to the language found in the other two drafts. For a
couple of reasons, the exemption is even more important to NRECA's
small members and their consumers this year than it was in the past.
First, FERC decided for the first time in its SMD NOPR to take
jurisdiction over and regulate bundled retail transmission. That means
that ``FERC-lite'' would now apply not only to those cooperatives
providing wholesale transmission service, and to those very few
cooperatives providing unbundled retail transmission, but also
potentially to hundreds of distribution cooperatives that use a small
amount of radial, high voltage transmission line to serve bundled
retail consumers. These distribution only entities whose facilities
could not possibly have any use to the competitive wholesale market
could be subjected by ``FERC-lite'' to all of the expensive and
complicated burdens imposed by SMD.
Second, in several cases FERC has asserted that any facility that
carries a wholesale electron is transmission subject to its
jurisdiction, even if the facility would otherwise be considered a
local distribution line. That means that any distribution-only
cooperative that serves only bundled retail consumers could also be
subjected by ``FERC-lite'' to all of the expensive and complicated
burdens imposed by SMD if a single retail consumer installs their own
generator no matter how small and no matter how little role the
generator could play in the wholesale market.
For these reasons, it is more important than ever, that Congress
adopt the small utility exemption contained in last year's Senate
Energy bill or the Thomas bill.
FERC Refund Authority
NRECA was pleased to see that the 2002 Senate Counteroffer, Senator
Thomas' bill, and the Staff Discussion Draft all lack a provision found
in the House draft that would, for the first time, subject RUS
borrowers' wholesale rates to FERC review and regulation. At a time
when Congress and FERC are seeking to move towards a competitive
wholesale market for electric energy, this provision of the House draft
would move in the opposite direction, increasing the regulatory burden
on electric cooperatives that seek to sell power in the wholesale
market. Yet, electric cooperatives have not been part of the problem.
Not-for-profit electric cooperatives have not gamed markets, they have
not abused consumers, and they have not exercised market power. It
would be impossible for them to have done so. Cooperatives do not own
enough generation and are not large enough players in electric markets
to exercise market power. All together, electric cooperatives generate
only about 5% of the electric power in the country, which is less than
half of the power they need to serve their own consumers. All combined,
electric cooperatives' sales to public utilities represent less than 1%
of all sales in the wholesale market.
Instead of solving a problem, the House draft would distract FERC
from its core responsibilities and increase uncertainty for electric
cooperatives, their member-owners, and their creditors. To date,
cooperatives have been one of the most financially stable sectors of
the electric utility industry. While other sectors have seen their
credit ratings decline precipitously, cooperatives have experienced
more credit upgrades than downgrades. Because cooperatives stuck to
their knitting and did not engage in speculative generation
construction or speculative trading, they have continued to have access
to the credit they need to serve their consumers' electricity needs at
a reasonable rate. Increasing FERC jurisdiction over RUS borrowers'
wholesale sales threatens that stability.
Transmission Siting
NRECA supports the requirements found in the Thomas, House, and
Staff Discussion drafts requiring coordination among federal agencies
to simplify and speed the process of siting transmission facilities
across federal lands.
NRECA also understands that limited federal siting authority may be
necessary to permit the construction of some regional transmission
facilities and upgrades that are critical to the continued reliable and
economic service of consumers. Nevertheless, NRECA believes the rights
of permitting; siting and eminent domain authority come with the
responsibility for serving the public interest. That means that any
provision providing for federal permitting, siting, or grant of eminent
domain must meet the following criteria:
Federal permitting, siting, and eminent domain must be used
solely to create an interstate high voltage transmission grid
that will help utility systems meet their obligations to the
states and their consumers;
The facility for which federal permitting, siting, or
eminent domain authority is sought must have been specifically
reviewed and determined by an RTO-led or other appropriate
multi-state regional planning process to be necessary for the
reliable and/or economic operation of the regional transmission
grid, and thus provide benefits to the consumers within the
region; and
Federal permitting, siting, or eminent domain must be used
only as a backstop to state permitting, siting, or eminent
domain authorities.
Both the Staff Discussion Draft and the House draft make a good
start in that direction. The limited federal authority they provide is
restricted to interstate transmission and may only be used as a
backstop where state authority fails.
Moreover, as a member of the Secretary of Energy's Energy Advisory
Board, I supported the idea of having the Department of Energy identify
those congestion points on interstate transmission system that affected
the national interest. That was one approach that would ensure that
federal siting authority would not be broadly granted to every
transmission project proposed by transmission investors. It is not
necessarily, however, the best approach. The drafts' requirement, for
example, that facilities receiving federal siting and eminent domain
authority be within federally determined interstate congestion areas is
both somewhat too broad and somewhat too narrow. On one hand, not all
transmission upgrades within a congested area may be properly located
or designed to address the congestion. Thus, some facilities built
within ``interstate congestion areas'' or ``congestion zones'' might
receive federal siting authority without providing significant benefit
to the consumers within a region. On the other hand, the process for
designating interstate congestion areas appears ill suited to
identifying the most serious problems in regional transmission grids.
Conducted in Washington, D.C. only once every three years, the process
seems rather too distant both physically and temporally from the
problems to be addressed.
NRECA believes it would be more effective to trust the regional
planning processes conducted by FERC-approved Regional Transmission
Organizations or other multi-state entities to make good, timely,
decisions about the transmission requirements of their regions.
Transmission construction proposals that meet the other criteria for
federal siting should qualify where a regional planning processes has
determined that the proposals are necessary to serve consumers within
the region more reliably and more economically.
Transmission Investment Incentives
For several reasons, NRECA believes that Senator Thomas' bill and
the 2002 Proposed Senate Counteroffer address this issue best: by not
addressing it at all.
First, it is unnecessary for Congress to legislate on the issue.
The Federal Power Act already provides FERC with the authority to
approve incentive rates to the extent that they are just and
reasonable. FERC has had a pricing policy for many years that
encouraged transmission owners to come forward with incentive rate
proposals. And, FERC has already begun work on a new transmission
pricing policy that offers specific incentives, including higher rates
of return for new transmission construction, participation in an RTO,
and transfer of transmission facilities to an independent transmission
company that is participating in an RTO. Congress does not have to
force FERC to do something it is already doing.
Second, NRECA believes it is wrong for Congress to restrict FERC's
discretion to adopt those approaches that it believes will best
encourage the construction of needed transmission facilities and
otherwise serve the public interest. As discussed above, with the
market in the beginning of an evolutionary process, a good approach to
transmission pricing today in one part of the country may not be a good
approach tomorrow or in a different region. FERC already has authority
today to adopt a transmission policy with incentives--and is doing so.
It also has the authority to rescind or alter that policy if, at a
later date, it considers incentives to be unnecessary or contrary to
the public interest. The draft House bill would deprive the FERC of
that critical authority. FERC would have to include incentives in its
transmission pricing policy no matter how unnecessary, unjust, or
unreasonable, it later considers them to be.
Finally, NRECA believes that arbitrary increases in rates of return
are already an unnecessary and unwise approach to encouraging
investment in needed transmission facilities. As explained by the
Department of Energy's National Transmission Grid Study, ``authorizing
higher rates of return is not the only approach to stimulating needed
investments in transmission facilities over the long term. Reducing
regulatory uncertainty should also be a focus of efforts to stimulate
needed investments'' (NTGS at 31) As the NTGS notes, the rate of return
required by investors varies with the level of risk. The lower the
risk, the lower the return required to attract capital.
Similarly, the Department of Energy's Energy Advisory Board looked
at how best to encourage the construction of needed new infrastructure,
given that ``there is a clear reluctance from the financial community
to finance transmission projects.'' (Report at 22.) The Board
determined that ``[I]investment in the grid will only occur when
regulatory policy provides (a) reasonably certain cost recovery, (b)
regulatory certainty, in terms of who can operate the system and under
what rules and (c) provides a return that makes investment in
transmission a reasonable option, considering other available
investment options.'' (Id).
That conclusion is significant. As NRECA has been saying for
several years, FERC can best encourage the construction of new
transmission facilities by providing investors with certainty that they
will recover their costs. While the rate of return may be important,
the level of return required to attract capital investment is a product
of the level of risk faced by investors: the lower the regulatory risk,
the lower the rate of return required to attract investment.
NRECA believes it is far better to increase regulatory certainty
than to simply throw more money at the transmission shortage. By
increasing regulatory certainty, Congress and the Administration can
attract greater investment in transmission infrastructure without
raising rates of return. That approach keeps costs down for consumers
and strengthens electric markets by permitting more generation from
across a region to compete economically. Higher rates of return should
be a last resort, not a first resort.
The competing approach, granting transmission owners higher
``incentive rates'' would raise costs for consumers and narrow electric
markets by building tollgates between generators and consumers.
Interestingly, recent Moody's reports indicate that the regulated
(i.e., transmission) component of the industry may now provide a more
attractive investment vehicle than the unregulated (i.e., generation
and trading) component of the industry. Similarly, Fitch recently rated
the newly formed American Transmission Company's senior unsecured debt
``A'' because:
Cash flow is expected to be stable and healthy. ATC is a
monopoly provider whose transmission franchise is supported by
state regulation and [FERC] approved tariff. Its costs are
recovered through an annual revenue requirement allocated as
fixed demand charges to regional electric utilities using the
transmission network.\1\
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\1\ Yahoo! Finance Press Release, ``Fitch Rates American
Transmission Company LLC `A/F-1' '' March 16, 2002.
In other words, ATC has an excellent debt rating (and associated
low cost of capital) because it faces low risk.
If Congress adopts language such as that in the House draft or in
the Staff Discussion Draft, that requires FERC to adopt transmission
pricing policies that support transmission expansion, the language
needs two significant amendments. First, the language should clearly
state that FERC could adopt other policies--besides transmission
pricing policies, which it believes will better promote economic
transmission expansion, such as policies that reduce risk to
transmission investors. Second, the language should clearly state that
FERC should only offer transmission pricing incentives where that
approach will encourage needed transmission investment at the lowest
cost to transmission customers. Why should FERC bribe investors with
consumers' money when it could encourage the same investment at lower
cost?
Transmission Cost Allocation (Participant Funding)
Again, NRECA believes that Senator Thomas' bill and the 2002
Proposed Senate Counteroffer best address this issue by not addressing
it at all. NRECA also recognizes and appreciates that the Staff
Discussion Draft includes a narrower approach to participant funding
than that found in the House bill. Although, as discussed below, NRECA
does not believe Congress should legislate on this issue, NRECA does
believe that the Staff Discussion Draft could, with a few minor
language changes, be consistent with the approach to transmission cost
allocation that NRECA has itself promoted.
First, the Federal Power Act already provides FERC the authority to
allocate the costs of transmission investments as it believes best
serves the public interest and FERC is already considering adopting
participant funding for certain transmission facilities as part of its
SMD rulemaking. Congress need not order FERC to do something it already
intends to do.
Second, NRECA believes it is wrong for Congress in this bill to
restrict FERC's discretion to adopt those approaches that it believes
will best encourage the construction of needed transmission facilities
and otherwise serve the public interest. The House draft would deprive
the FERC of that critical authority. FERC would have to permit
participant funding even if it later considers participant funding to
be unnecessary, unjust, or unreasonable.
Third, NRECA believes that a broad participant funding mandate will
discourage the construction of much needed transmission facilities,
raise costs to consumers, and entrench existing market power.
NRECA does not oppose the concept of participant funding of
transmission. Like many others, NRECA supports participant funding for
those transmission facilities that would not be required but for the
interconnection of new generating facilities that plan to export power
outside of the region where they are sited. That approach protects
native load consumers in one region from paying for transmission
facilities that provide them no benefit. If the new transmission
facilities benefit a generator, or consumers in another region, the
generator or the consumers in the other region should pay the costs of
the transmission facilities.
On the other hand, NRECA believes that the cost of any new
transmission facilities required in a region to serve consumers in that
region reliably or economically should be rolled into the cost of
transmission in that region. NRECA and many others, including the
Louisiana Public Service Commission, believe that this is the equitable
approach. If consumers in a region benefit from a particular
transmission upgrade, those consumers should all pay the cost of the
facilities.
NRECA also believes that this is the best approach to encourage
investment in needed transmission facilities. Rolling the costs of new
transmission facilities determined by a regional plan to provide
benefits to consumers in the region into the regional revenue
requirement gives investors precisely the assurance they need that they
will recover the costs of their investment as well as a reasonable rate
of return. Participant funding as envisioned in the House bill, on the
other hand, makes cost recovery extremely uncertain. Under the House
participant funding approach, investors receive no direct income from
the use of their facilities. Instead, they receive ``congestion revenue
rights,'' or CRRs. CRRs, however, only entitle their holders to revenue
in the event of congestion, which may be substantially reduced or even
eliminated due to the construction of new transmission. An allocation
of CRRs alone thus discourages investment in new facilities, or at the
least creates a perverse incentive to undersize upgrades to maintain
congestion on the system, since that is the only way they get paid.
Transmission Organizations/RTOs
NRECA strongly supports the development of RTOs. Nevertheless, it
believes that Congress should take only a very limited role with
respect to RTOs, at least for the present. Thus, NRECA agrees with the
Sense of the Congress in the House draft supporting the formation of
RTOs. NRECA also supports the very simple provision in the Staff
Discussion Draft authorizing the PMAs and TVA to join RTOs subject to
their existing statutory and treaty obligations.
On the other hand, NRECA is concerned by language in the Staff
Discussion Draft that outlines in detail the necessary elements and
functions of Transmission Organizations. While NRECA does not
necessarily disagree with any of the elements listed in the Staff
Discussion Draft, NRECA does not believe it is wise to freeze them in
place in law. Over just the last few years, we have already seen
movement from regional planning groups, to Regional Transmission Groups
(RTGs), to Transcos, to ITCs, to ISOs and now to RTOs. As wholesale
markets evolve in the next few years, we are likely to see further
evolution in best practices for regional coordination and operation of
the transmission system. This is one of the issues on which a ``time-
out'' is particularly important.
PUHCA and Market Power
NRECA opposes the repeal of PUHCA. Now is the wrong time to repeal
PUHCA. While it has not been adequately enforced, PUHCA is more
critical today than ever to protect consumers from abuses in the
utility industry. It was PUHCA that prevented Enron from owning, and
abusing, more than one electric utility. It was PUHCA that should have
prevented Enron and many other companies in the industry from shifting
the risks of their unregulated and offshore activities to retail
consumers in the United States.
If repealed, NRECA believes it should be replaced with modern
legislation that takes a practical approach to controlling market
power, focusing on the substance of consumer protection and market
power abuses, as well as the acquisition of undue market power through
ownership and affiliation. Such legislation should give federal
regulators an array of tools that they can use to protect consumers and
enhance competition in electric markets. If circumstances require it,
regulators should have the authority to impose structural solutions
that will prevent investor-owned utilities from accumulating undue
market power, or remedy already existing market power that threatens
competitive markets.
For these reasons, NRECA also was pleased that Section 7101 of the
House draft--which repealed FERC's authority to review dispositions of
jurisdictional property, including utility mergers--was deleted during
mark-up. Section 7101 moved far in the wrong direction. Without PUHCA
it is more important than ever that FERC not only exercise its existing
authority to review utility mergers but also new authority. As the 2002
Senate Counteroffer provided, FERC needs new authority to review
transfers of generating facilities and clearer authority to review
mergers between electric utility holding companies. The standard of
review for large utility mergers should also be strengthened to ensure
that such mergers enhance competition. At a time when competition is
just beginning to develop in the nascent wholesale electric market,
Congress and FERC should not allow it to be choked through the rapid
consolidation of generation assets in the hands of a few large
companies.
NRECA also believes that Congress should encourage FERC to
reconsider the standards FERC uses to grant utilities and others the
right to sell power at market-based rates. As FERC has conceded,
inadequately competitive wholesale markets have often led to exorbitant
rates for consumers. Thin markets, inadequate transmission, market
power and market manipulation have singly or together caused rates to
rise far above just and reasonable levels. Under such conditions, only
traditional rate regulation can ensure that rates are consistent with
the law and that consumers are protected from abuse. The 2002 Senate
Counteroffer provided a good start in this direction, though the
language could still be improved.
PURPA
NRECA supports the PURPA reform language in Senator Thomas' bill.
NRECA believes that PURPA imposes on the electric utility industry
regulatory and financial burdens that far exceed any benefit that the
Act might still provide. In many cases, application of the Act
increases the retail cost of electricity.
Net Metering and Real-Time Pricing
Net metering, real time pricing, and advanced metering are all
policies that can play an important role in some states, under some
circumstances. There are cooperatives today already providing net
metering, time-of-use pricing, and advanced metering to their member-
owners either under state law or because the cooperatives have
concluded that those policies best serve their members' interests.
The value of each of these policies, however, is very situation
specific. Handled incorrectly, or adopted under the wrong
circumstances, each of these policies could dramatically increase costs
to consumers while providing little or no benefit.
NRECA believes that Senator Thomas's bill best addressed these
issues. Our second choice would a voluntary approach, much like the one
employed in the Staff Discussion Draft, the House draft, and the 2002
Senate Counteroffer. States and cooperatives are already considering
these policy ideas, and in many cases adopting them. Over 34 states
already have net metering policies. In any event, NRECA is pleased that
none of the bills being considered by this Committee impose strict
mandates on states or cooperatives to adopt broad, inflexible net
metering, real-time pricing, or advanced metering policies.
Renewable Energy
NRECA supports fuel diversity, including the use of renewable
resources where they can be economically integrated into the resource
mix. Many electric cooperatives are actively using and developing
renewable resources, including hydropower, wind, solar, and landfill
gas. Dozens of cooperatives are also offering their members special
``green power'' choices, where consumers can demonstrate their support
for renewable energy by paying a little extra each month to cover the
incremental cost of renewable power.
NRECA believes there is an important federal role in supporting the
development of renewable energy through research and development and
through financial support for some renewable technologies.
Nevertheless, NRECA would oppose a federal mandate requiring all
utilities to include a fixed percentage of renewable power in their
resource mix. In most circumstances, renewable resources are still
considerably more expensive than traditional generation technologies.
Wind and solar are also intermittent resources, whose value to
consumers varies considerably depending on weather and time of day.
They must still be ``firmed'' with dispatchable generation resources.
Because of these characteristics, an inflexible federal mandate could
dramatically increase power costs to consumers. For this reason, NRECA
is pleased to see that the House draft, Senator Thomas' bill and the
Staff Discussion Draft all lack mandatory renewable portfolio
standards.
Market Transparency, Anti-Manipulation, Enforcement
NRECA supports provisions found in the Staff Discussion Draft,
Senator Thomas' bill, and the House draft that authorize FERC to
collect data from sellers of electric energy about the availability and
market price of wholesale electric energy. To prevent manipulation of
market prices, market price information must be transparent to buyers
and sellers. NRECA believes, however, that this section should include
language that ensures that data collection is implemented in a manner
that minimizes the cost and burden to those that must provide the
information and requires all relevant agencies to coordinate with one
another to prevent duplicative requirements. By focusing on aggregate
sales information, the two Senate bills probably do this best.
NRECA also supports language in the three bills prohibiting round
trip trading; enhancing criminal and civil penalties for violations of
FERC rules; and moving up the refund effective date to the day that a
complaint is filed with FERC. NRECA also supports language in the
Thomas bill prohibiting the provision of false information to any
entity for fraudulent purposes. Each of these provisions enhances
FERC's existing ability to protect consumers without limiting its
discretion and flexibility or distracting it from its core mission of
ensuring just and reasonable rates, terms, and conditions for
interstate transmission and wholesale electric sales.
Consumer Protections
NRECA believes it is important that consumers be protected from
abuses in the wholesale markets. The provisions discussed above under
PUHCA and Market Power and Market Transparency are all important for
that purpose. NRECA is less convinced that Congress needs to address
retail issues in this bill, though it does not oppose any reasonable
provisions of law required to protect consumers.
The Chairman. Thank you very much. I would say the Chairman
of FERC has indicated that a white paper is going to be
forthcoming. I am very pleased that that commitment was made in
response to an inquiry by me as chairman in behalf of a number
of Senators. We will have the Chairman before us here today,
and we will find out with more certainty about his agenda for
that white paper and other questions that will bear on some of
the things you have raised and others have raised today.
Let us proceed now to you, Mr. Richardson, please.
STATEMENT OF ALAN H. RICHARDSON, PRESIDENT AND CEO,
AMERICAN PUBLIC POWER ASSOCIATION
Mr. Richardson. Thank you, Mr. Chairman. My name is Alan
Richardson. I am the president and CEO of the American Public
Power Association representing the interests of the Nation's
2,000 publicly owned electric utilities located in virtually
every State.
Mr. Chairman, I would like to respond to a comment that you
made in your opening statement first before addressing some
other issues. You had noted that there are essentially two
camps and said that public power opposed open access and
opposed SMD. And in fact, public power has not opposed open
access. We are one of the leaders in efforts to amend the
Federal Power Act in 1992 to promote open access, and in fact
we have been the victims of discriminatory access for decades.
And so open access and competition is very important to us, and
we have benefitted from it.
Now, we do have some members that have some concerns about
standard market design and we also have concerns about whether
the goal is to promote competition or whether competition is
simply a means to an end of just and reasonable rates that
benefit consumers. I think my members believe that it is the
latter, not the former. So just comments on your opening
statement.
I do have a formal statement organized along the lines
recommended or requested by the committee that I have submitted
for the record, and I ask that that be inserted.
Senator Thomas, you mentioned the need for energy policy
and electricity policy. Electricity is a derivative of many
different sources, as you know, from coal to wind to hydro. And
we do support an energy policy bill that deals with the need
for diverse supplies of energy and deals with things like clean
coal technology, reauthorization of the Price-Anderson Act,
Senator Craig, hydroelectric relicensing and licensing reform,
which is a critically important to us, renewable energy
programs such as REPI and so forth. All of those I think fit
into the issue of energy policy and they are elements of
electricity policy.
We do have some serious concerns about whether we need
electricity policy and an electricity title in legislation at
this point. We are concerned that there are some things that
should be done that would not be done, some things that would
be done that should not be done.
This is one of the most difficult times that has been faced
by the electric utility industry certainly since the late
1920's and the 1930's. The industry is in turmoil. A shorthand
list of things include deceitful reporting of natural gas
prices, withholding of capacity in Western States--California
is shorthand for the Western energy crisis--the Enron
implosion, debt and liquidity crises for numerous traders and
marketers, legislative and regulatory uncertainty leading to
investor uncertainty, and legislative retrenchment in a number
of States, pulling back from restructuring, and the embrace of
retail deregulation. These problems we have encountered,
particularly in the West, in the last 2 years.
These are issues that are the subject of ongoing
investigations by the Federal Energy Regulatory Commission.
Yesterday they received a voluminous staff report outlining
problems in the West. I have not even begun to try to digest
that, but I think there are many issues there that should be
addressed, should be considered by this committee and this
Congress before moving forward on electricity legislation.
In addition, there has been much debate about standard
market design in this hearing, and as was mentioned, both the
Federal Energy Regulatory Commission, as well as the Department
of Energy, are coming forward with their reports on standard
market design, and it seems prudent to wait to see what they
have to say before moving forward with legislation. It may well
be that looking over what the Commission has done or is likely
to do with respect to its investigation of problems in the West
and what the commission is proposing to do with standard market
design could help develop the consensus that is necessary to
move electricity legislation, but we do not see that consensus
at the present time.
While the industry has been severely stressed, public power
has been doing quite well. Our ratings are stable. We have the
ability to raise capital, to invest in needed infrastructure to
meet the needs of our communities, and obviously, we do not
want to see any changes in Federal legislation that would
undermine our ability to continue to perform this valuable
public service.
If you are going to move forward on electricity, we have
concerns that have been expressed by others in this panel and
prior panels. We are very concerned about repeal of the Public
Utility Holding Company Act. We do not think that this going to
spur investment in new facilities. It is simply going to
facilitate investment in existing facilities as assets change
hands.
If the act is to be repealed, Senator Bingaman, you had
some very good proposals in your proposals last year and your
comments this morning about things that needed to be done. We
certainly agree with those recommendations in terms of merger
review authority, expanding the role of the commission to deal
with different types of mergers than they currently are
authorized to do under existing law.
I also agree with the comments that John Anderson made
earlier this morning that while that is important, we do not
think that is sufficient. There are other issues that need to
be addressed, including market transparency, market
manipulation, practices that need to be understood and
addressed and prohibited, market-based rate authority when it
is appropriate, when it is inappropriate, and how it should be
withdrawn. All of these things I think need to go into a mix,
and frankly, we do not see that mix congealing into the kind of
electricity legislation that we would find appropriate. So in
sum, we do believe that now is not the time to move forward on
electricity legislation.
We have been asked to address the RESC issue. This is a
very new proposition for us. It is obviously an attempt to
address regional differences. I think regional differences can
be addressed in different ways. We do see some problems in
terms of jurisdictional conflicts, conflicting interpretations
of the underlying statute, the Federal Power Commission forum
shopping, the fact that utility boundaries are not the same as
State boundaries, that are not the same as regional
transmission organization boundaries, and we see all those as
causing potential problems as well.
I see my time is expired, Mr. Chairman. Thank you very much
again for the opportunity to testify. I look forward to
answering your questions.
[The prepared statement of Mr. Richardson follows:]
Prepared Statement of Alan H. Richardson, President & CEO,
American Public Power Association
Mr. Chairman and members of the subcommittee, my name is Alan
Richardson and I am the President and Chief Executive Officer of the
American Public Power Association (APPA). Thank you for the opportunity
to appear before you today to discuss APPA's views on electricity
legislation.
APPA represents the interests of more than 2,000 publicly owned
electric utility systems across the country serving approximately 40
million customers. APPA member utilities include state public power
agencies and municipal electric utilities that provide electricity and
other services to some of the nation's largest cities. However, the
vast majority of these publicly owned electric utilities serve small
and medium-sized communities in 49 states, all but Hawaii. In fact, 75
percent of our members are located in communities with populations of
10,000 people or less.
The first and only purpose of public power systems is to provide
reliable, efficient service to their customers at the lowest possible
cost. Like hospitals, public schools, police and fire departments, and
publicly owned water and waste water utilities, public power systems
are locally created governmental institutions that address a basic
community need: they operate to provide an essential public service at
a reasonable, not-for-profit price. Publicly owned utilities also have
an obligation to serve the electricity needs of their customers and
they have maintained that obligation, even in states that have
introduced retail competition. And, because they are governed
democratically through their state and local government structures,
public power systems operate in the sunshine, subject to open meeting
laws, public record laws and conflict of interest rules. Most,
especially the smaller systems, are governed by an elected city
council, while an elected or appointed board independently governs
others. Democratically governed, not-for-profit, obligated to serve all
customers--understanding the underlying structure and mission of public
power is essential in promoting policies that will maintain industry
diversity and protect the consumer interest.
While the majority of my testimony will focus on those provisions
directly related to electricity, I will briefly review several other
areas of interest to APPA. As has been the case since President Bush
introduced his national energy policy plan in 2001, APPA believes that
there are a number of areas where the Administration and Congress
should act to maintain or enhance the viability of traditional fuels
used to generate electricity, promote the commercialization of new,
alternative sources of electricity, increase energy conservation,
provide adequate energy assistance to low-income households, and
maintain infrastructure security.
APPA supports the inclusion of provisions in an energy bill that
address the following:
Hydroelectric Relicensing--Over the next 15 years, two-thirds of
all non-federal hydroelectric capacity--which totals nearly 29,000
megawatts of power and can provide enough electricity to serve six
million retail customers--must undergo the Federal Energy Regulatory
Commission (FERC) relicensing process. The relicensing of each hydro
project may potentially result in a significant loss of existing
capacity due to the exceedingly complex, fragmented, costly and
inefficient relicensing process. Such lost capacity must be replaced by
less efficient generation sources that both impose additional costs to
the consumer and produce greenhouse gas emissions.
Therefore, we believe improvements to FERC's hydroelectric
licensing and relicensing processes are needed. Specifically, we
support legislation that will allow current licensees, for the first
time, to offer alternative conditions to those mandated by the federal
resource agencies under Sections 18 and 4E of the Federal Power Act as
long as those alternatives accomplish the same level of environmental
protection. In addition, federal resource agencies should be required
to document that they gave ``equal consideration'' to the economic,
environmental and other public impacts of their mandatory conditions
before imposing them on licensees--something that agencies are not
doing now.
Renewable Energy Production Incentive--APPA supports the
reauthorization of and changes to the Renewable Energy Production
Incentive (REPI) proposed in S. 421, recently introduced by Senators
Cantwell, Murray, Smith and Feinstein. REPI was established by the
Energy Policy Act of 1992, and authorizes the Department of Energy
(DOE) to make direct payments to publicly- and cooperatively-owned
electric utilities for electricity generated from solar, wind,
landfill-gas, and certain geothermal and biomass projects. Since 1995,
REPI has funded more than 36 renewable energy projects in 17 states.
REPI's authorization is set to expire in September of this year.
Future plans for acquiring or installing additional renewable
capacity will in large part be dependent on the continued availability
of REPI funds to help offset the additional cost to our customers. As
the only incentive available to locally-owned, not-for-profit utilities
to make new investments in renewable energy projects, REPI delivers
important and significant air quality benefits to the communities
served by project owners and operators. The REPI program merits
extension, requires reform, and deserves congressional attention.
Price-Anderson Act Reauthorization--The Price-Anderson Act, a law
that indemnifies DOE contractors and Nuclear Regulatory Commission
(NRC) licensees for damages resulting from nuclear incidents, is
scheduled to expire this year. APPA supports the reauthorization of the
Act.
Clean Coal Technology--Legislation is needed that will authorize
and fund the development of a program at DOE to deploy clean coal
technologies. APPA supports clean coal technology research and
development, as well as incentives as long as they are linked to a
tradable tax credit available for public power and rural electric
cooperatives.
Energy Conservation--APPA supports the authorization of increased
funding for energy efficiency and conservation efforts. Specifically,
APPA supports an increase in the funding authorization for the Low
Income Home Energy Assistance Program (LIHEAP) and weatherization
assistance. Recent weather and economic conditions underscore the need
for an increase in this federal program that helps thousands of
families pay their home energy costs.
APPA supports the inclusion of the provisions mentioned above in an
energy bill. As it pertains to electricity, APPA believes that
electricity should not be part of an energy bill at this time. In a
February policy meeting, APPA members unanimously voted in favor of a
resolution urging Congress to review the results of various ongoing
investigations into consumer abuses and market manipulation in western
electricity markets and then develop consensus for further action based
on those results before imposing any new requirements on electric
industry participants, or experimenting with further industry
restructuring.
Before proceeding with electricity legislation it is critical that
there be a full understanding of the western energy market crisis. The
crisis has had and continues to have broad and far-reaching adverse
effects throughout the West. The western energy crisis resulted in huge
increases in the wholesale price of electricity that will ultimately
cost consumers billions of dollars. The crisis has forced several
companies to file for bankruptcy resulting in thousands of employees
losing their jobs and in some cases their pensions. Ongoing discoveries
of market manipulation and abuse by energy traders and others continue
to send shockwaves through the industry and prompted credit downgrades
of numerous investor-owned utilities.
We realize that last year the Senate debated and passed an
electricity restructuring title as part of a comprehensive energy bill.
However, events in our industry, including FERC's dramatic proposal for
a standard market design, have progressed during this same time frame.
In addition, restructuring proposals advanced in the past were premised
on the expected near-term success of competitive wholesale electric
markets operating in a world populated with many energy traders and
independent power producers. That certainly has not happened.
Revelations in recent months have made it more clear that the
results of these deregulation efforts have been disastrous in the West
and questionable elsewhere. Rather than proceed with legislation
modeled on the failed Enron vision of the industry, we believe that
Congress should take a fresh look at the electricity industry and
examine the characteristics that are fundamentally different from those
of other industries. These characteristics include, among others, the
fact that electricity is a real-time product produced and consumed
simultaneously, cannot be stored, is a necessity of modern life, and
has no reasonable substitute. Delivery of electricity requires hard-
wire connections, making this function a natural monopoly that must be
regulated in some manner. Further, it is a complex network industry and
all parts--generation, transmission and distribution--must work
together. This situation necessitates planning to ensure optimum use of
individual facilities and the network, as well as associated
infrastructure investments. All of these unique characteristics make it
very difficult to displace regulation with a purely competitive market
in the electricity industry.
Despite promises that the deregulation of both wholesale and retail
markets would be beneficial to consumers by reducing electricity
prices, the western experiment caused power costs to skyrocket and has
had a detrimental impact on consumers and investors. We urge Congress
to reevaluate the merits of moving forward with legislation until there
is a greater understanding of what can be done by FERC under existing
law to ensure effective competition, including how FERC may proceed on
proposals to institute a standard market design. Only then will it
become clear as to what legislation, if any, is required.
The Committee requested that in my testimony I address specific
issues outlined by the Committee. My comments on those issues are
below.
Regional Energy Service Commissions--The Regional Energy Service
Commissions (RESC) outlined in the Committee's draft electricity title
is a new concept that merits further study. Since this is such a new
concept APPA has no formal policy position on the creation of RESCs.
Among the issues that need to be carefully considered with respect to
the proposition are: the probability of inconsistent interpretations of
the Federal Power Act by different RESCs; whether RESCs will promote
certainty and stability in this critical industry; the seams issues and
other difficulties that will arise when the RESC footprint does not
match the footprint of individual utilities within the RESC or the
footprint of a regional transmission organization; and the additional
costs of proceedings before RESCs with subsequent appeals to FERC.
Reliability Standards--APPA believes that ensuring the reliability
of the interstate electric transmission grid is one of the most
fundamental functions of electric utilities. Industry restructuring and
the resulting increase in transactions on the grid have made it
increasingly difficult to ensure reliability. Over the last few years
APPA has worked with a coalition of industry representatives to develop
legislative language granting NERC the ability to enforce national
reliability standards. The consensus reliability language developed by
the coalition is included in Section 104 of S. 475, and APPA supports
this language with minor technical changes. The special treatment of
New York State in the energy bill proposed by Congressman Barton and
recently marked-up by the House Subcommittee on Energy and Air Quality,
is problematic, particularly if it prompts other states or regions to
seek their own exemptions or exceptions.
Open-Access (FERC-Lite)--Open, non-discriminatory access to the
interstate transmission system has been a longstanding principle of
public power. FERC Order 888 required jurisdictional entities to file
an open access tariff and to provide transmission service based on the
principles of comparability and reciprocity. The FERC-Lite agreement
reached in 1997 represented an understanding that while public power
systems, as well as other non-jurisdictional entities such as rural
electric cooperatives and federal power marketing administrations
(PMAs) were not required to file tariffs under Order 888 they would be
required to file a tariff at FERC consistent with Order 888. FERC would
review the tariff to ensure that it met the conditions of comparability
and reciprocity before approving the tariff, but would not have the
authority to set the actual rates for transmission services. Rates
would continue to be set at the local level under the relevant existing
regulatory authority. If FERC found that the rates where somehow
inconsistent with the comparability requirement, it could remand the
rates to the local authority for re-consideration and/or modification,
but FERC could not itself change the rates.
APPA continues to support FERC-Lite language that clarifies that
FERC-Lite is limited to the review and approval of transmission service
tariffs for consistency with the comparability standard. This language
is contained in Section 7021 of the House energy bill and is supported
by APPA. FERC-Lite language contained in the Senate Committee's draft
and S. 475, introduced by Senator Thomas, does not reflect the
comparability standard and original intent of the FERC-Lite agreement.
Transmission Siting--APPA recognizes that federal backstop siting
authority is a necessary tool to facilitate the siting of new
transmission lines that are stymied by the current balkanized, state-
by-state siting approval process. In most cases difficulties associated
with the siting of transmission, not the lack of capital or
insufficient rate of return, act as obstacles to the development of
transmission. Transmission lines are necessary to support interstate
commerce, as well as security interests, and thus a federal role in the
siting of these lines is appropriate. APPA would strongly urge that
every reasonable effort be made first at the local and state levels to
resolve siting issues and that federal siting authority should only be
used as a last resort.
Transmission Investment Incentives--APPA is opposed to legislation
that would require FERC to adopt ``incentive transmission pricing''
rules. FERC, under the Federal Power Act and Order 888, already has
sufficient authority and flexibility to design transmission rates to
``promote economically efficient transmission and generation of
electricity.'' For example, the Commission on January 15, 2003, issued
a proposed policy on incentive transmission rates and already has
approved incentive rates based on the facts in individual proceedings.
These rates remain subject to the ``just, reasonable, and not unduly
discriminatory or preferential'' standard that has been the hallmark of
FERC ratemaking authority for decades. Further, mandatory incentive
pricing would lead to higher transmission rates that would ultimately
be passed on to consumers.
Proponents of this language have asserted that incentive pricing is
necessary in order to raise the capital needed for investments in new
transmission facilities. They argue that incentives are justified
because transmission investment is risky. This is clearly not the case.
In fact, as Wall Street representatives have testified before
Congress, transmission is a safe and stable investment and current
rates of return are sufficient to attract needed capital. Moreover, the
widely recognized need for additions to the currently constrained
system indicates the prudence of this type of investment. A case in
point is the infamous Path 15 in California where approximately a dozen
entities responded to the Department of Energy's request for proposals
to finance the new line. Developing new transmission facilities is
difficult, but the problem is not lack of financing. There are
substantial obstacles involved in the siting and permitting processes.
Rights of way may be denied for parochial reasons with no consideration
given to broader public interest considerations. Many of these
obstacles to transmission development will be resolved by the enactment
of federal siting language.
Congress should allow the Commission to continue to assess the
facts and provide for rates of return on a case-by-case basis.
Transmission Cost Allocation (Participant Funding)--FERC already
has sufficient authority to permit or require participant funding where
appropriate. Therefore, reiterating in legislation this ability is
unnecessary and would in fact create a preference for participant
funding. Furthermore, ``participant funding'' is an untested concept
and, in most parts of the country, is likely to delay and limit
transmission construction at a time when congestion and curtailments
are increasing, to the detriment of consumers.
Transmission Organizations/RTOs--FERC has maintained in Order 2000
and subsequent orders and proceedings, that it has the authority to
order RTO participation by jurisdictional utilities to remedy undue
discrimination or facilitate competition. In addition, the substantial
authority already provided to FERC under the Federal Power Act to
promote the creation of RTOs and to determine the appropriate size,
scope and functions to be performed, makes legislation unnecessary.
In regard to federal transmission-owning entities, it is critical
that any legislation addressing their participation in RTOs not impair
the existing statutory authorities and obligations of those entities.
Further, the rights of federal transmission-owning entities to withdraw
from an RTO should not be impaired by legislation. It should be no more
difficult for a federal transmission-owning entity to withdraw from an
RTO than for any other RTO participant. The energy bill recently
marked-up in the House Energy and Air Quality Subcommittee stated that
a Federal Power Marketing Agency would have withdrawal rights from an
RTO ``in the event of a material breach by the regional transmission
organization of the contract, agreement or other arrangement necessary
to allow the Federal utility to transmit electric power or to comply
with applicable statutory requirements.'' APPA views this language as
problematic since ``material breach'' can be difficult to prove and
could involve time-consuming litigation before a decision would be
made.
PUHCA--The Public Utility Holding Company Act (PUHCA), enacted as a
companion to the Federal Power Act, establishes passive restraints on
the structure of the electric utility industry in order to mitigate the
formation and exercise of market power, preclude practices abusive to
captive consumers and competitors, and facilitate effective regulation.
Those advocating repeal argue that the Act no longer serves its
original purpose of protecting investors, consumers and the general
public interest. This is simply not the case.
In fact, the turbulence in the utility industry over the past two
years--financial and accounting abuses, improper affiliate
transactions, market manipulation and consumer abuse--underscores the
importance of retaining and strengthening consumer and investor
protections provided by PUHCA. It is APPA's belief that many of the
serious financial and other problems facing the electric utility
industry can be traced directly to exemptions from PUHCA that were
enacted by Congress in the 1992 Energy Policy Act. The 1992 Act
exempted developers of independent power generation facilities, called
Exempt Wholesale Generators, whether they were owned by operating
utilities, utility holding companies, or parties not involved in the
electric utility business. This exemption resulted in a substantial
number of electric utilities and utility holding companies taking
advantage of the new freedom from Securities and Exchange Commission
scrutiny to create unregulated power production subsidiaries--the very
subsidiaries placing many operating utilities in financial jeopardy
today.
APPA has a long-standing position to oppose any efforts that repeal
PUHCA unless they are accompanied by appropriate structural and
regulatory safeguards designed to promote fair and open competition and
satisfy the underlying purposes of the Holding Company Act: consumer
protection, effective oversight and accountability, prevention of undue
market concentration and fair competition.
The electricity industry is in a state of turmoil. In 2002, 182
investor-owned utilities received credit downgrades from Standard &
Poor's. Given the current turmoil in the industry and considering the
adverse consequences of the partial repeal of PUHCA in 1992, it is
APPA's belief that now is not the time to repeal the Holding Company
Act.
However, if Congress does go forward with repeal of PUHCA there are
certain structural safeguards that must be in place to protect
consumers. First, FERC must be given strong authority to establish
clear rules for determining when competitive market conditions exist
and when suppliers can charge market rates. FERC should be required to
review markets in which a public utility is authorized to sell
wholesale electric energy at market-based rates to determine whether
such sales are subject to effective competition. If FERC determines
that the sales are not subject to effective competition FERC should be
required to modify or revoke market-based rate authority. Lastly, FERC
should be required to take corrective action, when necessary, to
enforce market rules, protect consumers and prevent market abuses and
manipulation. If FERC finds that a public utility has intentionally
engaged in an activity that violates any rule, or tariff or has engaged
in fraudulent, manipulative, or deceptive activities in wholesale
electric energy markets FERC should be required to immediately revoke
or modify the authority of that public utility to sell electric energy
at market-based rates. Many of these provisions are contained in
legislation Senator Cantwell introduced last week, S. 681, that APPA
supports.
Repealing PUHCA will eliminate legal barriers for certain utility
mergers and acquisitions and lead to increased consolidation and
reduced competition in the industry--and could lead to higher prices
for consumers. To offset this impact, APPA has consistently urged
adoption of a higher merger standard in the Federal Power Act that
would condition merger approval upon an affirmative finding that the
proposed merger will promote the public interest, as opposed to the
current standard that only requires the merger to be consistent with
the public interest. In addition, FERC's merger authority needs to be
clarified and expanded to cover mergers of utility holding companies as
well as the disposition of generation assets by jurisdictional
utilities and ``convergence'' mergers of electric and gas utilities.
PUHCA repeal should also be accompanied by provisions that protect
consumers from the costs and risks of utility diversifications and
prevent utilities from unfairly subsidizing affiliates that compete
with independent businesses. In addition, state and federal regulators
should be given enhanced access to books and records. Legislation
repealing PUHCA in the bills outlined by the Committee sharply
circumscribes the access that would be permitted. Regulators must have
full and complete access to holding company books and records. The
current language places the burden on the regulator to show, with some
degree of specificity, why requested books or records are relevant to
jurisdiction over rates. However, given that a holding company may have
hundreds or even thousands of subsidiaries (Enron--an exempt utility
holding company--had thousands of subsidiaries), it would be extremely
difficult for regulators to find the relevant books and records.
Net-Metering & Real-Time Pricing--While there can be positive
benefits to net metering, such as its potential to increase the use of
renewable resources and provide generation alternatives, net metering
is essentially a ``retail'' program and is best left to the
jurisdiction of states and local entities. In addition, 34 states
currently have some form of a net metering program in place. While
Congress may have a role in ensuring that net-metering receives
appropriate consideration, decisions as to how and if it should be
implemented are best made at the local level. Therefore, the best way
for Congress to deal with these issues, if it addresses them at all, is
by requiring the consideration of standards but leaving the adoption of
those standards to the appropriate regulatory authority. This is how
those issues are handled in the Committee staff draft and the Barton
bill.
Real-time pricing can provide a price signal to customers and give
them a monetary incentive to reduce their demand when the supply of
power is limited and demand is high. However, like net-metering,
decisions related to the implementation of real-time pricing programs
are best made at the local level.
Renewable Energy--APPA supports legislation and programs that
provide incentives to investments in renewable energy. Recently,
Senators Grassley and Baucus introduced legislation, S. 597, which
creates tradable tax credits that provide an incentive for public power
to generate from renewable resources and clean coal. APPA supports this
legislation.
As it pertains to renewable energy mandates or portfolio standards,
APPA believes that these decisions are best made at the local level.
Numerous states have already implemented renewable portfolio standards
and many utilities offer green power-pricing programs to their
customers. Furthermore, the opportunities for developing renewable
energy are not equally available across the country.
Market Transparency, Anti-Manipulation, Enforcement--The market
transparency provisions outlined in the Senate Energy Committee's draft
only require FERC to provide ``statistical information'' regarding the
availability and market price of wholesale electricity and transmission
services. APPA is concerned that limiting the release of information to
``statistical information'' will not provide an adequate picture of the
marketplace. Rather, APPA prefers the broader transparency language in
Congressman Barton's bill that does not limit the release of
information to ``statistical information.'' In addition, legislation
should clarify to FERC that close calls regarding whether information
will be made public should be resolved in favor of transparency, not
secrecy.
As mentioned previously, APPA supports the market manipulation
language contained in Senator Cantwell's legislation, S. 681. In cases
when a public utility has been found to have engaged in market
manipulation or fraudulent practices that entity should immediately
lose its privilege to sell electric energy at market-based rates. Also,
rather than identifying a specific manipulative practice, such as round
trip trades, the legislation should give FERC broad authority to
identify the type of activities that are prohibited (in general terms,
just as the antitrust laws define in general terms what is prohibited).
Consumer Protection--Subtitle I, Sections A and B of the
Committee's draft requires the Federal Trade Commission to promulgate
rules in regard to information that each utility would have to provide
to their customers concerning: the nature of electric service being
offered; the price of electricity including a description of any
variable charges; a description of all other charges; the percentage of
electricity generated by each fuel mix; and the environmental emissions
produced in generating the electricity. These types of decisions are
best made at the local level. While the means and frequency of
providing this information has yet to be determined, this could be
extremely burdensome and costly to small and mid-size utility systems.
FERC Jurisdiction--One additional provision I would like to comment
on is contained in Section 7092--Jurisdiction over Interstate Sales, of
Congressman Barton's bill. This provision would unnecessarily extend
FERC jurisdiction over public power systems by imposing FERC's refund
authority over the spot market sales made by public power systems. This
language is an encroachment on local authority that is neither prudent
nor warranted. Public power systems have been regulated differently
under federal law for more than 66 years. This is neither an accident
nor an oversight, but rather good public policy that recognizes the
differences between not-for-profit public power systems operating in
the public interest and regulated at the local level, and multi-state,
investor-owned private utilities. Public power systems do not represent
a significant presence as sellers in the wholesale markets, and public
power systems are, and will continue to be, net purchasers of
electricity. The limited volume of surplus energy from public power
systems precludes their ability to set a market-clearing price--public
power systems are price takers, not price makers.
Service Obligation--APPA supports language that would ensure that
both transmission owners and transmission dependent utilities
(investor-owned utilities, rural electric cooperatives, public power
systems, and the federal Power Marketing Administrations) holding firm
transmission rights under long-term contracts would be able to meet
their wholesale and retail service obligations under federal, state, or
local law or long term contract. This legislation simply reaffirms the
existing rights of load serving entities so that regardless of the
transmission regime in the future--SMD or otherwise--they would be
assured firm transmission access in accordance with the terms of their
existing contracts. The essential elements of this concept were
embodied in an amendment offered on the Senate floor last year by
Senator Kyl during consideration of the Energy Policy Act.
In conclusion, it is critical that Congress understand the lessons
of the western energy crisis, and the reasons behind the industry's
financial crisis, before proceeding with changes affecting the $200
billion wholesale electric utility market. Enacting electricity
legislation without a full understanding will almost surely result in
unintended adverse consequences that will cause further harm to energy
markets and the overall economy as well as consumers. For these reasons
we urge you to oppose efforts to include an electricity title in an
energy bill.
Senator Craig [presiding]. Alan, thank you very much for
your testimony.
Now let us move to Phil Tollefson.
STATEMENT OF PHIL TOLLEFSON, CEO, COLORADO SPRINGS UTILITIES,
ON BEHALF OF LARGE PUBLIC POWER COUNCIL
Mr. Tollefson. That is correct.
Senator Craig. Thank you. Colorado Springs Utilities.
Mr. Tollefson. My name is Phil Tollefson. I am the CEO of
Colorado Springs Utilities in Colorado. I am here today
testifying on behalf of The Large Public Power Council which
represents 24 of the largest public power systems in the
Nation. Our members directly or indirectly provide service to
about 40 million.
Thank you for the opportunity to appear before you today to
express the views of LPPC on your draft energy legislation. I
will not be commenting on all of the different provisions of
interest or concern to LPPC today but will, instead, focus on
several issues of primary concern to our members, that of FERC
jurisdiction, service obligation, and the regional
organizational options.
First, I would like to address the need for market reforms
at this time. Similar to several previous speakers, we
recognize that Congress has struggled with electricity
restructuring legislation for several years. Over the course of
that debate, the industry has undergone tremendous change.
Once-robust IOUs are now in serious financial shape with many
credit downgrades in the last year. Some have filed for
bankruptcy, major instabilities. You have heard all of that.
What we are seeing, however, is that in the midst of this
turmoil, that there are many, many allegations having been made
and many questions raised and many investigations have yet to
be initiated, yet alone completed. As a result, many LPPC
members and our customers have serious concerns about
legislating major changes to electric power markets at this
time, concerns which are shared in our cities and towns.
Let me turn now to our issue of primary concern today. That
is the issue of expanded FERC jurisdiction. LPPC and its member
companies support open access transmission. LPPC has worked
with Congress to guarantee open access transmission by non-
jurisdictional entities. Public power agreed that limited FERC
jurisdiction could be extended to public power systems and
cooperatives in order to assure that open access would be
provided to all market participants on an equal and comparable
basis. That is the provision that is traditionally referred to
as FERC-lite. LPPC continues to support this limited expansion
of FERC jurisdiction for the purpose of open access
transmission.
However, a recent Supreme Court decision and a subsequent
issuance of FERC's proposed standard market design rule have
raised questions that the current language of FERC-lite may be
read to allow expansion beyond its original intent, possibly to
impose full FERC jurisdiction over public power systems and
cooperatives, which is unacceptable.
Your draft electricity title currently includes a provision
on open access transmission. However, the provision, as
currently drafted and in particular proposed section
211A(a)(2), cannot be supported by LPPC unless the language is
modified to restore its original intent. In particular, the
modification that we seek to FERC-lite would make it clear that
FERC may require public power, co-ops, TVA, and PMAs to provide
open access transmission services; that is, service to others
that is comparable to the service they provide themselves. This
is completely consistent with FERC's reciprocity requirements
in Order 888.
Recently, the House Subcommittee on Energy and Air Quality
reported out their legislation which contains language that is
acceptable to LPPC on this matter, and we urge this committee
to take a similar approach to FERC-lite and restore this
provision to its original intent.
Also, it bears remembering that public power systems
continue to be constrained to some extent by private use rules
from the IRS. Certainly we appreciate that the IRS has recently
issued some rulings which clear up many of those questions, but
there are still a number of outstanding issues related to bond
covenants and the applicability of some State statutes.
Now, with regard to service obligation, the ability of
public power systems to serve our local communities is an issue
of paramount concern. Let me just reiterate, we do support open
access transmission. However, we do not want to risk the
reliability and reasonably priced power that our customers
expect and are entitled to receive.
In summary, the key point for us is that our customers
should not have to pay twice for their transmission systems,
first to build it and then again to use it when someone else
outbids our customers. Our customers have paid for the critical
transmission lines necessary to move power from our sources to
meet service obligations, and if we are required to pay
congestion charges whenever our use and the demands of others
exceed the capacity of the line, then in effect, our customers
would be double-billed for the same transmission capacity.
For that reason, last Congress we supported the service
obligation amendments that Senator Kyl and others put forward.
Lastly, to sum up, as this committee is well aware, the
FERC is considering a significant rulemaking initiative
denominated as standard market design. We have submitted other
comments to you twice in writing and believe that the SMD
proposal, as currently configured, is unworkable.
With respect to the regional energy services commission, we
echo some of the comments that you have heard earlier today. It
is a notable recognition of regional differences. It is a step
towards a more productive dialogue, but there are still many,
many questions that need to be studied before we can reach any
conclusive recommendation to you.
Thank you for the opportunity to comment.
[The prepared statement of Mr. Tollefson follows:]
Prepared Statement of Phil Tollefson, CEO, Colorado Springs Utilities,
on Behalf of the Large Public Power Council
My name is Phil Tollefson and I am the Chief Executive Officer of
Colorado Springs Utilities, located in Colorado Springs, Colorado. I am
testifying today on behalf of the Large Public Power Council (LPPC), an
association of 24 of the largest public power systems in the United
States. LPPC members directly or indirectly provide reliable,
affordably priced electricity to almost 22 million customers. Our
members own almost 33,000 miles of transmission and control over 61,500
MW of generation. LPPC members are located in states and territories
representing every region of the country, including several states
represented by members of this Committee--including my home state of
Colorado, as well as Arizona, Tennessee, Florida, New York, California,
and Washington.
LPPC has testified before the Committee in previous Congresses
during consideration of energy policy and electric restructuring.
Thank you for this opportunity to express the views of LPPC on your
draft energy legislation. I will not be commenting on all provisions of
interest or concern to LPPC members today but will, instead, focus on
several issues of primary concern to our members--FERC transmission
jurisdiction, service obligation, and the regional organizational
options. Attached to my testimony is a short outline of the issues on
which the Committee requested comment and LPPC's position on those
issues.
public power is unique
Public power systems are owned by the communities we serve, not by
investors. We are not-for-profit entities, which makes us different.
Public power systems have been a part of the nation's electric system
since the late 1800s, with many created as a part of city governments.
Many LPPC member systems continue to provide numerous services to their
communities in addition to electricity, such as flood control and
natural gas, water and wastewater services, like we do in Colorado
Springs. In fact, Colorado Springs Utilities is one of the largest
four-service utilities in the country.
Electricity is a vital component of our lives now and is a
cornerstone of the economy. There are dire consequences if electricity
is not reliable and affordable.
As the electric supply of the country has been ``deregulated,''
many providers of electricity have sold off their generation or
transmission assets or have severed their direct relationship with
electric customers. But public power systems still have an obligation
to serve the customers for which their systems are built. This service
obligation is generally imposed by state law or local ordinance,
sometimes by the statute creating the public entity. As a result, all
available resources go first to serving those customers. Power is sold
and surplus transmission made available only if it is surplus to those
needs.
Our rates reflect the fact that we are not-for-profit entities. Our
rates include only the costs of producing and delivering power to our
customers and, in some cases, payments to our governing boards or
municipal entities as a component of the local budget. Our system, for
example, Colorado Springs Utilities, contributes $24 million annually
to general fund of the city. Since public power systems are locally
controlled, decisions about policies such as rates are made by people
who are in touch with local concerns. A city council sets policies for
many LPPC members, while other public power systems have a separately
elected or appointed utility board that governs their policies. Local
control helps ensure that we respond to community needs. In addition,
since public power systems are community based, our revenues stay close
to home. This helps keep the local economy strong.
the need for market reforms
Congress has struggled with electric restructuring legislation for
several years. Over the course of that debate, the electric utility
industry has undergone tremendous change. Once robust investor-owned
utilities are now in serious financial shape with 180 rating downgrades
in the past year. Some significant players in the market have filed for
bankruptcy. There are instabilities in the market at this time. The
capital market for utility infrastructure has basically collapsed. Many
LPPC members and our customers have serious concerns about legislating
major changes to electric power markets at this time, concerns which
are shared by our cities and states.
Standard & Poor's recently issued a credit analysis report on the
public power sector that noted that the credit rating stability of
public power ``is a testament to the sector's ability to withstand
periodic shocks as well as respond to new challenges.'' More than 80%
of the public power sector has an ``A'' rating or better at this time
and public power systems are functioning well in competitive wholesale
markets. A strength of public power systems is our focus on providing
the lowest-cost power to our customers.
expansion of ferc jurisdiction (open access--ferc-lite)
Our issue of primary concern today before this Committee, one that
affects our willingness to continue to support legislative action and
our ability to exhibit the strength and resilience market watchers see
in our sector, is the issue of expanded FERC jurisdiction.
LPPC and its member companies support open access transmission.
LPPC has worked with Congress to guarantee open access transmission
service by non-jurisdictional entities. Public power agreed that
limited FERC jurisdiction could be extended to public power systems and
cooperatives in order to ensure that open access transmission service
would be provided to all market participants. That is the provision
that is known as ``FERC-lite.'' LPPC continues to support this limited
expansion of FERC transmission jurisdiction--for the purpose of open
access transmission. A recent Supreme Court Decision and the subsequent
issuance of FERC's proposed Standard Market Design rule have raised
concerns that the current language of the FERC-lite provision could be
read to allow expansion beyond its original intent, possibly to impose
full FERC jurisdiction over public power systems and cooperatives,
which is unacceptable.
The staff discussion draft dated 3/26/03, Electricity Title,
includes a provision on ``Open Access Transmission.'' However, the
provision, as currently drafted, and in particular the proposed Section
211A(a)(2), cannot be supported by LPPC--unless the language is
modified to restore its original intent. The modification we seek to
``FERC-lite'' would make it clear that FERC may require public power,
coops, TVA and PMAs to provide open access transmission services--that
is, service to others that is comparable to the service they provide
themselves. This is completely consistent with FERC's reciprocity
requirements in Order 888. We remain committed to providing such open
access transmission.
Recently, the House Subcommittee on Energy and Air Quality reported
out their legislation which contains language that is acceptable to
LPPC in Section 7021. We urge this Committee to take a similar approach
to FERC-lite and restore the provision to its earlier intent. This will
respect the long-standing agreement between LPPC and policy makers and
will ensure that open access transmission service is provided in
furtherance of a robust competitive wholesale market.
FERC Chairman Pat Wood has not asked Congress to expand federal
authority over public power systems, preferring a ``voluntary approach
to entice such utilities into the marketplace.'' The Administration and
Commission have generally supported the concept of open access
transmission but have not sought additional jurisdiction over the
transmission assets of public power. We hope that the Chairman and this
Committee recognize this issue and return FERC-lite to its original
intent--a limited extension of FERC jurisdiction to ensure open access
to the transmission system.
It bears remembering that public power systems continue to be
somewhat constrained by IRS ``private use rules'' from providing open
access transmission service using facilities financed with tax exempt
bonds. We appreciate that the Senate understands that the ability of
public power to make its transmission facilities available to all users
depends on a solution to the private use problem. Last year's Senate
bill reflected that understanding, as does the current staff discussion
draft by including subsection (f) in the Section 211A. The IRS did
issue final regulations on private use which resolve many of the issues
facing public power. However, the regulations do not address all
situations or concerns that may arise with bond covenants and, as a
result, public power may be restricted in its ability to provide open
access transmission service in all circumstances. Therefore the Senate
language is still necessary.
service obligation
The ability of public power systems to serve our local communities
is an issue of paramount concern to LPPC member systems. Let me just
reiterate--we support open access transmission policies. However, we do
not want to risk the reliable, reasonably-priced power that our
customers expect and are entitled to receive. We hope that you will
address this issue because, for us, it is about protecting our
customers.
Public power systems are established by state law and are
obligated, generally by state law, to provide electric service to their
customers. We need to maintain and preserve the ability to fulfill this
obligation. Some LPPC member systems have built their transmission
system specifically to serve their customer base, as is the case with
Colorado Springs Utilities. This transmission has been and is being
paid for by our customers/owners. Our customers want to be assured that
the transmission system which they paid for and which provides them
their electric power at reasonable rates, will continue to be available
to them first--with any excess to be made available to others who are
not customers.
LPPC members have also entered into long-term bilateral contracts
in making their long-term generation and transmission decisions. These
firm commitments allow for stable and secure electric rates and
reliability. They provide for certainty in the market and allow the
parties to make operational and investment decisions over the long-
term, decisions that are necessary for the continued expansion of a
functioning electric generation and transmission system. Without this
kind of certainty as to the future, obtaining approval from public
governing bodies for generation and transmission investments will be
difficult, if not impossible.
In summary, the key point for us is that our customers should not
have to pay twice for their transmission system--first to build it and
then to use it when someone else outbids our customers. Our customers
have paid for the critical transmission lines necessary to move power
from our own or distant generation sources to meet our service
obligation to our communities. If we are required to pay congestion
charges whenever our use and the demands of others exceed the capacity
of the line, our customers would, in effect, be ``double billed'' for
the same transmission capacity. Although the SMD NOPR seeks comment on
a transition proposal that offers limited protection against this
outcome, we think that direction from Congress is needed.
For that reason, last Congress, we supported the Kyl amendment--SA
3184--placed in the record during the Senate debate on S. 517. We
believe that the amendment is good energy policy and good public
policy. It protects our consumers and helps ensure the reliable
delivery of electricity to our customers. Under the amendment, a
utility that has firm transmission rights (by ownership or under
contract) can retain those rights to meet its state law service
obligation. The amendment makes it clear that customers don't have to
pay twice for transmission: once to build it and then a second time to
use it if congestion occurs. The amendment is consistent with FERC
policy objectives and has wide support from industry--both transmission
owners and transmission dependent utilities.
regional energy services commission
LPPC has no formal position on the new proposal by the Committee on
Regional Energy Services Commissions (RESCs).
LPPC continues to believe that regional differences need to be
respected in any legislative or regulatory framework and we are
appreciative that this proposal recognizes that principle. As an
organization of 24 member systems from all over the country, we are
very well aware of the distinctions that exist in the markets around
the country. We have member systems located in New York State that are
fully participating in the NY ISO. Other member systems are located in
ERCOT. Still other systems are in the Pacific Northwest, the Southeast,
Midwest, and the West. Genuine diversity exists among our members. This
leads to an awareness on the part of LPPC that ``one size doesn't fit
all''--especially in the West. The RESCs may be intended to address
this fundamental issue. But the proposal is so sweeping, so new, that
we feel that more details will have to be known and understood by all
parties before we would feel comfortable commenting substantively.
standard market design
As this Committee is well aware, the FERC is considering a
significant rulemaking initiative denominated as Standard Market
Design. The LPPC and many of its members filed comments on this
proposal. Colorado Springs Utilities made two filings, one addressing
issues unique to the Western Interconnect. In its comments Colorado
Springs Utilities opposed implementation of SMD, particularly in the
Western Interconnect.
Speaking for my own company, Colorado Springs Utilities favors open
access transmission and was one of the first nonjurisdictional
utilities to file a reciprocal open access tariff with the FERC.
Colorado Springs Utilities has participated in a number of initiatives
to create Regional Transmission Organizations. Nevertheless, Colorado
Springs Utilities believes the SMD proposal is unworkable, especially
in the Western Interconnect, and will impose significant new costs upon
electric consumers without any corresponding benefit.
transmission investment
Many LPPC members have built transmission systems to accommodate
load growth. To the extent permissible under the private use rules, any
excess is made available to the market. It is in our members' best
interest to both build for load growth and to make excess transmission
capacity available to the market place. Load serving entities and their
customers who prudently built transmission to accommodate future load
growth should not be deprived of the benefit of that investment by
having their future right to use that transmission taken away.
There are mechanisms in place by which entities can assure that
transmission upgrades are made when transmission customers are willing
to bear the cost of those upgrades. We believe that the building of new
transmission should be encouraged and believe that properly structured
incentive rates might be able to encourage such investment. However,
any incentives must be tied to acceptable and demonstrable benchmarks
of performance. Most importantly, the form of incentives or savings
must not disadvantage or discriminate among different types of
wholesale energy customers or transactions. Moreover, any incentives or
savings should not be imposed on all systems or in all circumstances.
This Committee and FERC have both expressed an interest in
encouraging investment in transmission facilities. In this respect,
public power is part of the solution, not the problem. Unlike most of
the industry, LPPC member systems, such as Sacramento Municipal
District (SMUD), the Lower Colorado River Authority (LCRA), Long Island
Power Authority (LIPA), JEA, and the Salt River Project (SRP), are
continuing to invest in transmission upgrades and expansions. In some
cases, we are building transmission for others. It is our understanding
that the Committee is looking for a mechanism that makes sense, allows
for planning, and facilitates reliable expansion. We will be happy to
work with the Committee and demonstrate how public power is helping to
build needed new transmission today.
energy conservation
LPPC supports increased funding for energy efficiency and
conservation programs. Low-income families spend a significant portion
of their income on energy costs. Colorado Springs Utilities and the
other LPPC members are committed to providing our eligible low-income
customers with the assistance they need and continue to strive for
rates as low as possible so that our customers can have an easier time
paying their utility bills.
clean coal technology
Although this is not a primary issue for the LPPC in the context of
the electricity title, LPPC strongly supports fuel diversity. Colorado
Springs feels strongly that a national energy policy must recognize the
role that coal plays as part of a diversified fuel base for the
generation of electricity. There are some that advocate the elimination
of coal. Colorado Springs believes this is the wrong approach.
Our nation has an abundant supply of coal that is inexpensive and
can be easily delivered using existing technology and infrastructure.
Coal is a domestic energy source that is not tied to foreign suppliers
and exists in such quantity that we can supply our energy needs for
generations to come. Our existing fleet of coal based generation
supplies approximately 43% of the current electricity consumed in the
United States.
Congress should recognize that coal is a fundamental part of our
energy supply portfolio and allocate resources to address the major
challenge to coal as a generation fuel. Scientific research and
federally supported projects to explore and demonstrate new and better
methods to eliminate the emissions of coal based generation is needed
to help address the concerns related to human health and the
environment.
lppc positions on the issues on which committee staff
requested specific comment
Regional Energy Services Commissions
LPPC has no official position on the staff discussion draft dated
3/26/03 at this time. LPPC continues to believe that regional
differences need to be respected in any legislative or regulatory
framework. As an organization of 24 member systems from all over the
country, we are very well aware of the distinctions that exist in the
markets around the country. We have member systems located in New York
State that are fully participating in the NY ISO. Other member systems
are located in ERCOT. Still other systems are in the Pacific Northwest,
the Southeast, Midwest, and the West. Genuine diversity exists among
our members. This leads to an awareness on the part of LPPC that ``one
size doesn't fit all''--especially in the West. The RESCs may be
intended to address this fundamental issue. But the proposal is so
sweeping, so new, that we feel that more details will have to be known
and understood by all parties before we would feel comfortable
commenting substantively.
Reliability Standards
LPPC supports mandatory reliability criteria and standards
developed by national or regional reliability organizations overseen by
FERC. We supported the NERC reliability consensus legislation last
Congress, which was included in the Senate counter-offer dated 10/16/
02. LPPC believes that there is a need to clarify FERC authority over
reliability, that there should be binding electric reliability
standards, and that there should be a clear mechanism to enforce these
reliability standards.
Open Access (FERC-Lite)
LPPC supports open-access transmission. However, LPPC cannot
support FERC-lite as contained in the staff discussion drafted dated 3/
26/03 unless the language is modified to restore its original intent.
The House bill reported out of the Energy and Air Quality Subcommittee
dated 3/19/03 moves in that direction.
Transmission Siting
LPPC does not have a position on the staff discussion draft dated
3/26/03 at this time. LPPC supports giving FERC carefully circumscribed
authority to provide the right of eminent domain where the installation
of transmission facilities is required to ensure adequate and reliable
service. However, the role of the state and local governments must be
given adequate weight.
Transmission Investment Incentives
LPPC does not have a position on the staff discussion draft dated
3/26/03 at this time. LPPC believes that incentive rates may be
appropriate in limited circumstances, if properly tied to acceptable
and demonstrable performance benchmarks. However, LPPC does not support
mandating universal application through legislation.
Transmission Cost Allocation (Participant Funding)
LPPC does not have a position on the staff discussion draft dated
3/26/03 at this time. LPPC believes that there are circumstances under
which transmission cost allocation may be useful. However, LPPC does
not support mandating universal application through legislation.
Transmission Organizations/RTOs
LPPC opposes the concept of an RTO mandate. There are legal
constraints--such as private use tax restrictions, bond indenture
requirements, and state statutory obligations--that are unique to
public power. Most of our members are currently working voluntarily to
join RTOs. RTOs, to be effective and worth the initial costs, will have
to deliver the promised benefits to consumer and LPPC strongly feels
that any participation must be accompanied by consumer benefits.
PUHCA
Each of the proposals would repeal the Public Utility Holding
Company Act (PUHCA). LPPC believes that PUHCA should be modernized. If
PUHCA is repealed, FERC's merger authority under section 203 of the
Federal Power Act should be strengthened, not eliminated, and consumer
protection provisions must be enhanced. FERC must be provided with
adequate tools to review mergers, including holding-company-to-holding-
company mergers, and to prevent abuses of market power.
PURPA
LPPC has no position on the staff discussion draft.
Net Metering & Real-Time Pricing
LPPC does not have a position on the staff discussion draft dated
3/26/03 at this time.
Renewable Energy
LPPC supports legislation that provides incentives to investment in
renewable energy, including tradable tax credits and the REPI program.
Market Transparency, Anti-Manipulation, Enforcement
Public power believes that there should be strong mechanisms to
ensure market transparency and prevent manipulation in the market. As
governmental entities, public power systems are subject to ``sunshine''
laws and good governance principles, requiring complete pubic
dissemination of information and openness of decision-making. We
support provisions such as those contained in the House draft bill
dated 3/19/03 and believe they can be strengthened.
Consumer Protections
Public power has continued to advocate for strong consumer
protection provisions in federal legislation.
Senator Craig. Well, thank you very much, Phil.
Now let us move to Betsy Moler, executive vice president,
Government and Environmental Affairs and Public Policy for
Exelon Corporation.
Welcome back to the committee.
STATEMENT OF ELIZABETH A. MOLER, EXECUTIVE VICE PRESIDENT,
GOVERNMENT AND ENVIRONMENTAL AFFAIRS AND PUBLIC POLICY, EXELON
CORPORATION, ON BEHALF OF ELECTRIC POWER SUPPLY CORPORATION
Ms. Moler. Thank you very much, Senator Craig. It is a
pleasure to be here today.
Exelon is a registered holding company. Our utility
subsidiaries, Commonwealth Edison in Chicago and PECO Energy in
Philadelphia, serve over 5 million electric customers, roughly
15 million people. We have the largest customer base of any
utility in the United States.
I am here today representing the Electric Power Supply
Association, known as EPSA. EPSA is the national trade
association representing competitive power suppliers, including
independent power producers, merchant generators, power
marketers, as well as some major utilities. These suppliers
account for more than a third of the Nation's installed
generating capacity.
Unlike some of my fellow panelists, EPSA strongly urges you
to enact long overdue energy legislation. In addition, EPSA
agrees with Senator Thomas' recent statement that if we pass a
comprehensive energy bill, it must include an electricity
title.
Various electricity marketing reforms have been pending
before this committee for nearly a decade. On March 4, this
committee heard compelling testimony that highlighted the
financial crisis facing our industry and that Allen Franklin
mentioned to you. We desperately need legislation that will
provide much needed reform outdated laws that hamper our access
to capital and thwart infrastructure development. Congress came
close to passing an electricity title in the comprehensive
energy policy legislation last year. Unfortunately that effort
fell short. We urge you to act this year.
We believe that the focus of any legislation should be on
repealing outmoded laws that impede competition and capital
formation, further the progress of wholesale competition, and
assure reliability. Wholesale competition, incomplete as it is,
has already benefitted consumers. Inflation-adjusted
electricity prices decreased from 1985 to 2001, the latest year
for which statistics are available. They decreased on average
by 31 percent for residential customers and by 45 percent for
industrial and commercial customers. Studies have repeatedly
shown that efficient wholesale markets bring real benefits to
consumers. Actions such as forming regional transmission
organizations could save consumers as much as $60 billion by
2021.
At your staffs' request, my written testimony today focuses
on the four major proposals before the Congress either this
year or last: Senator Thomas' bill, the majority staff draft,
the Senate offer from last year, and the electricity provisions
of the House Energy and Air Quality Subcommittee bill.
By focusing on the list of proposals that are or have been
pending and analyzing them very carefully, it is obvious that,
contrary to the impression you may get from today's discussion,
we believe the differences are actually narrowing among the
proposals. EPSA believes that by taking various parts of the
four pending proposals, that this committee could forge a
compromise proposal that would have very broad industry and
stakeholder support.
In the limited time I have today, I do want to focus on one
brand new topic, that is the proposal by the majority staff
discussion paper to create regional energy services
commissions, or RESCs. The staff draft, unveiled last week,
does propose a fundamental shift in the way the electricity
industry would be regulated. By authorizing RESCs, Congress
would be signaling the end of a system of regulation that has
brought this Nation an electricity network that is the backbone
of our modern economy and the envy of the modern world. The
staff RESC proposal is not a minor or incremental change. It
represents a radical shift in the regulation of wholesale
electric power markets.
EPSA simply cannot support the RESC proposal. We do
recognize that it is a well-intentioned proposal to address the
jurisdictional questions that have arisen in the wake of FERC's
standard market design initiative. But the RESC proposal, as it
currently stands, further complicates an already too
complicated jurisdictional split between FERC and the States.
We also believe that it raises serious constitutional
questions and those constitutional questions are outlined in
some detail in my testimony.
It also has a bunch of practical issues. It would create
another layer of bureaucracy with authority over rates for
transactions in interstate commerce. The industry would be
hamstrung with multiple overlapping layers, including FERC,
State PUCs, RESCs, RTOs, electric regional organizations, and
municipal and cooperative entities. Our goal should be to
simplify and streamline the regulatory model, not to complicate
it.
We also have serious questions about the transition to
RESCs. There are staffing issues. There are State issues with
respect to requiring legislation to implement it. There are
funding issues when States are having financial crises. There
is a question of recruiting appropriate staff to run these
organizations and people these organizations, and there is a
question of whether they could handle the caseload.
We think that RESCs would exacerbate the seams problem
rather than help them. A State could opt in one year, opt out
the next year, as Virginia has just done, opt in the next year,
and where would you be? In short, we think it is a mess.
Mr. Franklin's testimony on behalf of EEI had some further
practical questions, and I would also call your attention to
some testimony that is being submitted for this record by the
North American Electric Reliability Council which calls into
question the reliability implications of this proposal.
We do understand that one goal of the staff draft is to
stir creative thinking, and we give them a great deal of credit
for that. We do believe that there are aspects of our industry
that would benefit from greater cooperation among the States.
The include regional transmission planning, including expansion
of the transmission grid, and regional approaches to
determining generation adequacy. We would urge Congress to
focus on incremental improvements to enhance regional efforts
rather than adopting the RESC approach.
EPSA does support passage of an electricity title that
includes reliability language, FERC-lite provisions, PUHCA
repeal with safeguards to ensure that there are no cross-
subsidies by utilities, access to books and records by State
commissions, prospective PURPA repeal, voices support for RTOs,
has market transparency, anti-manipulation and enforcement
provisions, information disclosure, consumer privacy, and
unfair trade practices provisions. Some of these issues have
been highlighted, particularly by Senator Bingaman, as a
precondition for his degree of comfort with repealing PUHCA.
Exelon does support the Barton draft siting proposal, and I
would note that there are three panelists on this panel that
are members of the Department of Energy's Electricity Advisory
Board. We helped develop that proposal and we are delighted to
see it emerge in the Barton bill.
Again, I do believe that this committee has a wonderful
opportunity to forge a consensus where a consensus has eluded
the committee for years, and we would urge you to put your
efforts to that task.
Thank you.
[The prepared statement of Ms. Moler follows:]
Prepared Statement of Elizabeth A. Moler, Executive Vice President,
Government & Environmental Affairs & Public Policy, Exelon Corporation,
on Behalf of the Electric Power Supply Corporation
Mr. Chairman and members of the committee, thank you for the
opportunity to testify today; it is a pleasure to be back before this
Committee. I am Elizabeth A. (Betsy) Moler, Executive Vice President,
Government and Environmental Affairs and Public Policy for Exelon
Corporation. Exelon is a registered utility holding company. Our two
utilities, Commonwealth Edison (ComEd) of Chicago, and PECO Energy of
Philadelphia, serve over 5 million electric customers, the largest
electric customer base in the United States. We have more than 40,000
MW of generating capacity, the second largest portfolio in the United
States. Our wholesale power marketing division, known as the Power
Team, markets the output of our generation portfolio throughout the 48
States and Canada with a perfect delivery record.
I am here today representing the Electric Power Supply Association
(EPSA). EPSA is the national trade association representing competitive
power suppliers, including independent power producers, merchant
generators and power marketers. These suppliers, which account for more
than a third of the nation's installed generating capacity, provide
reliable and competitively priced electricity from environmentally
responsible facilities serving global power markets. EPSA seeks to
bring the benefits of competition to all power customers. On behalf of
the competitive power industry, I thank you for this opportunity to
comment on pending energy legislation.
I strongly urge you to enact long-overdue energy legislation. In
addition, EPSA agrees with Senator Thomas' recent statement that, ``If
we pass a comprehensive energy bill, it must include an electricity
title'' \1\ Various electricity market reform bills have been pending
before this Committee for nearly a decade. On March 4, 2003, this
Committee heard compelling testimony that highlighted the financial
crisis facing our industry; we desperately need legislation that will
provide much-needed reform of outdated laws that hamper our access to
capital and thwart infrastructure development. Congress came close to
passing an electricity title in the comprehensive energy policy
legislation last year; unfortunately that effort fell short. We urge
you to act this year.
---------------------------------------------------------------------------
\1\ ``Secretary Abraham and Senator Thomas Agree; Electricity
Essential for Comprehensive Energy Bill,'' Press Release (February 27,
2003).
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We believe that the focus of any legislation should be on repealing
outmoded laws that hinder competition and capital formation; furthering
the progress of wholesale competition; and assuring reliability. EPSA
members agree with the vision statement from a recent Western Business
Roundtable proposal \2\ that recommends, ``All transmission users enjoy
access to a robust regional transmission system capable of efficiently
moving adequate supplies throughout the grid.'' Wholesale competition--
incomplete as it is--has already benefited consumers; inflation-
adjusted electricity prices decreased from 1985 to 2001 on average by
31 percent for residential customers and by 35 percent for industrial/
commercial customers.\3\ Studies have repeatedly shown that efficient
competitive wholesale markets bring real benefits to consumers. Actions
such as forming Regional Transmission Organizations (``RTOs'') could
save consumers as much as $60 billion by 2021.\4\ Congress can foster
further savings by encouraging the use of the most economically
efficient generation and opening up the transmission system. Consumers
in areas of the country which do not have robust wholesale markets are
not reaping the full benefit of competition-if markets were established
in which the least expensive and most-efficient generation had the
opportunity to be deployed first, regardless of ownership, all
electricity customers would save.
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\2\ Western Market Design, A Proposed Model to Encourage Greater
Investment in Western Wholesale Electricity Markets,'' Western Business
Roundtable Proposal, www.westernroundtable.com.
\3\ The ``2003 Data Update: Assessing the `Good Old Days' of Cost-
Plus Regulation'' prepared for EPSA by the Boston Pacific Company.
\4\ ``Economic Assessment of TRO Policy'' for FERC by ICF
Consulting on February 26, 2002.
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At your staff's request, my testimony today will discuss three
major proposals pending before the Congress: S. 475, Senator Thomas's
Electric Transmission and Reliability Enhancement Act of 2003 (``Thomas
Bill''); the Majority Staff Discussion Draft, dated March 20, 2003
(``Staff Draft''); the Senate Offer of October 16, 2002 (``2002 Senate
Offer''); and the electricity provisions included in the comprehensive
bill reported last week by the House Energy and Air Quality
Subcommittee (``Barton Bill''). As your staff requested, the testimony
is organized to focus on specific areas of concern to this Committee.
Our analysis of these three proposals keeps in mind three basic
principles:
First, any structural or procedural change brought about by
legislation must be aimed at providing consumers with the
lowest-cost reliable power available;
Second, maximum consumer benefits will flow from competition
built around seamless regional markets in which power is
generated at the least expensive and most efficient facilities
regardless of who owns them; and
Third, the basic concept of ``first do no harm'' should
apply--the collateral effects from incomplete or poorly thought
out policy changes could have a negative impact on all
electricity users.
regional energy services commissions
The Staff Draft, unveiled last week, proposes a fundamental shift
in the way that the electricity industry would be regulated. By
authorizing the creation of ``Regional Energy Services Commissions''
(``RESCs'') Congress would be signaling the end of a system of
regulation that has brought this nation an electricity network that is
the backbone of our modern economy; it provides reliable service, at
reasonable cost and is the envy of the world. The Staff Draft RESC
proposal is not a minor or incremental change; it represents a radical
shift in the regulation of wholesale electric power markets.
EPSA simply cannot support the Staff Draft RESC proposal. We
recognize that it is a well-intentioned proposal to address the
jurisdictional questions that have arisen in the wake of the Federal
Energy Regulatory Commission's (``FERC'') recent market design
initiatives. But the RESC proposal, as it currently stands, further
complicates an already too-complicated jurisdictional split between
FERC's regulatory authority over wholesale sales and transmission under
the Federal Power Act and the states' authority to regulate retail
matters.
As a threshold matter, we believe that the RESC proposal, as
drafted, raises significant issues under the U.S. Constitution. The
Commerce Clause of the Constitution grants to Congress--and solely to
Congress--the power to regulate commerce among the states. Supreme
Court precedent has long established that transmission of electricity
is commerce among the states--out of reach of state regulation under
the Commerce Clause.\5\ In addition, the RESC concept implicates issues
under the Appointments Clause by legislating a new level of regional
government that is not contemplated by the Constitution. Congress can,
of course, abolish FERC's authority to set transmission rates, but it
is not at all clear that Congress can delegate that authority to the
states, or to congressionally appointed executives.
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\5\ The very case cited in the Staff Draft as the introduction for
the creation of RESCs, Public Utilities Comm'n v. Attleboro Steam &
Electric Company, 273 U.S. 83 (1927), held that a direct transfer of
power from a utility in Rhode Island to a utility in Massachusetts is
in interstate commerce and cannot be regulated by the states, even
though there was no federal authority then to regulate those
transactions. Federal Power Commission v. Florida Power & Light Co.,
404 U.S. 453 (1972), held that power generated and delivered solely
within Florida was nonetheless transmitted in interstate commerce
because it commingled in a bus with power from another state. New York
v. Federal Energy Regulatory Commission, 535 U.S. 1 (2002) held that
the transmission of power, even for retail services, was interstate
commerce, subject to Federal Power Act jurisdiction. These cases make
clear that the Commerce Clause of the Constitution precludes states
from regulating transmission of power in interstate commerce.
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The RESC proposal raises significant practical concerns, and it
would create another layer of bureaucracy governing some unquantifiable
percentage of transactions in interstate commerce. The industry would
be hamstrung with multiple overlapping layers of jurisdiction including
regulation by FERC; state regulation through public utility commissions
(``PUCs''), RESCs, RTOs, Electric Reliability Organizations (``EROs''),
and municipal and cooperative entities. Our goal should be to simplify
and streamline the regulatory model, not to complicate it.
The proposal builds on a questionable model: the multi-state
compact. These organizations, even when successful, tend to move
slowly, and are ill equipped to respond to rapidly evolving, dynamic
circumstances. They require state legislation for approval and lack
federal enforcement authority. I think that one must be very careful
before turning over regulation of an essential commodity, which is the
basic engine of our economy, to a new and unproven regulatory regime
when so much is at stake.
RESCs could quickly become a hodgepodge of highly-politicized
regulatory organizations that would practically guarantee huge
``seams'' issues, as even the most fundamental definitions and rules of
the road get set locally. A state could opt-in to an RESC one year, and
opt-out the next, which by the Staff Draft's contiguous requirement
could immediately disqualify other states from being part of the RESC.
Some states would have RESCs; others would not. Additional ``seams''
would be created as additional regional organizations come and go. This
is just one example of how one state's action could impact the
interstate transmission market in multiple states.
Further development of competitive wholesale markets would be
thwarted as different regions develop different rules. Whole new
regional bureaucracies would have to be created, funded, and qualified
staff recruited in an era of unprecedented state budget deficits. We do
not believe that is likely to happen smoothly. Furthermore, the RESCs
simply would not be prepared to handle the caseload.
I could elaborate on the list of questions that have been raised
since the proposal was revealed last week. The Edison Electric
Institute (``EEI'') testimony, and the North American Electric
Reliability Council (``NERC'') testimony, elaborate on many of the
practical issues presented by the Staff Draft.
Representatives of the capital markets that testified at the FERC's
capital availability technical meeting on January 16, 2003, uniformly
advocated that clear rules and regulatory certainty are a prerequisite
for the return of affordable capital to this industry as a whole.
RESCs, as formulated in the Staff Draft, likely would create even
greater uncertainty for an even longer time as they progress through
the state approved process, get organized, and sort out responsibility.
In the meantime, a financially beleaguered industry would be unable to
take sure steps to recovery.
The goal of Congress should be to encourage competition at the
wholesale level, and to simplify rather than complicate the regulatory
regime (``do no harm''). Putting all interstate transactions under FERC
jurisdiction, as provided in the Thomas Bill, rather than adopting the
Staff Draft can achieve this goal. EPSA members agree with Senator
Thomas' conclusion that the current [wholesale] electric market is
inefficient and fragmented; it does not allow the industry to provide
consumers with the savings they could otherwise receive with a system
that works.\6\
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\6\ Supra, n. 1.
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We understand that one goal of the Staff Draft is to ``stir
creative thinking'' about solutions to problems in our industry. EPSA
believes there clearly are aspects of our industry that would benefit
from greater cooperation among states. These include regional
transmission planning, including expansion of the transmission grid;
and regional approaches to determining generation adequacy. We would
urge Congress and FERC to focus on incremental improvements to regional
efforts, rather than adopting the radical RESC approach.
reliability standards
EPSA supports the passage of electric reliability language
establishing a nation-wide organization that would have the authority
to establish and enforce reliability standards with the oversight of
FERC. Although we are not yet convinced that any of the proposals is
ideal, we believe that the reliability language contained in the Thomas
Bill represents the best approach of the four bills under discussion.
open access (``ferc-lite'')
The expansion of FERC authority to include limited jurisdiction
over the transmission systems of public power and cooperatives is a
very important step toward creating an integrated national transmission
grid. We urge Congress to include the FERC-Lite provisions because they
will: support competitive market development; help prevent gaming of
the transmission system; and promote reliability by eliminating the
``holes'' in the regulatory oversight of the system. According to a
December 2002 GAO report, ``Lessons Learned From Electricity
Restructuring,'' because of this lack of jurisdiction:
FERC has not been able to prescribe the same standards of
open access to the transmission system. This situation, by
limiting the degree to which market participants can make
electricity transactions across these jurisdictions, will limit
the ability of restructuring efforts to achieve a truly
national competitive electricity system and, ultimately will
reduce the potential benefits expected from restructuring.
In theory, sections 211 and 212 of the Federal Power Act allow any
person to request FERC to issue an order requiring interconnection and
the wheeling of electricity. In practice, proceedings under sections
211 and 212 are expensive, time consuming and are a poor substitute for
a requirement that all transmitting utilities provide open, non-
discriminatory access under comparable rates, terms and conditions.
Access under these cumbersome rules and procedures merely perpetuates
opportunities for abuse and foot dragging by non-jurisdictional,
transmitting utilities until the competitive threat they face
disappears. One of the principle reasons that FERC initiated the Order
No. 888 open access rulemaking initiative in 1996, while I chaired the
Commission, was the recognition that individual case-specific
adjudications over the scope of open access requirements were simply
not working.
Unless FERC-Lite is included, regulation of the transmission grid
will continue to look like ``Swiss Cheese'' where the holes are the
Bermuda Triangles of competition. We endorse giving FERC the very
limited authority called for in the Staff Draft, the Thomas Bill or the
2002 Senate Offer. We also believe that the refinements to the FERC-
Lite provisions contained in the Barton Bill have the potential to make
the FERC-Lite provisions acceptable to a broader audience of industry
participants.
transmission siting
EPSA does not have an official position on transmission siting, but
its members do support the timely expansion of the transmission
infrastructure to support delivery of needed generation. Exelon as an
owner of generation and transmission assets does support providing the
FERC limited ``backstop'' authority to issue a certificate of public
convenience and necessity to site transmission needed to relieve
``National Interest'' bottlenecks as is called for in the Barton Bill.
The Barton Bill implements the recommendations of the Department of
Energy's Electricity Advisory Board (``EAB''). It was my privilege to
chair the Transmission Grid Solutions Subcommittee of the EAB, which
developed the recommendations. The EAB includes representatives of a
broad cross-section of the economy, including regulators,
environmentalists, financial services, utilities, public power and
consumer groups. In September 2002, the EAB published a comprehensive
report,\7\ which contained a set of recommendations that were provided
to the Secretary of Energy. The report identified ``important
initiatives that must be undertaken in order to ensure the nation's
transmission grid continues to be a reliable, strong engine for our
economy.'' The report recommended that the FERC backstop authority
should be provided only if the pending application for siting of a
``National Interest Transmission Facility'' is not acted on by State
and/or Federal authorities after 12 months of its filing.
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\7\ ``Transmission Grid Solutions Report,'' Electricity Advisory
Board (September 2002). Both reports can be found at
www.eab.energy.gov.
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We believe that this carefully crafted approach will provide
Federal siting authority only for a limited number of critical projects
found to be in the national interest. It is responsive to those that
have opposed a very broad grant of Federal siting authority by
balancing national interest with the concern of overriding existing
state siting processes. Exelon endorses the Barton Bill provision. The
Staff Draft provisions are not acceptable because they include cross-
references to the RESC proposal.
transmission investment incentives
EPSA has no position on whether there is a need to adopt statutory
provisions to encourage transmission investment. We certainly recognize
the need for a robust transmission system that will support a reliable,
efficient system. We have filed comments in support of the pending FERC
Policy Proposal to develop a pricing policy for efficient operation and
expansion of the transmission grid; those comments strongly endorse the
Commission's primary objectives of promoting RTO membership and
encouraging efficient infrastructure investment. We have made some
specific suggestions on how FERC should improve its policy proposal.
EPSA believes that efficient transmission investment is stalled and
should be promoted; investors considering transmission expansion
projects need to see commensurate reward for their commitment of
capital. We recognize that transmission owners must be able to recover
their investments, plus a fair return on those investments, in order to
encourage the necessary grid expansion. We believe that transmission
incentives should be tied to creating RTOs and developing competitive
market structures. The Barton Bill, the Staff Draft, and the 2002
Senate Offer are acceptable. We are especially supportive of the Staff
Draft's addition of provisions calling for proper price signals and
reduction of congestion on transmission networks.
transmission cost allocation (participant funding)
We do not believe that Congress needs to include any statutory
language to address the transmission cost allocation issue; intrusive
federal legislation on this topic could be both unnecessary and
harmful. Cost allocation is a quintessential example of the type of
work that is performed best by regulatory agencies, rather than enacted
into statutory law; the regulators are best-suited to address the
specifics facts of the cases requiring their expertise. Any
transmission cost allocation should provide flexibility and ensure that
transmission costs are born by those who benefit from the transmission.
Mandating one type of funding for expansion of the transmission system,
however, would be a serious mistake. We support participant funding in
the context of RTOs and competitive market structures as a general
rule, but do not believe the requirements should be set forth in a
statute.
transmission organizations/rtos
EPSA believes that forming RTOs is a crucial next step towards
furthering more competitive wholesale markets and that FERC has ample
authority under existing law to promote the formation of RTOs. Congress
should steer clear of proposals that would inhibit RTO formation.\8\
With the ``do no harm'' principal in mind, EPSA opposes the RESC
section of the Staff Draft because it would throw serious doubt on the
future viability of RTOs, and be deeply harmful to the operation of the
transmission grid. We endorse the Barton Bill provision on RTOs, which
supports membership in an independent RTO, requires a report to
Congress on pending RTO applications and authorizes Federal utilities
to enter into an agreement transferring control of all or part of their
transmission system to an approved RTO.
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\8\ One such proposal is being considered as a possible amendment
to the Barton Bill. It is an amendment by Rep. Norwood that would
severly restrict FERC's authority over interstate commerce by
overturning a recent landmark Supreme Court case reviewing FERC's
authority, New York v. FERC, op. cit. n. 3.
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puhca
PUHCA repeal is an important and long-awaited move towards
eliminating expensive, pointless restrictions that only create
additional regulatory costs and limit the ability of companies to
provide much-needed investment in the electric sector. PUHCA repeal is
included in the Thomas Bill, the Barton Bill, the 2002 Senate Offer,
and the Staff Draft. The draft bills all provide FERC sufficient
authority to ensure that utilities do not take enter into abusive
transactions with their affiliates that would harm utility customers.
They also provide states with an appropriate means to secure access to
utilities' books and records so that they can do their job. We endorse
including PUHCA repeal in any electricity bill approved by this
Committee. We specifically endorse the PUHCA repeal provisions in the
Thomas Bill; the Staff Draft provisions are not acceptable because they
include cross-references to the RESC proposal.
purpa
EPSA supports prospective PURPA repeal in regions where competitive
wholesale markets exist. PURPA facilities are currently an important
and efficient generation source. The current PURPA ownership
requirements, however, should be repealed in all cases, because they
are outdated limitations that are no longer required to promote
diversity in generation ownership. The Staff Draft provisions are not
acceptable because they include cross-references to the RESC proposal.
renewable energy
EPSA supports renewable energy and specifically endorses the
extension and expansion of the Section 45 production tax credit to
include the full range of renewable sources. This provision is not
included in any of the bills currently pending before this Committee
because the Senate Finance Committee has jurisdiction over tax credits.
EPSA believes that, if Congress chooses to adopt an RPS, it should be
set at a level that is supported by market demand, and should include a
broad definition of renewable resources. The Barton Bill contains a
number of useful provisions that support broader development of
renewable energy options, including renewable energy production
incentives, inclusion of landfill gas as a Qualifying Renewable Energy
Facility, and reports to Congress on use of renewables on federal lands
and an assessment of renewable energy resources by the DOE.
market transparency, anti-manipulation, enforcement
FERC has substantial authority under existing law to address issues
of market transparency, and manipulation. The recent enforcement
activities on the part of the Department of Justice (``DOJ'')
definitively make the case that there is not a regulatory ``gap'' among
Federal agencies charged with enforcing the laws against market
manipulation, collusion, anti-competitive pricing, and other illegal
activities. Nonetheless, we welcome additional statutory authority that
complements the FERC and DOJ activities on this front. Members of FERC,
the Bush Administration, the Senate and the House of Representatives
have all supported increasing civil and criminal penalties under the
Federal Power Act. EPSA supports these efforts because they give the
proper authorities additional tools to punish bad actors. The penalty
provisions in the Thomas Bill, the Barton Bill, the 2002 Senate Offer
and the Staff Draft are virtually identical, and we would endorse
including them in any bill reported by this Committee.
consumer protections
EPSA supports information disclosure, consumer privacy, and unfair
trade practices provisions. The Staff Draft would direct the Federal
Trade Commission to take appropriate steps to provide consumers
additional information about prices and sources of their electric
energy, and would avoid some unsavory business practices that have
emerged in the telecommunications industry. We are encouraged that the
Staff Draft provisions are applicable to all entities, including
municipals and cooperatives, because all electricity consumers deserve
this protection.
Thank you again for the opportunity to testify. EPSA, and Exelon,
look forward to continuing to work with you to promote effective
competitive electricity markets.
The Chairman. Thank you. We will certainly try.
Let us start with the questions. Senator Bingaman, you are
first.
Senator Bingaman. Thank you very much. Thank you all for
your excellent testimony.
Let me start with Mr. English and ask you to respond. Your
suggestion, as I understand, your view is that until FERC
completes whatever it is going to do with this standard market
design, Congress should hold off trying to legislate. Now,
Betsy Moler has just testified very differently that she
believes we should proceed to legislate, that we have had this
before the committee for 10 years and it is time we went ahead
and legislated on the things we could agree on and that there
is a whole list of things that she believes has pretty broad
consensus on, and she listed those off. What is your response?
Do you disagree that there is reasonably broad consensus on a
variety of things we ought to go ahead and do?
Mr. English. And I think that is the key that you made, is
with regard to consensus, those things that are not going to be
affected by SMD are in some way in which the Congress could
make certain are not going to be affected by SMD.
The point that I was trying to make is that any of these
items that are going to be affected in some way by standard
market design, we are putting the cart before the horse. If the
Congress can pass those and then suddenly we find out we have
got--and even if we had the white paper, Mr. Chairman--and I
want to applaud you for encouraging that to come forward. Until
we know for sure that is it, then suddenly we are into a
situation, we have passed a policy assuming one thing and we
are dealing with something else.
The other thing that troubles me a little bit--and again, I
may be overly cautious, Senator, but the thing that bothers me
a little bit is that I have been on the receiving end far too
often as a legislator of passing something, assuming certain
things are going to happen, and then when it gets within the
regulatory body, that is not the way that it is actually
implemented. What I would like to feel a bit of a comfort level
about here is if I knew there is something hanging in the
wings, there is a legislative vehicle in which we can come in
and deal with or make changes or make sure that we get it right
in line with what the regulatory body is doing. That just
raises my comfort level.
Senator Bingaman. Let me ask Mr. Franklin. How do you come
out on this question about whether we should wait on SMD or go
right ahead and do a list of these things that Ms. Moler went
through in her testimony?
Mr. Franklin. Senator, I think you can almost argue that
either way. Glenn and I were talking about it earlier, and
since he argued that we should hold off, I will argue that we
should go ahead.
Here is the situation in many States and many regions of
the country. There is an impasse. At this point let me speak
for the Southeast not for EEI. There is an impasse between the
FERC and the States on how to proceed. As much as we all talk
about getting past that impasse, I do not see that we are
making a lot of progress. I think the white paper coming out
from FERC, if it accommodates the regional differences
adequately, could help.
I have a concern if Congress does nothing, that we will not
proceed, we will not proceed, will not proceed to an orderly
regional market RTO scheme in many parts of the country. It
will simply continue to have this impasse between the States
and FERC.
It would be helpful--and it will have to be done
skillfully--that if Congress could lay out some basic
parameters, that could better define, first of all, the sense
of Congress as to how the market should develop and, number
two, could clarify these jurisdictional issues, I think that
would relieve some of the tension between the States and FERC
and perhaps let us go forward more orderly than simply hoping
that the States and FERC ultimately will work this out because
I just do not see, at least in the Southeast, those two parties
getting closer.
Senator Bingaman. Let me ask, Ms. Moler. Betsy, did you
have anything else you wanted to add on this issue?
It does seem to me that that is sort of the crucial
question before the committee right now. Do we basically hold
off and wait to see what FERC winds up with or where they wind
up on this standard market design, or do we proceed to
legislate in all of the areas you have described? And do you
see that we would be in any way impeding or altering the way
FERC would be coming out on SMD by virtue of doing what you
think we ought to do legislatively?
Ms. Moler. Senator Bingaman, I think you have waited long
enough. This process is not known for its speed. It is rather
tortoise-like. And I feel fairly confident that we will have
plenty of opportunity to review the standard market design, the
changes that the FERC is going to make in the standard market
design before we get to the Rose Garden. So I would urge you to
go full speed ahead, certainly keeping track of what FERC is up
to.
There is a myth--and I call it that--that FERC is not
accommodating regional differences. I could tote down a bunch
of regional differences that they have already accommodated. I
still read FERC orders. I do not write them anymore, but I
still read them. Pricing flexibility, resource adequacy,
planning, RTO governance. There is just a whole host of things
where they have already accommodated regional differences as
they have acted on individual RTO orders.
I feel fairly confident that they will recognize that in
the white paper, and I hope that, as Mr. Franklin said moments
ago, the white paper, if it accommodates regional differences,
could help. Assuming that that happens--and I think it will--
then I would absolutely urge you to go full speed ahead.
The Wall Street implications of the financial crisis, the
access to capital markets, what has happened to lots of
utilities is very serious and it needs to be dealt with.
Senator Bingaman. Thank you very much, Mr. Chairman.
Senator Thomas. Thank you, Mr. Chairman. Thank you all. I
think that was very helpful.
Mr. Franklin, you I thought mentioned better wholesale
markets, independent transmission, some countrywide rules. I
think that is good.
You indicated that there is no likelihood of a national
market. Last time we dealt quite a bit with the Louisiana to
Wisconsin transmission. We talk about Wyoming to Chicago. Is
that not pretty much of a national market?
Mr. Franklin. When I said I do not think we are moving to a
national market and not likely to have a national market, I am
speaking in the broadest sense. I do not think within the
foreseeable future, you are going to see power generated in
Georgia and sold in California. I do not think you are going to
see any major contribution to electric power source in New
England from the Southwest, for example. So I do not see a
national market as we see in many other commodities.
I think clearly we are evolving to regional markets, and as
more transmission is built, if it is economically justified, I
think those regions will get larger and larger. But I think we
are long way from what we traditionally think of as a
``national'' market.
Senator Thomas. Well, you are probably right, but I think
we are going to move outside of what we know now as RTOs. That
means we have to have some arrangement that goes beyond the
RTOs.
Mr. Franklin. I think what will naturally happen, Senator,
is if we can get these--and do not assume we have not had
regional markets for a long time. There has been power moved
around in these regions for many, many years, economy
transactions between utilities. What we are trying to do is
simply make these regional markets more efficient and more
systematic with more players. So we are not going from not
having regional markets to having regional markets.
As these regional markets develop and as we begin to see
price differences between markets, that is going to create the
opportunity for somebody to make money by moving power from one
regional market to another. I think just the economics will
drive those regions to be larger as we go forward.
Senator Thomas. We also have to proceed for the consumers'
benefit, not only for the producer.
Mr. Franklin. I think that is the only reason to proceed is
for consumers' benefit. I do not think we should be developing
legislation to favor one producer over another. It seems to me
the whole purpose of moving in this direction is lower cost to
consumers and more reliability for consumers.
Senator Thomas. Glenn, you mentioned small co-ops. Is 4
million megawatt hours elimination--does that deal with most of
your members?
Mr. English. Well, that certainly helps and I think that
you have a very good understanding of electric cooperatives and
the transmission and the realities between those. That I think
gets into this question of whether there is going to be a
bright line test between those that are truly distribution
cooperatives as opposed to those that are generation, and that
has been a problem.
Could I follow up just a little bit on the question that
you previously had? And you hit the point and I think it is an
excellent point.
I am not sure at this time that the Congress has really
focused on this issue of a transmission system that will
provide for the inter-regional sales of electric power as
perceived under the 1992 act. I think there is a real question
here on the way that it is being approached. We have had this
analogy from time to time, the interstate highway system, and I
think it is a good one. We do not seem to be following that or
looking at that. It is all or nothing. In our case it is a
small distribution that has a line of a certain magnitude.
Because of the distance, they have to have that to be able to
move that power. They are looked at in the same way as what we
would any kind of interstate system.
The question is whether we should, in fact, be a bit bolder
and look beyond this and truly try to establish a
differentiation between those high voltage systems that are
inter-regional or interstate in nature as opposed to those that
are not.
Senator Thomas. I agree. I hate to be redundant. I mean, in
this whole energy thing, there is where there is production and
where there is consumption. And they are not necessarily the
same. We have not had the demands to move that energy in the
past, but we are going to I believe.
One final quick one, Ms. Moler. I think you mentioned
investment and all that. We had a panel here a while back, and
they claim there is $120 million a year reduction in investment
in transmission. Generation has not been kept up as it has in
the past. There has been production. What can we do to
encourage the kind of investment in transmission that you talk
about?
Ms. Moler. The DOE Electricity Advisory Board that I
mentioned did create a transmission subcommittee. I chaired the
subcommittee. Mr. Franklin and Mr. English were also members of
the subcommittee as well. We looked at this issue.
We believe the backstop siting proposal for national
interest lines--not every line, but national interest lines--
would be very beneficial. We also think that you have to have
more appropriate returns that recognize the risks and the
permitting times that are involved in siting transmission. We
also need planning on a regional basis so that there will not
be as much opposition, that people in the region will
understand that you have to have the facilities. And then
proper pricing.
Senator Thomas. It is interesting. California had a big
problem partly because they did not want any transmission, did
not want any generation, but they wanted a hell of a lot of
power.
Ms. Moler. You need both.
Senator Thomas. It is a tough deal.
Yes, sir.
Mr. Richardson. If I could just add APPA's voice on this
also. We also support Federal eminent domain authority as a
backstop. So this is a very tough issue to deal with and I
understand that, Senator. This is a very tough issue to deal
with. Transmission is the weakest link in our industry. It is
the most critical issue. We have members that are building
suboptimal generation because of concerns over transmission.
Dealing with the seams issue, dealing with the transmission of
power in some cases we think is going to require some Federal
presence.
Senator Thomas. Thank you.
Mr. Franklin. May I comment on that?
Senator Thomas. Yes, sir.
Mr. Franklin. I agree with what the other panelists have
said, but there is another very important impediment to
building transmission for inter-regional transactions. And that
is that, first of all, the States have primary siting authority
and permitting authority for transmission. Some States are very
concerned that a great deal of transmission will be built in
their State to export power outside and the parties outside the
State will benefit and the State where the transmission is
built will be stuck with the cost of the transmission and no
benefit. So you cannot de-link getting the pricing of
transmission right.
One of the issues that we are very interested in is
participant funding, that is, let us make sure that as we build
all this new transmission, that the people that benefit pay.
And that will go a long way to relieving State opposition to
transmission because there would be assurance that their
customers would not be paying.
Senator Thomas. We got into an endless discussion about
that last time. It happened to be in Louisiana going up to
Wisconsin. But the problem is if you do it based on benefits,
why, the close people get some benefit but strengthening the
transmission line so it will be predictable, and they should
not have to pay. But you are right. That is really one we have
to deal with.
I am taking too much time.
The Chairman. No, that is fine, Senator.
Senator Craig.
Senator Craig. Well, let me thank all of you for your
testimony. As we try to sort this out, it is a difficult issue
in my opinion about an electrical title. It has been pretty
clear throughout this until the financial side of the industry
sorts itself out a bit, and yet, at the same time, there are
those who argue--and Betsy just has--that we might offer some
stability here. I would like to think we could do that. I am
not confident we can do that.
The Chairman. Well, you should sleep well, and the more you
sleep, you will get more confident.
Senator Craig. Is that it? All right.
[Laughter.]
Senator Craig. I will work on rest over the weekend, but
only on the weekend.
The Chairman. Rest before we meet. Then you will feel very
confident.
[Laughter.]
Senator Craig. Mr. Franklin, it seems to me that many of
the electricity provisions that we will be considering during
the next weeks' markup have a distinct purpose, and that is to
make the vertically integrated utility model obsolete. Do you
believe the vertically integrated utility model can continue to
be viable in an era of competitive wholesale electricity
markets?
Mr. Franklin. Absolutely. I not only think it can be
viable, it has served customers extremely well.
Let me speak for Southern here because we are vertically
integrated as opposed to EEI. If you look at the regions of the
country which have had the least problems, where investors have
suffered least, if at all, where consumers have benefitted most
and where there has been the greatest stability, it is where
there is vertical integration of utilities. Utilities were
vertically integrated to begin with because there are real
economies of scale in vertical integration.
Even with vertically integrated companies, a competitive
wholesale market can still be beneficial because those
companies still have to either build generation or go out and
buy in the wholesale market and have a competitive wholesale
market. It can be an economic plus to consumers even where you
have vertical integration.
Senator Craig. Do you agree that utilities should be
allowed to continue to reserve transmission capacity for their
native load customers even in an era of wholesale electricity
competition?
Mr. Franklin. Absolutely, especially in the transition
period. There are a lot of the concerns of States where there
is not enough transmission to continue to serve retail
consumers and accommodate all the new generation that is being
built. So I think it would be a huge mistake to take away
transmission that was built for retail consumers, dedicated to
retail consumers, so that we can export power from one region
to the other. I think politically that would be a very serious
problem. I think from a fairness standpoint, it makes no sense
at all.
Senator Craig. Well, I think the FERC has shown that it is
seeking to assert jurisdiction over all transmission facilities
and is even trending toward expanding its jurisdiction over all
retail services. If Congress acts to protect the reservation of
transmission capacity for native load customers, but does not
address the Federal-State jurisdictional issues, would that be
sufficient to protect customers?
Mr. Franklin. I think it is one step short of what many
companies and most State commissions would like to see,
especially in those States that still have vertically
integrated companies and regulated retail markets. I think that
would be seen as a half-measure in the regions where there is
vertical integration and regulated retail rates.
Mr. Richardson. Senator Craig.
Senator Craig. Yes.
Mr. Richardson. Could I just add one point on the
reservation of transmission so that it is not lost?
Senator Craig. Yes, please.
Mr. Richardson. The comments that have been offered so far
have been offered in terms of transmission owners and the
transmission facilities that they have constructed that they
need to serve to meet their own service obligation to the
extent that they have a service obligation. And that is a very
legitimate concern.
But there are a large number of public power systems and
some rural electric cooperatives as well that are transmission-
dependent utilities who have contractual rights to
transmission, and their need is every bit as significant in
terms of using those facilities for which they have contracted
to meet their own service obligations. So I want to make sure
that that point is not lost.
Senator Craig. Okay, thank you.
Phil, you are head of a large public power entity. Have you
been asked to provide open access transmission?
Mr. Tollefson. Yes, we have. In fact, we were one of the
first----
Senator Craig. How many times, do you know?
Mr. Tollefson. Once that I can recall.
Senator Craig. By whom?
Mr. Tollefson. I believe that was by West Plains Energy, a
private IOU in the area that was looking to do some maintenance
on some of its system, and certainly we agreed to do so.
Senator Craig. You did grant the request.
Mr. Tollefson. Yes.
Senator Craig. Alan Richardson, Mr. Franklin of Southern
Company says this has been a terrible time financially for
investor-owned utilities. In fact, I think we have all
understood that in general. There have been over 180 IOUs
downgraded and pending bankruptcies of the merchant power
sector. These are, indeed, tough times. How has the public
power sector fared during the same period?
Mr. Richardson. The public power sector has fared very
well. Our model is obviously one that has demonstrated that it
can work in these difficult times. I believe there have been
perhaps 12 to 15 downgrades and almost an equal number of
upgrades, and the credit rating for public power going forward
is very stable.
If I could add one more point on Wall Street implications
and financial security. You get different answers from Wall
Street depending upon who you ask.
Senator Craig. I was just going to say, what is Wall Street
saying?
Mr. Richardson. Who is Wall Street? I have talked to a
number of the rating agencies, and what they want is security
and stability, not turmoil and churn. And they look very
favorably on the regulatory safety net, and they are concerned,
in fact, about the standard market design and its implications
for financing going forward because they recognize that while
it may be a long-term solution, it is a long-term solution, if
that, and there will be instability during the period of time
when it is challenged in court and is being implemented.
Senator Craig. Are you building transmission?
Mr. Richardson. Yes, sir, we are.
Senator Craig. What is your debt load?
Mr. Richardson. I would have to answer that for the record,
sir. Across the board, I could not say.
Senator Craig. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator.
Senator Bingaman, did you have any follow-up questions?
Senator Bingaman. No, I did not, Mr. Chairman.
The Chairman. I have a number that I am going to submit to
you, and if you would answer them for me, in a week to 2 weeks.
I would comment, Mr. English, your statement that we ought to
perhaps wait until we get more clarification--oh, Senator Kyl.
You had not been here before. Let me withhold my last comments
and yield to you.
Senator Kyl. Well, thank you. Mr. Chairman, it is true I
was not here at the beginning. We had to deal with getting some
judges out of the Judiciary Committee which met at the same
time. So I apologize for not being here to hear all of the
testimony. But I did hear the comments of this panel. It was
just that I am so far down here, I know it is kind of hard to
see me down here. So thank you for calling on me.
The Chairman. You are welcome.
Senator Kyl. I had a couple of questions. Let me just make
sure that I understand the position, Mr. Richardson, that you
articulated and that, Mr. Franklin, you articulated is
essentially consistent with respect to the concerns expressed
about the standard market design and also specifically the
question that Senator Craig asked about the protection of
native load. Is there a difference of opinion between you there
or is it consistent?
Mr. Franklin. I do not believe there is a difference. I
think what we are saying is that retail customers that have
helped pay for transmission and depend on their transmission to
keep the lights on should not give way to new players that have
an economic interest in moving power across the region, that
the retail customer should have some priority. And that applies
to transmission-dependent public power entities that also
depend on that transmission and over time has helped contribute
to the payment of it. I certainly have no disagreement with
that concept.
Mr. Richardson. And, Senator, in principle, yes, I think we
agree. But as you know, the devil is in the details, and I
think you had two or three or four alternative proposals that
went through different iterations before they were even
publicly released. This is a tough issue. In concept, yes, I
think we do agree, but how it is accomplished legislatively is
a tough issue.
Senator Kyl. Sure. Well, the point I wanted to make is
there seems to be a substantial agreement, at least among a lot
of Senators, that this notion of protecting native load is very
important, and while we do need to be careful how we do it,
obviously I wanted to be sure that there was a consensus there.
Also, is it your view, Mr. Richardson, that it would also
be important, as Mr. Franklin noted, that not only is it
important to do that, but also we have got to deal with this
Federal-State jurisdictional issue with respect to the
application of FERC jurisdiction?
Mr. Richardson. As an association, we have not taken a
position in opposition to the standard market design or
requested Congress to either pull the plug or put a halt to
that. We do recognize and urge the commission to recognize
regional diversity. You have PJM, for example, that is a 75-
year-old institution where some of the proposals that they are
advancing fit very well, and you have the Pacific Northwest or
your region in the Southwest where the configuration of the
utility industry and the transmission and the generation is
significantly different. They are not as mature in terms of an
organizational structure as PJM, and FERC simply has to address
that. That is the association's position.
Now, as you know, you have some members in your region,
public power systems in the Pacific Northwest who are pretty
concerned about where the commission is going and would like to
see the standard market design simply taken off the table.
Senator Kyl. That is what I am hearing. You are right.
Let me ask you a question, Mr. Gifford. I am hearing a lot
from regulators in my State expressing concern about the
peculiarities of differences among regions, the point that was
just made by Mr. Richardson. Based on your experience as a
regulator, are there circumstances that you are aware of that
are peculiar to the western region that would cause particular
concern about the standard market design proposal?
I am sorry. Did I say Mr. Tollefson? I am sorry. I meant to
refer that to you. I am sorry.
Mr. Tollefson. I believe in the West there are certain
differences. For example, the Western Area Power Administration
facilities are ubiquitous throughout many of the Western States
and are capable of carrying a lot of transmission a long way.
Certainly there are a number of different entities operating
there.
But it is my sense that the issue in the West is not so
much access to transmission, primarily because of WAPA and some
of the other larger utility systems that are out there, but
rather certain congestion points. In Colorado, for example,
along the front range, it is difficult to import power from the
West and from the North. And certainly additional transmission
would be very beneficial there. We are working with a number of
folks to see how that can be accomplished, but it is, I think,
more of an issue of congestion in the West as opposed to the
East where it is more of an access issue.
Senator Kyl. Thank you. I guess my time is up. Thank you
and thank you, Mr. Chairman.
The Chairman. Are you finished, Senator Kyl?
Senator Kyl. Yes, sir.
The Chairman. Thank you very much.
I was just going to say I do not think we want to wait,
although your reasons and justifications clearly have some
merit. I assume we are going to move as quickly as we can. We
have plenty of people giving us advice and plenty to look back
on and review.
We want to thank all of you for your testimony.
I would comment on the staff draft of the new idea. We have
heard a lot of concern about it and a lot of ideas. It clearly
is a very difficult to implement entity, but I am not sure
that, in reading the legislation and in writing it, that the
staff put down what they had intended as they told me in that
there is nothing voluntary about what they do once you are in.
Once you are in, they have the same power that the Federal
Power Commission gives to FERC. So part of it, getting in, is
voluntary and choosing, but once you are in, it will not be
just sitting around doing planning. They will have tariff
responsibilities just as FERC does under the Federal Power
Commission. Of that I am certain. I am not sure in reading it
that people understood that.
It still has all the other impediments that have been
spoken here to today, and I understand that.
Did you have some comment?
Senator Bingaman. Mr. Chairman, could I just ask that we
include in the record a statement that the Union of Concerned
Scientists has sent in?
The Chairman. That will be made a part of the record.
Now, we have a hearing with the Commissioners, including
the Chairman, scheduled for 2 o'clock, but I understand,
Senator Bingaman, we have three or four consecutive votes at
the same time. So, Mr. Wood and the fellow Commissioners, if
you would be here at 3 o'clock, we will have the hearing then.
It should not take more than an hour, hour and a half, I would
think, although a number of Senators left saying they wanted to
come back and interrogate.
Thanks to all of you. Nice to be with you all.
[Whereupon, at 12:47 p.m., the hearing was recessed, to
reconvene at 3 p.m., this same day.]
AFTERNOON SESSION--3:00 p.m.
The Chairman. The committee will please come to order.
We have three witnesses this afternoon. Senator Bingaman
will be along shortly. The first witness will be the Honorable
Pat Wood, Chairman of the FERC. Our second witness will be the
Honorable William Massey, Commissioner, and third, the
Honorable Nora Mead Brownell, Commissioner.
Would you please lead off, Mr. Chairman? We are glad to
have you and both Commissioners with us today.
STATEMENT OF PAT WOOD III, CHAIRMAN,
FEDERAL ENERGY REGULATORY COMMISSION
Mr. Wood. Thank you, Mr. Chairman and Senator Craig. We are
also glad to be here and we appreciate the opportunity to
comment on the important concept of Federal electricity
legislation. I know from last session of Congress these issues
are familiar to the committee.
Senators, I am sorry. I did not see you over there,
Senators Wyden, Cantwell, and Feinstein.
The issues raised on the several bills that you all asked
us to look at are very important and ones that the committee
has looked at over the past couple of years in some detail. So
rather than go through a lot of that, I would just ask if our
written testimony from the three of us could be in the official
record here.
As stated in that testimony, I generally support, with very
few modifications, the FERC-type language in the electricity
proposals here. There has been a lot of, I think, negotiation
among interested parties over the past couple of years on these
important issues, and I think they will certainly give some
guidance and balance to the industry.
I think from just our point of view, it is important to
just get an answer. I think what we have tried to do is fill in
the vacuum here, and as you know and certainly you have
commented to me personally and to others, Senator Domenici, it
is time to kind of nail down what it is we want power markets
to look like.
FERC has put forth some outlines of a vision there last
summer after consultation with a broad bunch of people for the
prior year. We have gotten a lot of comment on that, as I
mentioned to you, Senator Domenici, back in January. The
Commission is working on a white paper which will be basically
the current statement of where we see the best way to go
forward being on the issues raised on wholesale power market
design. We anticipate, as I mentioned to you in January,
putting that out in the month of April.
As you know, yesterday, the Commission took a lot of
action, although not final action, on a number of items related
to the 2000-01 electricity and power and now gas market issues
in California and in the other Western States. We have had
really a tremendous commitment of resources at our agency and
from parties across the West to getting some resolution on
those issues. I do think that the end is in sight, but we do
have, as a result of yesterday's disclosures or findings, a
number of issues that still are before the commission and need
to be wrapped up. So we are trying to do that.
It is important to learn and remedy everything that we can
under the law with what has happened out in the West in 2000-
01, and it is important for us and I think we are all committed
to making sure that we lay the groundwork for the rules and the
framework and the platform so that that does not happen again
anywhere else in the country, not just in California.
So that is what we are about. We are trying to fix the past
and also lay down a future that for the electric customers in
this country is better than the one we have had to live
through.
We as always, of course, appreciate and welcome any
congressional guidance on how we should best accomplish that
effort. I think that the vehicles before you today, before the
committee, before ultimately the Congress are an excellent way
to get that moving and allow us to get the uncertainty behind
us and get a positive future before us.
So I appreciate the opportunity here today and welcome any
questions from the committee.
[The prepared statement of Mr. Wood follows:]
Prepared Statement of Pat Wood III, Chairman,
Federal Energy Regulatory Commission
Summary
Federal electricity legislation can help make existing regional
competitive electricity markets work to benefit all of the American
customers they now serve. The legislative proposals under consideration
today generally recognize the realities and challenges of regional
electricity systems and would benefit energy customers in numerous
ways. I generally support the FERC-related parts of the legislative
proposals, with minor modifications and certain additional provisions.
For example, I support Congressional proposals allowing for greater
transparency in energy markets and customer access to the broadest
range of useful market information. I also favor legislative proposals
that would increase significantly the penalties available under the
Federal Power Act in order to further discourage potential market
manipulation. In addition, I support legislative proposals that would
provide greater customer protection by changing the refund effective
date under Federal Power Act section 206 and extending refund
liability.
Statement
i. background
Thank you for inviting me to testify on the legislative proposals
to restructure electricity regulation. These legislative proposals
address a wide range of electricity restructuring issues confronting
our Nation. I will focus on the issues affecting the responsibilities
of the Federal Energy Regulatory Commission (FERC or the Commission).
On these issues, the legislative proposals generally respond to the
challenges facing competitive wholesale electricity markets to meet our
future electricity needs. I would suggest a few modifications and some
additional provisions, as described below.
Before discussing specific issues, I would emphasize the overall
need for certainty. For more than a decade, the wholesale power
industry has been stuck in the transition from its heavily-regulated
past to a competitively-driven future. The uncertainty of this
transition has discouraged investment in transmission and generation
infrastructure. Almost as important as the outcome the Congress may
reach on each issue under consideration at today's hearing is the need
for a decision of any kind. Once the Congress reaches resolution on
these issues, then utilities, their customers and others can implement
appropriate plans for the future, without having to hedge these plans
against legislative uncertainty.
ii. pending legislative proposals on electricity regulation
A. Regional Energy Services Commissions
Section 1211 of the Senate Staff Discussion Draft would authorize
States to enter into agreements to establish ``Regional Energy Services
Commissions (RESC).'' A RESC would be composed of one member from each
State in the RESC, appointed by the Governor as provided by state law.
A RESC could be vested with jurisdiction over, inter alia, transmission
planning and siting, interconnection of generating facilities to the
interstate transmission grid, rate design and revenue requirements for
transmission and wholesale sales, incentive rates for transmission,
market power review and market monitoring, formation and approval of
``Transmission Organizations,'' reliability standards and rules, and
adequate enforcement mechanisms.
A RESC or State regulatory authority may petition the Commission to
resolve a conflict on transmission of electric energy or wholesale
power sales between adjacent regions. Public utilities in States in a
RESC would not be subject to Commission authority under Federal Power
Act (FPA) Part II, except for section 204 and parts of sections 202 and
209, as well as any authorities not exercised by the RESC.
The Commission has long supported regional efforts, including
Regional Transmission Groups in the early 1990s, Independent System
Operators (ISOs) in Order No. 888, and Regional Transmission
Organizations (RTOs) in Order No. 2000. More recently, we have
supported greater state involvement in RTO policies through Regional
State Committees (RSCs) and Multi-State Entities (MSEs). All of these
efforts recognize that power systems are regional, and most significant
policy issues must be addressed on a regional basis by entities with
accountability to make the system work. The RESC proposal appears to
recognize the regional nature of today's power systems and is
consistent with the goal of establishing better regional governance to
solve regional problems. Certainly FERC would have less of a void to
fill if regional problems are resolved in the regions. Therefore, I
support the objectives of the RESC proposal and would like to help
advance regional governance to address regional issues.
Based on a quick review of this new draft RESC proposal, I have
some concerns that it may significantly delay the modernization of the
nation's electric grid and its operations due to the time needed to
establish the RESC institutions. I honestly do not think we can afford
that much time anymore. I am concerned that the proposal may not
adequately preserve current features of the Federal Power Act. The
draft language is unclear on whether the procedural protections in FPA
Parts II and III extend to the actions of a RESC. These protections
include the due process right to notice, an opportunity to be heard at
the Commission, and judicial review of Commission decisions which is a
fundamental right now afforded to all affected parties in any
Commission proceeding. Another example is the right to file a complaint
against existing rates, terms and conditions. Also, it appears that
public utilities governed by regional commissions would not be required
to have rates on file for public inspection.
The RESC draft proposal may also result in gaps in regulation in
cases where regional boundaries overlap and are smaller than the
Eastern or Western Interconnect. Many RTO regions have significant
power flows and transactions between and through neighboring regions.
Management of these seams between regions significantly affects
reliability, efficiency, and the opportunities for manipulation. As to
size, a RESC should be no smaller than the U.S.-jurisdictional part of
an existing NERC region.
It is unclear whether RESCs would be bound by the provisions in the
legislative proposals on, e.g., transmission rate incentives and
interconnections. There may also be broader legal issues concerning the
current draft language on RESCs. These issues include, for example,
questions involving the Compacts Clause and the Appointments Clause of
the U.S. Constitution. Commission Staff and I would be happy to provide
more detailed comments in the future.
B. Reliability Standards
Each of the legislative proposals under consideration at today's
hearing addresses the establishment and enforcement of electric
reliability standards for the bulk-power system. Under these proposals,
the Commission could designate an ``Electric Reliability Organization
(ERO),'' which would have authority to set and enforce such standards
subject to Commission review. The ERO would be allowed to assign to a
regional entity the ERO's authority to propose and enforce reliability
standards.
The approach to reliability in these proposals is a step in the
right direction. I am told that federal legislation is needed to ensure
the enforceability of reliability standards. The legislative proposals
take a reasonable and efficient approach to this problem.
C. Open Access (FERC-Lite)
The legislative proposals would allow the Commission to require
open access transmission service by transmitting utilities. Currently,
the Commission has authority to require such service only by public
utilities, and the legislative proposals would expand this authority to
the large part of our Nation's transmission grid controlled by non-
public utilities.
The proposals differ in one key respect. In one version (e.g.,
section 101 of S. 475), the terms and conditions of service must be
comparable to those ``under Commission rules that require public
utilities to offer open access transmission services and that are not
unduly discriminatory or preferential.'' In the other version (e.g.,
section 7021 of the House Subcommittee bill), the terms and conditions
of service must be comparable to those ``under which such unregulated
transmitting utility provides transmission services to itself and that
are not unduly discriminatory or preferential.''
The former version would appear to do a clearer job of ensuring
that all customers can get the same high quality of service, regardless
of whether the portion of the grid they need to use is owned by a
public utility, a municipality, a RUS-financed cooperative or
otherwise.
D. Transmission Siting
In recent years, the expansion of our Nation's transmission
infrastructure has lagged behind the need for expansion. One obstacle
to needed expansions is the process of obtaining siting authority.
Several of the bills under consideration would address this
problem. For example, section 1222 of the Senate Staff Discussion Draft
would give the Commission siting authority for transmission facilities
in ``congestion zones'' determined by the Department of Energy if a
State fails to start action on an application within 60 days of its
filing and finish within 18 months. However, the Commission would have
no authority if the State has vested its siting authority in a Regional
Energy Services Commission. Section 210 of the Senate Counter-Offer
would allow two or more States to enter into a compact for regional
transmission siting agencies. Section 7012 of the House Subcommittee
bill includes many of these same points, but without the concept of a
Regional Energy Services Commission.
Congressional action on this issue is appropriate to help ensure
that enough transmission is built to provide customers with reliable
and reasonably-priced electricity. I am not advocating that FERC must
have a role in siting; Congress can best make that determination.
E. Transmission Investment Incentives
Several of the legislative proposals would require the Commission
to adopt rules on transmission pricing to encourage, inter alia, the
economically efficient enlargement of transmission networks, the
deployment of transmission technologies to increase capacity and
efficiency, and the reduction of transmission congestion. Ensuring an
adequate return on equity invested in transmission facilities is also
listed as a goal in the proposals.
I support these proposals and note that the Commission has already
taken steps in this direction. On January 15, 2003, the Commission
issued a ``Proposed Pricing Policy for Efficient Operation and
Expansion of Transmission Grid'' (Proposed Pricing Policy) on incentive
rate treatments to promote transmission independence and enhancement.
This Proposed Pricing Policy is consistent with the transmission
pricing incentives and other language in the proposed legislation. The
Proposed Pricing Policy encourages investments in grid expansion by
allowing a higher return on equity when a utility participates in an
RTO, sells its RTO-operated transmission asset to an independent
company, or pursues additional measures that promote efficient
operation and expansion of the transmission grid. Under the proposal, a
utility's return on equity could be increased by 50 basis points for
joining a Commission-approved RTO, 150 basis points for selling RTO-
operated transmission assets to an independent company and 100 basis
points for investing in new transmission facilities found appropriate
pursuant to an RTO planning process.
F. Transmission Cost Allocation (Participant Funding)
Section 210 of the Senate Counter-Offer would require the
Commission to adopt new rules on transmission pricing, including rules
to ``define the costs and benefits of new transmission facilities and
how such costs should be allocated.''
Section 1243 of the Senate Staff Discussion Draft would require the
Commission to adopt rules on allocating the costs ``associated with the
interconnection of new transmission facilities as well as the
modification, expansion or upgrade of existing transmission facilities.
. . .'' The rules must ensure that all users of a transmission
expansion ``bear the appropriate share of its costs.'' The cost of
transmission expansions not providing ``system-wide benefits'' and
instead primarily benefitting only a subset of users or market
participants must be recovered from that subset incrementally. System-
wide benefits would include providing reliability and adequacy for
regional needs; accommodating load growth on a regional level;
increasing transmission capability into congested areas; and
facilitating major regional and inter-regional power transfers.
Section 7011 of the House Subcommittee bill provides that ``upon
the request of a regional transmission organization or other
Commission-approved transmission organization, new transmission
facilities that increase the transfer capability of the transmission
system shall be participant funded.'' The Commission would be required
to ``provide guidance as to what types of facilities may be participant
funded.''
Allocating the costs of new interconnections and grid expansions
has been, and remains, a contentious issue before the Commission.
Allocating these costs in a way that ensures economic efficiency and
fairness to all affected parties is always difficult. Cost allocation
policies vary significantly from one region to the next, and on a case
by case basis. Although we are attempting to define bright line
distinctions in our current wholesale markets rulemaking, it is a
difficult task for many reasons and is probably best left to regional
variation. I am not sure that national legislation is the appropriate
way to handle issues that may vary by region, depend on fact-based
distinctions between investment types, and may evolve over time. The
Commission has already proposed to allow participant funding in certain
circumstances, if requested by an independent transmission provider.
Thus, the Commission has the authority and the intent to achieve the
goals of the legislative proposals. While I do not oppose the ideas in
the proposed legislation, I am not persuaded that national legislation
on cost allocation is prudent.
G. Transmission Organizations/RTOs
Section 1212 of the Senate Counter-Offer and section 7022 of the
House Subcommittee bill state the sense of the Congress that all
transmitting utilities ``should voluntarily become members of
independently administered regional transmission organizations [RTOs]
that have operational control of interstate transmission facilities and
do not own or control generation facilities used to supply electric
energy for sale at wholesale.'' Both sections also state the sense of
the Congress that the Commission should provide utilities joining an
RTO ``a return on equity sufficient to attract new investment capital
for expansion of transmission capacity. . . .'' Finally, both sections
would require the Commission, within 120 days of the law's enactment,
to submit a report to its oversight Committees in the House and Senate
on the status of pending applications on RTOs.
Section 1211 of the Senate Staff Discussion Draft specifies
requirements for a Transmission Organization within the jurisdiction of
a Regional Energy Services Commission. These requirements are in some
(but not all) ways similar to the criteria established by the
Commission for RTOs. One key example of a difference is that, under the
Commission's criteria, an RTO must operate the relevant transmission
facilities, while, under the proposed bill, Transmission Organizations
must control or oversee the operation of transmission facilities.
``Oversight'' is not defined. Additionally, the bill would appear to
permit regional commissions to apply varying definitions of what
constitutes ``independence'' for an RTO.
I believe RTOs (or Transmission Organizations) will benefit
customers by operating the grid more efficiently, on a regional basis,
than the fragmented arrangements used in most regions today. The
Commission has strongly encouraged the formation of RTOs. Our policy
has had some success. RTOs are being developed in most of the United
States, and the Commission has approved many aspects proposed by those
working on these RTOs.
Congressional encouragement of RTO formation, as in the Senate
Counter-Offer and the House Subcommittee bill, may expedite the
process. Thus, I support these proposals.
Section 1211 of the Senate Staff Discussion Draft assumes the
formation of Regional Energy Services Commissions, which I have
addressed above. Subject to the concerns identified above, I believe
the provisions on Transmission Organizations are generally acceptable.
I am concerned, however, about the fact that Transmission Organizations
may only ``oversee'' but not operate the transmission facilities within
their geographic boundaries. If these facilities are still operated by
market participants, concern about discriminatory services may
discourage investors from supporting new generation in a region,
ultimately limiting the supplies available to serve the region's
customers.
H. PUHCA
S. 475 and the other legislative proposals would repeal the Public
Utility Holding Company Act of 1935 (PUHCA), but give the Commission
and State regulatory commissions broad access to the books and records
of holding companies and their affiliates. This is appropriate. PUHCA
was enacted primarily to undo harms caused by certain holding company
structures that no longer exist. In the almost 70 years since PUHCA was
enacted, utility regulation has increased substantially under the
Federal Power Act (including oversight of corporate restructurings such
as electric utility mergers), federal securities laws and state laws,
all of which ensure that customers are fully protected.
I. PURPA
I agree with the core concept of the legislative proposals that
Congress should repeal PURPA but ``grandfather'' existing PURPA
contracts. As in several of the proposals, it may be appropriate to
limit its prospective repeal to those states where all generation
entities have the ability to sell their output to the widest possible
range of customers.
J. Net Metering & Real-Time Pricing
These provisions generally do not affect the Commission's
responsibilities, but they are beneficial to infrastructure development
needed to make power markets more efficient.
K. Renewable Energy
I have no comment on these provisions, since they do not affect the
Commission's responsibilities.
L. Market Transparency, Anti-Manipulation, Enforcement
Some of the legislative proposals would require FERC to issue rules
establishing an electronic information system, accessible by the
public, specifying the availability and price of wholesale power and
transmission services. I support such proposals because more
transparency is needed in energy markets and customers should have
access to the broadest range of useful market information.
I note that these proposals refer to ``markets subject to the
Commission's jurisdiction,'' but do not explicitly mention natural gas
markets. I suggest modifying these proposals to clarify the
Commission's authority to obtain information on natural gas prices
(since these are an important factor in wholesale power prices), or
that a separate section be added to the legislation clarifying FERC's
authority under the Natural Gas Act (NGA) to obtain such information
for purposes of price discovery.
The legislative proposals also would prohibit round trip trading
and the filing of false information on wholesale power prices. Banning
these practices will help ensure customers that power prices are not
being manipulated.
The legislative proposals also would significantly increase the
penalties available under the FPA. I have long supported increasing
these penalties, and believe the increases proposed here are
appropriate. I recommend including similar penalties under the NGA.
M. Consumer Protections
Several of the legislative proposals would change the refund
effective date under FPA section 206, so that refunds would be allowed
from the date on which a complaint is filed, instead of 60 days later.
I support this change, and would support allowing refunds to the same
extent under the Natural Gas Act.
The proposals also would extend refund liability under FPA section
206 to large non-public utilities for spot market sales violating
Commission rules. I support this idea since I see no reason why only
public utilities, and not other large sellers, should be liable to
customers for refunds of spot market sales violating applicable
Commission rules. In the Senate Staff Discussion Draft, however, it
appears that these provisions would not apply to rates charged by
public utilities that are governed by Regional Energy Services
Commissions.
iii. conclusion
Thank you again for the opportunity to offer my views on the
legislative proposals to restructure electricity regulation. While I
have discussed the approaches in the bills generally, I would be happy
to provide technical comments in the future or make our staff available
as a resource if it would be helpful to the Committee.
The Chairman. How about the other Commissioners? Do you
have anything to say? Did you have prepared remarks, Mr.
Chairman, or are your remarks what you just said?
Mr. Wood. My prepared remarks were filed testimony, and
that was it. I do not have a written statement of what I just
said.
The Chairman. That will be made a part of the record.
Mr. Massey.
STATEMENT OF WILLIAM L. MASSEY, COMMISSIONER,
FEDERAL ENERGY REGULATORY COMMISSION
Mr. Massey. Mr. Chairman, I have a written statement as
well, which I would like to be included in the record, and I
will be very brief.
Yesterday, the Commission received and publicized a massive
staff investigation dealing with price manipulation in Western
markets. It made a number of very disturbing findings of
manipulation of epidemic proportions. The commission is still
digesting this report and its implications for energy markets.
Clearly this report will spawn new proceedings against several
market participants who may have employed manipulative bidding
strategies or engaged in other techniques.
And the Commission still must provide economic justice for
Western markets. We have taken big steps in that direction, but
more must be done. We must provide assurances that this kind of
a debacle will never occur again. We must insist on markets
that are well-structured, that markets produce prices that
comply with the Federal Power Act's often repeated requirement
that prices be just and reasonable, markets that cannot be
easily gamed, markets with clear and enforceable rules defining
acceptable and unacceptable behavior, markets with consumer
protections built in, markets that are well monitored where
manipulation is detected immediately and remedied. These are
our goals.
A number of provisions in pending legislation will help to
promote markets that work, mandatory reliability provisions,
transmission investment incentives, some reasonable
transmission siting authority at the Federal level, language
promoting RTOs, a number of provisions toughening our
enforcement authority and penalty authorities, language
authorizing an office of consumer advocacy on FERC matters.
These are all excellent provisions that I would recommend, and
the list is longer than that, but I will cut my opening
statement short and thank you for the opportunity to be here.
[The prepared statement of Mr. Massey follows:]
Prepared Statement of William L. Massey, Commissioner, Federal Energy
Regulatory Commission
i. introduction
I want to thank Chairman Domenici and the members of the Committee
on Energy and National Resources for inviting me to testify about
pending legislative proposals regarding electricity regulation.
All over the country, producers and transporters of energy want
policies that encourage investment in critical infrastructure such as
production wells, pipelines, high voltage electric transmission
capacity, electric generation, and demand resources. Customers want the
same things, plus assurances of reliability and reasonable prices. All
seem to want a level playing field where everyone gets fair treatment.
State regulators want their views respected. They want to be co-equal
partners in regulatory policy, and they insist on being in charge of
ensuring reasonable prices and fair treatment for end use consumers of
natural gas and electricity.
Broadly stated, the Commission's mission is to make energy markets
work for consumers. This has required a steady evolution of federal
regulatory policies. The issue is no longer--and has not been for quite
a number of years--whether to have wholesale markets for electricity
and natural gas. The issue now is this--will we tolerate poorly
structured markets, or will we insist on good markets, well structured
markets that provide customer benefits?
This is an important question, because wholesale markets don't
structure themselves and don't fix themselves. They don't oversee and
monitor themselves. They don't establish or enforce the rules. These
are the responsibilities of federal regulators under current law.
Markets that work--that is the clarion call at the Commission. Yet,
we still have much old business to tend to. The Commission is now
taking aggressive steps to take care of some old business even as we
press a number of initiatives aimed at better markets.
The old business involves the herculean effort to resolve all of
the pending issues and investigations arising out of the western energy
crisis of 2000-2001. Last year, we charged our staff with getting to
the bottom of all allegations of market manipulation and abuse in both
natural gas and electricity markets. Yesterday, staff presented to the
Commission a comprehensive report with recommendations for further
Commission action, including proposed remedies for the abuses they
found. This may spur additional Commission proceedings necessary to
ensure that justice is done.
This staff report has a bearing on the level of refunds that are
necessary to make western customers whole for electricity prices during
2000-2001, that the Commission has already found were unjust and
unreasonable.
This staff investigative report may also have relevance in
resolving the litigation pending before the Commission over complaints
about whether certain long term power contracts, negotiated when spot
electricity prices were out of control, should be set aside by the
Commission as either unjust and unreasonable or against the public
interest.
The Commission must resolve these Western matters as soon as we can
while ensuring that our investigation is thorough and our remedies
appropriate.
Resolving this important old business involves huge levels of
Commission resources. It also provides a painful daily reminder that
poorly structured electricity markets can wreak economic havoc and fail
miserably. The unfortunate result is loss of faith in electricity
markets, massive investigations, two year old refund cases, contract
abrogation fights, and lots of uncertainty for investors, lenders,
market participants and consumers.
There must be a better way. Why not insist that wholesale markets
are well structured from the start? By that I mean a market structure
that relies primarily on long term contracts negotiated in the context
of a transparent spot market that is producing just and reasonable
prices and locational price signals. I mean independent grid and
independent market operation to create a level playing field on which
all resources--supply and demand resources, renewable resources,
distributed generation--can compete; where there is no tolerance for
affiliate abuse; where clear rules define acceptable and unacceptable
behavior; where reasonable customer protections, reasonable price
mitigation measures, and solid market power screens are built in to the
market design; where there is potential for a robust demand response,
and where there is a highly professional and aggressive market
monitoring unit on the ground to serve as an early warning device
should problems arise.
Wholesale markets that are fair to all, that spur investment,
produce just and reasonable prices, and provide substantial consumer
benefits. After all, these are the core values that define our role as
federal regulators.
Two other related areas of electricity policy evolution are also
critical. The first is the establishment of regional grid operation and
market platforms we call RTOs. RTOs will create a level playing field
by operating without bias toward particular merchant interests, and
they will eliminate the multiple transmission rates over regions that
can make transactions uneconomic.
The second is our proposal to streamline the process and agreements
associated with generator interconnection. The thorniest issue in the
interconnection arena seems to be how to price the grid upgrades
necessary for the new generator. Traditionally, our policy has been to
roll in most of the cost over time, but state commissions and some
utilities have argued that the upgrades should be paid for by the
generator and the customers or ratepayers who benefit from the upgrade.
This concept of beneficiary pays, often referred to as participant
funding, has been formally proposed by the Commission, and the concept
is also being debated in the comments to our interconnection NOPR.
With this introduction, now let me turn to the specific legislative
proposals on which I have been asked to comment.
ii. pending legislative proposals
At the outset, in the interest of brevity let me point out that I
am in general agreement with the testimony of Chairman Wood.
A. Regional Energy Service Commissions
I agree with the comments of Chairman Wood. Delegating federal
powers to regional bodies of state policymakers and regulators may risk
the regional balkanization of electricity markets. I am not yet
persuaded, for example, that the interpretation and implementation of
the ``just and reasonable'' standard of the Federal Power Act should
vary from one region to the next.
I would recommend that the Committee consider whether the enactment
of this proposal, representing a fundamental shift in the manner in
which utilities and markets are regulated, would create uncertainty for
an industry already burdened by the substantial uncertainty inherent in
a decade-long transition to competitive wholesale markets.
Finally, I would suggest that the Committee consider whether
regional regulatory bodies exercising broad federal authority may be an
unnecessary new layer of regulation that would outweigh potential
regional benefits.
B. Reliability Standards
I agree that legislation to enforce mandatory reliability standards
for the bulk power system is necessary. All proposals seem to address
this issue appropriately.
C. Open Access
I am generally in agreement with Chairman Wood. I would add that it
remains my hope that municipals, rural electric cooperatives and other
governmental entities will choose to participate in RTOs because they
conclude that these institutions are structured and operated to provide
substantial long-term benefits to all wholesale market participants.
D. Transmission Siting
I would recommend that the Commission at least have a backstop role
where a state fails to act within a reasonable time on an application
for new transmission facilities necessary to enable wholesale markets
to produce just and reasonable prices. The congestion zone proposal of
the Staff Draft is also a good step in the right direction. Authorizing
states to address the siting issue through regional compacts is worthy
of serious consideration, but perhaps there should still be a federal
backstop role where the health of wholesale markets is at stake.
E. Transmission Investment Incentives
I agree with the thrust of these various proposals. The provision
of the Senate Staff Discussion Draft is probably the closest to my
thinking on this important issue.
F. Transmission Cost Allocation (Participant Funding)
The Commission has proposed generically that the concept of
participant funding govern the allocation of costs for grid expansions
within RTOs. I support this policy direction, and hence would support
legislative proposals that move toward this concept as a national
policy.
G. Transmission Organizations/RTOs
I endorse any legislative proposal that sends an unmistakable
signal to the industry that these institutions are in the public
interest and participation is expected. Both the Senate Counteroffer
and the House Subcommittee bill meet this recommendation. I agree with
Chairman's Wood's comments about the Senate Staff Discussion Draft.
H. PUHCA
In the wake of the collapse of Enron, I have mixed views about the
repeal of PUHCA. PUHCA actually tilts toward regional concentrations of
facilities that may be harmful to robust wholesale competition. This
would argue for repeal. On the other hand, the PUHCA provisions that
limit complex corporate structures and place reasonable limits on
capital formation by holding companies may still remain in the public
interest. An important consideration is whether other laws enacted
since PUHCA provide similar protections that make PUHCA unnecessary. If
PUHCA is repealed, it is certainly appropriate to ensure broad access
to books and records of holding companies and their affiliates by the
Commission and state regulatory bodies.
I. PURPA
Existing PURPA contracts should be grandfathered if PURPA is
reformed. I support in particular the concept in the House Subcommittee
bill conditioning PURPA reform on access to a well functioning
wholesale market. I support a national policy of promoting renewable
resources, so I would recommend that the Committee consider other
effective ways to achieve such a goal in the absence of PURPA. A
reasonable renewable portfolio standard is worthy of serious
consideration.
J. Net Metering & Real-Time Pricing
I have not studied these provisions in detail, but I am generally
supportive of net metering, real-time pricing and streamlining the
standards for interconnection for distributed generation resources.
K. Renewable Energy
Please see my comments under Section I above.
L. Market Transparency, Anti-Manipulation, Enforcement
I generally support all reasonable proposals to provide greater
market transparency via a public electronic information system with
respect to natural gas and electricity sales and transmission services.
I support proposals to ban both round trip trading and filing false
information on wholesale transactions. I have long advocated an
increase in and expansion of the Commission's FPA and NGA penalty
authority. I support reasonable proposals to strengthen the
Commission's authority to order refunds under section 206 of the FPA.
M. Miscellaneous
The provisions of the October 16, 2002 Draft with respect to the
Commission's merger authority are reasonable, and I endorse them. The
Draft also establishes an Office of Consumer Advocacy within DOE to
represent consumers on FERC matters. This is an excellent proposal and
I endorse it.
In addition, Senator Feinstein has introduced S. 509 and S. 517.
Both bills would increase FERC's penalty authority and investigative
powers in several respects, and ensure that derivative products for
energy are regulated by the CFTC. I would recommend that these bills be
given favorable consideration by this or other appropriate Senate
committee. Senator Cantwell has introduced S. 681, legislation to
strengthen the Commission's authority to remedy market manipulation and
to ensure just and reasonable prices. I suggest that this consumer
protection legislation be given serious consideration by the Committee.
The Chairman. Thank you very much.
STATEMENT OF NORA MEAD BROWNELL, COMMISSIONER,
FEDERAL ENERGY REGULATORY COMMISSION
Ms. Brownell. Thank you, sir. I have a written statement
that I would asked to be entered, and I know that you have had
a busy day so I will keep my remarks short.
I appreciate and applaud the work that you are doing on
restructuring and completing the restructuring of the
electricity sector as well as creating a vision and a policy
for the future. So we will join you in working towards the hard
work that you have to do.
I particularly appreciate the bold thinking that has been
shown on looking at regional markets and how we approach them
because neither the Federal Power Act nor the State acts
envisioned markets as they have evolved today.
But I think it is important to be clear and concise in how
we assign roles and responsibilities so we do not end up in
many years of litigation as we have seen in some of the other
restructured markets. I think that this market needs certainty.
I think that this market needs accountability. I think we did,
in fact, make great steps forward yesterday, and I hope that as
we move forward with energy policy, we will be informed by what
we are learning in the ongoing investigations at the FERC.
But most importantly, I hope that we can bring this to
conclusion so that we can begin to build for the future because
this future I believe is in jeopardy by the uncertainty that
has been created both by the mistakes that we have made--and
there is plenty of blame to go around--and the need to build
investment and infrastructure.
I enjoy many of the proposals made today, particularly the
ones that have been outlined, and I have articulated those in
my statement. I would be happy to answer any questions about
those or anything else.
[The prepared statement of Ms. Brownell follows:]
Prepared Statement of Nora Mead Brownell, Commissioner, Federal Energy
Regulatory Commission
Summary
I want to commend the Committee for pushing forward on the
difficult issue of restructuring electricity markets. I believe that we
are at a point where it is imperative for leadership to set the tone,
the principles, and the framework for moving forward. We are at the
point where, I believe, we need to make sound legislative and
regulatory calls to restore confidence to customers and investors and
bring the energy sector out of its battered and beleaguered state.
The legislative proposals address a wide range of electricity
restructuring issues and contain numerous reforms to the current laws,
many of which I believe will go a long way toward helping to create and
sustain a healthy energy sector. I appreciate the willingness to think
innovatively about regional approaches. The current federal and state
regulatory framework did not envision regional markets so we must
address roles and responsibilities. I do, however, have questions about
the Regional Energy Service Commission proposal and would welcome the
opportunity to work further with the Committee on thinking through the
appropriate structures to address regional issues.
Statement
i. background
Thank you for inviting me and giving me the opportunity to share my
views on the legislative proposals to restructure electricity markets.
I want to commend the Committee for pushing forward on some very
difficult issues. I believe that we are at a point where it is
imperative for leadership to set the tone, the principles, and the
framework for moving forward. We are at the point where, I believe, we
need to make sound legislative and regulatory calls to restore
confidence to customers and investors and to bring the energy sector
out of its battered and beleaguered state. We are witnessing a silent
and insidious deterioration of our infrastructure.
The legislative proposals address a wide range of electricity
restructuring issues and contain numerous reforms to the current laws,
many of which I believe will go a long way toward helping to create and
sustain a healthy energy sector. There are a few areas, as described
below, where I believe further evaluation and discussion is warranted.
ii. pending legislative proposals on electricity regulation
A. Regional Energy Service Commissions
As I understand it, Section 1211 of the Senate Staff Discussion
Draft would authorize States to enter into agreements to establish
Regional Energy Services Commissions (RESCs) that could then have
jurisdiction over transmission planning and siting, rate design and
revenue requirements for transmission and wholesale sales, market power
review and market monitoring, formation and approval of ``Transmission
Organizations,'' reliability standards and rules, and enforcement
mechanisms. Public utilities in States in an RESC would not be subject
to Commission authority under the Federal Power Act (FPA) Part II,
except for section 204 and parts of 202 and 209.
As the Commission has stated on numerous occasions and as the
Discussion Draft reflects, energy markets are regional in nature. For
more than 10 years now, from Regional Transmission Groups in the early
1990s to recent proposals for Multi-State Entities, the Commission has
supported and encouraged regional solutions to energy issues in the
energy markets. Presently, I believe we have success stories where
States have worked together on resources and planning. I also know that
there are hurdles to overcome if we expect States by themselves to move
beyond opening lines of communication to actual implementation of
solutions for the more intractable regional problems. I believe that
such difficult issues as infrastructure planning, identification of
resource needs, market monitoring and independent operation of the grid
are among those that should be considered on a regional basis. I also
believe that regional transmission organizations (RTOs) that are
independent from market participants both in perception and reality and
are guided by a consistent set of regulatory principles are the best
forum for addressing these issues. We have also emphasized the
important role for states in leading these policy discussions through
multi-state entities or some other structure. While I share what I
believe to be your vision for allowing state input and regional
flexibility and variation, I am concerned that the proposal largely
eliminates any consistency in regulation as currently afforded to the
industry under the FPA. I would suggest that we study the following:
Presently all utilities enjoy a common set of rules and
requirements provided for by the FPA. The Draft permits the
creation of governor-appointed regulatory commissions, each of
which could have different due process requirements (or decide
to have none at all); different filing requirements for rates,
terms and conditions of service; different rate policies and
incentives and terms and conditions for interconnection to and
access to the transmission grid. What are the practical effects
of introducing regional variation in areas that have already
been standardized nationally?
RESCs only need to seek to ensure no undue discrimination;
there does not appear to be any requirement to ensure just and
reasonable rates, terms and conditions of transmission or
wholesale sales of energy. Would the RESCs be charged with
ensuring just and reasonable rates or would FERC retain
jurisdiction to do so? If the RESCs are given such
jurisdiction, what if just and reasonable rates are defined
differently in each region? What if undue discrimination is
defined differently in each region?
It appears that the public utilities and market participants
would have no ability to seek review of any decisions--either
from the RESC or through appellate rights to the Commission or
to a court. How will due process rights be protected?
It is unclear from the Draft whether public utilities
governed by RESCs would be exempt from the Commission's
investigatory, enforcement, accounting and auditing
requirements. Is that the Committee's intent? If not, will FERC
have the information or tools necessary to perform these
functions?
Is it the responsibility of the appointees to be governed by
state needs or regional needs?
How does a multi-state utility whose territory covers
multiple regions assure compliance to multiple sets of rules?
How does it effectively participate in the stakeholder process?
Will multiple rules require companies to restructure their
companies by region? Will RESCs cause added personnel and
regulatory and compliance costs? How will we measure the cost/
benefit of the model? Could DOE provide a study? Could DOE
provide an analysis of what regions should look like to
maximize efficiency?
The major criticism from investors, rating agencies, and
bankers has been the lack of certainty caused by the failure to
complete the restructuring started in 1992. Will the
possibility of as many as 20 sets of regional rules on rates,
terms and conditions of service, and cost recovery, among
others, resolve those concerns?
New technologies have been slow to be applied in this market
place. Will regional variation on issues such as queuing,
interconnection, transmission access, and technology
application act as a barrier to entry? How will technology
manufacturers adapt to variations? Will we lose manufacturing
efficiencies?
I agree that the time has come for change. I believe that regional
variation has been acknowledged and implemented in RTO dockets.
Further, I believe that FERC has acknowledged the need for state
involvement in regional planning, siting and market monitoring. But, we
must look to solutions that create regulatory certainty and clarity and
that reflect what we have already learned about the highly integrated
and interdependent nature of this nation's energy markets.
B. Reliability Standards
Each of the legislative proposals under consideration today provide
for an electric reliability organization (ERO) to develop and enforce
reliability standards applicable to all users, owners and operators of
the bulk power system. The Commission would certify an organization as
an ERO and the Commission would approve the security and reliability
standards and enforcement provisions of the ERO. All users, owners and
operators of the bulk power system would be required to comply with the
reliability standards. The approach envisioned by the legislative
proposals is precisely what is needed in the evolving competitive
electricity markets. What has been missing in the past and what this
legislation adds for the future is accountability. Under existing law,
there are no legally enforceable reliability standards. Compliance with
the reliability rules established by the North American Electric
Reliability Council (NERC) is voluntary. Therefore, it is difficult to
assess (and impossible to ensure) whether the best job is being done by
NERC and the market participants to preserve reliability.
C. Open Access (FERC-Lite)
Section 31 of the Senate Staff Discussion Draft and Section 7021 of
the House Subcommittee version would grant the FERC the authority to
require all transmitting utilities (not just those that constitute
``public utilities'' under the Federal Power Act) to offer open access
transmission service, with some exceptions, e.g., unless they sell no
more than 4 million megawatt hours of electricity per year.
I support the intent of these provisions to ensure a properly
functioning and transparent transmission grid. At the same time, I
understand the concerns of parties not now subject to open access, and
I believe that we must work to ensure that their rights are protected.
D. Transmission Siting
Studies report that the nation's infrastructure is lacking.
Transmission investment is not meeting the growing peak
demand--the amount of new transmission added in the past 2
decades has consistently lagged behind growth in peak demand.
NERC reports that investment in new transmission facilities
is lagging far behind in new generation and growth in
electricity demand. Construction of high voltage transmission
facilities is expected to increase by only 6 percent (in line-
miles) during the next 10 years, in contrast to the expected 20
percent increase in electricity demand and generation capacity.
The cost of transmission accounts for less than 10 percent of
the final delivered cost of electricity in what is today a $224
billion industry.
Several of the bills under consideration address the siting
problem. Section 1222 of the Senate Staff Discussion Draft would give
the Commission siting authority for transmission facilities in
``congestion zones'' determined by the Department of Energy if a State
fails to start action on an application within 60 days of its filing
and finish within 18 months. However, the Commission would have no
authority if the State has vested its siting authority in a Regional
Energy Services Commission. As discussed above, I have several
questions regarding the workability and implementation of RESCs.
Section 210 of the Senate Counter-Offer would allow two or more States
to enter into a compact for regional transmission siting agencies.
Section 7012 of the House Subcommittee bill includes many of these same
points, but without the concept of a Regional Energy Services
Commission.
I believe that state-by-state siting of such transmission
superhighways is an anachronism that impedes transmission investment
and slows transmission construction. We should not allow this
relatively small cost to prevent consumers from enjoying reliable
service and the low cost of alternative supplies. It is past time that
someone address this elephant in the living room. I am not wedded to
any particular legislative approach, but I do believe that some
Congressional action on this issue is needed to help ensure that enough
transmission is built to provide customers with reliable and reasonably
priced electricity. This is an area where a regional perspective is
needed.
E. Transmission Investment Incentives
Several of the legislative proposals would require the Commission
to adopt rules on transmission pricing to encourage the economically
efficient enlargement of transmission networks, the deployment of
transmission technologies to increase capacity and efficiency, and the
reduction of transmission congestion. I support these proposals and
note that the Commission has already issued a ``Proposed Pricing Policy
for Efficient Operation and Expansion of Transmission Grid'' that is
consistent with the proposed legislation.
Some have expressed concern that incentives are extraordinary and
unnecessary costs for consumers. They ignore three realities:
transmission is 10% or less of the total bill, transmission enables
access to lower cost generation which may well offset the costs of
associated transmission, and the fragility of our nation's transmission
system has serious security and economic repercussions which we cannot
ignore.
F. Transmission Cost Allocation (Participant Funding)
Section 33 of the Senate Staff Discussion Draft would require the
Commission to adopt rules on allocating the costs of
``interconnect[ing] new transmission facilities as well as the
modification, expansion or upgrade of existing transmission facilities.
. . .'' The rules must ensure that all users of a transmission
expansion ``bear the appropriate share of its costs.'' The cost of
transmission expansions not providing ``system-wide benefits'' and
instead primarily benefitting only a subset of users or market
participants must be recovered from that subset incrementally. System-
wide benefits would include providing reliability and adequacy for
regional needs; accommodating load growth on a regional level;
increasing transmission capability into congested areas; and
facilitating major regional and inter-regional power transfers.
The House Subcommittee bill provides that ``upon the request of a
regional transmission organization or other Commission-approved
transmission organization, new transmission facilities that increase
the transfer capability of the transmission system shall be participant
funded.'' The Commission would be required to ``provide guidance as to
what types of facilities may be participant funded.''
I believe that the Commission needs to address issues surrounding
cost allocation of new interconnections and grid expansions. This
country desperately needs a strong transmission grid, which in turn
necessitates a cost allocation mechanism that gets infrastructure built
and encourages innovation and new technology. I believe that an
independent transmission organization can ensure nondiscriminatory
access and rate treatment.
G. Transmission Organizations/RTOs
Section 212 of the Senate Counteroffer and section 7022 of the
House Subcommittee bill state the sense of the Congress that ``all
transmitting utilities should voluntarily become members of
independently administered regional transmission organizations [RTOs]
that have operational control of interstate transmission facilities and
do not own or control generation facilities used to supply electric
energy for sale at wholesale.''
I continue to believe that creation of RTOs is the single most
effective way of achieving a vibrant, competitive electric market. RTOs
that are fully independent of market participants can ensure non-
discriminatory operation of the transmission facilities under their
control. RTOs have FERC-approved market monitors, implement FERC-
approved market mitigation plans, and conduct long-range planning all
for the protection of customers. RTOs can perform economic dispatch
over large geographic areas that will ensure the selection of least-
cost generators. Finally, RTOs can offer organized markets and one-stop
shopping that reduce transaction costs, provide transparent market
rules and allow the opportunity for price discovery.
Therefore, I strongly support Congressional encouragement of RTO
formation.
H. PUHCA
I believe that these legislative proposals strike an appropriate
balance by replacing PUHCA with increased access by the FERC and state
regulators to certain books and records.
I. PURPA
I support the general approach to PURPA included in the draft
bills. I support prospective elimination of the forced sale provision
of PURPA provided that qualifying facilities have access to a
competitive market and provided there are appropriate transitions rules
to recognize the rights and obligations of parties.
J. Market Transparency, Anti-Manipulation, Enforcement
Some of the legislative proposals would require FERC to issue rules
establishing an electronic information system, accessible by the
public, specifying the availability and price of wholesale power and
transmission services. While I support the goal of transparency in
energy markets, I believe that there may be more efficient ways of
reaching that goal than having the government take over collecting and
reporting information on prices.
The legislative proposals also would prohibit round trip trading
and the filing of false information on wholesale power prices. Banning
these practices will help ensure customers that power prices are not
being manipulated.
The legislative proposals also would significantly increase the
penalties available under the FPA. The FERC must have an expanded role
in monitoring for, and mitigating, market power abuse. The enabling
statutes of the Securities and Exchange Commission and the Federal
Communications Commission provide for a range of enforcement measures,
such as civil penalties. I believe that providing FERC with similar
authority would send a powerful message to electricity market
participants that we take violations of the Federal Power Act just as
seriously.
K. Consumer Protections
I support allowing refunds from the date a complaint is filed, as
opposed to 60 days after the filing. This proposed change will better
protect customers. I also support the proposals to extend refund
liability under FPA section 206 to large non-public utilities for spot
market sales violating Commission rules.
iii. conclusion
Thank you again for the opportunity to offer my views on the
legislative proposals to restructure electricity regulation pending
before your Committee. While I have discussed the approaches in the
bills generally, I would be happy to provide technical comments in the
future if it would be helpful to the Committee.
The Chairman. Thank you very much.
We have a number of Senators who seem to have a particular
interest in what you are doing of late that are here, and I am
sure they are going to want to talk with you about that,
although that is purely an accident. We did not invite you here
for that. Nonetheless, Senators are Senators and you are here,
and so there will be questions about it.
I want to ask a few questions about some other things, not
your decision yesterday, although I might get to that.
First, when will the white paper be completed and could you
clarify for the record what you are going to tell us about it,
understanding, Mr. Chairman, and realizing that it was
committed to us in an atmosphere of confusion about what you
were going to be doing in the future on the one hand and maybe
all the way over to anger about what people thought you might
be contemplating under your concept and your talk about SMD.
So, I would like you to tell us what do you think will be in
generally and when will it be ready?
Mr. Wood. Well, until about this time yesterday, we were up
to here in the issues that I know we will be visiting about
later. And we had worked certainly back in February on
beginning the white paper, and it is being drafted in
accordance with our directions today. So I expect that
certainly by the end of the month of April and hopefully before
then we will have it.
What is it, which is your question, a good one. I think I
could characterize it as really the Cliff Notes version of what
we intend the final rule to be, the response to and hopefully a
readable response--I know the rule, the original proposal was
quite long because there were quite a few interested parties
that had comments that needed to be incorporated, but to tell
the story about why we are doing what we are doing, what we
have learned from the parties since we put out a proposal last
summer. We have had probably over 1,000 written comments from
different parties filed in three rounds of comments. We have
had probably over 350 face-to-face meetings, us or your senior
staff, with people from across the spectrum, across the
country. So we have learned a lot and I think it is very
helpful to you all, to our staff, to the outside world to know
really what adjustments we are making to what we put out there.
So that is what I expect we will be able to do. Again, as I
indicated to you, Senator Domenici, we would be glad to come
back and visit with the committee either individually or en
banc here.
The Chairman. I only hope that you will expedite it. Yet I
know it is difficult. If you try to make it brief, it is harder
to write, but we do expect that. We do not expect another rule,
at least like the last one, because we will all be more
confused than we were to begin with.
Let me move on. You understand that there is great concern
about the SMD, and might you take a couple of minutes and tell
the committee why you think the various Senators representing
constituents and various of our constituents have lodged their
serious complaints and concerns? What are the principal
concerns, as you see them, about this proposal?
Mr. Wood. I think certainly there are probably five
categories.
One is, is the cost of this, of getting a market platform
in place across the country, greater than the benefits that we
could reasonably expect to come from that? I know that, for
example, the appropriation for our current budget that we are
living under has directed the Department of Energy to do an
assessment in that regard, as well as ones that we have done.
I think the second probably, a big one, is a concern by our
colleagues at the State level that we are encroaching on their
jurisdiction, their jurisdiction over the retail sales of power
that they have regulated.
And a related issue is the protection of native load.
Everybody is somebody's native load, but there are current
expectations of uses of the grid that I think--at least
certainly by what we published--appeared to be threatened, and
I think we have got to address that and will. But as it stands
now, there is a concern that the native uses, the current uses
of the grid would somehow be relegated to a second tier status,
and we want to clear up that misconception.
Two other issues are ones that I actually think we did
indicate in the proposed ruled generally the right direction,
but I think probably nobody read it more than it once, because
it was so long that people have kind of departed from what we
actually said. There are two things that have to be done in a
market. There are a lot, but there are two that have attracted
some concern.
The first is the need to have adequate resources, adequate
supply. We call that resource adequacy. Basically we indicated
that there is a need to make sure there is an insurance policy
on the top of electric generation across the country, and if
that role is not fulfilled by a State, then we proposed the
solution. But we will clarify and make very clear that that is
a State's role primarily. If they do not do it or want to defer
to us, because of inter-regional needs, then certainly we need
to play that role.
And similarly, transmission planning and the related result
of actually building a transmission line are State issues, and
we need to make sure that we clarify what we think our role is
and not to try to take on ourselves.
I think those five issues, Senator, probably seemed to me
to be why we have got a lot of, I think, angst about the
Commission's rule, and we certainly intend to address each of
those and others in the white paper this next month.
The Chairman. Thank you very much.
I am going to now move. Senator Bingaman is not here and he
may not be able to make it. Let us follow the early bird rule.
Is that all right with you all on your side? That means that
Senator Craig, you are next. Senator Thomas, you are next. Then
Senator Craig.
STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR
FROM IDAHO
Senator Craig. Well, Mr. Chairman, in this first round, let
me make the opening statement that I did not make this morning
and I will use that as my first round. There are several
questions I want to ask the Commissioners.
Let me say at the outset, I appreciate all three of you
being here.
Mr. Chairman, over a decade ago, Congress passed
legislation that cautiously moved the electric industry away
from its historically regulated framework toward a more
competitive market approach for the sale and resale of
wholesale electricity.
Some believe it is time for Congress to take bolder action.
Most of these advocates represent a class in the industry known
as merchant traders and merchant generators that I understand
is suffering substantial financial distress.
It is instructive to me that most public power, co-ops, and
investor-owned utilities are not clamoring for bold change.
It is also instructive that the pressure for bold action is
coming primarily from electrical system geographical corridors
located in the Northeast and parts of the Midwest. Apparently,
Mid-Atlantic, Southeast, and Western electric system entities
are content with the pace of the electrical industry evolution.
They obviously do not rely on merchant traders and merchant
generators the way the Northeast region did, and it appears
that those regions did not fall prey to the over-regulation
experienced in the Northeast.
It certainly explains the outrage expressed by the South
and West regions about the Commission's proposed standard
market design that we now refer to as the SMD rule.
Chairman Domenici has aptly characterized the Commission's
action on SMD as a serious overreach of its authority. And I
and many others on this committee agree.
But what is equally troubling to me is the confusion
created by the Commission's action since 2001. For example, the
Commission's Order 2000 set out a voluntary incentive-based
approach to restructuring that is clearly in conflict with the
prescriptive approach set out in its proposed SMD. The industry
spent about $100 million to form regional transmission
organizations under Order 2000 that now appears to be money not
well spent in light of SMD, if we understand it correctly.
Moreover, the Commission placed utility companies in
settlement proceedings to form RTOs, only to disavow the
results when the new Commission took over in 2001. It happened
most dramatically in the Midwest where parties negotiated and
the Commission approved two RTOs, one for-profit, one not-for-
profit in May 2001.
In December, the Commission ignored its previous final
action. In fact, the Commission questioned whether for-profit
companies could become RTOs.
In the Northeast and the Southeast, the Commission opened
marathon mediation efforts only to ignore the results. In the
Northeast, the Commission originally required three RTOs to
merge, then reduced the number to two, and acquiesced when the
parties to the merger that would have established the two RTOs
canceled their plans.
It seems to me that the Commission's policy lacks
direction. Since 2001, there has been too much lurching forward
in provocative ways and then retraction once it becomes clear
that the Commission went too far.
It would be far better for the industry and consumers alike
if the Commission would propose reasonable rules in the first
place, in my opinion, rather than announcing ambitious programs
that require later modification.
I believe it is far more prudent for this committee to
exercise much closer oversight for the Commission's
administration of its current authority rather than
contemplating the value of giving the Commission more
authority, which in my opinion would only give the Commission
more opportunity to create uncertainty in the marketplace.
I have made no secret of my preference for Congress to go
slow in determining whether electricity legislation is needed.
During the last 6 years, Congress has struggled to find
consensus on what to do on this issue. That consensus, to put
it bluntly, has been elusive.
We once again find ourselves on the eve of another effort
to find that. The chairman is working hard to make that happen.
I want to express my appreciation to the chairman for his
effort to accommodate the many Western concerns that have been
expressed by me and other colleagues on the committee. I am
grateful for his willingness to think outside the box to ensure
the traditional role of the States in this area is not
compromised.
However, the draft legislation distributed by the chairman
introduces, I think, a rather novel idea for regional control
of electric regulation. Although it raises many attractive
concepts for regional and local control, it demands more
thought and I think careful analysis. Put simply, it needs more
time to mature. We will work hard to see if we can do that.
Electricity regulation is, by nature, complex. In the short
time I have had to review the proposal, I have developed many
questions about the concepts of the chairman's proposal. We
will be visiting with you, Mr. Chairman, about that to see if
we can work those out. I would be much more comfortable about
proceeding with the analysis if I was not confronted with the
very short time line that we are dealing with in this energy
bill.
But now we are focused on the FERC and its authority and
its responsibility, and I have already expressed my opinions
there. I am pleased you Commissioners are before us. I will
have questions to follow in the next round.
Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Senator Craig is next, Senator Alexander, and then we will
move to your side.
Senator Craig.
Senator Craig. Craig Thomas.
Senator Thomas. Craig Thomas. This is Craig over here.
[Laughter.]
Senator Thomas. Thank you all for being here. I appreciate
it.
I think we ought to get on with doing something. I disagree
with my friend that we are not prepared to do something. I
think we ought to be and we can be.
So of the topics that we have covered in the committee and
so on, what would you identify as essential, bare essentials
that ought to go into an energy bill?
The Chairman. You mean on this issue?
Senator Thomas. Yes, on this issue. Sure, that is what we
are talking about.
Mr. Wood. I would broaden it a little bit because of the
relatedness of gas and electricity, but the transparency type
issues, ability to actually get information, quality
information from the electric and gas markets, an enhancement
of the Commission's ability to police that market through the
penalties. I believe those were in your legislation as well,
Senator Thomas.
You and I visited about your legislation last week. I think
that that is a pretty streamlined bill and hits, I guess,
without exception, all the high spots, the reliability
language, the PUHCA and PURPA issues, which are certainly
fixtures on the scene, but in moving to a different market
structure, those are clearly impediments.
The FERC-lite language. The backstop language--I do not
really advocate that FERC do that, but I think having an
action-forcing item that allows inter-regional transmission to
get a fair shake, which I do not know that it gets under the
current way we do transmission siting, is important.
Senator Thomas. So if the FERC's responsibility basically
was limited in terms of operations to interstate movement, then
that would be satisfactory with you, and the RTOs and so, the
regional areas could do their own work within the regions.
Mr. Wood. Are you talking about like the RESC concept here?
Or just in general?
Senator Thomas. No. I am just talking about setting up RTOs
and with the necessary agreements among the States to be able
to let the States go ahead and do their retail pricing
intrastate and so on. Within the region, they could do their
own.
Mr. Wood. Absolutely. Again, just so you know, that is
where we want to go. That is where we want the SMD to go. We do
not want to go farther than that.
Senator Thomas. Do you believe it is essential for WAPA and
Bonneville and TVA to be active participants in developing
RTOs?
Mr. Wood. Yes, sir. They own significant mileage of
transmission, and they are certainly, in the Western part of
the country as TVA would be here in the east, a very critical
part of the overall grid.
Senator Thomas. In terms of PUHCA, with the Justice
Department and the SEC, if there was transparency and we
repealed PUHCA, is there not plenty of authority for the
agencies to oversee trading and financial arrangements?
Mr. Wood. I think there is as far as what PUHCA would
otherwise have given us. Again on the gas issues, in
particular, I have got a few concerns about our current--this
is really new since I testified last session in light of what
we have learned and released yesterday. But by and large, I
think the PUHCA has a lot of reporting requirements, as I
recall, from your bill. Is that correct, Senator Thomas? The
reporting requirements are important to us and the States to
allow those that are regulated in multiple States, for example,
to have access to the books so you do not basically put a lot
of costs in one State and then move them around. So to have the
ability to look at what are increasingly becoming multistate
utilities is a critical thing to preserve and really is the
heart of what PUHCA is useful for to a regulator today.
Senator Thomas. I said earlier--and I think I have visited
with you about it--our role here really is to try and establish
some policy. We are not into the detailed regulatory business
here, but to decide, with the changes that have taken place and
are taking place in the industry, to be able to deal with it in
the future, for instance, to get more investment into
transmission, to get more investment into generation, to be
able to let the marketers move around for a market system. So
that is I think our goal, and I hope we can pursue that and
come up with some things.
Thank you. Thank you, Mr. Chairman.
Senator Craig [presiding]. Senator Alexander.
Senator Alexander. Senator Smith was here before me.
Senator Craig. I am trying to read the list here of order.
Senator Smith, then.
Senator Smith. Senator Wyden was here before I was.
Senator Craig. Senator Wyden was here?
[Laughter.]
Senator Craig. See, you are such a tough bunch, they are
deferring.
[Laughter.]
Senator Craig. Senator Wyden, the opportunity is yours.
Senator Wyden. I thank my colleagues, and obviously we are
going to work on all of these issues in a bipartisan way as
Senator Smith and I have so often.
Let me just say to the folks at FERC that yesterday's
decision was more horrendous news for Western ratepayers. You
look at what California and Washington and Oregon have been
through. The three of us all have ratepayers who have just been
hammered by overpriced contracts that resulted from market
manipulation. The energy traders were caught on tape talking
about deliberate market manipulation strategies, that
manipulation caused long-term prices to go up and those higher
prices were reflected in the contracts that Northwest
utilities, that Western utilities were induced to sign.
But somehow for some reason, the FERC cannot see the
connection between those caught in the act, smoking gun memos
and transcripts, and the higher energy prices that our
constituents are now paying because of the market manipulation
that has been detailed in these transcripts. And for Bonneville
and Northwest utilities, we are talking about hundreds of
millions of dollars, folks. We have the highest unemployment
rate in the country. So this is of enormous importance.
I just want to ask you about a couple of examples which, it
seems to me, show clearly why we should get relief from these
overpriced contracts.
In one of the transcripts, a Reliant manager said, how did
it work today. The Reliant trader said, 129 for the power
exchange. The Reliant manager, yeah, I saw that. The Reliant
trader, and then we trade up to 113 for the third quarter next
year. Reliant manager, sweet. Reliant trader, we even had a
senior manager down here. He just wanted to know he was--
everybody thought it was really exciting that we were going to
play some market power.
So my question to the panel is, do the Reliant transcripts
not demonstrate beyond any doubt at all that market
manipulation directly impacted not just the spot market, but
also the forward markets and the prices that were paid for
power in the West under long-term contracts based on those
forward markets?
To me, that is the ball game, folks. That is as clear an
example as you can get for why those Western ratepayers ought
to get some relief from long-term contracts. What more do you
all need? It is right there in the transcript. I would like to
hear your response.
Mr. Wood. Thank you. We announced yesterday the staff
report of what we have got. We indicated that that is not the
final action, Senator, on everything that we are doing. We do
have some further work to do. It was important to make that
public what we did know. Let the information--and you referred
to one piece of it--be out so that the people know what
happened or what we have got before us.
But on the contract issues, we discussed some of those
yesterday. We did take action on the spot market issues in
California and reinstated an action that I have discussed with
the committee a while back on the dysfunctional spot market in
the Pacific Northwest and have allowed those items to go
forward because there were strong dysfunctions there. That work
tied back to a lot of the activity that was laid out in the
overall report.
Let me just say as a process matter what we are doing now
is public, but what we are doing now is not complete. We have
got some further investigation to do. We do think in the
process of what we are supposed to do as a judicial agency to
make sure that both sides get heard. We are going through that.
And the analysis that comes out of that is something that again
is a future event.
But we understand the issues and we are committed to taking
action on those as we go through the proper judicial process.
Senator Wyden. Mr. Massey? Just again, when you look at
these transcripts, this is an open-and-shut case. The example I
gave--I do not know how you reach any other conclusion than
overpriced contracts based on manipulated forward market prices
were what happened there and they ought to be voided. Disagree?
Mr. Massey. Senator, I do not want to get myself in the
position of having prejudged this issue because we are still
looking at it. But to me there is absolutely no question, based
on what I have seen so far, but that manipulation of the
market, which staff described as epidemic, had a huge impact on
long-term contract prices. There is simply no question about it
in my mind. We found that manipulation affected spot prices,
both defined as daily, hourly. We found in the Pacific
Northwest that the spot prices defined as a month or less were
unjust and unreasonable and had been manipulated. To me it
simply makes sense that the long-term contract prices were
affected--and staff found that there was a correlation between
the out-of-control spot prices and the long-term contract
prices. So to me we have irrefutable evidence.
So I am considering what the standard of review ought to
be, whether it ought to be the just and reasonable standard,
the public interest standard. But I am inclined to believe that
some of these contracts are going to have to be reformed to
meet our obligation under the Federal Power Act to ensure that
only just and reasonable prices are charged in all contracts.
Senator Wyden. My time is up, Mr. Chairman. But could Ms.
Brownell respond to the same question?
Ms. Brownell. Senator, with the many, many complex issues
before us, this was perhaps the most difficult because the
record is deep, it is mixed, and we looked at and will continue
to look at it, and as the Chairman described yesterday,
evidence that has been entered in the 100-day discovery
process, evidence that was entered by the report and the
rebuttal testimony to the 100-day evidence is something that we
still need to look at. But the totality of circumstances
involved in the long-term contracts would suggest that far more
damage would be done to the public by abrogating those
contracts in even the short and the longer term.
Further, there are a variety of circumstances behind those
contracts. There were, in most cases, choices. In one case the
individual who entered the contracts is suggesting they are
unreasonable and unjust was selling at prices at $1,100 a
megawatt hour. There are complaints from people whose contracts
were structural--where the risk was borne at the front end by
the seller, and those prices were kind of below water in the
early years, now that those early years are coming to an end,
they want us to cancel those contracts.
Further, I think that the risk to the customer of
abrogating contracts and setting in place in the West a
situation where no one can count on sophisticated players
entering into contracts that would be upheld will cause a risk
premium that will far outlast the length of these contracts.
While we have an obligation and we will continue to look at
the relationship between manipulation and shorter- and longer-
term contracts, I think these were fully litigated proceedings.
There is still one to go. The judges evaluated this evidence.
There were studies that in fact did not agree that the evidence
of manipulation and its effect on the short- and long-term
contracts was conclusive. I think all of those were weighed,
and the judges came to the conclusion that the Chairman and I
did yesterday.
I understand that we disagree. We looked at the totality of
circumstances and concluded that the public was best served by
upholding these contracts.
Senator Wyden. My time is up, Mr. Chairman. I would only
say, Ms. Brownell, you are trying to make a very clinical and
antiseptic case for why contracts based on fraud ought to be
upheld, and I just am staggered that you would try to make that
argument. You have said that the record is mixed. The staff
said there was an epidemic of market manipulation. I do not
find in the dictionary that epidemic is sort of the same thing
as a mixed record. So I just hope you all take another look at
this.
Thank you for the extra time, Mr. Chairman.
The Chairman. You are welcome.
Senator Cantwell, you are next, but I wonder if Senator
Smith could go. He has to preside in a couple of minutes. Could
he just take this time and you are next?
Senator Cantwell. That is fine, Mr. Chairman.
The Chairman. Thank you very much.
Senator Smith. Thank you, Senator Cantwell. Thank you, Mr.
Chairman, for your courtesy.
The Chairman. You are welcome.
Senator Smith. I would like to have included in the record
my full statement, if I may.
The Chairman. It will be.
[The prepared statement of Senator Smith follows:]
Prepared Statement of Hon. Gordon Smith, U.S. Senator From Oregon
Mr. Chairman, I appreciate your willingness to schedule this
hearing on electricity legislation currently pending before the
Congress. There are a variety of approaches contained in these various
bills, and I look forward to hearing from the witnesses today about
these differing approaches.
I remain concerned, however, about the wisdom of pursuing a
comprehensive electricity title, particularly one that does not deal
specifically with FERC's proposed rulemaking on Standard Market Design.
I do not see that the retail customer, particularly on the west coast,
is benefitting from the policies already approved by the FERC, or by
the policies under consideration by the FERC and by some of these
legislative proposals. Let's not forget, FERC actually approved the
California restructuring before it was implemented.
In the Pacific Northwest, we are still feeling the financial
effects of the volatile electricity market of late 2000 and 2001. Most
ratepayers in the Pacific Northwest have seen their power rates go up
by at least 40 percent, and BPA has begun another rate case to raise
rates again next October. Meanwhile, our energy intensive industries
are shuttered, and Oregon continues to have the second highest
unemployment rate in the country.
This is the third Congress in which we have attempted to move
energy legislation. I honestly believe there is no consensus on an
electricity title because there is no consensus on what the industry
itself should look like once we're done legislating.
There is no question that certain sectors of the electric utility
industry face a wide range of financial challenges, particularly those
corporations with merchant plants or energy trading and marketing
operations. These challenges include: excess generating capacity and
thin profit margins in parts of the country; extensive credit
downgrades since 2001; high levels of debt; the need to refinance tens
of billions of dollars in short-term debt; reduced electricity demand;
and continued regulatory uncertainty.
What is clear to me, however, is that there is no ``silver bullet''
that will cure the myriad of ills facing certain electricity providers,
particularly those with unregulated generation. In fact, from a
regulatory and legislative standpoint, we seem to be rushing to save
the merchant plant sector of the industry by sacrificing traditional,
vertically-integrated investor-owned utilities and public power
providers. Yet it is the investor-owned utilities, and public power
providers, that have a legal obligation to keep the lights on in their
service areas. Traditional utilities with regulated rates of return
also represent the financially healthiest sector of the for-profit
providers.
I, for one, cannot support a broad expansion of FERC's authority in
any legislation. In fact, I agree with the Chairman's assessment that
FERC has overreached its statutory authority in its proposed rulemaking
on SMD. I think it is imperative that if we move any electricity
legislation we clarify FERC's authority. Congress can make it perfectly
clear that states, not FERC, have authority over the transmission
component of bundled retail sales.
Mr. Chairman, I appreciate your leadership in addressing the
complex regulatory issues facing the electricity industry, and your
innovative proposal for regional energy services commissions. I look
forward to hearing from the witnesses on this concept, that recognizes
the regional nature of wholesale electricity markets.
However, I believe the Committee cannot act on an electricity title
without directly addressing the proposed rulemaking on Standard Market
Design. As you know, I have opposed this rulemaking, because I believe
it is unnecessary and unworkable, particularly in the Pacific
Northwest. If there are instances of undue discrimination on the
transmission system, I believe that the Federal Energy Regulatory
Commission (FERC) has the ability, under Order 888 or in the
development of tariffs for regional transmission organizations, to
remedy such discrimination.
It is my understanding that, despite FERC's anecdotal evidence of
the need for Standard Market Design, there are only four instances when
the FERC has actually ruled that undue discrimination has occurred
since Order 888 was issued. I intend to pursue this line of questioning
when the FERC Commissioners appear before the Committee this afternoon.
Our goal must be to ensure that the universal availability of
reasonably priced, reliable power is not compromised. We must move away
from, not facilitate, policies that will allow gaming and market
manipulation such as we saw on the west coast in 2000 and 2001, and are
now seeing evidence of in Texas as well.
I appreciate the willingness of the witnesses to appear before the
Committee today.
Senator Smith. First of all, thank you all for being here.
This is a very important hearing. I think our chairman is
showing real leadership in trying to get an energy bill out
that includes an electricity title.
But I want to say without any reservation I think, Mr.
Chairman, that it is imperative that if we move on an
electricity title, that we clarify FERC's authority and make it
perfectly clear that States, not the FERC, have authority over
transmission components and bundled retail sales. I say this
because I am very concerned about this moving forward.
The whole idea of SMD I think is born out of good
intentions, but is misapplied to the historic and regional
development of energy transmission. I think it has worked in
Texas because Texas, as I understand it, is a fairly holistic
grid that serves all of Texas, part of Oklahoma. But it ignores
the Tennessee Valley Authority and how that was developed or
the Bonneville Power Administration.
I think it is fair to say that people in the West in
particular have particular alarm about FERC's having authority
to manage these because the message that comes across is we
need to make the world safe for a better Enron. It seems to me
to be saying that marketers are more important than local
utilities and their judgments as to how to keep the lights on.
I want to be on record as highly opposed, deeply alarmed at
this part of any proposal to have an electricity title. I think
I speak, with few exceptions, for the publics, the privates,
the utilities of all stripes in the State of Oregon, and I
think Senator Wyden would agree with me.
Perhaps I am making a speech here, Mr. Chairman, but I
would love to get your response. Our alarm is born out of the
fact that the FERC, before any of you were there, actually I
understand approved the California deregulation. And our State
suffers to this day, as Senator Wyden and Senator Cantwell are
about to make clear. And frankly, we are highly alarmed about
turning over our region's planning to a national program that
can come up with these kinds of results.
I would love to get your response to what I have said and
help me understand why I should have any confidence in a
proposal that to me says let us make the world safe for
marketers without respect to local utilities.
Mr. Wood. I would like to ask my colleague who actually was
here before when these got set up--he made some pretty eloquent
remarks yesterday on the California issue that I think are
useful for the committee.
But our point here is as it has been since I walked in the
door, Senator. It is about the customer. It is not about the
marketer. The marketer, if there is sufficient competition
among them, and the rules are fair, which we did not see in the
West, because they were not clear or there were not rules at
all in a good part of the West, then the customer does not get
the benefit of those people competing against each other. So
please know that our goal here is not to benefit the marketer,
a bankrupt one or otherwise, but to improve the lot as it has
been seen in a good part of this part of the country that an
organized and regional electricity grid has, in fact, created a
much more efficient and well planned and well expanded network
that benefits customers. So that is our goal.
Bill, did you want to----
Mr. Massey. Well, I was actually at the Commission when the
California market design was approved. It was a homegrown
market design that emanated from California, literally enacted
by the legislature. The Governor supported it. It was proposed
to us, and I regret the fact that we approved it but it was the
interest of regional deference that we did so. And now we are
cleaning up a huge mess that arose from that. It was a market
that could be easily manipulated. It was a short-term market,
which made no sense whatsoever.
What we are trying to do is say to the Congress and to the
world that we do not want bad markets. We want well-designed
markets. We want markets that cannot be manipulated. We want
markets that are primarily long-term contract markets, and that
is what we are trying to achieve.
We have to do a better job of respecting the interests that
you raise, local interests, State interests. States want to be
co-equal partners in this process, and I think my colleagues
and want to be highly respectful of that and I think you will
see some significant changes in this white paper.
The goal is to ensure that consumers out West and other
parts of the country never have to go through this again in a
market-based environment.
Senator Smith. Well, I meant no disrespect to you, but I do
want to register again my skepticism, even my concern and
alarm, because right now Northwest customers are paying double
what they used to, and SMD is projected to raise the costs even
more. So I must be counted as opposed.
Thank you.
The Chairman. Thank you.
Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman. I would like to
have a longer statement submitted for the record, if I could.
The Chairman. It will be made a part of the record,
Senator.
[The prepared statement of Senator Cantwell follows:]
Prepared Statement of Hon. Maria Cantwell, U.S. Senator
From Washington
Thank you, Mr. Chairman, for holding this important hearing on
legislative electricity proposals as well as FERC's action--and
inaction--yesterday on western market manipulation.
I hope the witnesses on the first few panels today will forgive me.
I had every intention of coming to this hearing to discuss with them
and with my colleagues the finer points of those issues that divide
this Committee--primarily along regional rather than partisan lines--
when it comes to the always-contentious issue of electricity
legislation.
Yesterday, however, I believe the Federal Energy Regulatory
Commission made some important decisions-and some monumental mistakes--
all of which speak to the Committee's broader concerns regarding the
appropriate levels of authority and discretion Congress should vest in
this agency.
Unfortunately, if this Commission seriously intends to follow-
through on the proposed treatment of the Northwest that a majority of
its members outlined yesterday, FERC and its leadership will have
earned a vote of absolutely, positively no confidence from the
residents of my home state of Washington. This comes at a time when
FERC is, in essence, telling the people of the Northwest to ``just
trust us; we've learned our lessons about how your region works,'' when
it comes to its mind-numbingly complex Standard Market Design proposal.
Mr. Chairman, I am astounded by the insensitivity and arbitrary nature
of the Commission's apparent decision to tell the people of my state
that, while it has finally unearthed what it deems to be convincing
evidence that manipulation of markets took place during the crisis of
2000-2001 and our utilities could be on the hook to pay refunds to
California, prospects for recovering any of the billions of dollars
lost by entities in the rest of the West are exceedingly dim.
As my colleagues are aware, the Commission yesterday released a
staff report, which Chairman Wood commissioned at the request of
myself, Senators Wyden and Feinstein at this Committee's January 2002
hearing on Enron's collapse. This report substantiates what many of us
have argued all along: that manipulation was pervasive in the western
electricity markets during 2000 and 2001; that the Northwest and
California markets are connected; and that spot market prices have an
important--or in the words of the staff report, ``statistically
significant''--impact on forward market prices.
Despite these findings, a majority of FERC Commissioners also said
yesterday that they do not envision granting any relief to utilities
throughout the West which signed absurdly expensive long-term contracts
during the height of the crisis.
I should note that I appreciate the fact that the Commission seemed
to signal that it would consider Northwest refunds for short-term
transactions. However, FERC failed to actually take any action on that
matter. Further, as the Commission well knows, the majority of
Northwest utilities' money is tied up in long-term contracts, simply
because of the way business is transacted in our region.
Thus, my question is simple. How are residents of Washington
supposed to understand that, while FERC has--after conducting a 13-
month investigation--finally connected the dots so obvious to most, the
Commission still believes residents of the Northwest and the utilities
that serve them do not deserve the same treatment as their neighbors in
California, simply because our markets are differently structured?
In essence, FERC proposes to penalize us because our utilities
rely--and have always relied--more heavily on long-term contracts to
meet their statutory obligation to serve customers. As I understand it,
FERC itself encouraged utilities to get out of the spot market and
enter into such contracts during the height of the crisis to mitigate
price volatility.
Mr. Chairman, I know that many believe that the concept of
``contract sanctity'' is paramount. And I assure my colleagues, as a
business woman, I clearly understand its importance. However, the
western energy crisis of 2000-2001 was a market debacle of historically
unprecedented magnitude. Do we really believe, as policymakers, that
contracts resulting from manipulative business practices should be
immune from reform? Do we really believe, after all we've learned about
Enron, that millions of dollars of Northwest ratepayers' money should
continue to flow--if not into the company's coffers, then into the
pockets of either its creditors or bankruptcy lawyers? Do we really
believe that FERC's proposal to revoke Enron's market-based rate
authority more than a year after the company has filed for bankruptcy,
after the company has admitted manipulating markets, and after some of
its executives have plead guilty to felony charges, represents the
actions of a ``tough cop on the beat''?
As I said, the western energy crisis was a debacle unparalleled in
the history of the industry--save, perhaps, for that infamous period in
the 1920s and early 1930s that resulted in the Roosevelt
Administration's passage of the Federal Power Act and Public Utility
Holding Company Act of 1935. Still, the magnitude of the economic
devastation caused by the latest crisis would take even Samuel Insull's
breath away. According to a June 2002 study published in the journal
Competition and Trade, the crisis has resulted in the West's loss of
$35 billion in domestic economic product--in other words, a 1.5 percent
decline in productivity and a total loss of 589,000 jobs.
I ask my colleagues to consider this another way. Think about the
extra money consumers and businesses are spending on utility bills in
my state. Since the Bonneville Power Administration put in place a 46
percent rate increase in October 2001, Washington state consumers and
businesses have paid $895 million more for power than they would have
previous to the crisis, and the Pacific Northwest as a whole has paid
an excess of $1.3 billion. These are purely energy costs, and do not
account for their multiplier effect on associated economic activities.
Consider the fact that these costs essentially function as a tax on
any economic activity that requires the use of power--for our purposes,
we'll call it the Enron tax. Consider the fact that $700 million--the
amount of Enron's contracts with BPA--is equivalent, in terms of
Bonneville's revenue requirement, to between five to seven percentage
points on its rates. Do any of my colleagues believe sound economic
policy would be served if a similar five percent Enron tax were imposed
on the rest of this nation, at a time when our economy continues to
struggle to climb out of a recession? Do any of us believe this
Administration would support such an initiative?
In my state, we have, over the past two years, seen our electricity
and unemployment rates rise in tandem. And I'm afraid that the
electricity policies of FERC and this Administration have effectively
tied a 1,000 pound weight around our neck at precisely the moment in
time when our economy requires inflatable water wings if it is going to
learn to swim again.
Perhaps I'll hear something different from our FERC witnesses here
today about the Commission's intentions toward the Pacific Northwest.
Otherwise, I'm afraid this agency's response to the western market
crisis can be portrayed as nothing less than pathetic, negligent and
outrageously unfair.
I thank the Chairman for holding this important hearing.
Senator Cantwell. I think the interesting thing about this
hearing today is that the issue is not really whether
ratepayers in my State have now had a 50 percent rate increase
and will have so for the next 5 years. I do not really think it
is the issue that Oregon and California have also suffered
gravely from their economies being impacted by these high
rates. One analysis said $35 billion in domestic economic
product loss and a 1.5 percent decline in productivity, and
almost 600,000 jobs lost. My colleagues are going to talk, I am
sure, more about that.
But you know what? That is not even the issue today. The
issue today is whether FERC is capable of doing their job.
Mr. Wood, you once responded that you were the cop on the
beat, and I can guarantee you after seeing this report that any
policeman on this beat seeing this kind of corruption would be
relieved of their duty if they did not respond.
The issue today before this committee, certainly the issue
as it relates to SMD is whether FERC is capable of doing this
job. An entity that was created in 1935 and has had very little
of the public spotlight ever shown on it, but now we are seeing
possibly the inadequacy of the only Federal agency that is
supposed to protect consumers from unjust and unreasonable
price gouging. That is your duty. It is in the Power Act.
I would like to ask you a question, Mr. Wood, because you
came before this committee and I asked you about this issue. I
asked you specifically, my quote, ``Do you think that market
manipulation, if you found market manipulation, could it ever
be just and reasonable or ever in the public interest?'' And
your reply to this committee and to myself was, ``I cannot
think of an instance when it would.''
Do you stand by that testimony?
Mr. Wood. I do.
Senator Cantwell. What was your statement yesterday? What
was your statement yesterday as it related to the report?
Mr. Wood. That we were going to move forward on every one
of the 31 recommendations in that report. We took action on
some yesterday, some market-based rate authority revocations
for, I believe, eight natural gas companies and five power
marketers. We have got another 30 or so that we are continuing
to review the record on because a number of pleadings came in
last Thursday, a week ago today, from a number of parties in
California and in the West that were subject to accusation, I
suppose, from other parties that came in on March 3. So this is
what we call the 100-day discovery evidence.
Please know we are still looking at a number of items in
the report. We have got the report this month. It was
imperative I think for us and for you all to get this out in
the public, to put the full record behind it in the public for
everybody to see, for us to continue our review----
Senator Cantwell. Mr. Wood, just because I am going to run
out of time.
Mr. Wood. Yes, I am sorry.
Senator Cantwell. I just want to make this point. You have
a whole chapter, chapter 5, dedicated to the relationship
between the spot market and long-term contracts, and the
conclusion by staff was, quote, for contracts that are subject
to a just and reasonable standard of review in the ongoing
complaint proceeding, that they should send this analysis to an
administrative law judge. You spent a whole chapter saying that
they are related.
We want relief on those long-term contracts. We want the
just and reasonable clause that you are empowered with under
the Federal Power Act to stand. You have testified before this
committee that you do not believe contracts that have been
manipulated can either be just or reasonable or in the public
interest. So I have a strong legal belief that you are going to
have to use the just and reasonable clause, but it does not
matter. You have testified before this committee saying neither
of those kinds of market manipulations could be either in the
public interest or just and reasonable. So I do not know why
FERC is continuing to go so slow on what is known by the rest
of this country and certainly felt by the ratepayers in
Washington State.
Mr. Wood. Well, certainly it is our intention to move
forward as soon as we can. I would point out that the part you
referred to in the staff analysis which did look at all the
contracts that were entered into in this period made the direct
correlation between the dysfunctional spot market and the
shorter-term, the 1- to 2-year contracts. So there was a .33
correlation, a one-third correlation, between a dysfunctional
spot market and those contracts. And I think that that, as I
mentioned yesterday, is a factor that I weigh in when I look at
the public interest standard in looking at any contract.
Senator Cantwell. Well, we will get back to the public
interest standard. But my time is expired. Mr. Chairman, thank
you.
The Chairman. Thank you very much, Senator.
Senator Feinstein, you are next.
Senator Feinstein. Mr. Chairman, I just want to say that I
really concur with my colleagues that have just spoken.
I would like to enter my full statement. Plus, we have had
an opportunity to analyze the California submitted documents
and I would like to submit that brief analysis for the record,
if I might.
The Chairman. It will be done.
[The prepared statement of Senator Feinstein and the
analysis follow:]
Prepared Statement of Hon. Dianne Feinstein, U.S. Senator
From California
Mr. Chairman, thank you very much for holding this hearing. You
have laid out an aggressive timetable to markup Comprehensive Energy
Legislation this year in this Committee. While I am pleased we will be
able to discuss these issues here in Committee before they come up on
the Floor, I am worried that we are rushing to pass legislation without
fully understanding how to properly fix our broken energy markets.
I strongly believe we should not rush this process, we must make
sure we do it right.
Just yesterday, FERC released its ``Final Report on Price
Manipulation in Western Markets'' which confirmed widespread and
pervasive fraud and manipulation during the Western Energy Crisis and
FERC announced that California would receive more than the $1.8 billion
in refunds recommended by an administrative law judge in December. At
the very least FERC is estimating refunds of around $3.5 billion.
The regulatory hammer has finally begun to drop. The question now
is how hard. In view of the inflated profits that energy companies
reaped at the expense of California homeowners and businesses--FERC
should right this wrong and honor California's claim for $9 billion in
refunds.
FERC must also re-examine the long term contracts signed by the
State of California at the height of the Energy Crisis. Yesterday the
FERC report acknowledged the significant linkage between spot prices
and contracts. I strongly believe the evidence is clear that the
contracts were entered into under extraordinary circumstances with
rates inflated by market manipulation, and I believe failure to open up
the contracts would be a big mistake.
However, I will give credit to the Commission where credit is due.
FERC is finally headed down the right path and I want to commend the
Commission for lifting its ``Protective Order'' and releasing thousands
of pages of new documents which demonstrate that energy companies
deliberately manipulated electricity and natural gas markets during the
Crisis.
This abuse was pervasive and unlawful.
These now-public documents were submitted to FERC earlier this
month by the State of California, the California Attorney General and
the State's largest utilities. They provide strong evidence that there
was a concerted effort to boost company profits at the expense of
consumers.
Mr. Chairman, I would like to enter a summary of this documentation
produced by my staff into the Record.
First, the documents detail new incidents when energy companies
intentionally held their plants offline to drive prices up.
Second, the documents show energy traders were deliberately
attempting to manipulate the Western market--frequently through
strategies earlier Enron memos termed ``Death Star,'' ``Get Shorty,''
``Fat Boy,'' and ``Ricochet,'' among others.
These strategies were implemented not just by Enron, but by energy
companies across the board. For example:
A conversation between a Mirant trader and a trader from
Public Service of Colorado reveals an effort to engage in
overscheduling energy--the ``Fat Boy'' strategy.
The trader from Public Service of Colorado states, ``Why don't we
just do something where we overschedule, overschedule load and share an
upside, dude.'' The Mirant trader responds, ``That's fine.''
These were not isolated incidents. They were widely implemented
practices designed to fleece consumers in the West.
Third, the documents lay out new evidence of possible anti-trust
violations by energy companies. The filing shows the largest energy
suppliers in California shared non-public information through a third-
party company called Industrial Information Resources. Traders called
this company ``The Mole.''
Industrial Information Resources provided sellers detailed, non-
public information on daily plant outages--essentially giving energy
companies insider information on when an unplanned outage could
transform an energy shortage into a Stage 3 energy emergency or
blackout.
Yesterday, I wrote the Attorney General to ask the Justice
Department to look into possible anti-trust violations by energy firms
who used Industrial Information Resources to share non public
information on plant outages in California.
Fourth, the documents provide new evidence of document destruction
by energy companies to cover up details of their actions.
In the documents, an ex-Mirant employee disclosed that:
He was instructed to delete certain files relating to the
California markets from hard drives; and
Key Mirant executives were instructed to turn in their
laptops so that Mirant could clear their hard drives.
According to this employee, he was ordered to flagrantly destroy
documents, which may have detailed market fraud. This means that we
will never know the true scope of the gaming and manipulation.
I strongly believe this type of fraud and manipulation occurred, in
part, because strong federal oversight of the energy trading system was
non-existent.
For FERC to be an effective regulator, Congress must provide the
Commission with more authority to punish violators with stiffer
criminal and civil penalties under the Federal Power Act.
Mr. Chairman, I am pleased to see that your draft legislation
proposes to eliminate the 60-day waiting period after a complaint is
filed at FERC for a party to become eligible to receive refunds. This
unnecessary 60-day waiting period may cost California billion of
dollars in refunds because thus far the Commission has refused to grant
refunds prior to October 2, 2000 despite the overwhelming evidence of
fraud and manipulation before that date.
Mr. Chairman, I am also pleased to see provisions in your draft
legislation that propose to increase criminal and civil penalties under
the Federal Power Act. I would like to work with you to see these same
penalties strengthened as part of the Natural Gas Act to punish abuse
in the natural gas sector, not just the electricity sector. And refund
authority should be part of the options FERC has at its disposal to
punish those who manipulate the gas markets. As the FERC report on
Price Manipulation in the Western Markets states, ``markets for natural
gas and electricity in California are inextricably linked.''
There are other remedies to market power that Senator Bingaman and
Senator Daschle included in the Senate Energy Bill last year that I
would like to see the Committee include in an Electricity Title. I
believe specific prohibitions on market manipulation, authority for
FERC to review all mergers and acquisitions in the energy industry, and
more authority for FERC to remedy market abuse must be part of any
energy bill this committee reports to the Floor.
Mr. Chairman, I am interested to hear comments from our witnesses
on the new idea you have proposed to create ``Regional Energy Services
Commissions.'' I would like to commend you for bringing forward this
idea, but I think this proposal should be studied carefully by this
Committee before we act on any proposal that could further balkanize
the already fractured energy markets and take power away from FERC--at
a time we should be providing the Commission more authority, not less.
Again, Mr. Chairman, I would like to thank you, the members of this
Committee, and the Committee staff for holding this hearing and I look
forward to the Committee's examination of these important issues. Thank
you very much.
New Evidence That Energy Companies Besides ENRON Manipulated the
Western Energy Market
(unofficial report--office of senator dianne feinstein)
After a 100-day discovery period that ended March 3, 2003, the
State of California, the California Attorney General's Office, and the
state's largest utilities filed over 3,000 pages of evidence at the
Federal Energy Regulatory Commission to show how fraud and manipulation
was pervasive throughout the Western Energy Crisis of 2000-2001. The
market abuse was not limited to a few rogue traders at one firm, but
was a widespread series of schemes perpetuated by many employees across
most companies that supplied and traded in the West.
Highlights of the Information Filed by the California Parties
(This information was previously under a ``Protective Order'' at FERC)
Details on new specific incidents when energy companies
intentionally held their plants offline to drive prices up
during 2000 and 2001.
New transcripts of conversations between energy company
employees revealing an intent to defraud and manipulate the
California market.
Reliant knew about transcripts proving their employees held
power offline, but the company sat on the evidence for over a
year before turning them over to FERC. (CA Parties brief, p122,
footnote 375/Exhibit CA-218)
New evidence of document destruction by energy companies to
hide details of their behavior in the Western Energy Market.
New evidence laying out possible anti-trust violations by
energy companies.
The filing by the California parties shows that there was a
extensive and coordinated attempt by energy companies to game the
Western market to drive prices up by engaging in the following:
1. Withholding of Power--driving up prices by creating false shortages.
New evidence of Withholding of Power according to the California
parties: (CA Parties brief, p28-31/Exhibit CA-9)
On August 15, 2000 Williams reported that its plant in Long
Beach called Alamitos 7 was unavailable due to NOX
limitations, but AES's real-time logs from that day show the
plant was shut down because Williams directed it to be.
Reliant failed to return its Etiwanda Unit 2 in Rancho
Cucamonga to service for two days after repairs were completed
on January 26, 2001, even though the ISO system was
experiencing continuous Stage 3 emergencies in California.
Redondo Beach Unit 6 power plant was shut down by Williams
and AES April 3-April 6, 2000. Although the ISO was told the
plant was offline due to a boiler tube leak, the plant records
indicate this was a planned shutdown and the leak was an excuse
concocted two days later.
Dynegy shut down its El Segundo Unit 1 plant August 30-
September 3, 2000 for repairs, but the repairs had been done
and the plant was shut down to force prices up.
Mirant held its Pittsburg Unit 1 plant offline until October
22, 2000 even though an external tube leak ended October 20,
2000.
Duke delayed returning Oakland Unit 1 to service after
repairs to a lube oil cooler and a cooling fan in November,
2000 despite ISO-declared emergencies.
During an ISO-declared emergency December 19 and 20, 2000,
Williams declared Redondo Unit 5 a forced outage due to a
boiler tube leak. However, the control operator logs
uncharacteristically put quotation marks around the outage
reason, ``Blr. Tube Leak'' and later, after tests were done,
the logs indicate that no leaks were found.
Reliant delayed reporting the end of an outage at its
Ellwood Unit in Goleta for more than twelve hours during peak
demand in early April 2001.
Between November 19 and December 5, 2000 Dynegy reported
that its El Segundo 1 and 2 units (with a capacity of about 350
MW) were on ``forced outage,'' but these units were actually
shutdown because Dynegy claimed its operating staff was on
vacation. Forced outages should not include vacation days--
especially during ISO emergencies, which occurred on November
19 and 20.
2. Bidding to Exercise Market Power--suppliers bid higher after the
California ISO declared emergencies, knowing the State would need power
and be willing to pay any price to get it.
New evidence of Bidding to Exercise Market Power according to the
California parties:
A Mirant email to eleven traders in July of 2000 reveals
this strategy:
``load is average above 40 thousand during peak. So, submit
revised supp. Bids and `stick-it to `em!!'' (CA Parties brief,
p42-43/Exhibit CA-141)
3. Scheduling of Bogus Load (aka ``Fat Boy'' or ``Inc-ing'')--suppliers
submitted false load schedules to increase prices.
New evidence of Scheduling Bogus Load according to the California
parties:
A Dynegy trader confirms that Dynegy's load deviation in
August 2000 is ``probably because [the traders] are just doing
some dummy load scheduling.'' (CA Parties brief, p48/Exhibit
CA-202)
A conversation between a Mirant trader and a trader from
Public Service of Colorado reveal a joint effort to engage in
``Fat Boy.''
The trader from Public Service of Colorado states, ``Why don't we
just do something where we overschedule, overschedule load and share an
upside, dude.''
The Mirant trader responds, ``That's fine.'' (CA Parties brief,
p49/Exhibit CA-204)
A Sempra trader states Sempra should submit ``fake load'' to
the day ahead market. (CA Parties brief, p49/Exhibit CA-71)
A Williams trading strategy is identified as ``scheduling
bogus load.'' (CA Parties brief, p49/Exhibit CA-22)
An internal Powerex memo documents that Powerex entered into a
contract with the explicit purpose of ``overscheduling'' and
``underscheduling'' and for congestion manipulation. (CA Parties brief,
p49)
4. Export-Import Games (aka ``Ricochet or ``Megawatt Laundering'')--
suppliers exported power out of California and imported it back into
the State in an attempt to sell power at inflated prices
New evidence of Export-Import Games according to the California
parties:
Powerex's head trader congratulated its daily traders on
their successful use of strategies to buy-ahead and sell back
real-time. (CA Parties brief, p53/Exhibit CA-40)
Reliant had ``camouflage transactions'' where the company
sold power out of California day-ahead to Arizona and New
Mexico utilities, and bought it back for sale in the real-time
market. (CA Parties brief, p55/Exhibit CA-56)
5. Congestion Games (aka ``Death Star'')--suppliers created false
congestion and were then paid for relieving congestion without moving
any power.
New evidence of Congestion Games according to the California
parties:
Other names like ``Death Star'' were given to these schemes: EPMI--
Star, CISO--Death, Curious and George, Red and Green, Hungry and Hippo,
James and Dean or Chinook and Atlantic and SCEM--Loopy. (CA Parties
brief, p59/Exhibit CA-1)
These congestion games were called ``free money.'' (CA
Parties brief, p59/Exhibit CA-145)
A Mirant trader summed up the scheme, ``I mean its just kind
of loop-t-looping but it's making money . . . [laugh].'' (CA
Parties brief, p48/Exhibit CA-204)
6. Double-Selling--suppliers sold reserves, but then failed to keep
those reserves available for the ISO.
7. Selling of Non-Existent Ancillary Services (aka ``Get Shorty'')--
suppliers sold resources that were either already committed to other
sales or incapable of being provided.
8. Sharing of Non-Public Generation Outage Information--the largest
suppliers in California shared information from a company called
Industrial Information Resources that provided sellers detailed, non-
public information on daily plant outages. A one-year subscription to
Industrial Information Resources cost $70,000. Providing multiple
competitors the same, non-public, outage information signals all
competitors to act in a parallel manner.
New evidence of Sharing of Non-Public Information according to the
California parties:
Duke energy traders called Industrial Information Resources
``the mole.'' For example, Duke trader James Stebbins emailed:
``I just heard back from the mole. He is reporting that the PV3
will be coming back on line 6 days earlier than expected. The
new return date is March 3. Good luck and happy selling.'' (CA
Parties brief, p70/Exhibit CA-95 and Exhibit CA-253)
9. Collusion Among Sellers--sellers were jointly implementing or
facilitating Enron-type trading strategies.
New evidence of Collusion Among Sellers according to the California
parties:
Glendale traders learned manipulation from Enron and Coral
traders. (CA Parties brief, p77/Exhibit CA-105 and Exhibit CA-
1)
Sempra provided Coral with advance information regarding the
status of a plant. (CA Parties brief, p78/Exhibit CA-1)
Transcripts of calls show traders from Public Service of
Colorado and Mirant discussing ``sharing'' or ``splitting''
``the upside. (CA Parties brief, p79/Exhibit CA-204)
10. Manipulation of NOX Emission Market--sellers manipulated
the market for NOX emissions in the South Coast Air Quality
Management District through a series of wash trades that created the
appearance of a dramatic price increase that may have been fabricated.
For example, Dynegy, together with AES and others, entered into a
series of trades of NOX credits in July and August 2000 by
which Dynegy would sell a large quality of credits and then
simultaneously buy back a smaller quantity of credits at a higher per
credit price. (CA Parties brief, p90-93/Exhibit CA-11)
11. Wanton Document Destruction--sellers (not just Enron) flagrantly
destroyed documents detailing behavior in the Western Energy Market.
New evidence of Wanton Document Destruction according to the
California parties:
Mirant--an ex-Mirant employee disclosed that he was
instructed to delete certain files relating to the California
markets from hard drives and that key Mirant executives were
instructed to turn in their laptops so that Mirant could clear
their hard drives. (CA Parties brief, p129/Exhibit CA-178)
City of Glendale, California--a Glendale employee, Jack
Dolan, told an ex-Glendale employee, Carl Edginton, that Mr.
Edginton could destroy one of the documents that contained
information about Enron's gaming strategies. (CA Parties brief,
p129-130/Exhibit CA-213)
12. Negligent Document Destruction--sellers failed to retain documents
detailing behavior in the Western Energy Market in accordance with FERC
rules and the Federal Power Act.
According to the California parties, new evidence of Negligent
Document Destruction by:
Powerex
Portland General Electric
Reliant
Bonneville Power Administration
City of Glendale
Northern California Power Agency (CA Parties brief, p130-
132)
13. Traders Did Not Care How High Prices Went--sellers said that it did
not matter how high prices went, as long as Californians paid and
generators made money.
New evidence Traders Did Not Care How High Prices Went in the
filing:
Conversation between two Reliant employees on May 22, 2000:
Kevin: ``Hey, guys, you know when we might follow rules? If there's
some sort of penalty.
Walter: ``That's right.''
Kevin: ``I would never suggest it, but it seems like the writing would
be on the wall.''
Walter: ``Well, I mean, there's--you know, our position is if it's a
reliability issue, then the reliability comes over the
economics.
Kevin: ``Right.''
Walter: ``So we don't have a problem with that. But it needs to be a
reliability issue. If it's economics, and by God, that's what
rules.''
Kevin: ``You'll let the California rate payers pay.''
Walter: ``That's right. I don't have a problem with that. I have no
guilty conscience about that.''
Kevin: ``All right, man.''
(CA Parties brief, p110-111/Exhibit CA-239)
Senator Feinstein. The bottom line, in an answer to Senator
Smith's question, in 1996 it is true, California passed a
broken energy law, lobbied for by the energy industry, headed
in the lobbying effort by Enron, signed not by a Democratic
Governor, by a Republican Governor, and the broken market was
created.
Since that time, a whole industry I believe has pervasively
committed illegal acts, and we have an energy commission--and
this is prior to both Mrs. Brownell and Mr. Wood--who did
nothing, with exception of Mr. Massey who was a lone vote, who
stood up, who knew something was wrong, and who tried to get at
it. Those of us that sat down with the Commission got not to
first base. There was a noblesse oblige. There was a ``we know
it all.'' ``It is all California's fault.'' And guess what? Now
it turns out that that is not correct.
Where California I think made a big mistake was picking up
billions of inflated energy costs because if those costs had
been able to be onto the ratepayers, you would have had a yell
and a scream that would have taken this place apart. But the
State paid for it. It bankrupted one major investor-owned
utility and nearly bankrupted the other.
And I pick up this FERC report and the Commission has given
show cause to 30 companies to come and tell them why they
should not have to give their profits back. And they are all
the star companies of America. I am absolutely disgusted.
But you know what it shows? It shows that in a capitalist
society, in a free market, you need regulation and you need
people who are going to be courageous and who are not going to
be bothered by the fact that their salaries are paid by the
very industry they have to regulate but do their job: regulate
that industry. And it has not been regulated.
Consequently, you have literally billions--probably one of
the greatest frauds ever perpetrated on the entire West Coast.
And as you read these transcripts, and you see trader language
like ``junkyard dogs,'' saying in essence, shove it to them--
this is America's star energy companies. I am disgusted.
I would like to ask some questions.
The evidence makes clear that the type of fraud and
manipulation was not confined just to Enron, Reliant, and BP
Energy. The first question is, will the commission rescind
market-based rate authority for other companies to ensure that
this market abuse is properly punished?
Mr. Wood. Yes, ma'am, we can. As I mentioned to one of your
colleagues a moment ago, we are in the process of basically
hearing the other side of the story, which was filed last
Thursday, on each of these claims. One, for example, made a
claim that the California ISO asked us to do this Enron
strategy because they needed to keep the lights on.
Well, I am going to follow that up. I think it is important
to both the ISO's reputation and to the accused party to make
sure that before we move forward with a show cause to disgorge
or to revoke, which are basically the two options for us,
revoke the certificate or disgorge the profits, if there is in
fact a tariff hook to go back and say you violated a law that
was on the books at the time. That is what we are putting
together this month. Again, that evidence just came in last
week.
There were those companies that you referred to, Senator
Feinstein mentioned, in the document----
Senator Feinstein. Page 16 of your document.
Mr. Wood. Yes, ma'am, in the footnote.
Senator Feinstein. They are footnoted, but they are there.
Mr. Wood. They are there.
There were actually kind of three camps of groups. The
Enron gaming strategies which I should add were pointed out by
an ISO report in January. So we did find issues, but I will
give the ISO credit. They did a lot of the scrubbing of all the
records for the prior year for Senator Dunn's hearing and
provided that record to us as well.
Some other people that were engaged in the Enron business
relationships, which the staff turned up in its discovery over
the last year, were kind of the outside of California parties
that potentially facilitated some of these transactions.
And then the third category were about 10 companies that
staff identified as having potentially performed economic
withholding because their bidding strategies were anomalous to
what the market rules were at the time.
So those three categories are really what we had hoped to
have yesterday, but I think when we saw the volume of evidence
that came in last Thursday, it is incumbent on our agency to
review that before we send it over to trial.
Senator Feinstein. I notice my time has run out. Will there
be a second round, Mr. Chairman?
The Chairman. Yes. We will stay and do that, if you want.
Thank you very much.
Senator Burns.
Senator Burns. No. I think it is Senator Alexander.
Senator Alexander. Thank you, Conrad.
I have one question. Thank you for coming.
The staff draft of the energy bill has what we call a FERC-
lite section that would put many parts of TVA's transmission
system under FERC. As we look at that in the Tennessee Valley,
Mr. Wood, maybe you could help us think about how to look at
that in terms of what are the pros and cons to the ratepayers
of the Tennessee Valley and even to TVA itself of putting parts
of the transmission system under FERC?
Mr. Wood. I would like to actually think a lot deeper about
that and give you and the committee something in writing,
Senator Alexander, because I have not given the FERC-lite
language a lot of deep thought lately.
But just in general, what this language really is and a lot
of what we are talking about is integrating these grids into
their neighboring grids more tightly so there is not, in
effect, like a big wall around TVA--a ring fence I guess they
have called it--but that there is more of an integrated
approach toward more coal-fired power in the Midwest and
natural gas-fired power in the South. Certainly depending on
costs and time of year, those--TVA sits right in the middle of
the grid, and I think from a national perspective, it is
important to have TVA involved in the grid.
From the TVA customers' perspective, it is a similar
benefit to have access to not only the power that TVA would
generate, but for those customers, particularly if they have
the ability to buy from someone other than TVA, to actually be
able to reach the adjacent utility or some powerplant along the
Ohio River or down in Louisiana and actually buy power
contractually from those places, as well as buy it from TVA, so
that they have got more competitive choices for their own
retail customers.
So it is just, in effect, broadening the market and doing
so through a form that allows for some uniformity of treatment
of those by the TVA grid operator, the people at TVA that run
the grid.
Senator Alexander. I wonder if the other Commissioners have
a comment on that.
Mr. Massey. Senator, my own view is that the Commission, at
least under existing law, ought to try to make these RTOs and
these markets attractive enough so that non-jurisdictional
companies will want to participate in them. They will want to
participate in RTOs because they see value to it to their
customers. They see that it is in the national interest. So
that is step one. It seems to me we have to be working to make
that happen.
Senator Alexander. Would one aspect of making it attractive
be a transition period? One of the things about public policy
in general I have observed over time is that when you make big
adjustments, that the law of unanticipated consequences can
come into play, and the big adjustments are sometimes easier to
make gradually. As you do your planning and your thinking about
these changes, do you think about transition time?
Mr. Massey. I think about transition time in lots of
different ways. It seems to me the industry in general has been
undergoing this transition to competitive markets for quite a
while, and I think they are looking for some certainty. But new
players who may want to participate in an RTO or who are
jurisdictionally required to comply with FERC policies, yes, I
think they need some time to get used to the idea. I am hoping
that that is one of the issues that we can deal with in our
white paper with respect to standard market design or RTO
formation, what should be the sequence of events that will make
this happen in an orderly fashion, respecting regional
differences, respecting State commission rights. That is my
hope.
Senator Alexander. Ms. Brownell.
Ms. Brownell. Senator, I think your caution is well placed
certainly by what we have learned, but some of my lessons were
learned in PJM where indeed we did undergo a transition. Where
we introduced new markets over time, we introduced ancillary
services over time. There was a lot of testing. So I surely
think that that will be part of any transition.
Indeed, that transition and period of evolution has already
been laid out in many of the RTO dockets where people are on
different tracks depending on where they are in terms of their
own market design elements.
I would also add that the length of the transition period I
think has made us all vulnerable, and the lack of transparency
in some of our marketplaces and the lack of clear and
consistent rules has, in fact, made the marketplace vulnerable
not only to market manipulation and games, but more
importantly, to the lack of efficiency that would bring value
to customers, to the inability to introduce new technology into
the marketplace that would benefit customers both from an
environmental and efficiency perspective, and indeed, from some
assurance that we are operating that grid as efficiently as we
can and using economic dispatch. So I think we have to balance
what our goals are.
Remember, this is not about throwing out what works. This
is about building on it, which is what this country does when
it restructures marketplaces.
Senator Alexander. Thank you. Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Burns.
Senator Burns. Thank you, Mr. Chairman.
I just got a couple of questions, and they are kind of
along same lines as--oh, by the way, Mr. Chairman, I would like
my statement to be made a part of the record.
The Chairman. It will be made a part of the record.
[The prepared statement of Senator Burns follows:]
Prepared Statement of Hon. Conrad Burns, U.S. Senator From Montana
Mr. Chairman, I thank you for holding this hearing today. I
appreciate your efforts to move the energy bill forward on schedule. It
is important that we let the committee process work, and that we all
have a chance to work out a bill in this room. Starting next week you
have set up an ambitious mark up schedule, and I commit to working with
you to produce an energy bill this Congress.
Electricity is never an easy subject, so this hearing is especially
important. First of all, Mr. Chairman, I would like to say that the
draft language your staff has distributed is a step in the right
direction, since it focuses on a regionally based rather than a top-
down approach.
I do believe there are steps we can take to improve reliability and
to improve confidence in the electricity markets without putting
consumers at risk. Some people believe that responsibility lies with
FERC, but I do not necessarily agree.
SMD is a perfect example. The justification behind the Standard
Market Design proposal is that we are in a desperate situation, and
that FERC needs authority over every sector of electric markets to save
the industry from itself.
The ``We are the government and we are here to help'' philosophy
does not sit well with me.
I don't have great faith that FERC will wield its authority any
more carefully with SMD than it has with the RTO's it ordered to be
created just a few years back. In the Northwest, we have been trying to
form RTO West at the order of FERC. This has been a long and painful
process, not to mention an expensive one. The filing utilities, the
State commissions, the cooperatives and BPA all spent thousands of
hours, and literally millions of dollars negotiating the terms of the
new RTO. They made real progress and then FERC swept in last year and
announced SMD. Now this committee is advocating yet a different
regional commission approach.
I would like someone to explain to me how this creates stability in
the electricity markets. It doesn't look that way from where I'm
standing. Whether or not you like the RTO approach, and plenty of
Montanans did not like it, they are willing to see it through rather
than change horses mid-stream.
I have been on this committee for a long time, and I have seen a
lot of ideas come and go. One thing is for sure: every time Congress or
the federal government acts to solve a problem in the electricity
markets, we create a whole new one we didn't anticipate. I don't want
to be part of a situation where the only job security we create is for
lawyers.
Montanans were hit hard in the summer of 2000. Water was short,
power was expensive, California energy prices hit record highs, and
those high prices echoed throughout the West. We know more about the
causes of that situation now then we did then, but it was by all
accounts a failure. Is that why we are here? I would maintain that
situation was created by a flawed State electricity policy in
California at the time, and a failure by FERC to use its authority to
fix the problem. A few people were asleep at the switch. FERC would
like us to believe the California crisis was caused by a mechanical
failure of the entire electric market--I prefer to think of the
California situation as pilot error.
I bring up the California situation because I fear that good actors
in the energy industry are being punished because of the actions of a
few bad ones. Despite the horror stories, there are plenty of markets
across this country that work pretty well. We shouldn't handcuff those
that are doing a good job just to prop up the stock prices of the
others.
As we move forward, let's focus on the facts, rather than the
emotion of this situation. If we get caught up in trying to create the
perfect competitive market, we will all be disappointed with the
results. Any electricity policy we consider should have one goal:
reliable delivery of affordable power to consumers and businesses.
Senator Burns. As I look at this and not really being an
expert on this particular subject, I have to look at it from
the standpoint of the cooperatives. The committee staff draft
includes provisions that would subject rural electric
distribution cooperatives to the jurisdiction of FERC. Mr.
English noted that some of these operations employ as few as
five people, and I personally have a problem with the idea that
we are going to subject these small mom and pop rural electric
distribution cooperatives to FERC oversight.
Do you believe that it is necessary to extend FERC
jurisdiction over these small electric cooperatives in order to
make the interconnected utility system work?
Mr. Wood. No, sir. I am not sure. That was in the staff
draft?
Senator Burns. Mr. English testified to that.
Mr. Wood. That it was in the FERC issue?
Senator Burns. Yes.
Mr. Wood. That issue they did raise with us and we clearly
want to clear that up. They raised that back in November and I
agree with that. We need to clarify that issue. That is not an
issue we care at all about because distribution is local.
Transmission is not and we need to keep focused on the
transmission, not the distribution.
Senator Burns. Do you agree with that, Mr. Massey?
Mr. Massey. I do, Senator. I have read their pleadings and
I think they make very persuasive arguments.
Senator Burns. Well, that sort of answers my second
question then.
The Chairman. I believe Mr. English was speaking about
being concerned about it but not saying it was covered
someplace.
Senator Burns. All right. I did not know about this. Well,
that answers my second question. Those are the only two
questions that I had other than the fact that I think the first
thing I look for is stability and reliability as far as
electricity is concerned. That is first.
And second, if we are subjected to some rules and
regulations, especially in a State like Montana, that would be
harmful to ratepayers higher than we have now, how do I explain
that to my co-op members and of course, trying to solve a
problem that basically we do not have. That is where I am kind
of coming from on this. We shall monitor this as we move along.
But I think my main concern, though, is the cooperatives
and whenever they fall under this jurisdiction. So you have
answered that question and I appreciate that very much. And
thank you for coming today. I appreciate your testimony. It is
very interesting.
The Chairman. Thank you very much, Senator.
Senators Cantwell and Feinstein, did you want a second
round, Senator Cantwell? Go ahead. Excuse me, Senator Craig,
then Senator Cantwell. Go ahead, Larry.
Senator Craig. Well, thank you very much, Mr. Chairman.
Commissioner Massey, let me follow through with some
questions in relation to California that always frustrate me.
Obviously we are all frustrated by that. Senators from
Washington are concerned and upset. Senators from Oregon,
Senators from Idaho are upset and the reason is because our
rates went up when California became so dysfunctional as power
was pulled out of our system and the supply obviously was under
high demand, and as a result of that, we are still paying. And
it was very disruptive to the economy of my State.
You said a few moments ago you were on the Commission when
the FERC ruled in 1996-97 on the filings made to implement the
California electric restructuring law. And I understand that
you have now stated publicly just in the past year or so that
the Commission's approval of the California plan was a mistake.
Is that true?
Mr. Massey. You know, hindsight is 20/20, but I do think it
was a mistake, Senator.
Senator Craig. That is the question or at least the line of
questioning I want to pursue for the next moment about
hindsight and also awareness of the time. I appreciate your
acknowledgement. I think I agree that California's wounds were
self-inflicted. They may have been signed by a Republican
Governor. They were voted out by a Democrat legislature. So it
is a bipartisan dysfunctionalism.
It is not to suggest that any one group had authority other
than there were an awful lot of people, though, Commissioner
Massey, that were out there in the marketplace with great
knowledge saying it was a bad idea. We had people who came
before this committee during the height of the California
crisis who had been before this committee prior to it saying,
wrong idea, California, do not go there. But they did.
And I guess my question is, was any attention brought to
you as it related to the California plan before you signed off
on it?
Mr. Massey. It was certainly well debated before the
Commission. The argument that weighed heavily on the Commission
I think was this is what a major region of the country wanted.
They were first movers. This was a plan that they had devised
with extensive proceedings, and the Commission essentially, in
the interest of regional deference, approved it. It clearly was
a well-intentioned plan, but a plan that relied almost
exclusively on short-term contracts, which I think we certainly
understand now was a huge mistake. So I do not blame the people
of California. There is plenty of blame to go around for all of
this.
Senator Craig. Did you have staff on the FERC provide you
with arguments that would argue contrary to the plan?
Mr. Massey. Yes. There were members of our staff that were
concerned about it. There were members of our staff that liked
it very much. There was a debate about whether there ought to
be a separate ISO and power exchange created. That was one of
the big arguments. There was a debate on whether a short-term
contract market would function well. There was a debate on
whether there were sufficient consumer protections.
But I think the argument that persuaded the commission was
that this was a market design that this major region of the
Nation wanted, and the commission approved it. I think it was a
unanimous vote.
Senator Craig. Did you find any merit in any of the
comments filed by the intervenors raising concern about the
California plan before you voted?
Mr. Massey. Yes, I did find merit to their concerns.
Senator Craig. My frustration here, Mr. Massey, is not with
just you. It is with all of you before us today. You looked at
a plan and you signed off on it. It is probably going to go
down in history as the greatest dysfunctional marketing plan in
the history of this country for electrical energy. And now you
are coming forth with a new idea and saying, buy this,
Congress; buy this, consumer. We just got through signing off
on something that did not work, so let us try this one.
And now you are out finding that there were those who could
abuse and did abuse. Most did not but some did. We are going to
hear from California and Washington on those who did as if they
were the whole, and they were not the whole. There was a great
disparity in supply also. But the plan was dysfunctional.
I guess my frustration is when do you know what is right,
especially if you centralize that authority, as California did,
and do so in a way that forced everybody to a short-term
market, could not allow the flexibility that the market would
have otherwise by a prudent investor demanded.
Is it true, Commissioner, that before the--for the past 6
years, there has been a constant chorus of concern raised by
the FERC staff and the intervenors about the California market
structure.
The Chairman. Before you answer that, let me just say,
Senator, could you be here?
Senator Craig. Yes. My time is out. So let us do this and
then we will move to the others.
The Chairman. Will you get another round and I will be
right back?
Senator Craig [presiding]. Yes.
Mr. Massey. There has been a constant chorus of concern,
and arguments on the other side that it would work. It worked
generally well until May 2000, and then it went totally out of
control. I appreciate and respect your outrage about that.
I simply say that we have learned from our mistakes I
believe. I certainly have. I will never again vote for a market
design that relies exclusively on short-term contracts. I will
not vote for a market design that does not contain sufficient
anti-manipulation provisions. I will not vote for a market
design that can be easily gamed and manipulated, that does not
have customer protections built in, and I will not vote for one
that is not adequately monitored. And I do not think my
colleagues will either.
All I can say is from this very, very painful, outrageous
experience, we have learned a lot. That may not provide much
comfort, but I think we have learned a lot and I think we need
to ensure that this never again happens.
Senator Craig. Thank you.
Let me turn to Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman.
Mr. Wood, I am confused by apparently a statement you made
yesterday that you did not believe that long-term contracts of
Northwest utilities should be reformed because they did not
meet the public interest test. Again referring to the chapter 5
that is very explicit, in your conclusions from staff, it says,
if as we maintain in earlier chapters, spot power prices were
distorted, these results imply that price distortion flowed
through to forward power prices, particularly those for
contracts of 1- to 2-year time delivery. I think in your last
statement you might have reaffirmed part of that.
My question is I asked you at a previous hearing whether in
market-based rate contracts where FERC had never reviewed the
contract for its just and unreasonable--in the first place,
that the Federal Power Act standard should apply, not the
public interest standard. And you said on the record, ``In that
case, you would have an unjust and unreasonable standard.''
Do you stand by that testimony, Mr. Wood?
Mr. Wood. I remember when you and I had that colloquy,
ma'am, and I think the important issue that was not repeated
just now was what the parties had actually negotiated for. I
think that is where we have some different interpretations
among the three of us. But if there is not a provision in there
between the negotiating parties that indicates what standard
ought to be applicable, then yes, I think the default would be
a just and reasonable standard. Now, if the parties have
provided otherwise, I think certainly that controls.
Senator Cantwell. So a contract that did not say that it
should be in the public interest, you should use the Federal
Power Act of just and reasonable.
Mr. Wood. A contract that did not have language that
indicated how the parties agree changes to the contract ought
to be handled should be handled as a just and reasonable type
standard. Yes, I said that.
Senator Cantwell. So what is the problem then moving
forward? Why did not yesterday, given the conclusions of the
report--your statement apparently was long-term contracts of
Northwest utilities should be--you did not believe that they
should be reformed because doing so would not meet the public
interest test. What did yesterday's statement then mean?
Mr. Wood. Yesterday--did we have any Northwest----
Senator Cantwell. Those were your comments at yesterday's
meeting----
Mr. Wood. I do not think I limited that to a Northwestern
contract. To a short-term contract, which there were a few
yesterday before us. There were a few, but there were quite a
few that were outside the 1- to 2-year window, and I take this
evidence that the staff put out and it said basically this
matters as to the shorter-term contracts, this linkage between
the dysfunctional spot market and a long-term market. This
matters on the 1- to 2-year contracts. There were a number of
contracts before us yesterday that were quite a bit longer than
that. So I did not take the recommendation here into
consideration on those contracts. That was not the findings
that we asked our staff to go do.
Does manipulation matter as to a short-term contract? Yes.
In fact, we----
Senator Cantwell. I do not understand why it would even
matter. You have the Federal Power Act before you as a body who
is supposed to be upholding it. It says use the unjust and
unreasonable standard, and you are playing hijinks by trying to
say that the Sierra/Mobil case that is a totally different case
and different standard--now all of a sudden, you are going to
apply the public interest standard, a much higher legal
standard, and say that these long-term contracts cannot meet
that standard.
Mr. Wood. Actually, that is not what I said yesterday and
it is not what I have said today and not what I said last time.
I think--and I think we are all a little different on this
still--that if the parties agreed as to how their contract
ought to be handled, that controls. If they are silent on that,
then we use the just and reasonable standard.
Now, a number of these contracts did have how the parties
think that these--as we found. We asked our judges to go in and
find what do these contracts really mean, how should we
interpret those. Did the parties agree that a higher standard
ought to apply or that a lower standard ought to apply?
At the time we discussed that before, I did not know the
correct answer to that. We sent that to a judge. The judges
investigated the parties' intent when they formed the contract,
and then we got a number of those back yesterday.
Senator Cantwell. Mr. Massey, do you have a comment on
this? Because I do not even know why we would have a Federal
Energy Regulatory Commission and a Federal Power Act that said
that your job and responsibility is to protect consumers
against unjust and unreasonable rates if then in every contract
that was negotiated, you could come up with some higher legal
standard. Why would we even have FERC then if that was the
case?
Mr. Massey. Senator, I agree that the default standard for
the Commission ought to be the standards set out in the Federal
Power Act, which I was just looking at. ``All rates and charges
made, demanded, or received by any public utility, all rules
and regulations shall be just and reasonable, and any such rate
or charge that is not just and reasonable is hereby declared to
be unlawful.'' I think we ought to stay firmly tethered to
that.
There is case law indicating that under certain
circumstances the public interest standard ought to apply, and
that is what we are struggling with.
Senator Cantwell. In that case, Mr. Massey, just to review,
prior to the deregulation of market-based rates, when you were
doing rate case approvals--and in this particular case, the
Mobil/Sierra--Mobil/Sierra wanted to come back and charge
higher rates. FERC had reviewed the contract to begin with and
said it was just and reasonable. The court then came in and
said, well, if the basic utility wants to charge a higher rate
to consumers, they are going to have to show that it is in
public interest because the FERC has already reviewed this as
just and reasonable.
Then taking that decision by the court and trying to white
wash all that has happened, the abuse to ratepayers, by now
trying to have the public interest standard, saying that we in
the Northwest have to meet the public interest standard or we
are not going to get any relief from this market corruption is
just absurd.
Mr. Massey. Senator, I think there is a good argument that
the Mobil and Sierra standards do have their strongest
applicability in a cost of service regime in which the contract
has actually been approved by the Commission as just and
reasonable. In that circumstance, it might make sense to change
it, to say, well, we have to find that this contract----
Senator Cantwell. That is not this circumstance.
Mr. Massey. True. It is not. I am trying to agree with you
on this. I think you raise a very good argument, a strong
argument, and I think we ought to take that into account.
Senator Cantwell. Well, count me as one legislator who is
not going to be fooled by this hijinks of a higher legal
standard. I do not care if we go all the way to the D.C. or the
Supreme Court on this. We passed a law in this country to
protect consumers. It was called the Federal Power Act. It set
out your specific responsibilities. It said that those
responsibilities were to determine whether rates were unjust
and unreasonable. You, Mr. Wood, have agreed in testimony
before this committee on two occasions that you believe that
that is the standard. Please apply it.
My time has expired, Mr. Chairman.
Senator Cantwell. It has?
Let me turn to Senator Feinstein.
Senator Feinstein. Thank you very much.
Mr. Chairman, I must say I agree with you about the fact
that the 1996 California deregulation law was deeply flawed.
However, that law did not provide for ``get shorty'' or ``death
star'' or ``ricochet'' or ``megawatt laundering'' or ``fat
boy'' or any of these schemes, schemes that were fraudulently
devised by traders to game the marketplace. In the evidence put
forward by California, there are new names: ``curious and
George,'' ``red and green,'' ``hungry and hippo,'' ``James and
Dean,'' ``Chinook and the Atlantic.'' All these games were
called free money. Free money.
A Mirant trader summed up the scheme: ``I mean, it's just
kind of loop to looping, but it's making money.'' For shame.
The evidence made public yesterday also shows that,
according to the California parties, the largest energy
suppliers in California shared non-public information through a
third party company called Industrial Information Resources.
Traders called this company ``The Mole.'' This company detailed
non-public information on daily plant outages, essentially
giving energy companies insider information on when an
unplanned outage could transform an energy shortage in
California into a stage 3 energy emergency, or a blackout.
My question is, why did the Commission not immediately
refer this to the Attorney General and ask them to look at
possible antitrust violations?
Mr. Wood. We addressed that particular claim in our refund
order that we did put out yesterday, Senator. It turns out that
that information was provided by the independent system
operator to a public data clearinghouse which made that data
available. For example, the data of the outages across the
entire West, when they are scheduled to be back. That is
actually published in trade publications that people can
subscribe to. The Commission does that as well.
We will certainly follow up on that, but the initial take
was that information was being provided by the independent
system operator not by the individual utilities. So there is
not the collusion issue there.
Senator Feinstein. I am not really concerned with who
provided the data. Is there such a publication called ``The
Mole,'' which is an insiders' publication, which alerts people
when they can take advantage of certain market conditions? Yes
or no. Either that publication exists----
Mr. Wood. I do not know the answer to that, Senator.
Senator Feinstein. You do not?
Mr. Wood. I do not know that. What we looked into was the
allegation that the--what was the company, Nora?
Ms. Brownell. I cannot remember the name of it.
Mr. Wood. Industrial Information.
Ms. Brownell. The company that was referred to--and this is
preliminary research because this information all just came in.
I actually went to the Internet. It looks like a fairly major
data provider that provides information in a number of
industries, including the gas industry, the electric industry,
about things like factory outages, generation outages. I think
it does need further investigation, Senator.
I could not find any suggestion of something called ``The
Mole.'' It looked like kind of a casual reference. There may be
more to it than that, but I can actually get you the Internet
site.
Senator Feinstein. All right.
Let me ask another question. According to the California
parties, the evidence made public yesterday suggests that
energy companies may have intentionally destroyed documents to
cover up fraud in the Western energy market. An ex-Mirant
employee disclosed that he was instructed to delete certain
files relating to these energy markets from hard drives, and
key executives were instructed to turn in their laptops so
Mirant could clear their hard drives.
Could you tell me if FERC has referred this matter to the
Justice Department?
Mr. Wood. Not at this time. The reply evidence came in last
week, and that is this host of issues that we are actually
working on now and expect to move forward on in April. If it is
appropriate for criminal issues, yes, ma'am, we would
certainly, as I indicated yesterday to a reporter's question,
refer those to the Department of Justice.
Senator Feinstein. Does it, Mr. Wood, make sense to
establish the same penalties and refund authority under section
S of the Natural Gas Act to deter fraud and manipulation in the
natural gas sector since FERC found yesterday that markets for
natural gas and electricity are inextricably linked?
Mr. Wood. Yes, ma'am, and for that reason I endorsed that
approach in today's testimony even though it was supposed to be
focused on electricity.
Senator Feinstein. Just two quick questions, if I may, Mr.
Chairman, on the proposed electricity title. These would be new
regional regulators encompassing several contiguous States.
My question is, will the creation of these regional energy
service commissions further balkanize our energy markets? Can
you comment on the difficulty of creating and organizing these
new regional commissions?
Mr. Wood. I think certainly the size would matter. If you
had a large one that covered perhaps the whole West as, for
example, our current market mitigation plan covers the entire
West, if there was a regulatory body that was that big, I could
see some good issues there. I think the restriction of being at
just 5 percent would create a balkanization. I do think it has
just got to be sufficiently broad to cover the necessary area.
And when you need 13 States to agree on that, I do think it is,
as a practical matter, going to be difficult to get there.
There is balkanization potential certainly. I would not
discount that.
Senator Feinstein. See, I am not so sure that this is not a
good idea. One of the things I have learned back here is that
what happens inside the Beltway is very different from how
people think in the Western part of the United States. There is
a big tendency here to play inside baseball and not to really
understand the rest of the country. The east coast is very
different from the west coast. It may well be that a regional
commission would be much more responsive to Western needs
because--I think you all know this--it has been pulling teeth
to get FERC to do its job.
He is nodding.
Mr. Massey. Senator, I respect your frustration that you
have stated very eloquently. My own view is that the best
solution here is for FERC to do its job well as an overseer of
wholesale markets in interstate transmission, do our job in a
way that westerners broadly respect and trust.
Senator Feinstein. One last question, if I might.
As I understand it, the regional service commissions would
be created when States come together to forge a compact and
draw up a charter. If we did proceed along those lines, do you
believe that the Department of Energy should draw up the
minimum standards that a compact has to meet before it is
approved?
Mr. Wood. I think that would be appropriate. I do think
just a compact without maybe a little bit of structure there
might be difficult. So I think that is appropriate. The
Commission could do that as well.
Senator Feinstein. Thank you very much.
Mr. Chairman, I would like to submit my letter to the
Attorney General asking for an investigation for the record.
Senator Craig. Without objection.
[The letter of Senator Feinstein follows:]
United States Senate,
Washington, DC, March 26, 2003.
Hon. John Ashcroft,
Attorney General of the United States, Department of Justice,
Washington, DC.
Dear Attorney General Ashcroft: Now that the Federal Energy
Regulatory Commission (FERC) has lifted its ``Protective Order'' and
has allowed the public to review evidence of market manipulation in the
Western Energy Market, I am writing to ask the Department of Justice to
fully investigate and prosecute possible violations of anti-trust and
fraud statutes by energy companies.
The State of California has filed thousands of pages of new
evidence at FERC that further demonstrate how these incidents of fraud
and manipulation were not isolated events attributable to a few rogue
energy traders. Instead, the documents provide substantial evidence
that energy companies engaged in well-established and coordinated
strategies to deliberately withhold electric power and natural gas at
critical moments during the Western Energy Crisis in a concerted effort
to boost company profits.
The filing at FERC shows that there was a coordinated attempt by
energy companies to manipulate the Western market and to drive prices
up by engaging in the following schemes:
1. Withholding of Power--driving up prices by creating false
shortages.
2. Bidding to Exercise Market Power--suppliers bid higher
after the California ISO declared emergencies, knowing the
State would need power and be willing to pay any price to get
it.
3. Scheduling, of Bogus Load--suppliers submitted false load
schedules to increase prices.
4. Export-Import Games--suppliers exported power out of
California and imported it back into the State in an attempt to
sell power at inflated prices.
5. Congestion Games--suppliers created false congestion and
were then paid for relieving congestion without moving any
power.
6. Double-Selling--suppliers sold reserves, but then failed
to keep those reserves available for the ISO.
7. Selling of Non-Existent Ancillary Services--suppliers sold
resources that were either already committed to other sales or
incapable of being provided.
8. Sharing of Non-Public Generation Outage Information--the
largest suppliers in California shared information from a
company called Industrial Information Resources that provided
sellers detailed, non-public information on daily plant
outages.
9. Collusion Among Sellers--sellers were jointly implementing
or facilitating Enron-type trading strategies.
I strongly believe the Department of Justice must investigate
possible anti-trust violations by energy companies as detailed by the
California parties in their brief. Allowing competitors to share non-
public information on plant outages through Industrial Information
Resources that traders called ``the mole'' seems to be an anti-trust
violation on its face. As the California parties state, ``even in the
absence of a price fixing agreement, the exchange of price or output
information can itself violate the Sherman Act as an unreasonable
restraint of trade, if it causes anticompetitive effects.'' How can it
be lawful for traders to obtain information from their competitors
through an intermediary like Industrial Information Resources?
Furthermore, I urge that your department vigorously investigate the
new evidence of intentional document destruction cited in the filing at
FERC. During the 100-day discovery process, an ex-Mirant employee
disclosed that he was instructed to delete certain files relating to
the California markets from hard drives and that key Mirant executives
were instructed to turn in their laptops so that Mirant could clear
their hard drives. Similarly, a City of Glendale employee told an ex-
Glendale employee that he could destroy one of the documents that
contained information about Enron's gaming strategies.
I would like to ask the Department of Justice to use its
investigative and subpoena powers to conduct a thorough review of the
market abuse by energy generators, suppliers, and traders in the
Western Energy Market. The mountain of evidence submitted to FERC
requires a complete and thorough investigation to ensure families and
businesses see an end to fraud and manipulation in our energy markets.
Thank you for your consideration of this request.
Sincerely,
Dianne Feinstein.
Senator Feinstein. Thank you and I thank you all. Thank you
very much.
Senator Craig. Thank you very much, Senator Feinstein.
I have a couple of more questions here and the chairman
should be returning shortly to conclude this.
Let me ask a question of all three of you. Senator Cantwell
was discussing it some a few moments ago, and I wish she were
still here.
Part of your work yesterday addressed the issue of contract
sanctity, but also without any final resolution. In my opinion,
unless a contract provides otherwise, it should be overturned
only upon the application of the highest standard of review,
the public interest standard. And I say that because of an
awful lot of court action over the years about the sanctity of
contracts. To treat them otherwise, I think undermines the very
sanctity.
Do you agree or disagree with that statement, Ms. Brownell?
Ms. Brownell. Senator, I agree. I think it is critical to
the functioning of the economy in this country.
Moreover, I would add that we need to look at the totality
of circumstances in which each of the buyers was also a seller.
Some of the complainants who are complaining about contracts
were selling and they were selling into the marketplace, as I
said, for $1,100 a megawatt hour. That is a non-jurisdictional
entity. Two-thirds of the people in the marketplace perhaps are
under our jurisdiction. So do we, whether it is J&R or public
interest, abrogate contracts for some and not all, particularly
those who were selling at the kind of elevated prices like
that?
I think that one must, when we talk about the totality of
the circumstances, which is what the public interest standard
tells us to do, look at those facts of the marketplace, more
importantly, look at the real impact on that marketplace. The
premium that the West would pay if we abrogated contracts today
would be for the next 50 or 100 years and would far exceed even
perhaps that $1,100 gouging price.
Senator Craig. Mr. Chairman?
Mr. Wood. I think under whichever standard you review, as
we indicated when we sent these to hearing, whether it is the
just and reasonable or public interest standard, it is a very
high burden to overturn a contract entered into. I think I just
would echo Nora's issue. As we talked yesterday, when those
issues come before us, we do have to look at the totality of
the circumstances, but I do think it is something that we have
to really wander into very carefully, if at all, for the
reasons she laid out.
Senator Craig. Mr. Massey.
Mr. Massey. Senator, in Order 888, which went to the D.C.
Circuit and the Supreme Court, the Commission said--I just
reread it before I came over here--that the standard that we
should apply is, generally speaking, the just and reasonable
standard unless the parties specify a higher standard. The
court decisions I find to be really all over the lot on this
question.
In the proceeding before us, I am very concerned about the
impact of manipulation on the long-term contracts. I also want
to respect the sanctity of contracts, but I want to ensure that
they are negotiated in an environment free from manipulation
and market power.
So I am struggling with this. It may be that at some point
the just and reasonable standard and the public interest
standard merge, and I am thinking about that concept. But I
certainly respect your views on this issue.
I am inclined to think that the Commission can reform some
of these agreements and probably should, applying either the
just and reasonable standard or the public interest standard,
because it seems very clear to me that many of these contracts
were infected with the taint of market manipulation. That
greatly concerns me.
Senator Craig. Thank you.
Commissioner Brownell, a couple more questions I would like
to ask of you. In discussing regional differences, do you view
the exporting of electrical power from a low cost region and
the resulting increase in the cost of electrical power to the
low cost region as a meritorious basis for opposition to SMDs?
Ms. Brownell. I believe if that were the outcome to
consistent market rules, yes, I think that would be a very real
reason, particularly if I were a State commission. We have
talked at some length about how to preserve that low cost
power. I wish we had had it in Pennsylvania, frankly, because
we were among the highest in the country. So I certainly
respect that as an economic opportunity for the State and the
region as a whole. I think that there are many ways to protect
that low cost power, including long-term contracts. We have
talked today about native load and have been talking within the
agency before the white paper how to ensure that that native
load is protected. So if I thought that were the outcome, sir,
I would not be a proponent of regional market designs that were
consistent and transparent.
Senator Craig. The reason I asked that question of you is
because I see that as the ultimate test and the fear that many
of us have by what you may be attempting to do--and I say
``may.'' I am willing to look at your final work product,
obviously--is a nationalizing of the costs of generation and
transmission. For those in Idaho who have worked mightily hard
to keep energy costs down, blessed by resource, but also by I
think reasonably wise decisions over an extended period of
time, they are fearful of the idea that the FERC by design is
going to do just that, nationalize the general cost of
generation and transmission. The regional advantage is gone,
obviously, by that. And it infers an indirect tax, if you will,
levied by the FERC against those who are least-cost producers
certainly by the outcome of design.
I think that is the ultimate test that those of us in the
Pacific Northwest and those in the South, Southeast, and a few
others are going to put before you. And if you do not make that
test, you fail.
Ms. Brownell. Senator, I have said publicly, as this
oversight committee has raised these issues, that you are doing
your job to hold me to do my job, which is to do what is in the
best interest of the customers without compromising the local
advantages. I would be the first to say that that economic
advantage and the behavior and the leadership that the Idaho
commission has shown to give you and keep those low cost
opportunities ought to be preserved.
We have also talked a lot about cost causers, and to the
extent that we allocate costs appropriately, we should not in
any way jeopardize those who have done their jobs. That is not
the intent, nor do I think that is the outcome.
I respect, in fact, the job you are doing in kind of
holding our feet to the fire in asking those questions, and if
we cannot answer them, well, then you ought to say no.
Senator Craig. Well, I thank you very much. The chairman is
back and I will give my time back to him. But I want to say in
his presence because he has been very helpful and helped lead
in this, you have our attention. We simply hope we have yours
because if we do not, there is more to come. We will ultimately
get it if we do not have it now.
Thank you all very much for being here today.
Mr. Wood. Thank you, Senator Craig.
The Chairman [presiding]. Thank you very much, Senator. I
do not know what I missed, but it looks like it was a lot.
[Laughter.]
Senator Craig. Not really.
The Chairman. The air is kind of stern.
Senator Craig. No.
The Chairman. In any event, I want to thank you again for
being here.
It is a tough issue. Just because I am smiling does not
mean I do not think so. I think it will be very hard to put
something together, but I do not think that means we are going
to default out. We are going to do something to make sure that,
as you go through this, you do some things that are the way we,
the Congress, collectively think you ought to do them. You will
not have all the liberty and freedom you have now to act. Let
us hope that when we do that, what we force you to come up with
that way is better for the people than what you would come up
with otherwise.
That is a bit presumptuous, but that is what we are for.
After all, you do work for us in a sense, not the reverse. You
work for the people, but you do not have any power if we do not
give it to you.
So having said that, just kind of a technical question. It
had something to do with bundling and non-bundling. Where is
the question?
There are some who advocate, Mr. Chairman, legislating a
jurisdictional delineation between bundled and unbundled
transmission. What are the advantages and disadvantages?
Quickly.
Mr. Wood. I think some clarification of that might actually
lift a big cloud over this whole debate, and on that and those
other four issues I mentioned to you at the beginning, Senator
Domenici. Certainly I think if the Congress, which has this
fortuitous opportunity with the bill open to nail down the
parameters--I think that will really elevate the debate among
all the market participants to the solutions as opposed to the
jockeying and kind of this stagnation that we have been in for
the last 6 months. So we would be glad to provide any input to
the committee or to you on that issue.
The Chairman. I thank you very much. I was going to say
there is not any question in my mind that the California
situation cries out clearly for fixing. Certainly statutes were
drawn wrong. Legislation was impropietious, and people did
things wrong. I am hopeful that, whether you were there when
they did it and you were not, you will use every bit of your
discretion to see that it is corrected to the extent that what
is past gets fixed, those who are responsible, if responsible,
get so found, and justice is done to the extent that you all
are involved. I assume that is what California wants and I join
with that using my own way of describing it.
Thank you very much. We will see you soon. As we draft
things, we will be in touch with you and your staff.
We stand adjourned.
[Whereupon, at 4:43 p.m., the hearing was adjourned]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
Public Utility Law Project,
Albany, NY, April 14, 2003.
Hon. Pete V. Domenici,
Chairman, Senate Energy and Natural Resources Committee, Dirksen Senate
Office Building, Washington, DC.
Re: Follow-up Questions to Witnesses at March 27, 2003 FERC Oversight
Hearings
Dear Senator Domenici: I again wish to thank you and the Committee
for providing the opportunity to testify for the National Association
of State Utility Consumer Advocates (NASUCA) at the March 27, 2003
oversight hearings regarding proposals to modify the Federal Power Act.
Because the primary purpose of the Federal Power Act is to protect
consumers, NASUCA particularly welcomed this opportunity to share its
views. On matters where NASUCA had not taken positions, I also put
forward my views for the Public Utility Law Project (PULP).
Your letter dated April 3, 2003 invites witnesses to respond to
follow-up questions from the Committee. As NASUCA has not taken a
position on these issues, I will offer my comments for PULP.
Very truly yours,
Gerald A. Norlander, Esq.,
Chairman, NASUCA.
Responses to Questions From Senator Campbell
Question. It seems that, in many ways, SMD actually undermines
electricity deregulation efforts. Would you agree that current SMD
regulations allow FERC to greatly increase its size and power; in
effect making it the centralized planning agent for the entire
electricity sector?
Answer. NASUCA has not taken a position regarding the FERC SMD, and
so I will state below my opinion.
States that did not ``unbundle'' the generation and transmission
aspects of electric service presently fix full service rates for retail
electric consumers. These full service ``bundled'' rates necessarily
include a transmission component. The proposed SMD regulations would
require control of all transmission assets to be turned over to
Regional Transmission Organizations (RTOs) or ``Independent
Transmission Providers'' who would operate private spot markets to set
rates for wholesale energy and for transmission, including the
transmission component of bundled rates.
NASUCA members from ``bundled'' states filed comments questioning
the FERC's power to adopt the proposed SMD rules, raising concerns that
rates for ``native load'' consumers will be increased or destabilized
if the transmission portion of the rates, and short term energy
transactions, is to be set in new private spot markets operating under
FERC rules.
NASUCA members from some ``unbundled'' states whose utilities
joined voluntary RTOs filed comments on the proposed SMD regulations,
also raising concerns. These concerns include, for example, market
monitoring and resource adequacy planning by RTOs.
Under the SMD, rates might be considered to be ``deregulated''
because they would no longer be filed subject to FERC review for
reasonableness, and instead will be set in the private markets designed
and approved by the agency. Oversight of these newly proposed markets,
however, would require additional market monitors at those markets and
additional oversight by the FERC. Thus, what is being proposed by the
FERC is not ``deregulation,'' but a system which relies on market
results to set rates.
Question. According to a private study conducted for a state task
force, if Colorado's electricity market was opened to competition,
electricity prices in Colorado would go up to more closely match rates
in other Western states. Currently, Colorado ranks in the top quarter
of least expensive states for electricity prices in the nation. Denver
is one of the top five least expensive cities in the nation when it
comes to electricity prices. However, SMD does not guarantee rate
reductions for anybody. In fact, by changing regional rules to match
those in the northeast, it might actually raise rates for some areas.
How does SMD account for regional differences in electricity markets?
How will this specifically affect western state utilities and their
customers?
Answer. NASUCA has not taken a position regarding whether the FERC
SMD adequately addresses state and regional concerns. A ``white paper''
to be issued by the FERC may contain revised interpretations of the SMD
proposal, or may point the way to revision of specific SMD rules in
response to state concerns.
Question. Many statements have been made that California's recent
electricity crisis was a regional crisis. I know that when California
needed or wanted water they got water from Colorado, now when they need
power are they going to take Colorado power? What impact will
California's current problems likely have on Colorado and the other
Rocky Mountain states?
Answer. NASUCA has not taken a position on this issue. Events such
as power plant outages occurring in one area of a synchronous regional
electric power grid will affect other areas because, under the laws of
physics, generation and load must be instantaneously maintained in
balance. For this reason NASUCA has supported legislative proposals to
reinforce the voluntary grid reliability standards established by NERC.
It is my understanding that while the causes of the California
price and reliability crisis in 2000 and 2001 remain under
investigation, there is an emerging consensus that it was due in
significant part to manipulation or gaming of short-term natural gas
and electricity markets.
______
Response to Question From Senator Graham
Question. Economic dispatch has been discussed as an approach to
facilitate the procurement of least cost power in the wholesale
marketplace. What is your opinion of this concept?
Answer. NASUCA has not taken a position on this question.
Economic dispatch--using the most efficient resource to meet the
demand for electricity--advances the important societal goal of energy
efficiency. For many years economic dispatch, tempered by environmental
concerns, has been an operating principle of cooperative power pools.
In some areas of the country, power plant output is now directed by
RTOs. These entities dispatch power from electricity generating plants,
based on physical conditions, contract commitments and a hierarchy of
price ``bids'' by sellers established in a uniform price spot market
auction. This auction system dispenses with filed rates based on costs.
A theoretical assumption is that if there is no market power, bidders
will offer the electricity produced at their plants at their marginal
cost, to avoid running at a loss and to reap the margin when their
costs are less than those of another seller who clears the market with
a higher price paid to all.
Mathematical game theory analysis, economics laboratory simulation
of spot market bidding behavior, and actual experience in the ISO and
RTO spot markets all indicate there may be significant deviation from
the assumption of competitive behavior and marginal cost bidding.
NASUCA has recommended that in those areas with RTOs there should
be strong measures against the exercise of market power, vigilant
market monitoring, and filing of cost data, so that sellers' spot
market bids may be compared with their operating costs. In this way,
the efficacy of the spot market auction mechanism in achieving economic
dispatch could be more readily assessed.\1\
---------------------------------------------------------------------------
\1\ ``The MMU [RTO Market Monitoring Unit] must have the authority
to compel collection from all market participants, including those with
bilateral contracts all relevant cost data, including, but not limited
to, short-run cost, fuel cost, unit heat rate, start-up cost,
environmental constraints, emissions allowances, evaluate the causes
for outages, analyze cost of capital additions and capacity addition
and upgrades, and fixed operation and maintenance cost. . . . The MMU
should have the authority to immediately report to FERC and recommend
refunds where prices depart substantially from marginal cost when in
the judgment of the MMU the price is the result of market failure or
market manipulation.'' Promoting Market Monitoring Functions Within
Regional Transmission Organizations (RTOs) Whenever Such Regional
Entities Are Created, NASUCA Resolution, June 19, 2002.
---------------------------------------------------------------------------
______
Responses to Questions Prepared by Neil Naraine
Question. Do you believe that Participant Funding combined with
Tradable Transmission Right at the discretion of a Regional
Transmission Organization (RTO), or a transmission entity authorized by
FERC would increase the capacity of the transmission system? Clearly
state your positions for or against this.
Answer. NASUCA has taken no position on this issue.
I believe the principle of participant funding is presently used to
allocate the costs of transmission system improvements where
investments are made primarily for economic reasons rather than for
grid reliability. Potential investors in transmission facilities
desiring assurance of cost recovery may prefer to connect generating
plants with load serving entities with dedicated lines under long term
contracts with stable rates.
The existing transmission system was built, and new capacity can
been increased, in areas without spot markets for tradable transmission
rights. Short term spot market price signals for use of congested
portions of the existing transmission system would not necessarily lead
to construction of new transmission facilities. Raising the costs of
using certain congested transmission links could lead to increased
construction of generation facilities (or reduced demand by
interrupting large users or their self-generation) on the deficit side
of a congested link, rather than construction of new transmission
system improvements. The possibility of generation solutions with
relatively short investment payback periods could deter investment in
transmission solutions that may have lengthier siting proceedings and
longer investment payback periods.
Question. There seems to be a widening rift between the States and
FERC on the FERC's plans for energy markets. If we continue this path,
we could be headed for years of litigation and no progress. What can be
done now to avoid this continuing rift?
Answer. NASUCA has not taken a position on this issue.
I believe some states lack confidence that the SMD spot market
models proposed by the FERC will work as intended to increase
reliability and lower costs. In the absence of national consensus for
changes in the Federal Power Act, the FERC will need to take
incremental steps with less downside risk to consumers.
Existing provisions of the Federal Power Act allow bilateral
contracts for wholesale electricity and transmission, usually for long
term service. Refinement of standard bilateral contract products and
terms, and rapid electronic posting by the FERC of approved contract
rates, may foster more transparent, supervised, bilateral markets at
the FERC.
In the spot markets, the FERC might ease concerns about market
manipulation and advance its apparent policy of marginal cost pricing
for short term wholesale energy sales by requiring generating utilities
to file marginal cost rates and to demand no more than their filed
rates in the spot markets.
Thank you again for this opportunity to respond to Committee
questions. Please feel free to contact NASUCA for its views on this
important subject.
______
Responses of John Anderson, Executive Director of the Electricity
Consumers Resource Council (ELCON) to Questions From the Committee
Question 1. Do you believe that Participant Funding combined with
Tradable Transmission Right[s] at the discretion of a Regional
Transmission Organization (RTO), or a transmission entity authorized by
FERC, would increase the capacity of the transmission system?
Answer. We are opposed to statutorily directing FERC to utilize
Participant Funding as the standard for allocating costs associated
with new transmission. We do not believe such legislation is necessary
since FERC already has the authority to implement Participant Funding.
In fact FERC, in its proposed Standard Market Design, stated that
participant funding would be a standard (though not an inviolable
standard) for funding new transmission. Decisions regarding funding of
new transmission are by their nature regulatory, not legislative, in
nature.
To repeat my prepared statement, as a practical matter, it is
nearly impossible to determine who will benefit from transmission
upgrades, and it is inevitable that such beneficiaries will change over
time. In addition, since nearly all stakeholders agree that new
transmission is necessary in some areas, I question why Congress would
adopt a plan such as Participant Funding that will likely retard the
growth of new transmission. All consumer groups and all non-utility
generators--the groups most likely to suffer if new transmission is not
built-believe that mandating Participant Funding will hinder, rather
than help, the construction of new transmission.
We do not see how tradable transmission rights in anyway change
this position (the issue of who should hold such rights, e.g.,
generators or end users, and how they should be awarded, is a debate
for another day). In fact if new transmission is built and congestion
is relieved, such rights would be worth less. And it is hard to see how
such rights could be traded, since generators would need to have such
rights over specific parts of the transmission grid (presumably
starting with their own point of generation). If anything, Tradable
Transmission Rights make the issue of Participant Funding more
difficult to implement and add nothing that this positive.
It should be noted that too often incumbent utilities have called
for Participant Funding as a means of protecting their own generation
when challenged by generation from non-utility generators. Without new
transmission, generation from other sources has often had a difficult
time getting on to a constrained grid. Mandatory Participant Funding
would exacerbate that situation.
As an aside, Participant Funding requires that the user who
``causes'' the need for new transmission to pay for the new
transmission. A valid follow-up question is whether the person who pays
for the new transmission then owns it.
Question 2. There seems to be a widening rift between the States
and FERC on the FERC's plans for energy markets. If we continue this
path, we could be headed for years of litigation and no progress. What
can be done now to avoid this continuing rift?
Answer. Years ago someone more clever than I said that the greatest
problem in dealing with electricity restructuring was not the issue of
``stranded costs'' but the issue of ``stranded regulators.'' It is
clear that the wholesale electricity market is interstate. The role
that some state regulators had (wrongly) assumed was theirs should in
fact be subsumed by federal regulators. Simply put, the transmission
grid is interstate, it needs federal regulation as guaranteed by the
``Commerce Clause'' of the Constitution, and state arguments that such
interstate commerce should still be subject to state regulation are
both wrong and anti-competition.
We believe Congress can--and should--pass legislation amending the
Federal Power Act clearly stating that the interstate transmission grid
is subject solely to federal regulation. Such a statement would end the
ambiguity and would make any litigation on the part of the states very
difficult to pursue.
State regulatory commissions would of course retain jurisdiction
over all retail issues, including intrastate lines (primarily utility
distribution lines) as well as siting of generation and transmission
pursuant to state law.
For obvious reasons, jurisdictional issues within ERCOT are unique
and my statement does not necessarily apply.
______
April 17, 2003.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: Thank you for forwarding to me questions for the
record of your Committee's March 27, 2003 hearing on various
electricity proposals.
Enclosed are my responses. If I can be of further assistance,
please do not hesitate to let me know.
Best Regards,
Pat Wood, III,
Chairman, FERC.
Responses of Pat Wood to Questions From Senator Campbell
Question 1. There seems to be a deep dilemma we are dealing with
here: while we are trying to bring open competition to certain
electricity markets, we are actively engaged in federal design of these
same markets. It seems that, in many ways, SMD actually undermines
electricity deregulation efforts. Would you agree that current SMD
regulations allow FERC to greatly increase its size and power; in
effect making it the centralized planning agent for the entire
electricity sector?
Answer. The Commission's goal in the SMD proposed rule is to lay
out a regulatory framework that allows the wholesale power industry to
transition from its heavily-regulated past to seamless, regional
markets for wholesale electricity, so that sellers can transact
throughout broad regions and customers can receive the benefits of less
expensive and more reliable electricity. The Commission is proposing to
establish common rules of the road for interstate transmission so as to
have a stable and workable platform for competition in electric power.
I believe that dependable, affordable, competitive wholesale energy
markets require three key elements: adequate infrastructure, balanced
market rules and vigilant oversight. The Commission is proposing a
comprehensive plan that establishes these elements as well as includes
regulatory backstop mechanisms to protect customers until truly
competitive wholesale markets are in place. This would not greatly
increase the size or the power of the Commission. Further, the
Commission does not want to be, and will not be, the centralized
electricity planning agent for the nation; however, markets are
becoming more regional and the Commission is proposing methods for
states and the Commission to collaborate on regulating regional
interstate commerce in electric power. The Commission is encouraging
the establishment of independent regional entities such as RTOs and
ISOs that will be operating the transmission grid and administering the
voluntary spot markets. This platform leaves plenty of room for
regional variation with regard to a variety of functions, including
transmission planning, resource adequacy, mitigation techniques and RTO
governance.
Question 2. Can you provide specific examples of any public power
system denying access to surplus transmission capacity to a requestor?
Please list the systems that have made such allegations and the systems
against which allegations have been made.
Answer. Because transmission owned by public power is not subject
to the Commission's jurisdiction under sections 205 and 206 of the
Federal Power Act, if a public power system with transmission did deny
access to its surplus capacity, the party denied may simply not report
this to the Commission. Consequently, the Commission is not in a
position to have a comprehensive list of such denials.
However, under section 211 of the Federal Power Act, which Congress
added in 1992, someone denied access by any transmission owner may seek
an order from the Commission to obtain access. The process is
considered cumbersome and is rarely used; for example, if one wants
access to a temporary power supply for the next few hours, days or
weeks, there is little incentive to begin a process that takes up to a
year or more to obtain access. Nevertheless, there have been a number
of section 211 requests brought to us for transmission access on public
power systems. These are:
Docket No. TX94-3, Minnesota Municipal Power Agency v.
Southern Minnesota Municipal Power Agency
Docket No. TX94-7, AES Power, Inc. (request for transmission
service from Tennessee Valley Authority)
Docket No. TX96-2, City of College Station, Texas (request
for transmission service from City of Bryan, Texas and Texas
Municipal Power Agency)
Docket No. TX96-6, Montana Power Company (request for
transmission service from Basin Electric Power Cooperative)
Docket No. TX97-6, Idaho Power Company (request for
transmission service from Bonneville Power Administration)
Docket No. TX97-7, Missouri Basin Municipal Power Agency
(request for transmission service from Western Area Power
Administration)
Docket No. TX97-8, PECO Energy Company (request for
transmission service from Oglethorpe Power Corporation and
Georgia Transmission Corporation)
Docket No. TX97-9, Cinergy Services, Inc. (request for
transmission service from Tennessee Valley Authority)
Docket No. TX98-2, Public Service Company of Colorado
(request for transmission service from Missouri Basin Power
Project, including its Project Manager, Basin Electric Power
Cooperative; Tri-State Generation & Transmission Association,
Inc.; Rocky Mountain Generation Cooperative; and Western Area
Power Administration)
Docket No. TX02-1, Pinnacle West Capital Corporation
(request for transmission service from Electrical District No.
Three of the County of Pinal and the State of Arizona)
Docket No. TX03-1, Mirant Las Vegas et al. (request for an
order directing Los Angeles Department of Water and Power,
Nevada Power Company, Salt River Project Agricultural
Improvement and Power District, and the United States
Department of the Interior, Bureau of Reclamation to establish
an interconnection between their transmission systems and the
Applicants)
Question 3. You participated in a symposium back in November 2002
sponsored by the Progress & Freedom Foundation. In that symposium, you
talked about capturing the victories of competition. I am concerned
that your SMD rule is going to capture a lot more than you intended.
You stated, ``there are parts of the country and parts of
individual small area that are not really competitive because of
natural geographic reasons or historic concentration of ownership. And
we've got to acknowledge that.''
How does the SMD, in your words, ``acknowledge that?''
Answer. By having special market power mitigation provisions for
what we call ``load pockets,'' the Commission's proposal acknowledges
that some areas of the country are not competitive yet. This is not
surprising, considering power competition was introduced in 1992 by the
Energy Policy Act reforms. ``Load pockets'' are areas where ownership
of generation is concentrated in the hands of a few sellers and where
insufficient transmission or geographic features--for example, being on
a peninsula--limit the ability to import power from outside the area.
The market power mitigation part of our proposal calls for limitations
on competitive bidding in loads pockets until the market power problem
is resolved and competition can serve as an effective discipline on
price.
Question 4. How does the SMD address Colorado's differences and
ensure that ratepayers are not going to be detrimentally affected?
Answer. Colorado utilities are different from utilities in other
states mainly by being part of larger organizations that traverse the
Eastern and Western Interconnections in the U.S. Past Commission
actions, as well as our proposed rule, would permit and encourage
different treatment for entities in the East and the West. By
accommodating Colorado's differences in this way, our proposal should
benefit Colorado customers by providing for well functioning markets
tailored to the needs of each region.
The electric utilities of Colorado are predominantly associated
with the Western Interconnection, where the Commission has already
approved considerably more latitude for regional differences than in
the SMD rule itself. By way of background, Public Service Company of
Colorado (PSCo) and Southwestern Public Service Company are now public
utility operating subsidiaries of Xcel Energy, which also includes NSP
Wisconsin, NSP Minnesota, Cheyenne Light Fuel & Power and Black
Mountain Gas Company. These utilities, together with other investor-
owned utilities and public power participants, are part of TRANSLink,
the independent transmission company operating under Midwest ISO. In
the order approving the TRANSLink proposal, the Commission noted that
facilities that TRANSLink would operate are located in the Eastern
Interconnection and would be part of the Midwest ISO; however, the
transmission facilities of PSCo are located in the Western
Interconnection. As a result, the Commission authorized the requested
transfer of operational control of PSCo's transmission assets to
TRANSLink with the understanding that the PSCo facilities will
participate in the western RTO formation process through TRANSLink.
Three RTOs are forming in the West: RTO-West in the Pacific
Northwest, the California ISO, and WestConnect in the Southwest. To
date PSCo has not joined one of these, in part because it must connect
to its western neighbors through the Western Area Power Administration
(WAPA), which has not yet firmly committed to join. However, WAPA and
PSCo are actively participating in WestConnect discussions of RTO
features and of the costs and benefits of establishing WestConnect.
For both the Midwest ISO and for the Western RTOs, the Commission
has approved many aspects of their RTO designs and committed that
specific approved design features that suit the unique characteristics
of each region would not be made subject to conformance with the
corresponding features of the SMD final rule. For the West in
particular, we have authorized a pre-existing western group called the
Seams Steering Group--Western Interconnection, known as SSG-WI, to work
out the features of a western market design that would meet the goals
of the SMD rulemaking. We committed that a satisfactory common western
market design developed by westerners through this process would not be
subject to the detailed market design provisions of the SMD final rule.
The considerable latitude for regional variation, especially in the
West, allows western stakeholders and state government representatives
to develop market rules that suit the different characteristics of each
region so that electric power customers in every region can buy
electric power at the lowest possible price.
Question 5. Your SMD assumes that competition benefits everyone.
Yet, some states have opted against opening up to competition. How can
SMD respect states' traditional authority while compelling them to do
something they have been unwilling to do all along?
Answer. The proposed rule only applies to matters affecting
interstate transmission and wholesale, not retail, power markets. Some
states have opened the retail service franchise to competition; others
have chosen not to. That is a state choice, and nothing in the SMD
proposal at all undermines the states' choices. Just as with wholesale
natural gas competition, benefits under SMD can be achieved by
customers in states with or without retail access. Utilities would be
able to buy electric power more readily to lower costs, or to sell
excess power for a profit and thus reduce rates for their own
customers. The SMD proposal accommodates state decisions to allow or
not allow retail competition.
Responses to Questions From Senator Craig
Question 1. In your July 24th testimony, you called the gas
pipeline system an example of a success story. Did the gas pipeline
system have ISOs or RTOs? Did the gas pipelines have Standard Market
Design? Rather, did not the gas pipeline system have better rates of
return than you give electric utilities? Would you not say that pricing
reform would make electric transmission a success story?
Answer. Because of the different operational and structural
characteristics of gas pipelines and electrical systems, RTOs and ISOs
are used for electrical systems, but not for gas pipelines. The
different operational characteristics include the much greater ability
of pipelines to physically control deliveries to the system and thus
the lack of loop flow considerations that affect electric utilities.
Finally, the gas industry has far less vertical integration than the
electric industry. RTOs and ISOs were designed, in part, to address the
potential for discrimination against other sellers that results from
the extensive vertical integration in the electric utility industry.
Order No. 636, the restructuring rule that applied to gas
pipelines, shares the same objectives as the Commission's proposal for
Standard Market Design. Both were intended to eliminate remaining
opportunities for discrimination against competing sellers and to
ensure a platform of changes necessary for well-functioning wholesale
markets.
Since I have been Chairman, the Commission has set returns for four
public utilities, and one natural gas company: Consumers Energy
Company, 11.77% equity return; Midwest Independent System Operator,
12.88% equity return; Northern Indiana Public Service Company, 10.39%
equity return; International Transmission Company, 13.88% equity
return; and Enbridge Pipeline, 11.83% equity return.
Thus, the average return on equity for electric utilities has been
slightly higher (12.23% versus 11.83%) than for the one gas pipeline
which has come before us since my tenure as Chairman.
Question 2. On January 29, 2002, you testified that the, ``Enron
collapse had little perceptible impact on the nation's commodity
markets (electric and gas) which are FERC's primary regulatory
responsibility.'' Would you agree then that the FERC does not need any
new authority over the commodity markets?
Answer. Generally, yes. As I explained in my March 27 testimony
before the Committee, however, I support some legislative proposals
that would modify the Commission's existing authority, on issues such
as civil and criminal penalties and refunds. In addition, some
legislative proposals would require the Commission to issue rules
establishing an information system, accessible by the public,
specifying the availability and price of wholesale power and
transmission services. I support such proposals because more
transparency is needed in the energy markets and customers should have
access to the broadest range of useful market information. I also
support a similar approach under the Natural Gas Act.
Question 3. On the March 26, 2001 broadcast of Frontline you said:
``I think the current regulated market reacts very well to
political pressure by large industrial customers who put pressure on
the utility and the regulator under the regulated environment to get
sweetheart deals, such as low rates and subsidized rates and
interruptibility rates that are low rates in disguise. So my general
response has been that the big guy is at the trough. Let the little
pigs get it, too. That's why I have been a strong advocate for getting
out of the regulated environment so I can go out and get a taste of
some of this low-cost power just like the big guys do.''
Would you say with Standard Market Design you are ``getting out''
of the regulated environment, when your SMD has 340 pages of preamble,
10 pages of regulatory text, 185 pages of the interim and Standard
Market Design tariffs and a proposed rule that takes over State rules
on reserve margins, forces divestiture of control to an independent
transmission provider (ITP) and describes the governance of an entity
in such detail that you prescribe the number of directors and even ask
whether the ITP CEO should have a vote on the board?
Answer. I made the referenced comments while I served as Chairman
of the Public Utility Commission of Texas, shortly after Governor Bush
signed legislation opening up the retail electric franchise to
competition for all customers.
The FERC's goal in the SMD proposed rule is to provide regulatory
clarity as the wholesale power industry evolves from its heavily-
regulated past to seamless, regional markets for wholesale electricity,
so that sellers can transact throughout broad regions and customers can
receive the benefits of less expensive and more reliable electricity.
In the current regulated environment, the regulator (whether state or
federal) makes all the choices with regard to pricing and new
infrastructure. In a market environment, the customers will have the
opportunity to choose the options that are most favorable for them. The
Commission is proposing to establish common rules of the road for
interstate transmission so as to have a stable and workable platform
for competition in electric power. To help get power sales at wholesale
out of the old regulated environment requires better oversight of
transmission in interstate commerce. Because power and transmission are
so closely intertwined, new transmission regulations are needed to
establish an appropriate platform for wholesale competition in the
electric power business.
As I have mentioned on several previous occasions, I believe that
dependable, affordable, competitive wholesale energy markets require
three key elements: adequate infrastructure, balanced market rules and
vigilant oversight. The Commission is proposing a comprehensive plan
that establishes these elements as well as includes regulatory backstop
mechanisms to protect the customers until truly competitive markets are
in place. As markets are becoming more regional, the Commission is
proposing methods for states and the Commission to collaborate on
regulating regional interstate commerce in electric power. The
Commission is encouraging the establishment of independent regional
entities such as RTOs and ISOs that will be operating the grid and
administering the energy markets. This platform leaves plenty of room
for regional variation with regard to a variety of functions, including
transmission planning, resource adequacy, mitigation techniques and RTO
governance.
Question 4. I agree with the premise of your statement that
regulation leads itself to political pressure and log rolling. Isn't
your SMD the product of political maneuvering by the new entrants whom
you seem to favor over the incumbent utilities on which you seem to
place the costs and burdens of SMD?
Answer. No. SMD is the product of the need to reform wholesale
power markets to provide greater benefits to customers. It is informed
by many months of open meetings and conferences with utilities,
customers, ISOs, new entrants, financial experts, academics and experts
from around the world about how best to support the movement toward
improved competition. SMD welcomes new entrants to the electricity
marketplace, but it does not favor them over incumbent utilities; in
fact, SMD seeks to provide a level playing field for all entities. All
costs are ultimately borne by customers, not utilities, so we must be
sure that the costs of reforms are reasonable for the benefits we
expect to achieve.
Question 5. Last November 12, you testified on the Enron scandal
that the FERC did not regulate the parent company, whose financial
chicanery led to the corporation's bankruptcy and the suffering of many
people, including hard-working employees who lost their pensions. Will
the Standard Market Design prevent financial scandals such as the Enron
debacle?
Answer. Standard Market Design would not prevent the financial
scandals that led to the collapse of Enron, which were due to
accounting and other financial practices. These practices are for the
Securities and Exchange Commission and other federal agencies to
address.
However, Standard Market Design would prevent the various trading
strategies that were allegedly used for market manipulation by
subsidiaries of Enron which operated in energy markets. The proposed
market rules would eliminate the market design flaws that were the
basis for these trading strategies. The strategies discussed in the
Enron memoranda were mainly tailored to take advantage of flaws in the
California market design, particularly its congestion management
system. Standard Market Design uses a different congestion management
system that would make most of these strategies infeasible. A few of
the strategies in the Enron memoranda appear to depend on the marketer
providing false information to the ISO. Thus, these strategies rely on
evading or violating the market rules rather than on market design
flaws. Standard Market Design addresses these types of strategies by
requiring an active market monitoring program (independent transmission
provider's Market Monitor and the Commission's Office of Market
Oversight and Investigation) that will detect violations of market
rules and take appropriate action against entities that violate the
market rules. SMD also would require that each RTO have in place market
power mitigation measures to prevent exercises of market power.
I should add that the Commission has already developed and
implemented rules outside the context of this proposal to increase the
clarity and transparency of market transactions. These rules--including
Order No. 2001, which directs quarterly public reports on all
jurisdictional electricity sales--will help market participants and
observers (including regulators) better understand and react to
changing prices and conditions in the marketplace, and increase
investor and participant confidence in the integrity of market
transactions.
Question 6. Is it not the case that when you arrived at the FERC,
utilities had filed for approval of regional transmission organizations
all over the country, but that since then, GridSouth and GridFlorida
that had obtained at least conditional approval fell apart because of
state opposition, the merger between Midwest ISO and Southwest Power
pool fell apart, the merger between New England and New York ISO fell
apart, long after PJM abandoned the Northeast market where it belongs?
Isn't it also true that PJM announced delay in its development and that
the Midwest ISO with whom you required PJM to merge may miss the
deadline you set? Why doesn't the Commission embrace the policies of
Order No. 2000 that seemed to work, over its efforts in SMD?
Answer. From its beginning, the Commission's rulemaking has been
intended to fill in the important details that Order No. 2000 did not
address. The industry and its customers have learned much from the
California experience and from the collapse of Enron. It is important
to reflect that current understanding in our rules. Shortly after I
joined the Commission in mid-2001, as we were processing a number of
Order No. 2000 compliance filings, it became apparent that we were
moving to approval of incompatible market design features, even in
neighboring RTOs. If there was any clear lesson the agency should have
learned from the Western Market crisis, it was the criticality of
getting the right set of market rules. However, at that time, rather
than moving forward to address critical market design issues head-on,
the Commission decided to direct parties in the South and in the
Northeast into mediation to form large single RTOs for those regions. I
supported that proposal as a solution to the balkanization problem that
was coming forth from the pending cases. Ultimately, however, for
various reasons, the two mediations made insufficient progress to allow
for healthy wholesale markets to develop. So, the SMD proposal, and the
highly public process in 2001 and 2002 that led to its development is
intended to get the Order No. 2000 RTO agenda, which is a good one,
back on track, not simply by approving filings, but by making sure that
they work well based on real world experience.
Response to Question From Senator Graham
Question. Economic dispatch has been discussed as an approach to
facilitate the procurement of least cost power in the wholesale
marketplace. What is your opinion of this concept?
Answer. I strongly support the concept of economic dispatch.
Economic dispatch has been used by each electric utility since the
beginning of the industry to provide the lowest cost power to its
customers. The SMD proposal would extend the basic concept underlying
economic dispatch from single utility scope to larger, regional scope.
Economic dispatch is simply the process of using the lowest cost
generator first, then the second lowest cost generator, and so on,
until the total amount generated meets the total electric demand on the
system at the time. Until recently, economic dispatch has been applied
within only one utility's system, and only for network resources, which
are primarily generators owned by that utility, aside from the three
major power pools of the Northeast. A typical utility owns many
generators dispersed throughout its service territory--and buys from
neighboring utilities--and also has customers at diverse locations
throughout its service territory. Because of this geographic
dispersion, transmission constraints affect economic dispatch. At some
point the next lowest cost generator cannot be used because
transmission limitations keep power at that generator from reaching
customers over lines that are already fully loaded by lower cost
generators. As a result, economic dispatch means using the lowest cost
generators that the transmission system will allow.
The SMD proposal would extend opportunities for economic dispatch
to a multi-utility region. Use of economic dispatch over a large region
with many utilities might seem at first to require a central authority
to decide how to use all the generators in a large region to meet the
region's total demand at lowest cost. But this is not the case if a
market is designed to simulate the results achieved by economic
dispatch. Where traditional economic dispatch relies on knowledge of
generator costs and transmission constraints, the market relies on
voluntary price bids as well as knowledge of transmission constraints
to reach about the same result.
The SMD proposal would require the provider of transmission
services to establish a spot market that collects bids from all willing
sellers and buyers at all locations in its region and, taking into
account transmission limitations, select the lowest priced generators
to satisfy the spot market demand of the region.
Let me emphasize that selling into and buying from this market is
entirely voluntary under the proposed SMD rule. I would expect that
most traditional utilities would continue to use their own economic
dispatch process within their own service territories to match their
own generation with their own load. However, under the SMD proposal
they would, in addition, have the opportunity to buy and sell
voluntarily across a larger region using a process very much like
economic dispatch so as to take transmission limitations into account
and lower costs for customers throughout the region. I would also
emphasize that, because a utility may be required by state law to use
its lowest cost generators first for its own customers, it can offer
left-over generating capacity into the spot market so as to lower
others' power costs without in any way taking the lowest cost power
from its own customers.
Responses to Questions From Senator Smith
Question 1. I realize you were not on the commission at the time,
it is my understanding that the FERC approved California's electric
restructuring before it was actually implemented. Given that, in
hindsight, this was a terrible market structure that enabled market
manipulation and is still harming the northwest economy, what makes you
so certain that FERC and the FERC staff have gotten everything right in
the standard market design proposed rulemaking?
Answer. The SMD proposal is specifically designed to combat the
well-known market rule flaws and structural shortcomings of the
California market using tools that are being used successfully in other
markets today. The following are a few specific examples:
The California market faced severe shortages of generation
capacity, largely due to obstacles to timely investment in
needed generation to keep up with growing demand and hydropower
shortages. The price signals produced under Standard Market
Design will provide appropriate incentives for investors to
develop electrical infrastructure (generation, transmission and
demand response), so long as state laws and regulations on
siting and resource adequacy, among other issues, will
accommodate such development. Other successful markets in the
U.S. and across the world have seen substantial new investment
in generation due to constructive state and local policies, as
well as clear market rules.
The California market design relied on a less sophisticated
method (a zonal method) for managing congestion that made it
profitable for sellers to manipulate the system in a variety of
well-documented ways. The SMD proposal uses locational price
signals and Firm Transmission Rights to eliminate the
profitability of these manipulation schemes. This method is
working is U.S. power markets today.
The SMD proposal recognizes that where sellers have market
power, mitigation measures must be incorporated into the market
design. Before-the-fact mitigation measures eliminate the need
for the type of after-the-fact refund proceedings and
litigation on contracts and market manipulation that followed
the Western energy crisis. These sorts of mitigation measures
are working in eastern markets today.
Unlike the California design, which required that most power
be procured through the California spot market, our proposal is
built on the reality that in today's power markets, about 90%
of energy is procured under bilateral contracts between
customers and their suppliers--outside the spot markets. Spot
markets under SMD are voluntary (unless you are long or short
in real-time), and they are intended to facilitate congestion
management on the transmission system and to provide a
mechanism to buyers to secure lower-cost resources than those
they own or have contracted for, when it is efficient to do so.
Because only supplemental power is likely to be obtained
through SMD markets, not the buyer's entire power supply needs,
the consequences of any market design flaw will be
significantly limited. This is a basic feature in all power
markets today.
The SMD proposal calls for each RTO to establish an
independent market monitor that would, among other things,
continuously monitor the market for design flaws and promptly
report any need for market rule adjustments to the RTO Board
and the Commission. To its credit, California had this feature
in its market design from the early days.
Finally, a critical difference between SMD and the California
market design of the late 1990s is that from the outset, the SMD
rulemaking process has been geared to adoption of the best practices
that are already working in the world's and America's markets. We have
found and incorporated what is working today in the wholesale markets
of the Eastern United States, Texas, Canada, Great Britain, New Zealand
and Europe, as well as features that make markets work better for
commodities, financial instruments and consumer goods. Virtually all of
the solutions we propose have been explored and recommended by groups
and authors ranging from President Bush's National Energy Policy to the
Western Governors Association and innumerable blue ribbon panels,
academics and public interest groups. SMD endeavors to bring these best
practices together in a comprehensive way that will benefit the
nation's energy customers.
Question 2. It seems to me that, in certain electricity market
structures, there seems to be an enhanced ability to game or manipulate
the market. Why would we want to pursue market structures that will
facilitate gaming?
Answer. It is true that some market structures create or enhance
the ability to game or manipulate the market, but other market
structures limit or eliminate such ability. Based on the lessons
learned in California and elsewhere, the Commission proposed the SMD
market design to reduce gaming opportunities to a minimum.
I should point out that gaming probably cannot be entirely
eliminated in any market design. Even under traditional cost of service
regulation, regulators throughout the last century were constantly
vigilant for attempts to improperly add assets to rate base, inflate
expenses, manipulate accounting rules, and so on. A market approach can
eliminate most of these gaming opportunities, but the need for
vigilance against new gaming opportunities remains. The Commission is
relying on strong market monitoring by the regional transmission
provider's market monitor and the Commission's Office of Market
Oversight and Investigations to ensure compliance with the market rules
and to detect new market manipulation strategies.
Question 3. Does the market oversight that would be required under
SMD require an activist FERC that is willing to intervene quickly when
market anomalies are suspected? How do we know that there will always
be an activist, rather than a laissez-faire Commission?
Answer. This Commission's commitment to prevent future market
abuses, and to remedy past ones, is now a firmly established part of
our agency's mission, and we will continue to strengthen our present
coordination with other federal agencies to ensure that we effectively
regulate energy industries so that customers and investors are fully
protected. The Commission has institutionalized market oversight by
creating the Office of Market Oversight and Investigations (OMOI),
which should assure that the Commission remains active in market
oversight. OMOI serves as an early warning system to alert the
Commission when market problems develop, and allows the Commission to
analyze and address any problems more quickly. We are also requiring
the regional market monitors to provide timely data to relevant state
regulatory officials so they can join with us in overseeing these
markets.
Question 4. Regarding ``Undue Discrimination'' Claims Underlying
Standard Market Design:
I want to focus on the FERC's legal basis for promulgating Standard
Market Design. The preamble to the proposed rule lists the categories
of alleged undue discrimination that the FERC wants to remedy through
SMD. These include:
Question (a). Native load--the FERC alleges that vertically
integrated utilities that have legal or contractual obligations to
serve retail customers discriminate when they use their transmission
grid for the benefit of these customers ahead of everyone else. Since
state laws require that utilities give priority to native load,
including load growth, and the FERC itself in Order No. 888 recognized
the validity of protecting captive customers, utilities obeying the law
and doing what Order No. 888 allowed can hardly engage in unlawful
discrimination. Is this correct?
Answer. SMD does not propose to take transmission away from those
who have existing rights to it or to interfere with the ability to
obtain adequate transmission for native load growth; instead, it will
preserve all the rights of existing transmission rights holders,
including native load. When all these preexisting rights have been
satisfied, any transmission capacity left over would be made available
to all market participants on a non-discriminatory basis. This
continues the Commission policy that has been in place without
controversy since Order No. 888.
The Commission explained in the NOPR its concern that vertically
integrated utilities may improperly use their state obligation to serve
native load as a cloak to engage in unduly discriminatory behavior that
has nothing to do with protecting native load. For example, the current
pro forma tariff requires transmission providers to allow existing
transmission customers to roll over their service agreements into new
contracts. A transmission provider is allowed to recall that customer's
capacity at the end of the service agreement only if its reasonably
forecasted native load growth needs would prevent it from extending the
contract and it noted that restriction in its initial agreement with
the transmission customer. Some transmission providers, however, have
attempted to terminate expiring service contracts to accommodate
alleged native load growth, even when they have not claimed in the
initial service agreement that the transmission capacity in question
may be needed in the future for native load growth. SMD seeks to
provide adequate native load protection but, at the same time, to
prevent abuses of the native load preference.
Question (b). Studies for interconnecting generators--the FERC
claims that integrated utilities discriminate when they delay complying
with interconnection requests from competing generators, as by delaying
studies. Do you agree that transmission owners need to study the effect
on the grid before going ahead with interconnections? Is it not true
that Order No. 888 recognized the varying complexity of studies and did
not establish strict deadlines for conducting studies, by saying that
if they take longer than 60 days, the utility must notify the
generator? How many adjudicated cases of discrimination through delay
in interconnection studies can you point to? Could you name them and
give me citations?
Answer. Yes, transmission owners need to study the effect on the
grid before going ahead with interconnections. In the Order No. 888 pro
forma tariff, the Commission stated that a transmission provider would
use ``due diligence'' to complete the required studies within a sixty-
day period, but if the transmission provider was unable to complete the
required study within such a time period, it had to notify the customer
and provide an estimated completion date with an explanation of the
reasons why additional time was required to complete the studies. We
also stated that the transmission provider was to use the same due
diligence in completing the study for a customer as it used for
completing studies for itself. While this provided some flexibility to
transmission providers it was not an invitation to indefinitely delay
customers' interconnection requests.
As an example, Kinder Morgan Power Company complained to the
Commission that Southern Company had allowed interconnection
applications to sit unreviewed for up to six months, and delayed
completion of the interconnection systems impact study for
approximately nine months. Kinder Morgan argued that the time lag
slowed commercial development of generation projects, added uncertainty
to interconnection customers' plans for developing new generation
plants, and prevented or delayed the entry of new generation plants
into markets where Southern's generation companies operated. The
Commission found that Southern's interconnection application procedures
were unjust and unreasonable because they discriminated against
generation customers' ability to develop new projects. The Commission
ordered Southern to revise its interconnection application review
process so that the review of interconnection applications is completed
within 30 days from receipt of an application or rejected as deficient.
Kinder Morgan Power Co. v. Southern Company Services, Inc., 97 FERC
para. 61,240 (2001), reh'g denied, 98 FERC para. 61,044 (2002).
We have heard from several commenters in the SMD proceeding and the
Standardization of Generator Interconnection Agreements and Procedures
proceeding in Docket No. RM02-1-000 that discriminatory application of
interconnection procedures, including delays in performing studies,
constitutes a barrier to entry for new generation.
Question (c). Scheduling issues--the FERC claims that integrated
utilities can favor themselves when reserving transmission capacity in
order to gain access to generation in other regions for reliability
purposes. The preamble mentions two cases in which the FERC found
trouble. My research shows two others. The cases involve two utilities.
Did any of them involve deliberate discrimination? How many
reservations of such capacity have occurred since 1996 and Order No.
888? What percentage does four cases represent out of that number? The
FERC also claims that vertically integrated utilities can treat
themselves more leniently for scheduling errors. What evidence do you
have of that? How many cases did the FERC adjudicate.that came to that
conclusion? Please name them and give me citations?
Answer. No, we do not have additional examples at this time. As to
whether discrimination was deliberate in the cases you cited, it is
often difficult to determine intent; therefore, the Commission simply
determines if its rules are complied with or violated. We do not have
data regarding how many reservations of capacity were made since 1996,
but the number is likely to be large. As discussed in the SMD proposal,
a utility that is out of balance (fails to schedule exactly) may be
able to avoid a payment for imbalance in a way that is not available to
another transmission customer. However, the Commission has an
affirmative obligation to prevent undue discrimination, including the
obligation to prevent the conditions under which undue discrimination
is likely to occur.
The North American Electric Reliability Council (NERC) is
developing new market rules to alleviate this problem. Compliance with
NERC rules is voluntary, so two NERC reliability councils also have
filed Inadvertent Settlement Tariffs to make their rules relating to
balancing energy mandatory. Those rules mandated cash payments for
imbalances and eliminated returns of power in kind. The Commission
approved those tariffs. See Mid-Continent Area Power Pool, 96 FERC
para. 61,150 (2001); East Central Area Reliability Council, 91 FERC
para. 61,197 (2000).
The SMD proposal responds not just to documented instances of undue
discrimination, but also to flaws in existing market structures that
present opportunities for undue discrimination. As discussed in recent
court opinions, the Commission does not necessarily have to find
specific instances of discrimination in order to have a duty to act to
prevent it; in fact, ``the open access requirement of Order No. 888 is
premised not on individualized findings of discrimination by specific
transmission providers, but on FERC's identification of a fundamental
systemic problem in the industry.'' Transmission Access Policy Study
Group v. FERC, 225 F.3d 667, 683 (D.C. Cir. 2000). See also Associated
Gas Distributors v. FERC, 824 F.2d 981, 998-99 (D.C. Cir. 1987);
Wisconsin Gas Co. v. FERC, 770 F.2d 1144, 1166 (D.C. Cir. 1985). SMD,
like Order No. 888, is a generic response to defects in electricity
market design.
Question (d). Information issues--the FERC claims that vertically
integrated utilities can--and I emphasize can--post misleading
information on their Web sites regarding how much transmission capacity
they have to sell. While maybe they can do that, how many instances of
deliberate misleading have you found in adjudicated cases? Could you
name them and give me citations? Is it not a fact that one case you
mention in the preamble comes from Enron's allegations and the case is
still before FERC on rehearing?
Answer. The Commission has encountered some instances in which
incorrect information was published on utility OASIS sites:
Morgan Stanley Capital Group v. Illinois Power Company, 83
FERC para. 61,204, reh'g denied 83 FERC para. 61,299 (1998),
order granting reh'g in part and clarifying prior order 93 FERC
para. 61,081 (2000) (taking note of incorrect posting on
utility OASIS site)
The Washington Water Power Company, 83 FERC para. 61,097
(1998), order on responses to show cause order 83 FERC para.
61,282 (1998) (finding utility failed to indicate on its OASIS
that it may have firm transmission capacity available)para.
Madison Gas & Electric Company v. Wisconsin Power & Light
Company, 80 FERC para. 61,331 (1997), reh'g denied 82 FERC
para. 61,099 (1998) (explaining that Wisconsin Power & Light's
steps to clarify terminology and procedures on the OASIS should
reduce any confusion that may arise concerning future
transactions under its open access transmission tariff)
In addition, the Commission has adjudicated cases involving
incorrect calculation of available transfer capability:
Opinion No. 437, 87 FERC 61,202 (1999) (finding, among other
things, that El Paso had incorrectly calculated its available
transmission capacity)
Wisconsin Public Power Inc. SYSTEM v. Wisconsin Public
Service Corporation, 83 FERC para. 61,198 (1998), reh'g granted
in part on other grounds 84 FERC para. 61,120 (1998) (finding
Wisconsin Public Service took capacity benefit margin into
consideration when it calculated available transfer capability,
but did not include this information in its tariff)
The above cases do not address the issue of intent, only whether
the Commission's rules or the utility's tariff was violated. In
addition, Commission staff is currently performing a staff audit of
information on sites and turning up anomalies that companies are being
asked to explain. This investigation is confidential under Commission
regulations.
The NOPR preamble discusses a Commission order that directed
Entergy and Southern Companies to employ an independent third party to
operate and administer their OASIS sites. This direction was in
response to a number of parties, including Enron, who raised serious
concerns about the integrity of the postings of ATC on the Entergy's
and Southern Companies' OASIS. AEP Power Marketing, Inc., et al., 97
FERC para. 61,219 at 61,973 (2001), reh'g pending, Docket No. ER96-
2495-016 et al.
Question (e). Transmission Loading Relief--the FERC claims that in
the past few years, utilities have called more brownouts and blackouts.
Even if true, what evidence do you have that this resulted from undue
discrimination, rather than a lack of investment in new capacity, given
the growth in demand for electricity? How many adjudicated cases of
discrimination in transmission loading relief can you point to? Please
name them and give me citation? Would you not agree that utilities that
called blackouts unnecessarily would attract regulatory sanctions,
lawsuits and great risks of exposing themselves to liability?
Answer. For purposes of clarification, the Commission stated that
instances of Transmission Loading Relief (TLR) are increasing, but
these rarely if ever have resulted in blackouts or brownouts. The TLR
was designed by the North American Electric Reliability Council (NERC)
as an emergency management tool intended to protect the reliability of
the grid in the event of a true emergency such a transmission facility
outage. Although discrimination is a problem that must be addressed,
these TLR events are the result primarily not of discrimination, but of
routine use of TLRs for everyday congestion management. A better method
for managing congestion is needed for transmission customers to have
fairer and more reasonable conditions of transmission service. That
said, the current situation leads power buyers to favor power from
local sellers over power from distant sellers that may be subject to
routine curtailment--a situation that can be exploited by those who own
both transmission and generation who may be able to create congestion
so as to help maintain their local dominance, despite our open access
rules. However. such intent is extremely difficult to prove, and there
have been no adjudicated cases that find discriminatory use of TLRs.
Although unnecessary blackouts would seem to expose a utility to
sanctions or lawsuits, use of TLRs does not. Both the FERC tariff and
NERC rules require the use of TLRs to manage congestion on the grid
when certain defined condition arise.
______
April 17, 2003.
Hon. Pete V. Domenici,
Chairman, Senate Energy and Natural Resources Committee, Hart Senate
Office Building, Washington, DC.
Dear Chairman Domenic: Thank you for including me in the March 27,
2003 hearing before the Senate Energy and Natural Resources Committee
and for giving me this opportunity to respond to certain of the
questions that have been submitted for the record. As always, it is a
pleasure to work with you on these important issues.
Sincerely,
Glenn English,
Chief Executive Officer, NRECA.
Responses to Questions From Senator Campbell
Question. Allen Franklin says this has been a terrible time
financially for investor-owned utilities. In fact, there have been over
180 IOUs downgraded and pending bankruptcies of the merchant power
sector. These are indeed tough times. How has public power fared during
the same period? What has Wall Street said about public power? Are you
building generation and transmission? What is your debt load?
Answer. Cooperatives and public power are extremely strong today
financially. Both Fitch and S&P have remarked that cooperatives have
largely retained their strong investment grade ratings because they
have stuck to their knitting. Cooperatives and public power have not
engaged in risky financial speculation or constructed generation for
the competitive market. They have instead continued their focus on
building and acquiring generation and transmission capacity for their
own consumer-owners.
Question. Allen Franklin testified earlier that public power should
be subject to ``full FERC jurisdiction'' so others can gain access to
its transmission. Do you agree? JEA is directly connected to Southern.
Do you get requests for transmission access from Southern? Have you
granted such access? Are you aware of any complaint issued by Southern
or any other requestor of access that you have failed to give access to
your surplus transmission?
Answer. There is no need for cooperatives or public power to be
subject to ``full FERC jurisdiction.'' Such proposals are a solution in
search of a problem.
If Southern or another public utility believed that a cooperative
were denying it transmission service it would have at least two options
under current law. Its first option would be to file a complaint with
the Federal Energy Regulatory Commission (FERC) under Sec. 211 of the
Federal Power Act. Expanded by Congress in the Energy Policy Act of
1992, Sec. 211 permits FERC to require any non-jurisdictional
transmitting utility to provide transmission service to other utilities
at just and reasonable rates.
Southern's second option would be to take advantage of the
``reciprocity'' provisions of Order 888. Order 888 was FERC's primary
open access order. In that order, FERC told all public utilities that
they had to provide open access transmission service to everyone
pursuant to a single standard contract, or ``pro forma'' tariff.
Although FERC could not impose open access and the pro forma tariff
directly on nonpublic utilities, FERC did so indirectly through
``reciprocity.'' FERC told non-public utilities that if they wanted
transmission service on transmission lines regulated by FERC, they too
would have to provide open access transmission service under a tariff
comparable to the pro forma tariff. To enforce the reciprocity
provision, FERC told the public utilities that they could deny
transmission service to any non-public utility that failed to provide
it with comparable transmission service.
Were cooperatives denying Southern or other public utilities open
access to their transmission systems, one would expect that there would
have been a lot of Sec. 211 complaints filed at FERC, or that a lot of
cooperatives would have been denied transmission service under Order
888's reciprocity provisions. But the opposite has been the case. There
have been no Sec. 211 complaints in the past few years against
cooperatives and no instances that NRECA is aware of in which a
cooperative has been denied transmission service pursuant to
reciprocity. Even if cooperatives were inclined to deny third parties
access to their transmission service, the threat of those remedies
would have been enough to enforce fair access. Significantly, FERC
listed in its SMD proposal numerous instances where investor-owned
utilities were engaged in alleged discriminatory behavior yet not a
single cooperative was referenced.
Response to Question Prepared by Neil Naraine
Question. Do you believe that Participant Funding combined with
Tradable Transmission Right at the discretion of a Regional
Transmission Organization (RTO), or a transmission entity authorized by
FERC would increase the capacity of the transmission system?
Answer. NRECA does not believe that requiring the Commission to
accept participant funding and tradable transmission rights would
increase the capacity of the transmission system. In fact, NRECA
believes that a strict participant funding approach would have opposite
effect: it would dissuade investors from improving the transmission
system and therefore undermine wholesale markets and increase the
delivered cost of power to consumers.
If all transmission facilities required to serve consumers in a
region had to be ``participant funded'' very little transmission would
be built. First, transmission improvements are like improvements to the
highway: once a new lane is constructed all drivers can use it and all
drivers benefit from the decrease in congestion. There is, therefore,
no effective way within a region to allocate the benefit and thus the
cost of system upgrades. Few investors would be willing to fund all of
the cost of an upgrade if they do not get all of the benefits.
Second, participant funding increases the risk to investors and
therefore makes it less likely that they will invest in needed new
transmission capacity. Under participant funding, transmission
investors do not get paid by those who use the new transmission line or
new transmission capacity. All investors get if they participant fund a
line is the right to congestion payments. But, if investors properly
design the line, there will be no congestion anymore, and thus no
payments. The more effective the facility is at increasing transmission
capacity, the greater the risk that investors will not recover their
investment. Why, then, would they build transmission capacity?
By dissuading investors from making improvements to the
transmission system, a strict participant funding approach would lock
in existing congestion points on the transmission system, undermine
wholesale power markets, and thus raise costs to consumers.
It would be better for Congress to leave issues of transmission
pricing and cost allocation to the Commission. FERC has the authority
today to adopt any policy, including participant funding, that it
concludes is just and reasonable and not unduly discriminatory or
preferential. The Commission is presently considering adopting a more
nuanced approach to participant funding in its Standard Market Design
rule.
If Congress does act in this area, NRECA believes that transmission
facilities required in a region to serve consumers more economically or
more reliably should be rolled into regional transmission prices and
recovered from all consumers in the region. We will never be able to
develop an interstate highway system for transmission if every industry
participant is required to build its own private roadways.
On the other hand, NRECA does believe that transmission facilities
that are not needed to serve load within a region, but are instead
required by those selling power outside the region should be paid for
by the power seller or the customers outside the region. Consumers
within a region should not have to subsidize the poor siting decision
of generators.
As a general principle, the best way to get transmission
infrastructure built and to reduce transmission congestion is to
address risk and focus on regional planning. More transmission would be
built if Congress were to make it easier for investors to build new
transmission and more certain that investors would recover their costs.
That is why NRECA has supported rolling in of transmission investment
into regional transmission rates for those upgrades that a regional
planning process has determined are required in a region to serve
consumers more economically and more reliably. That is also why NRECA
has supported limited federal siting authority for such facilities.
______
Southern Company,
Atlanta, GA, April 17, 2003.
Hon. Pete V. Domenici,
Chairman, Energy and Natural Resources Committee, U.S. Senate,
Washington, DC.
Dear Senator Domenici: Please find attached responses to the
questions of members of the Energy and Natural Resources Committee that
were provided to us in your letter of April 3. It was a pleasure to
testify before your Committee on March 27, 2003 and I hope that these
responses help to further the Committee's consideration of energy
legislation in the current Congress.
In addition to responding to the questions that were posed directly
to me or my panel, I have also provided answers to questions that
directly relate to my testimony or to Southern Company. As I was
testifying on behalf of EEI, my responses will reflect EEI positions,
except where specifically noted.
Thank you for the opportunity to provide this response and further
clarify the electric utility industry's perspectives on proposed
legislation. We remain ready to help you in any way we can as the
legislation progresses through your Committee and the Congress.
Sincerely,
Allen Franklin,
President and CEO.
Responses to Questions From Senator Campbell
Question. It seems that, in many ways, SMD actually undermines
electricity deregulation efforts. Would you agree that the current SMD
regulations allow FERC to greatly increase its size and power; in
effect making it the centralized planning agent for the entire
electricity sector?
Answer. While centralized planning may overstate the impact of the
Commission's proposal, SMD certainly does not amount to deregulation.
APPA supports RTOs that perform the functions articulated in the
proposed SMD rule, but cautions that the cost effectiveness of a
proposed RTO must be shown before proceeding in each region. Further,
badly designed and organized spot markets can do great damage to
consumers and to industry participants.
Question. How does SMD account for regional differences in
electricity markets? How will this specifically affect western state
utilities and their customers?
Answer. The Commission has stated that it will allow regional
flexibility in the implementation of SMD, particularly in areas such as
the Pacific Northwest, with its substantial reliance on the
coordinated, regional operation of multi-use hydro-electric facilities
to accomplish a variety of conflicting objectives, including delivery
of electric energy and capacity when and where it is most needed. The
Commission's proposal has in fact given preliminary approval to certain
RTO design elements that are seemingly inconsistent with the proposed
rule, such as the physical transmission rights model adopted by
participants in the West Connect RTO.
APPA has urged the Commission to proceed with RTOs and SMD
cautiously, to allow regional consensus to be maintained and to provide
sufficient time to conduct the cost-benefit studies that are required
to give customers and the states confidence that the specific RTO
design proposed in each region is workable and cost-effective.
Question. Many statements have been made that California's recent
electricity crisis was a regional crisis. I know that when California
needed or wanted water they got water from Colorado, now when they need
power are they going to take Colorado power? What impact will
California's current problems likely have on Colorado and other Rocky
Mountain states?
Answer. The recent western energy crisis has reinforced the fact
that wholesale electricity markets are interstate in nature and
disturbances in the market cut across all industry segments. The
failure of federal and state electricity deregulation in California has
had, and continues to have, broad and far-reaching adverse effects
throughout the Western States Coordinating Council region, including
Colorado. Colorado was certainly not immune to the dramatic increases
in the wholesale price of electricity that many consumers in the West
were forced to assume.
Beginning in late 2000, APPA repeatedly urged FERC to stabilize the
western electricity markets by imposing price caps. It was not until
June 2001, well into the crisis, that FERC acted to impose credible
pricing discipline on the dysfunctional western markets. While FERC's
actions have brought stability to the western wholesale electricity
market, that relief came far too late for consumers.
Until FERC acts more decisively to address market manipulation,
including establishing clearer rules on the use and revocation of
market-based rates, substantial price volatility may continue.
There is no legal mechanism through which California, or any other
state, can ``take'' power from Colorado. It is possible that renewed
price volatility or other factors, such as downed transmission lines or
broken generating units, could result in an increased demand for
available power in Colorado. However, absent any statutory or
contractual obligations, there would be no requirement for generators
in Colorado to sell energy to utilities in California or in any other
state.
In rare circumstances, the Secretary of Energy may declare an
electrical emergency that would direct all generators to make any
surplus available to the capacity deficient system, but only after the
generator had met all of its contract and native load service
obligations.
Question. Allen Franklin, CEO of Southern Co. testified that public
power owns and operated 30% of the transmission system in the U.S. And
that they need to be ``fully FERC jurisdictional'' to ensure a
competitive wholesale market.
Answer. The above question incorrectly states that public power
owns and operates 30% of the nation's transmission system. Public power
strictly defined (electric utilities owned by states or units of local
government), in fact, owns approximately 8% of the transmission system.
Mr. Franklin was perhaps referring to transmission facilities owned by
the federal government as well as those owned by rural electric
cooperatives in addition to those owned by public power. Under Section
211 of the Federal Power Act, FERC already has the authority to ensure
non-discriminatory access to all transmission lines, including those
owned by public power. Bringing those lines under increased FERC
jurisdiction will not solve the major problems of siting and technology
development and will not result in a more robust competitive wholesale
market. In addition, APPA agreed several years ago to the language
known as FERC-lite which gives FERC an additional tool to ensure that
public power systems provide comparable treatment to other entities
that wish to access our transmission lines.
Question. Allen Franklin says this has been a terrible time
financially for investor-owned utilities. In fact, there have been over
180 IOUs downgraded and pending bankruptcies of the merchant power
sector. These are indeed tough times. How has public power fared during
the same period?
Answer. While some western public power utilities were hurt by the
skyrocketing wholesale power prices during the energy crisis, they were
able to minimize the effect on their consumers and remain fiscally
responsible because of their flexibility and local control.
In contrast to energy trading companies and investor-owned
utilities the credit ratings of public power systems have remained
stable. During 2002, out of 197 public power entities evaluated by
Standard & Poor's, there were only 14 downgrades. Furthermore, these
downgrades were balanced by 12 upgrades during the same period. More
than 80% of the total public power entities rated by Standard & Poor's
are rated A- and higher.
Question. What has Wall Street said about public power?
Answer. In its ``Outlook 2003: U.S. Power and Gas'', Fitch Ratings
states ``Public power was by far the most stable utility sector in
2002, and the outlook remains clear for the coming year.'' Standard and
Poor's and Moody's Investors Service also project a strong outlook for
public power in 2003.
Credit rating agencies cite several reasons why public power has
been able to weather the western energy crisis and maintain a stable
outlook. The previously mentioned Fitch Ratings report ``Outlook 2003:
U.S. Power and Gas'' states as an explanation of public power's
success:
``Part of public power's success reflects a conscious
decision by utility managers and board of directors to avoid
the riskiest parts of electric deregulation, such as wholesale
power marketing and merchant transactions. By nature public
power agencies tend to be a more conservative group. They view
their primary mission as serving native load customers on a
mostly not-for-profit basis.''
Question. Are you building generation and transmission?
Answer. Public power utilities are continuing to build generation
and transmission to meet their individual local needs. In fact, the
recent market turmoil coupled with a lack of confidence in being able
to obtain firm, reasonably-priced transmission service (without
significant risk of curtailments or hefty congestion charges), has
prompted some public power systems to build their own localized
generation.
While there are substantial obstacles involved in the siting and
permitting processes for transmission, the investment in transmission
continues to represent a safe and stable investment.
Question. What is your debt load?
Answer. Based on Energy Information Agency data for the largest
public power systems (covering about one-fourth of all public power
systems, but representing more than 70 percent of all sales to retail
customers and all significant wholesale power systems) the total amount
of bonds outstanding in 2000 was approximately $72 billion. In 2001,
the total amount of outstanding bonds was $77.9 billion. The total long
term debt, which includes bonds, advances from municipality and other
long-term debt, and adjustments for unabortized premiums and discounts
on long-term debt, was $81.3 billion in 2001.
Responses to Questions From the Committee
Question. Do you believe that Participant Funding combined with
Tradable Transmission Right at the discretion of a Regional
Transmission Organization (RTO), or a transmission entity authorized by
FERC would increase the capacity of the transmission system?
Answer. FERC already has sufficient authority to permit or require
participant funding where appropriate. Therefore, reiterating in
legislation this ability is unnecessary and would in fact create a
preference for participant funding. Furthermore, participant funding is
an untested concept and, in most parts of the country, is likely to
delay and limit transmission construction at a time when congestion and
curtailments are increasing, to the detriment of consumers. APPA does
not believe that participant funding would ultimately increase
transmission capacity.
Question. There seems to be a widening rift between the States and
FERC on the FERC's plans for energy markets. If we continue this path,
we could be headed for years of litigation and no progress. What can be
done to avoid this continuing rift?
Answer. The rift between the Commission and the States comes
directly from the failure to address the California and Western market
debacle immediately after the symptoms of dysfunction first emerged in
Summer 2000. The causes for the debacle are complex and the reports are
both voluminous and still emerging. FERC's credibility as the agency
with primary jurisdiction over the natural gas and electric energy and
transportation markets was severely damaged in the process. FERC needs
to complete its Western investigations promptly, while ensuring due
process for affected customers and industry participants and then
initiate a public inquiry into how it should regulate and oversee
energy markets going forward.
Elements of this inquiry should include:
1. Standards for prohibited behavior as a condition of market
based rates;
2. Transparency requirements, including industry reporting
and disclosure of detailed market price and operating data on a
close to real-time basis, subject to very limited commercial
sensitivity limitations;
3. New standards for market based rates that ensure that
entities with market power do not have the opportunity to
exploit that ability in the first place;
4. Tangible steps to demonstrate the Commission and its
oversight and investigations staff in fact has the capability
and will to enforce these standards on a routine basis, not
just when a crisis develops.
With respect to RTOs and the Commission's proposed Standard Market
Design, it seems apparent that many regions do not now have and will
not have RTOs operating the organized electricity spot markets
discussed in the proposed rule for some time. Further, the Commission's
oversight of natural gas markets has also proved wanting, in that a
number of jurisdictional companies have been alleged to have
manipulated natural gas prices at major trading hubs, as well as the
prices reported to trade publications. The commission needs to
articulate how it will monitor these markets as well.
In contrast, Chairman Pat Wood recently said that his agency
intends to ``articulate more clearly'' how regional transmission
planning and generation adequacy arc to be areas for state regulation,
while independent transmission operators, locational pricing, firm
tradable transmission rights, and predictable and balanced market
mitigation are core elements of SMD. We will provide the Committee with
our comments when the FERC SMD White Paper becomes available.
______
Standard & Poor's,
New York, NY, April 22, 2003.
Senator Pete V. Domenici,
Chairman, U.S. Senate Committee on Energy and Natural Resources,
Washington, DC.
Dear Mr. Chairman: As follow up to my testimony on March 4, 2003
regarding the financial conditions of the electricity market, I am
providing answers to some of the questions that were submitted for the
record. As I mentioned in my testimony, Standard & Poor's, a division
of The McGraw-Hill Companies, provides independent financial
information, analytical services and credit ratings to the world's
financial markets. Standard & Poor's Ratings Services (``Standard &
Poor's'') does not advocate any specific industry structures or
regulatory and energy policies and thus I am not offering answers to
questions that would advocate specific policies.
Thank you for the opportunity to respond to your questions.
Sincerely,
Suzanne G. Smith,
Director.
Responses to Questions From the Committee
Question 1. Explain the primary factors that have led to the
current financial situation in the electricity sector.
Answer. The popular explanation for the industry's current decline
in financial health has been to place the blame on the introduction of
competition into the electricity market. Such a characterization would
be an oversimplification of a complicated situation. A more accurate
explanation of the industry's problems would be that the introduction
of competition gave management the opportunity to make investments in
areas, perhaps beyond their companies' expertise. A second cause of the
industry's problems was that the rapid investments in generation
capacity came on the heels of one of the largest economic expansions
that the U.S. economy has experienced in decades. Since the bursting of
that bubble, electricity demand growth did not materialize as many
expected. For example, industrial demand for electricity has been
contracting for the last few years. Another contributing problem was
that debt was cheap and readily available. As a result many companies
succumbed to the problems of over investment in risky assets or
ventures.
Low margins on electricity sales, trading losses and excess
leverage have substantially driven down cash flow and profitability for
the merchant energy (the uncontracted-for) segment of the electricity
business. The weakened economy and incomplete or partial deregulation
have to the overall surplus of electric generation capacity that now
exists in most regions of the United States. This surplus, which will
likely remain for the next several years, means that the market is
largely only compensating power plant owners for their variable fuel
costs and not for capital recovery.
Last year, companies engaged in energy marketing and trading found
themselves without sufficient capital at a time when they needed more
liquidity to fund losses and to meet collateral calls. Loss of investor
confidence caused industry stock prices to plummet and virtually shut
many energy companies out of the equity markets.
The presence of contingent liabilities in loan agreements and
trading contracts made the situation worse by creating ``credit
cliffs''. Contingent liabilities exist where the terms of borrowing
change (or repayment is accelerated) if debt ratings or financial
performance, or both, deteriorate below specified levels. In the
electricity markets, ``ratings triggers'' are used extensively by
counterparties as a way to determine collateral requirements. A common
trigger is the loss of an investment grade rating, which required some
companies to immediately post hundreds of millions of dollars of
increased collateral.
Lastly, another contributing factor to credit deterioration is
financing practice. Many generation companies relied very heavily on
the near-term debt markets, chiefly through the medium of short- and
medium-term construction revolvers, acquisition bridge loans, and
``mini-perm'' loans to fund construction or acquisition of individual
merchant energy plants and portfolios of merchant assets. This departs
from the traditional way in which generating assets are traditionally
funded, that is with more reliance on equity and long-term debt. Banks
and borrowers as near-term lenders expected that their loans would be
repaid within two to five years, mainly from proceeds from capital
market ``take-out'' issues. Today, because of the uncertainties in the
electricity sector, capital markets may not be a viable source of
repayment for the banks. Making matters worse, some banks want to
reduce their exposure to the electricity sector and are reluctant to
roll over or refinance outstanding loans. Some companies are deeply
exposed as the vast majority of their capitalization consists of short-
or medium-term bank loans that mature this year or next.
Question 2. To what extent do you think the challenges facing the
electric industry are related to the general downturn in the economy?
Answer. Some of the challenges facing the electric industry are
related to the general downturn in the economy. Generally, electric
demand is closely related to changes in overall economic output.
However, the collision of business and financial risks currently being
experienced by the competitive segment of the electric industry is not
closely related to the general downturn in the economy. For example,
the generation overcapacity situation is not a result of rapidly
falling demand for electricity, but more a result of overbuilding.
Question 3. The credit rating for many energy companies has been
reduced, some to below investment grade. The credit rating agencies
have been accused of reactionary downgrading and changing valuation
criteria. How do you respond to those allegations?
Answer. Standard & Poor's downgraded an unprecedented number of
energy and power companies in the past year due to the many factors
cited in my response to question #1. This is an acceleration of a trend
that started at least three years ago. The downgrades are justified
based upon the deteriorating creditworthiness of certain companies.
Standard & Poor's continually seeks to enhance its process and
procedures to ensure that its ratings meet investor needs and keep pace
with new investment structures, accounting issues and market
developments. These changes are made public and are widely distributed
so that our ratings process is transparent to the marketplace. For
example, last year, Standard & Poor's published an article (a copy of
which is attached) * which describes Standard & Poor's' updated
approach to rating U.S. energy trading and marketing firms. The article
describes refinements to Standard & Poor's' methodology, which
includes: enhanced liquidity analysis, fine-tuning assessments of two
key components of capital at risk, and additional disclosure requests
made to energy and marketing firms. However, Standard & Poor's has not
made any material changes to its basic criteria for rating energy and
power companies. Certainly the methodology refinements described above
were not the sole cause for the downgrades.
---------------------------------------------------------------------------
* The article has been retained in committee files.
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Question 4. Do you think that developers overestimated the demand?
Answer. In part developers may have overestimated demand growth,
particularly as the economy was rapidly expanding. There was much
speculation that the dot.com revolution was going to need increasingly
more electricity. In addition, some developers likely overestimated the
demand for gas-fired generation on the premise that older coal-fired
and nuclear power plants would retire as competition spread and under
the assumption that natural gas prices would remain at levels well
below today's prices. In many instances just the opposite occurred.
Older plants, with little incremental investment, have greatly
increased their availabilities and load factors since their variable
costs are low. Hence, many companies are suffering losses from non-
performing gas-fired power generation assets that are not being
dispatched.
Question 5. Are the problems now faced by competitive generators
due to overbuilding?
Answer. Excess generation capacity, or perhaps the wrong mix of
generation, in most regions of the U.S. has contributed to the
competitive generators' problems.
Question 6. What is your response to this potential issue of
insufficient natural gas supplies and increased dependence on LNG?
Answer. The growing gap between U.S. gas production and demand
suggests that the U.S. natural gas industry could be on the threshold
of entering the ranks of major long-term LNG importers, such as South
Korea and Japan. Indeed, since 1995, LNG imports have swelled from 5
billion cubic feet (BCF) per year to almost 155 BCF in 2002, albeit a
fraction in the 23 trillion cubic feet (TCF) per year U.S. market and a
very small part of the total imported gas.
To date Canada has filled the growing gap between U.S. natural gas
supplies and natural gas consumption. But as reported in a recent study
by Standard & Poor's, Western Canada, which has made up the U.S.
production-demand deficit, may be hard pressed in the longer term to
continue to do so as many have expected. According to a recent report
in the Oil and Gas Journal, as well as other analyses, much like the
Lower 48, higher development costs, smaller prospects, and rising
depletion rates are challenging Canada's huge gas potential. Also, as
in the U.S., Canadian demand is increasing because of gas-fired power
generation and power needs associated with Alberta oil sands projects.
The oil sands projects alone could potentially consume as much as 2 BCF
per day of Arctic gas.
The nature of U.S. gas demand is changing as electricity generation
growth replaces industrial gas demand and becomes willing to pay more
for gas than industrial users. This development combined with declining
gas production may be moving sustainable normalized gas pricing into
the $3-4 per MCF range. Higher natural gas prices combined with falling
LNG liquefaction and transport costs could be the developments needed
to sustain a long-term U.S. LNG market. New LNG projects will need
about $2.0 to $3.0 per MCF to cover capital costs from wellhead to
shipping to storage/regassification terminal. Shipping will add between
30 cents and $1.25 per MCF depending upon distance. Therefore, if
potential LNG developers expect gas prices to permanently move into the
$3.00 to $4.00 range, U.S.-destined LNG projects may be feasible.
There is no shortage of potential greenfield projects in the
Atlantic and the Pacific basins that are looking to supply the U.S. LNG
market. In the Pacific basin, stranded gas reserves in Australia,
Alaska, Indonesia, Malaysia, and Peru could support new or expansion
projects. Similarly, in the Atlantic basin, Algeria, Egypt, Nigeria,
Trinidad & Tobago, Venezuela, and West Africa could also support new
projects dedicated to the U.S. Finally, in the Persian Gulf region,
Oman and gas giant Qatar with almost 900 TCF of proven reserves--the
newest LNG exporters--are anxious to monetize their stranded gas
reserves.
Obviously, given the politically sensitive regions where some LNG
projects might be located and the distances involved, a growing
dependence on LNG could raise concerns about energy security and trade
balance payments. But given the difficulties in siting LNG receiving
terminals in the U.S. and the magnitude of LNG terminals needed to fill
the growing production/supply gap, it seems unlikely that the U.S. will
become as dependent on LNG as major importers in East Asia are, namely
Japan and Korea.
Question 7. Do you think that companies will successfully refinance
their substantial debt? Or should we prepare ourselves to see a series
of generating assets fall into the hands of banks?
Answer. To date, companies have been refinancing their substantial
debts. In most cases refinancings are better characterized as
extensions or rollovers even though the companies have executed new
load agreements. Most of the new facilities are short-term in nature--
two to three years--and allow the companies to forestall bankruptcy by
providing liquidity and time. It is fair to say that banks and
borrowers are hoping that the market improves with time and that that
will solve many financial problems. Few of the ``refinancings''
actually solve the energy merchants' problems of too much debt and too
much capacity. In fact the financial conditions of some of these
companies are so weak that the banks cannot charge interest rates
commensurate with default risk or else the companies' financial
positions would only worsen. Over the near term, Standard & Poor's
expects that some generating assets will be handed over to banks, but
most assets will remain in the hands of the borrowers, with the lenders
taking a first lien on the asset. Should borrowers be unable to repay
the loans over the next several years through internal cash generation
or access to the capital markets, some banks will again be faced with
the decision of whether or not to accelerate their loans and seize
their collateral security.
Question 8. Given these constraints, will the merchant model
survive?
Answer. The overhang of #90 billion in short-term debt that must be
refinanced, as Standard & Poor's first reported in an article in
November 2002, will not be the determinate as to whether the merchant
generator model will survive. How and whether that debt is refinanced,
restructured or written-off may decide who continues to participate in
the business. One thing is fairly certain, given the capital
requirements of competitive power, it will be very difficult for a
companies with debt ratings in the single-``B'' category to survive
long. The challenges of the high cost of capital and the undermining of
counterparty confidence will drive most out of the business, sooner or
later unless balance sheets are substantially restructured.
The answer to the sustainability of the merchant generation model
may rest with the policy and lawmakers. As Standard & Poor's reported
in an article in March 2002, the merchant energy model--and, more
broadly, the competitive power industry--may indeed still be viable.
The model was perhaps never applied in a context in which it could
succeed. The business institutions and market framework did not fully
develop across the country. But a collision of business and financial
risks may soon close the door on the merchant energy business unless
something changes. Refinancing short-term obligations is proving
difficult and the ability to attract new capital to competitive power
may be almost impossible.
Through its Standardized Market Design (SMD) notice of proposed
rulemaking (NOPR), the Federal Energy Regulatory Commission (FERC) has
proposed bold reforms to promote a healthy, competitive electricity
industry. But the complexity and the scope of the proposal threaten its
implementation. In addition, the political opposition to SMD may be
appreciable enough to raise doubts as to whether FERC can push its
reforms through--and ultimately whether merchant energy can survive.
Basic competitive industries, such as oil and gas, steel, pulp and
paper, among others, need customer bases, or rather at least a fighting
chance to reach customers. And therein lies electricity's rub. In the
U.S., the institutions that merchant energy needs to support a
competitive power market do not broadly exist. Transparency in pricing
varies tremendously from market to market, as does access to
transmission and electricity end-users. At times the price for power
paid by consumers does not necessarily reflect its cost. Regulatory
reform has not only progressed more slowly than many investments were
predicated upon, but it has not spread widely. In theory,
disaggregating vertically integrated utilities into their component
parts of generation, transmission, distribution, and marketing and
trading should foster efficiencies, innovation, and investor
confidence. But the reality has been very different, particularly in
generation and energy marketing and trading. In addition, California's
experience dramatically illustrated the vulnerability of even the
franchise service monopolies of distribution and supply if well-
conceived, underlying institutions are not in place before introducing
competition.
Parts of the nation's grid in particular have been frustrating the
development of competitive power markets. In some markets independent
or merchant power cannot deliver their low cost power to retail users
because of artificial barriers to market entry. Industry participants
have alleged to FERC that vertically integrated utilities are
discriminating against low cost providers by restricting access to
their transmission lines so that they can sell their own, often times
more costly, generation to their native loads. In addition, seams
issues between adjacent markets, such as Pennsylvania-New Jersey-
Maryland (PJM) and the New York Power Pool, restrict commerce between
regions due to a host of reasons, including, different reliability
standards, generation ramp-up procedures, and computer systems, amongst
others. Finally, some transmission systems hide price signals, which
raises concerns about whether needed investments in generation or
transmission are made or whether they are made in the wrong locations.
Given the various market problems, it is not a difficult case to
make that business risk for the competitive electricity industry, which
must rely upon open well-functioning markets, has become riskier than
other basic industries and that the competitive generator model is at
risk. Few other industries face the artificial barriers that have
developed as a result of partial, or incomplete, restructuring of the
industry. Moreover, the industry's problems come at a time that when it
has seen the largest overbuild in capacity since its beginnings and at
a time when load growth has fallen off. Merchant generation, at best,
largely earns only marginal revenues with no little ability to cover
fixed costs.
In the current U.S. environment, merchant energy or competitive
electricity will have a hard time surviving and credit quality could
further deteriorate.
Question 18. Competition in electricity brings volatility in
prices, but does it also bring lower prices for consumers?
Answer. Merchant energy has delivered some of the intended benefits
of deregulation. Power plants formerly owned by utilities, especially
the older nuclear and coal-fired facilities, are now operating at much
higher availabilities and capacity factors under their new owners.
Wholesale power costs have fallen, albeit they are more predisposed to
volatility than before. And ratepayers are not paying for the
tremendous overcapacity in generation that characterizes the industry,
as they did in the past; lenders and equity investors are now
shouldering those costs.
Question 24. Standard Market Design (SMD) has been proposed by FERC
to fix instability in the marketplace. Kentucky has the lowest
residential electricity rates in the country. Do you believe that
FERC's proposed SMD rule will work? Will the rule penalize states with
low costs to benefit those with high costs? Do you believe that the
proposed SMD rule takes into account unique regional differences and
individual state interests?
Answer. The scope of Standard Market Design is very broad, but by
some arguments, necessary. As Massachusetts Institute of Technology
economists Paul Joskow and Richard Schmalanzee pointed out in their
1983 book on deregulation, ``Markets for Power'': ``Transmission plays
the most fundamental role in achieving the economics of electric power
supply. . . . The practice of ignoring the critical functions played by
the transmission system in many discussions of deregulation almost
certainly leads to incorrect conclusions about the optimal structure of
an electric power system.''
If the transmission system does not address the needs of a
competitive energy market, then financial and business risks for the
industry will likely remain high, which, in turn, does not bode well
for the industry's credit ratings. That will translate to a higher cost
of capital as investors and lenders move to protect themselves from
uncertain credit risks. Markets will not fix a flawed market design,
but financial markets will move to limit their exposure to a flawed
market. Even if stronger demand works off the excess capacity and
margins widen, the underlying structural problems will still exist.
______
April 28, 2003.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: Attached are my answers to the questions
submitted for the record of the Committee's March 27, 2003 hearing on
various electricity proposals.
Thank you for granting my request for an extension of time.
Sincerely,
William L. Massey,
Commissioner.
[Attachment]
Response to Question From Senator Campbell
Question. There seems to be a deep dilemma we are dealing with
here: while we are trying to bring open competition to certain
electricity markets, we are actively engaged in federal design of these
same markets. It seems that, in many ways, SMD actually undermines
electricity deregulation efforts. Would you agree that current SMD
regulations allow FERC to greatly increase its size and power; in
effect making it the centralized planning agent for the entire
electricity sector?
Answer. Respectfully, I do not agree. Under SMD, planning for the
electricity sector would be carried out regionally, with the states
primarily in charge. On the issue of market design, wholesale
electricity markets do not automatically design themselves or provide a
level playing field. Under existing law, wholesale markets are within
the jurisdiction of the Commission and are shaped, or ``designed,''
pursuant to Commission policy.
Responses to Questions From Senator Craig
In light of the Commission's California refund actions on
Wednesday, March 26, 2003, I think it is important for the Committee to
fully understand the history of how the Commission got to this point.
You are the only sitting Commissioner who participated in the
review and approval of the California electric restructuring plan. I
appreciate your acknowledgment during the Senate hearing on March 27th
that the Commission's approval of California's plan was a mistake. What
is needed now is a full accounting that can lead to a better
understanding of how and why this mistake happened.
In response to my questions during the March 27th hearing you
stated that some on Commission staff thought the California plan to be
flawed and that those concerns were brought to the Commission's
attention prior to Commission action to approve the plan.
Question 1. Please describe fully your discussions with staff that
were critical of the plan prior to the Commission's approval of that
plan. Please provide descriptions of any internal memoranda or
analysis, written or oral, raising concerns about California's plan
before your votes, and copies of the written documents described.
Please include all written documents, including e-mails and all
handwritten notes from you, your staff, and Commission staff that are
in your possession.
Answer. I agree with you that it is important for the Committee to
fully understand the history of how the Commission got to this point.
In a nutshell, the Commission, in deference to the wishes of a
major region of the country, approved during 1996 and 1997 a market
design approved by the California PUC, legislated by the California
General Assembly and strongly endorsed by the Governor. The complex
plan enjoyed broad support within most segments of the industry. The
policy of the State of California was to separate transmission from
generation, rely upon wholesale markets, and move toward retail
competition. The State could not do so, however, without the
Commission's approval.
The Commission has a longstanding policy of working with states
where possible to achieve common goals. This is an excellent policy. A
rejection of the California plan at that time would no doubt have been
viewed by California and other states, and perhaps even by Congress, as
FERC insensitivity to state and local needs. I do not believe that any
other state intervened to object to the plan.
The Commission orders with respect to the California plan span more
than 450 single-spaced pages and resolve literally scores of issues.
Key features of the plan were required by California law. The
separation of the ISO and Power Exchange, for example, was required by
California law.
I know now that approval of the California plan--primarily the ISO/
Power Exchange separation and the over reliance on the spot markets--
was a mistake. Hindsight has 20-20 vision. At the time, however, I
believed the plan to be in the public interest, as did all of my fellow
Commissioners. All Commission votes on the California plan were
unanimous.
The market opened in early 1998, and seemed to function reasonably
well until May 2000 when prices began to spike wildly. The market was
severely dysfunctional, manipulation occurred and market power was
exercised, and the extraordinary prices were unlawful. Despite my early
advocacy of full time price controls that would have ended the crisis,
the Commission failed to intervene forcefully. This failure of
intervene early was mistake number two. Fortunately, the Commission
finally took forceful action to stop the economic carnage by imposing
full-time price controls on June 25, 2001. Had the Commission
intervened early in the crisis with effective price mitigation, this
economic catastrophe could have been largely avoided. Opportunities for
manipulation would have been substantially reduced early in the crisis,
just and reasonable prices would have been largely ensured, and the
need for refunds would have been sharply reduced or perhaps even
eliminated. There would have been no or few long term contracts with
unjust and unreasonable prices. These facts are also an important part
of the history of how the Commission got to this point.
As mentioned earlier, the Commission's original actions to approve
the California market design were taken during 1996 and 1997. Various
aspects of the California restructuring were under consideration by the
Commission for well over a year. I am sure I had ongoing discussions
and meetings with Commission staff on a number of issues. I do not,
however, have specific recollections about any particular meetings and
discussions that occurred. Our orders dealing with the California plan
resolved scores of issues raised by the parties. There could have been
internal staff memoranda or analysis of California's plan, but I have
no specific recollection of the content of such memoranda or analysis.
I do not have in my possession any written documents or notes that
would be responsive to your question.
I have a general recollection that staff raised issues about the
separation of the ISO and Power Exchange, the reliance on short term
markets, and market power mitigation. However, I do not recall a clear
staff recommendation to reject these features of the plan. Our staff
did, however, recommend a rejection of the state residency requirement
for members of the ISO and Power Exchange boards, as well as the
aggressive role of the state's Oversight Board over features that were
jurisdictional to FERC. I agreed with staffs recommendation, as did my
fellow Commissioners. I have a general recollection that FERC staff
also expressed support for the structural unbundling of transmission
and the transfer of operational control to the ISO. Staff supported the
desire of California to rely on competitive wholesale markets.
California's approach was consistent with the Commission's long-term
policy goals. Overall, I have a general recollection that staff
comments were much more supportive than critical of the plan.
Question 2. Please fully discuss what you did in response to the
concerns raised?
You mentioned at the Senate's March 27th hearing that you found
merit in the concerns expressed by staff and in those comments filed by
intervenors raising concerns about California's plan before you voted.
Answer. I read briefs submitted by the parties both supporting the
California plan and raising concerns. I considered all of the views
expressed along with any recommendations or opinions expressed by staff
noting concerns or expressing support for the plan. I discussed these
matters with my fellow Commissioners, and listened to their views.
There was little or no interest among my fellow Commissioners in making
major changes to the plan, although we did vote to eliminate the state
residency requirement for the ISO and Power Exchange boards, and we
limited the role of the Oversight Board. I satisfied myself that my
vote would be in the public interest. I dealt with these issues the
same way I deal with all matters to come before the Commission.
Question 3. Please describe the concerns that you found had merit
and how you resolved those concerns to justify voting in favor of the
plan. Describe changes to the plan that you recommended, if any, before
voting.
Answer. I had some concern about the separation of the ISO and
Power Exchange, the reliance upon short term markets, and the adequacy
of market power mitigation and monitoring. At that time, there was a
vigorous debate within the industry about the wisdom of ISO/Power
Exchange separation. There was certainly no consensus, however, that
separation was a flawed concept. The ISO/Power Exchange separation was
mandated by state law, and the California PUC insisted that load
serving entities purchase all of their needs through the spot markets.
This latter feature was a key part of California's stranded cost
recovery plan for the utilities. Our Commission Chair did not recommend
rejection of these features, and my fellow commissioners had little or
no interest in modifying them. On balance, I voted for the plan because
despite some concerns it seemed reasonable, and the Commission's policy
at the time with respect to market structure was based upon a theory of
regional deference. It was much earlier in the restructuring debate,
and Commission policy was that a variety of wholesale market designs
could be appropriate and in the public interest.
During our internal debates, I believe I made proposals to
strengthen the plan's market power mitigation and monitoring features.
I believe my proposals were accepted at least in part by our orders,
but I have no written records and am relying upon memory. Hence, I am
unable to provide details on the proposals I made.
Question 4. After you voted to approve this flawed plan, and
California implemented the flawed new market structure, what changed
your mind about having voted for the California experiment? Was that
something that the Commission staff had predicted before you voted for
the California Plan?
Answer. My mind was changed when the California market spun out of
control in the summer of 2000 and the Commission failed to intervene
effectively to ensure just and reasonable prices. I began to champion a
more standardized market design that relied upon existing long term
contracts, and strong up front market power mitigation and monitoring
measures. This became the basis for our proposed Standard Market Design
(SMD). I do not recall any specific predictions by our staff.
Question 5. Did you understand at the time you voted for the
California Plan the bad impact retail rate caps would have if demand
rose more than supply? If not, please explain why you thought they
would not cause harm. If so, since the rate caps remained in place
throughout the California debacle, please explain what made you realize
the flaw in retail rate caps? Did you ever urge cap removal? If so,
please document. If not, why not?
You said at the March 27th hearing that you will ``never make that
mistake again'' of approving a flawed market and one that can be
``gamed,'' as you put it. Recall that the California design emerged
from very lengthy stakeholder meetings with the great experts of the
time, similar to what you describe you are undertaking with respect to
Standard Market Design.
Answer. Whether to have retail rate caps is solely a matter of
state law or policy and is not for federal regulators to deternline
under existing federal law. I did not urge retail rate cap removal. Had
the Commission insisted through effective price mitigation that
wholesale prices remain just and reasonable, retail rate caps would
probably have worked fine. I did urge forceful wholesale price
mitigation.
Question 6. Can you assure me that you would not make the
``mistake'' again of approving a flawed market that cannot be gamed? Do
you think it ever possible to design a market that cannot be ``gamed''?
Please cite to me an actual electricity market that could not be
``gamed''? I understand that even PJM, which the Commission likes to
cite as the exemplar, has had problems with gaming. Please cite to me
the Commission orders describing the incidents. Explain why you think
you can do it when no one else yet has.
Answer. My testimony was that I would not again vote for a market
design that can be easily gamed. I believe that policymakers can design
an electricity market that cannot be easily gamed. Clear bidding rules,
tough penalties, up front mitigation measures and effective market
monitoring can make gaming a much less successful strategy.
I can recall three cases involving manipulation in PJM markets. In
all cases, however, the problem was detected early by PJM or its market
monitor, and corrections were proposed that effectively stopped the
abuse well before there was a significant impact on consumers.
PJM Interconnection, L.L.C., 95 FERC 61,175 (Redistribution Order),
reh. denied, 95 FERC para. 61,477 (2001). Docket No. ER01-1440.
PJM Interconnection, L.L.C., 95 FERC para. 61,330 (Seasonal Order),
reh. denied, 96 FERC para. 61,206 (Seasonal Rehearing Order) (2001).
Docket No. ELO1-63.
PJM Interconnection, L.L.C., 92 FERC para. 61,013 (Docket Nos.
EROO-2445-000 and EL00-74-000) (2000), reh. denied, 93 FERC para.
61,157 (2000) (Minimum Run Time Order).
PJM Interconnection, L.L.C., 97 FERC para. 61,319 (Docket No. ELO1-
122-000) (2001), reh. denied (PECO Order).
Response to Question From Senator Graham
Question. Economic dispatch has been discussed as an approach to
facilitate the procurement of least cost power in the wholesale
marketplace. What is your opinion of this concept?
Answer. Economic dispatch is the industry standard and should
continue to be utilized. It enjoys broad support at the Commission. In
fact, the Commission's Standard Market Design proposal is for each RTO
to establish a spot market that operates pursuant to a bid-based
security-constrained dispatch in which the generators that bid the
lowest are dispatched instead of more expensive generators.
Responses to Questions From Senator Smith
Question 1. The proposed rulemaking has a series of financial tools
that are supposed to address transmission congestion. It is my
understanding that this financial instruments may be auctioned off. How
do these tools benefit the retail customer--the mom and pop grocery
store B in a transmission constrained area? What happens once these
tools are no longer available, if new transmission has yet to be
constructed?
Answer. I believe that the SMD Final Rule should simply assign
these congestion rights (relying upon state recommendations) to
wholesale customers who need them to meet their obligations to retail
consumers. We must ensure that customers have protection from
congestion costs equal to or superior to the pre-existing congestion
rules. Certainly the protection from congestion costs provided by these
instruments should be available during all periods of present or future
congestion.
Question 2. What is the longest transmission contract that any new
market entrant could get under Standard Market Design? Will that allow
for lending for new investments, and for the recovery of capital
investments on non-utility generation?
Answer. The SMD NOPR places no limits on the length of contracts.
Question 3. You provide financial incentives for utilities that
relinquish control over their transmission assets. Have you calculated
how much that will cost the retail customers nationwide?
Answer. The financial incentives are intended to ensure that the
transmission grid is operated independently, and new transmission
investments are made. These improvements in transmission will allow the
cheapest generation to reach customers. Generation is more than half of
the consumer's bill, while transmission is about 7 percent in most
areas. Thus, our incentive policy should reduce costs to retail
consumers nationwide.
Question 4. There is no question that certain sectors of the
electric utility industry face a wide range of financial challenges,
particularly those corporations with merchant plants or energy trading
and marketing operations. These challenges include: excess generating
capacity and thin profit margins in parts of the country; extensive
credit downgrades since 2001; high levels of debt; the need to
refinance tens of billions of dollars in short-term debt; reduced
electricity demand; and continued regulatory uncertainty.
(a) Will SMD solve the problem of excess generating capacity in
certain regions of the country?
(b) Will SMD solve the problem of thin profit margins in certain
regions of the country?
Answer to 4(a) and 4(b). SMD will certainly help. By enlarging
regional markets and eliminating trading seams among regions, SMD will
provide greater market opportunities for cheaper generation to reach
distant customers. This will provide profit opportunities for
generators that can compete. This will benefit the customers as well,
which is the primary purpose of SMD.
(c) Will SMD solve the problem that there is $90 billion worth of
industry debt that needs to be refinanced in the next 3 years?
Answer. Again, SMD will help. Wall Street representatives who
testified before the Commission at a day-long hearing in January 2003
were virtually unanimous in strongly endorsing SMD. They said that
successful refinancing would be facilitated by an industry defined by
reliable, stable, and enduring markets, clear behavioral rules, and
effective monitoring and oversight. These are the hallmarks of SMD.
Industry leaders and investors agreed that SMD would help to promote
necessary capital formation, both debt and equity, in the energy
industry.
(d) Will SMD solve the problem that, nationwide, demand for
electricity is down about 4 percent from 2000?
Answer. The decline in electricity demand is primarily a function
of a poor national economy. SMD will not solve this problem, but will
ensure that customer-friendly electricity markets are in place when the
economy revives.
______
Responses of Jim Torgerson to Questions From Senator Campbell
Question. Why does it take so long to set up a voluntary RTO?
Answer. The amount of time it takes to set up a voluntary RTO is a
function of many factors, prominent in the Midwest were:
1. Lack of a pre-existing tight power pool;
2. Establishing certainty as to structure and functions;
3. Establishing certainty as to geographic scope;
4. The interrelation of State and Federal regulatory
approvals; and
5. Variations in motivations of transmission owners,
regulators and other stakeholders.
My conclusion is that enough entities, their regulators and enough
of their customers that represent a coherent geographic region have to
agree to a core mission for the organization. Establishing that
agreement on the core mission takes time. Everyone does not have to
agree with every aspect of an RTO, but it has to be of value and be
perceived to be of value to its key stakeholders in order for
transmission owners to be willing to turn over functional control of
their systems to an independent entity. The States whose customers will
be impacted by these decisions must similarly recognize the value of
the new arrangement. They must trust the structure set up for the RTO,
often in advance of knowing who the people are who actually will lead
it, its independent Board of Directors and Officers. The economic
outcomes perceived to be likely from the transfer have to be regarded
as fair for asset owners and customers. In different regions of the
country the background circumstances facing the organizers of an RTO
(retail rates, pace of retail choice or divestiture, presence of
Federal Power Marketing agencies, difficulty of access to sources of
power by TDUs, presence of a power pool or regional tariff, etc.) often
differ. They also differ within a region over time. As stakeholders
face the decisions necessary to move forward in the steps to create an
RTO, they also need some degree of certainty as to the regulatory
framework they will be operating under.
The timeline for creation of the Midwest ISO first as an ISO and
then to transform it to become an RTO was as follows:
Regional efforts at solutions to the contract path dilemma--
1993 forward
FERC Order No. 888--May 1996
Initial negotiations--two years starting in 1996
Initial application to the FERC--January 1998
First FERC order approving the Midwest ISO--September 1998
Independent Board elected--January 1999
FERC Order 2000--December 1999
Midwest ISO independent financing closed June 2000 ($100
million)
RTO status sought January and August 2001
RTO status granted December 2001
Start of Midwest ISO transmission service February 2002
Question. Allen Franklin, CEO of Southern Co. testifies that public
power owns and operates 30% of the transmission system in the U.S. And
that they need to be ``fully FERC jurisdictional'' to ensure a
competitive wholesale market.
Please give us specific examples of occasions when access to
surplus transmission was requested and refused by public power systems.
Can you name the public systems you haven't gotten access to?
Answer. Because the Midwest ISO operates the systems over which it
has been given control and is not a participant in the transmission
markets itself--that is the Midwest ISO has not and does not request
transmission service over other systems--it has never been refused a
transmission service request by any party. The Midwest ISO administers
its transmission tariff over a system that includes some municipal or
cooperative owned systems. For instance, the City of Springfield,
Illinois Light and Water Department, Indiana Municipal Power Agency,
Hoosier Electric Cooperative, Inc. and Wabash Valley Power Association
are all Midwest ISO transmission owner members.
Question. Do you believe that Participant Funding combined with
tradable Transmission Rights at the discretion of a Regional
Transmission Organization (RTO), or a transmission entity authorized by
FERC would increase the capacity of the transmission system?
Answer. The Midwest ISO supports cost allocation principles that
recognize that the entity seeking to interconnect with the transmission
grid should pay the cost for that transaction. Also, where the addition
to the grid can be shown to provide benefits to existing load, those
consumers with their state's concurrence, should pay a portion of these
transaction's costs. Under all circumstances, the identification of
these costs and benefits must be made by an independent transmission
organization. The addition of assigning tradable transmission rights to
the parties that pay for upgrades is an important factor. The
combination of the two principles should allow the construction of
those facilities that would increase the capacity of the transmission
system to deliver the capacity of new sources of electrical generation
into the grid for the benefit of the local area and the wholesale
market.
Question. There seems to be a widening rift between the States and
the FERC on the FERC's plans for energy market. If we continue this
path, we could be headed for years of litigation and no progress. What
can be done now to avoid this continuing rift?
Answer. In the Midwest region, while there is some disagreement
between the states and the FERC on some issues, generally, the states
support a broad market scope, with minimal and rational economic seams
for the region. The formation of the Midwest Multistate Committee for
interaction with the Midwest ISO on various matters is an example of
how, in our region at least, the rift can be bridged.
______
Responses of Allen Franklin, Chairman and CEO, Southern Company,
to Questions From Senator Campbell
Question. It seems in many ways, SMD actually undermines
electricity deregulation efforts. Would you agree that current SMD
regulations allow FERC to greatly increase its size and power; in
effect making it the centralized planning agent for the entire
electricity sector?
Answer. EEI members differ as to whether or not SMD will further or
undermine electricity deregulation efforts. All EEI members support
some parts of the proposed SMD rule, but none support all of its
aspects. The association believes that regional differences must be
accounted for in developing rules governing market design and
institutions, and that the current proposal does not adequately account
for such differences.
Southern Company, in particular, believes that the SMD proposal
would greatly broaden FERC's size and power, and would unnecessarily
place the Commission in the role of a centralized planner for regions
and the nation. In our view, the proposal usurps many traditional state
roles with respect to electric service, reliability and planning. In
certain regions of the country, including the Southeast, the FERC's SMD
proposal has been counter-productive to the formation of regional
transmission organizations (RTOs) and the furtherance of wholesale
competition in the region. The Commission's decision to assert
authority over the transmission component of bundled retail sales, and
its proposals that would remove the ability of utilities to give
priority to their own customers has created a firestorm of protest and
concern among the states. The Commission has proceeded with this rule
in spite of the fact that we were already well along in the formation
of an independent RTO for the region that would have met most of the
objectives that the Commission seeks in its SMD proposal.
The SMD proposal is not the best way to proceed to achieve the
Commission's goals for efficient and reliable wholesale markets that
benefit end-use consumers. Market rules and institutions, in our view,
must be tailored to regional needs and circumstances. The Commission
must take regional differences into account in considering these
significant changes to the regulatory framework for the electric
utility industry.
Question. How does SMD account for regional differences in
electricity markets?
Answer. Under its current formulation, the SMD proposal does not
account for regional differences. It basically establishes a single set
of rules and a single market design that all regions would have to
follow. We believe that much more regional flexibility is required. The
best way for FERC to proceed in this regard would be for the Commission
to sit down work jointly with state regulators to implement market
designs and institutions that are appropriate for each region.
Question. Why does it take so long to set up a voluntary RTO?
Answer. Insetting up a regional transmission organization, there
are literally thousands of details that must be worked out and
negotiated among the stakeholders. A new organization basically has to
be started from the ground up, including the selection of a Board of
Directors, the hiring of employees, the development of all the internal
systems, etc. There are new software systems that must be developed to
manage the transmission system, and telecommunications links have to be
developed. Agreements must be reached between the transmission owners
and the new organization on the details of transferring control over
transmission, and a new tariff and operating protocols must be
developed for the new organization. New markets must be established,
and the rules of those markets must be negotiated. Software and
hardware must be tested. And all of this must be done in a way that
ensures that reliability is not harmed in the transition from utility
operation to RTO operation.
Regulatory approvals are also required, both from the FERC and from
all of the state commissions that have jurisdictional facilities that
would be utilized. In most cases, this requires hearings and
evidentiary proceedings. And all changes have to go back through a
regulatory approval process. We are talking about a major change in the
way that utility system are operated, and any such major change must be
undertaken with caution and care, so that consumers are not affected.
It is more surprising to me that we have been able to make such
significant progress with RTOs in just a few short years since the
concept was introduced with FERC Order 2000. Those who are impatient
with the process probably don't fully understand the complexity of
forming such organizations and getting them up and operating
successfully.
Question. Please give us specific examples of occasions when access
to surplus transmission was requested and refused by public power
systems. Can you name the public systems you haven't gotten access to?
Answer. While we cannot speak to other investor-owned utilities,
Southern Company has not been specifically refused access to public
power systems in our region. In fact, we are working with other public
power entities in our region to form the SeTrans RTO to continue to
ensure that all utilities in the region will have fair and non-
discriminatory access to transmission systems. We do believe it is
important that all transmission owners, be they private, public, or
cooperatively-owned, participate in competitive wholesale markets and
play by the same rules. Since these non-private utilities control about
one-third of the transmission system in our region, their participation
is vitally important.
______
Response of Bud Para of JEA to Question From Senator Campbell
Question. Are you aware of any complaint issued by Southern or any
other requestor of access that you have failed to give access to your
surplus transmission?
Answer. Southern Company is not aware of any situations in which
JEA has failed to provide access to their surplus transmission.
______
Response of Pat Wood, FERC, to Question From Senator Campbell
Question. Your SMD assumes that competition benefits everyone. Yet
some states have opted against opening up to competition. How can the
SMD respect states' traditional authority while compelling them to do
something they have been unwilling to do all along?
Answer. Southern Company believes that even those states that have
decided not to move to retail competition and customer choice do
recognize the value to consumers of competition in wholesale electric
markets. In fact, almost all of these non-retail access states were
moving towards the development of RTOs and the formulation of new
wholesale market designs before FERC issued its SMD NOPR, mostly with
the guidance of FERC Order 2000. We do not believe that FERC should
compel states to implement SMD if the states do not believe it is in
the best interest of their own consumers. Wholesale competition will
have greater benefits in those regions that have retail competition. It
is appropriate that other regions take a more measured approach and
develop institutions and markets appropriate to their own circumstances
over time. Such an approach is more likely to avoid years of litigation
and will be more successful in achieving the goals that we all seek--
reliable supplies of electric power at the lowest possible cost to
consumers.
______
Responses of FERC Chairman and Commissioners to Questions
From Senator Graham
Question. Economic Dispatch has been discussed as an approach to
facilitate the procurement of least cost power in the wholesale
marketplace? What is your opinion of this concept?
Answer. Southern Company believes that utilizing economic dispatch
as a means ``to facilitate the procurement of least cost power in the
wholesale marketplace'' would have major impacts on current state
regulation of electric service to retail consumers, particularly in
those states that have decided to continue to have that service
provided by vertically-integrated, regulated utilities. It has the
potential to cause significant cost increases to retail customers by
requiring states to move from cost-based economic dispatch to bid-
based, competitive economic dispatch. While the idea is admirable--that
utilities should look at lower cost alternatives available in the
wholesale marketplace in determining what plants to run on an hourly
basis, attempting to actually include wholesale alternatives in
economic dispatch would create major disruptions to utility operations
and create significant additional costs.
Utilities already base the dispatch of their generators not only on
an economic dispatch of resources we own, but by also considering
generation resources available from the market. Since the passage of
FERC Order 888, we have willingly accepted, solicited, and provided
voluntary market-based bids/offers from/to the wholesale market. We
have a regulatory obligation to evaluate opportunities available in the
wholesale market not only on an economic basis but on the wholesale
supplier's ability to deliver, as well. A few of the issues we must
evaluate include generation operational issues, commitment costs of
generators, transmission limitations, or as we have seen in the recent
past, creditworthiness. Likewise, we have an obligation to serve our
native load today and will have this obligation in the future, as well.
Therefore, we must evaluate our market bids/offers with a longer term
outlook than many other market participants. Furthermore, our PSC
mandate to provide long-term reliable service forces us to evaluate the
long-term effects of any short-term opportunity. Our evaluations must
focus on providing a balance between providing energy at the lowest
cost possible while maintaining the reliability levels our customers
have come to expect and the type of service they expect in the future.
Southern Company is actively participating in the formation of
SeTrans which proposes to utilize a market design that includes a spot
market. All generators that are not committed under bilateral contracts
will have an opportunity to bid into the spot market, and load-serving
entities will be watching the spot market for opportunities to buy
lower cost power to replace their own resources. This is a much more
logical mechanism for ensuring the use of the lowest cost resources.
Including wholesale supplies in economic dispatch would thus be an
interim solution only, and a solution to a problem that doesn't exist.
______
Responses of FERC Chairman and Commissioners to Questions
From Senator Landrieu
Question. Do you believe that Participant Funding combined with
Tradable Transmission Rights at the discretion of a Regional
Transmission Organization (RTO), or a transmission entity authorized by
the FERC would increase the capacity of the transmission system?
Clearly state your positions for or against this.
Answer. EEI does not have a position on participant funding, but
does believe that costs of transmission improvements should be paid for
by those who create the need for and benefit from the improvements.
Participant funding is but one way that this principle can be
satisfied.
Southern Company does believe that participant funding with
tradable transmission rights is the best way to ensure that both
generation and transmission owners have the right price signals to
build new generation and transmission where it is needed and where it
will save consumers the most. And if those who fund transmission
improvements can capture the economic value of their investments via
tradable transmission rights, then capacity that reduces congestion is
much more likely to be built than in a pricing regime where someone has
to pay for transmission but can not reap the benefits of the
investment. We believe that in a market design that relies on
congestion pricing and tradable transmission rights to hedge
congestion, participant funding is critically important to ensure the
development of efficient markets.
Question. There seems to be a widening rift between the States and
the FERC on the FERC's plans for energy markets. If we continue this
path, we could be headed for years of litigation and no progress. What
can be done now to avoid this continuing rift?
Answer. Southern Company agrees that if we continue down the
current path planned by FERC for energy markets, we will be in for
years of litigation and increased uncertainty. The best way to avoid
this continuing rift is for the FERC to work directly with states to
tailor market design and institutions to meet the needs of individual
regions, rather than relying on a cookie-cutter approach to a national
standardized market design. In particular, FERC must work with states
to ensure that the needs of retail and other native load customers are
addressed, that planning and reserve margins are tailored to regional
needs, and that transmission pricing and interconnection costs are paid
for by those who create and benefit from the incursion of those costs.
Furthermore, Congress should settle the jurisdictional fight over
bundled retail transmission by clarifying that states that continue to
regulate bundles retail sales will continue to have jurisdiction over
all aspects of those sales.
______
Responses of Phil Tollefson's to Questions From Senator Campbell
Question. It seems that, in many ways, SMD actually undermines
electricity deregulation efforts. Would you agree that current SMD
regulations allow FERC to greatly increase its size and power; in
effect making it the centralized planning agent for the entire electric
sector?
Answer. This question goes to the heart of one of our central
concerns with the SMD proposal. The Federal Power Act establishes the
FERC as a regulatory body. The SMD proposal clearly demonstrates that
the FERC is not satisfied with its role as regulator, but rather wants
the opportunity to redesign the electric industry in a fashion of its
liking; it is assuming a planning function and neglecting the
regulatory role Congress has delegated to it.
At a time of traumatic market dislocation, the market participants
in the West--thankfully with the help of members of Congress--have had
to goad the FERC to address the pervasive market manipulation that
resulted from the failed California experiment in industry
restructuring. When the FERC should have been acting aggressively as a
regulator to address the unjust and unreasonable prices existing in the
West, instead it chose to ``one-up'' the California market planners by
creating the FERC's own ``better mousetrap'' for industry restructuring
in the guise of SMD. The electric industry and its consumers would all
be better off if the FERC devoted its attention to its role as
regulator, the role assigned to it by Congress, and left arcane aspects
of theoretical market efficiencies to college professors.
Question. How does SMD account for regional differences in
electricity markets? How will this specifically affect western state
utilities and their customers?
Answer. As proposed, the SMD rule makes virtually no account for
regional differences. Regional differences are significant and, as this
has been pointed out, the FERC has made statements, often vague and
contradictory, about its willingness to recognize and accommodate these
regional differences. Colorado Springs Utilities has not taken any
great comfort from these statements.
As is recited in the comments submitted by Colorado Springs
Utilities in the SMD docket, the West differs from the PJM region in
numerous significant respects. The Western Interconnect is
geographically expansive and sparsely populated; PJM is geographically
compact and densely populated. The topographic and meteorologic
features of these two regions are vastly different and have resulted in
different utility system designs and constraints. The Western
Interconnect is heavily reliant on hydropower resources, PJM is not. An
additional and often overlooked difference is the regulatory nature of
the utilities in the Western Interconnect. Many of the utilities in the
West are not FERC-jurisdictional. In fact, geographically a majority of
the West is served by municipal utilities, cooperatives and tribal
authorities and much of the regional transmission backbone is owned and
operated by federal power marketing authorities.
The FERC is trying to pound square pegs into round holes. Given the
recent refusal of the FERC to recognize and effectively address the
market dislocations resulting from the failed California restructuring
experiment, we are very concerned about the willingness of the FERC to
acknowledge and deal with the market dislocations of its own creation
if SMD is implemented in its present form.
Question. Many statements have been made that California's recent
electricity crisis was a regional crisis. I know that when California
needed or wanted water they got water from Colorado, now when they need
power are they going to take Colorado power? What impacts will
California's current problems have on Colorado and the other Rocky
Mountain States?
Answer. This is a good question, and the answer is complicated.
During the California blackouts, when it appeared that California was
in desperate need of power, Colorado Springs Utilities as well as many
other systems throughout the Western Interconnect did their level best
to provide any excess power to assist the residents of California. We
did this for two reasons: First, we function in a market economy and it
was beneficial for Colorado Springs Utilities to provide excess power
to California. Second, and every bit as important, the people who work
within the traditional ``natural monopoly'' utility industry are
thoroughly imbibed with the belief that reliability is ``job one''. If
another utility is facing an operational threat, we will do everything
within our power to assist.
Practically our ability to assist California was hindered by
transmission constraints. But this gets back to the point of the
regional nature of the California crisis; even though Colorado
utilities could provide little power into California due to
transmission constraints, prices for power increased dramatically
throughout the West. When Colorado Springs Utilities encountered unit
outages, and unfortunately we did during this period, the prices we had
to pay for replacement power were quite high. What is particularly
disturbing is that it is now clear that many of the California power
``shortages'' were the cynical creations of market manipulation. The
electric industry and its customers throughout the West suffered great
economic harm, and the FERC has still not effectively addressed the
underlying issues of market manipulation.
As the chief executive officer of a utility that takes its
obligations to provide reliable service to the public seriously, we are
concerned about the lingering impacts of the California restructuring
experiment and fear the repercussions of the SMD experiment, if it
moves forward. That is why we favor provisions that recognize native
load responsibilities and afford protections for native load service.
Question. Have you been asked to provide open access transmission?
How many times? By who? Did you grant the request?
Answer. Colorado Springs Utilities was one of the first non-
jurisdictional utilities to file an open access transmission tariff
with the FERC. Until recently we had no requests for service under this
tariff. The Front Range Power Company is about to go into commercial
operation with a generation facility south of the Colorado Springs
metropolitan area. Colorado Springs Utilities will provide transmission
service to Front Range under its open access tariff. We also anticipate
a request for transmission service from the City of Fountain for the
delivery of wholesale power through our system, and we believe we will
be able to accommodate this request.
Before we filed our open access transmission tariff with the FERC
in 1997, Colorado Springs Utilities received only one request to wheel
through our system. In 1994 through 1996 WestPlains was allowed to
wheel through our system to accommodate them until they completed
building their tie. Colorado Springs Utilities has never declined a
transmission request.
Question. Allen Franklin says this has been a terrible time
financially for investor-owned utilities. In fact, there have been over
180 IOUs downgraded and pending bankruptcies of the merchant power
sector. These are indeed tough times. How has public power fared during
the same period? What has Wall Street said about public power? Are you
building generation and transmission?What is your debt load?
Answer. Standard & Poor's recently issued a credit analysis report
on the public power sector that noted that the credit rating stability
of public power ``is a testament to the sector's ability to withstand
periodic shocks as well as respond to new challenges.'' More than 80%
of the public power sector has an ``A'' rating or better at this time
and public power systems are functioning well in competitive wholesale
markets. A strength of public power systems is our focus on providing
the lowest-cost power to our customers.
Many LPPC members have built transmission systems to accommodate
load growth. It is in our members' best interest to both build for load
growth and to make excess transmission capacity available to the market
place. Load serving entities and their customers who prudently built
transmission to accommodate future load growth should not be deprived
of the benefit of that investment by having their future right to use
that transmission taken away. There are mechanisms in place by which
entities can assure that transmission upgrades are made when
transmission customers are willing to bear the cost of those upgrades.
We believe that the building of new transmission should be encouraged
and believe that properly structured incentive rates might be able to
encourage such investment.
As of December 31, 2002 Colorado Springs Utilities total asset
value is $2.07 billion with $1.04 billion in long-term debt.
Response to Question From Senator Graham
Question. There seems to be a widening rift between the States and
FERC on the FERC's plans for energy markets. If we continue this path,
we could be headed for years of litigation and no progress. What can be
done to avoid this continuing rift?
Answer. The litigation to which you refer has a schizophrenic
nature. Much of this litigation is a reaction to the efforts of the
FERC to extend its jurisdiction into areas traditionally reserved to
the States, while at the same time victims of the Western energy
markets are going to court to force the FERC to perform the regulatory
functions delegated to it. Congressional action can help on both
fronts. Legislation that clearly delineates the bounds of FERC
authority would be helpful. It would also be helpful for the Congress
to remind the FERC that its first responsibility is that of a regulator
ensuring that wholesale electric rates are just and reasonable.
Appendix II
Additional Material Submitted for the Record
----------
Western Business Roundtable,
Golden, CO, March 27, 2003.
Hon. Pete Domenici,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: I am writing on behalf of the Western Business
Roundtable. Our members represent a broad base of industry sectors
across the West, including construction, manufacturing, retail sales,
refining, iron and steel, mining, electric power generation and oil and
gas exploration and development.
The Roundtable wishes to provide comment on the March 20, 2003
Senate Energy and Natural Resources staff discussion draft of a
proposed electricity title to comprehensive energy legislation.
Specifically, we would like to express concern regarding the language
that would create so-called Regional Energy Service Commissions
(RESCs).
We applaud staff for attempting to move along the discussion
regarding clarification of federal vs. state authority in the
development and governance of the wholesale electricity market. We
agree that, ultimately, the only way out of the long-time
jurisdictional quagmire that has hampered development of robust
regional electricity markets is through a model that allows
stakeholders within regions an adequate role in the development and
operation of those markets.
However, we believe that the model articulated in the staff draft
will not prove effective in expediting solutions to the significant
electricity infrastructure challenges facing the West. In fact, as
currently structured, the model will likely add further regulatory
uncertainty and delay into an already unsettled market environment.
The Roundtable has developed a model for ``Regional Market Design''
that we believe strikes a more appropriate balance of power between the
states and the Federal Energy Regulatory Commission, and which can be
instituted without upsetting long-standing authorities granted to FERC
under the Federal Power Act.
We respectfully request that our proposal, which is attached, be
entered into the record. Thank you very much.
Sincerely,
James T. Sims,
Executive Director.
Regional Market Design
a proposed model to encourage greater investment in western and other
regional wholesale electricity markets
i. background: storm clouds on the horizon
Over the past decade, unprecedented changes in the electricity
industry have uncoupled the historic link between new electric
generation and transmission construction. While competitive wholesale
electricity markets depend on a strong transmission system to flourish,
uncertainty has arisen about the roles and responsibilities for
developing infrastructure.
While electric utilities in the West have done an excellent job of
ensuring the reliability of the transmission systems serving their
native load, few new Western regional transmission improvements have
been made in the last 20 years.\1\ Worse yet, little is on the drawing
board for the next 10 years. This inertia has occurred while the West's
electric load has grown explosively--60 percent between 1982 and 2002
and another 20+ percent expected over the next decade. While thousands
of megawatts of new natural gas generation capacity located near load
has been added to meet much of this growth, the lack of significant
transmission expansion has created a situation where the West is
increasingly exposed to the fuel price volatility of natural gas.
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\1\ The grid (the so-called ``Western Interconnect'') is composed
of the geographical area containing the synchronously operated grid in
the Western part of North America, including parts of Montana,
Nebraska, New Mexico, South Dakota, Texas and Wyoming and all of
Arizona, California, Colorado, Idaho, Nevada, Oregon, Utah, Washington
and the Canadian providences of British Columbia and Alberta.
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A major lesson learned during the 2000-2001 Western electricity
crisis was that transmission grid deficiencies exacerbated a cascade of
problems. Supply scarcity, market manipulation and input fuel price
volatility all led to dramatic electricity price spikes that heavily
burdened all consumers and drove a number of important Western
industries to the edge of extinction.
Western Consumers Facing New Price Pain
Now, consumers in some parts of the West are being threatened with
rising electricity and natural gas utility bills--just as they were in
the energy crisis of 2000-2001. Spot market prices for natural gas are
over 300 percent higher than they were a year ago. Further,
hydroelectric output for the coming year is expected to be not just
below normal, but below last year's level, likely causing a further
draw on an already tight natural gas market. Many natural gas market
analysts are projecting that natural gas prices could reach a permanent
plateau of $4.00--$5.00/mmbtu. These fuel price spikes, coupled with a
lack of transmission to provide alternative electricity supply, puts
consumers in many parts of the West in a position to take it on the
chin again unless decisive action is taken now to address transmission
grid deficiencies.
Transmission Infrastructure Key To Insulating Consumers
The Western Business Roundtable (Roundtable) participated with the
Western Governors' Association (WGA) in the development of the 2001 WGA
report entitled ``Conceptual Plans for Electricity Transmission in the
West.'' That report concluded that increased transmission
infrastructure is an important tool to insulate the West from
electricity price volatility due to hydro availability and fuel price
volatility, while at the same time enabling remote low-cost coal and
renewable resources to be expanded and integrated into the Western fuel
mix.
The report went on to note that increased transmission
infrastructure will help mitigate market power issues, where one or a
few generators can dictate market prices in an area because there is
not enough transmission in place to get competing generation into the
market area.
ii. current state of play
Though there is wide recognition that the Western region needs
significant new investment in regional transmission in order to sustain
future growth, little progress has been made toward that goal. With the
exception of joint siting protocols developed by the WGA and their
federal counterparts, few other concrete steps have been taken towards
answering two critical questions:
1. What facilities are needed in the West?
2. How can an environment be created that will allow such
projects to be financed and built?
There are many reasons for this, but most boil down to the lack of
clarity regarding federal versus state regulatory authority. The
political battles surrounding those ambiguities have paralyzed
legitimate efforts to make progress on these two questions.
Exasperating the political tensions are some operational and
institutional characteristics unique to the Western region:
In many parts of the region, there are long distances
between the low cost hydroelectric and coal generating
facilities and major load centers. This characteristic promotes
unscheduled flows among various loads and generating points,
resulting in adverse effects on transmission users.
Hydropower plays a major role in the region's wholesale
electricity market.\2\ Most of this generation is provided by
federally constituted agencies (Bonneville Power Administration
and the Western Area Power Administration) that have other
objectives to take into consideration in addition to
electricity power production. Many such facilities are linked,
with multiple dams utilizing the same water to produce
electricity. In addition, there are many non-energy constraints
on how and when the water may be used, including irrigation,
species habitat preservation and recreation.
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\2\ For example, in the Northwest Power Pool Area 62 percent of the
capacity is supplied by hydropower. In the WECC, as a whole, 39 percent
of its generation comes from hydro.
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Multiple parties jointly own many large nuclear, coal and
hydro generating facilities and appurtenant transmission lines
and switchyards. Such multi-party ownership presents unique
operating and contractual challenges to market participants.
There is a high concentration of non-jurisdictional
utilities, including federal power marketing agencies,
municipalities, rural cooperatives and generation and
transmission providers. In some cases, such non-jurisdictional
utilities completely surround jurisdictional utilities.
Imposition of any changes to the Western electricity grid and
its operations must include these entities.
There are currently two proposed Regional Transmission
Organizations (RTOs) in the West--RTO West, comprised of utilities in
the Pacific Northwest, and WestConnect, an RTO located in the
Southwest. California's existing Independent System Operator (ISO) also
provides independent transmission service to electricity users. Each of
these entities has proposed and received conditional Federal Energy
Regulatory Commission (FERC) approval for market designs that have
critical and fundamental differences. These differences are proposed to
be resolved through establishment of the Seams Steering Group-Western
Interconnection (SSG-WI).
SSG-WI is intended to serve as the discussion forum for: 1)
facilitating creation of a seamless Western market; 2) proposing
resolution of issues associated with differences in RTO practices and
procedures; and (3) identifying the benefits of important multi-state/
regional transmission projects that need to be constructed to support a
regional market. However, the SSG-WI process has been painfully slow in
developing. There are a number of reasons for this lack of progress.
First, the group is a voluntary collaboration by RTO participants.
There is no formal staff or budget for this effort and no concrete
deadline for delivery of a Westwide plan. Further, the group lacks
legal standing and accountability to resolve numerous intractable
issues. Finally, several key Western market participants are not
currently signatory to any of the RTOs, thus creating gaps that make it
very difficult for SSG-WI to achieve its stated goals.
From an infrastructure perspective, this leaves the region in a
very bleak position. The SSG-WI process does not have the authority or
the tools to develop and implement a sound region-wide transmission
plan to adequately strengthen the grid on the timeline that is
necessary to protect consumers. Further, no progress has been made in
improving the investment climate for the financing of major
transmission projects.
Clearly, a regional planning mechanism is needed so that investors
can see a path to a reasonable return on investment. The most likely
method for doing so would be establishment of a regional tariff
mechanism whereby the customers who benefit from these new multi-state/
regional projects share in the cost of them. No such multi-state/
regional transmission revenue authority for new facilities exists in
the West.
iii. the roundtable's vision for the west
The Western Business Roundtable's vision for the West is one in
which:
Consumers across the West have greater access to a balanced
and reliable portfolio of low-cost wholesale power sources and
are thus better protected from costly and dangerous price
spikes attributable to the volatility of a single fuel source;
Effective incentives successfully encourage the investment
necessary to build the thousands of miles of new transmission
lines that are needed to ensure the West benefits from a
diverse range of affordable generation sources;
A robust regional transmission system is capable of
efficiently moving adequate and affordable power supplies
throughout the grid for all users under various the hydro
conditions, fuel prices scenarios or system configurations; and
Fair and balanced market rules prevent market participants
from exercising market power and gaming the wholesale
electricity system to the detriment of consumers.
To accomplish this vision, we believe that the jurisdictional
ambiguities and market distortions that currently plague the wholesale
electricity markets must be resolved and resolved quickly. The West's
long-term economic viability depends on it.
iv. the roundtable's proposal: western market design
A. The Framework
The Roundtable \3\ urges state and federal policymakers to consider
a Western regional market concept structured around a ``delegation of
authority'' model. Under this approach, Congress would statutorily
authorize a Western regional entity with authority to establish and
govern a number of critical elements of market design and function,
including, at a minimum: 1) regional planning; 2) regional transmission
tariff development and administration, and; 3) siting of critical
interstate transmission facilities.
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\3\ The Edison Electric Institute, a member of the Roundtable, was
not able to endorse all of the elements of this proposal.
---------------------------------------------------------------------------
Governors of the Western states would take the lead in proposing
the specific structure and composition of such a regional entity. The
Federal Government would provide sufficient funding to establish the
Western regional entity. Once established and functioning, funding for
its operations would be provided through a fee on electricity
consumption.
We believe this approach could provide a win-win opportunity for
both Western States and the Federal Government.
From the States' perspective:
It would enhance the power of states. Rather than simply
being relegated to an advisory role in a FERC-run process, the
states, through the regional body, would enjoy real authority
to shape and monitor the interstate wholesale electricity
market in the region;
It would provide a framework to achieve what policymakers
seek--a regional planning approach developed and carried out by
regional stakeholders;
It would provide an efficient mechanism to truly deal with
the range of issues that currently plague the regional market,
but which no one state has authority to resolve;
It would assure that the proper legal and administrative
remedies will be available to assure that any state-versus-
state conflicts that may emerge can be resolved;
It would allow a mechanism to adequately fund the planning
process, thus solving one of the impediments which currently is
hampering progress of the SSG-WI process; and
It would leave the decision of how and where critical
infrastructure projects will be sited and paid for with those
policymakers who directly represent impacted consumers.
From the Feds' perspective:
It would provide an efficient, streamlined mechanism for
dealing with unique regional attributes and challenges;
Because it would require accountability by state and
regional entities, it should reduce the amount of needless
friction and delay that currently plagues federal officials as
they try to work through these jurisdictional issues; and
Under a delegation regime, Congress and the Federal
government would retain overarching authority to make sure that
the regional approach being developed by the regional entity
does not violate the overall objectives of the Federal Power
Act.
B. Critical Organizing Principles
1. All transmission entities within the region--including FERC non-
jurisdictional entities, WAPA and BPA--must be involved and treated
equitably. In the West particularly, a significant portion of the
transmission system is owned by federal power agencies, municipal
utilities and rural electric cooperatives. It is critically important
that all such entities play by the same rules and be treated equitably.
Otherwise, the goal of ending balkanization of the system will be
frustrated and regional bottlenecks will continue to exist.
2. The regional planning involved must include the entire West. The
regional body should be tasked with identifying: 1) coordination issues
needed to be resolved between functioning RTOs; 2) what facilities are
needed; 3) when those facilities need to come on-line; 4) cost
justifications for each; and 5) what is required to ensure that
reliable and affordable service is provided to all consumers in the
West.
3. When such projects identified are multi-state in nature, the
regional body must have tariff authority and use it to assure that
costs are properly allocated among all regional beneficiaries of the
project. The costs of multi-state transmission projects should be
spread across regional beneficiaries via regional transmission tariffs,
thereby eliminating the pancaking of rates that now occurs. Absent this
approach, transmission for low-cost, remote projects will not be built,
thereby causing a continued reliance on price-volatile sources built
close to load centers.
4. The regional entity needs to be vested with adequate authority
for planning, siting and issuance of Certificates of Need. The grant of
such authorities is important to assure that critical multi-state
facilities can be constructed on the timeline dictated by the regional
planning process. It is important to recognize that, in the case of
most transmission upgrade projects, only the widening of existing
transmission corridors are involved.
5. State regulatory commissions must be assured meaningful roles in
governance and operation of the process. This approach should enhance
the power of states and state commissions by giving them real
authority, via a regional mechanism, to shape and monitor the
interstate wholesale electricity market in the region;
6. A clear mechanism to govern operation of the entire interstate
grid must be established. We believe that independent entities must be
a key component of that system and will go far in mitigating the
conflicts of interest that currently occur where wholesale market
participants also control transmission planning, rights availability
and allocations.
7. Full and open transmission access is critically important. Open
and non-discriminatory access is the key to eliminating market power
abuses that result from exploitation of imperfections and bottlenecks
in the regional transmission grid.
The Roundtable believes that consumers across the West deserve and
will demand a transmission system that delivers low-cost and reliable
power when and where it is needed. We look forward to rolling up our
sleeves and continuing to work with Western Governors, State Public
Utility Commissions, Congress, FERC and other stakeholders to achieve
this and other important goals.
______
National Electrical Manufacturers Association,
Rosslyn, VA, March 27, 2003.
Hon. Pete Domenici,
Chairman, Energy and Natural Resources Committee, U.S. Senate,
Washington, DC.
Hon. Jeff Bingaman,
Ranking Member, Energy and Natural Resources Committee, U.S. Senate,
Washington, DC.
Dear Senators Domenici and Bingaman: We understand that the matter
of reliable electrical energy has many stakeholders and regret that
NEMA was unable to testify at today's hearing on electricity provisions
of the draft Senate electricity bill (S. 475). We believe that the 400
manufacturers of electrical equipment that NEMA represents are
important players in the electricity enterprise as we make the
electricity infrastructure that needs to be improved for the demands of
today and the future.
We note that several witnesses pointed out the essential nature of
transmission, without which the generation cannot be connected to the
customer. We also note that transmission reliability is defined as
including adequacy and security. While we support the efforts underway
to move to mandatory and enforceable standards under a self-regulated
regime, at the same time we note that this helps principally with the
security aspect, while investments in infrastructure are needed for
adequacy. The decreasing annual investment in transmission
infrastructure shows that inadequate incentives exist.
We have attached our written testimony for your consideration. In
it we propose the incentives in rates and taxes that we believe are
needed for transmission infrastructure improvements to occur. We have
made specific comments keyed to the draft bill.
We look forward to working with you and your staff on the
legislation needed for all of us to enjoy the economic prosperity that
is so dependent on reliable electricity.
Sincerely yours,
Edward Gray,
Director, Energy Policy.
______
Statement of Dr. Gregory Reed, Vice President, Marketing and Technology
Mitsubishi Electric Power Products, Inc., for the National Electrical
Manufacturers Association
introduction
Good morning, Senator Domenici, Senator Bingaman, and members of
the Committee on Energy and Natural Resources. I am Dr. Gregory Reed of
Mitsubishi Electric Power Products, a U.S. based manufacturer of
electric power industry products and systems, and today I am
representing the National Electrical Manufacturers Association (NEMA).
These remarks are the result of a consensus of a number of NEMA
members. The remarks are presented in the format requested in the
template for witness testimony.
NEMA is the leading trade association in the United States
representing the interests of electro-industry manufacturers. Founded
in 1926 and headquartered near Washington, D.C., its 400 member
companies manufacture products used in the generation, transmission and
distribution, control, and end-use of electricity. Domestic shipments
of electrical products within the NEMA scope exceed $100 billion.
NEMA's members have unparalleled expertise in the manufacture of
generation, transmission and distribution equipment and systems. As
such, NEMA brings important expertise and unique policy perspectives to
the issues involved in the ongoing restructuring of the electric
utility industry.
My testimony today will address NEMA's perspective regarding issues
related to improving electrical transmission system reliability.
Specifically, we will comment on the applicable provisions in the draft
Electric Transmission and Reliability Enhancement Act of 2003. We also
have commented on the March 20, 2003 ``STAFF DISCUSSION DRAFT'' where
an issue in the template is not addressed in the draft Electric
Transmission and Reliability Enhancement Act (S. 475).
We applaud the development of a draft electricity bill, and
encourage the Committee to assure that electricity provisions are part
of any comprehensive energy measure ultimately sent to the Senate
floor. Even before the recent meltdown of energy markets, electric
transmission system investments were decreasing at 15% per year. With
the situation now, with credit ratings and stock values of industry
participants far lower than they have been traditionally, it is more
difficult than ever for them to make the needed transmission
investments and Congressional action is essential.
reliability standards
Section 215 of the draft Electric Transmission and Reliability
Enhancement Act would establish mandatory and enforceable transmission
reliability standards. We support this provision.
NEMA supports policies that create enforceable and mandatory
reliability standards to ensure that the interstate transmission grid
is not operated in a manner that adversely affects system reliability.
Currently, the utility industry operates under voluntary standards
established by the National Electric Reliability Council (NERC) with
regard to the planning, engineering, and operation of electric systems.
Utilities have generally adhered to NERC's guidelines based on a
collective concern for the reliable operation of the interstate
transmission grid. NERC has no enforcement capability, however, and
their guidelines have sometimes been ignored by some market
participants.
The term transmission reliability of the interconnected bulk
electric system represents both the adequacy and security of the
electric system. NEMA is concerned with ensuring reliability through
more adequate transmission infrastructure. To date, the operational
action typically taken to ensure security has been to reduce load.
Improving the infrastructure will decrease the frequency of load
reductions.
transmission siting
Section 1221 of the staff discussion draft legislation calls for
studies of transmission congestion and designation of ``Congestion
Zones''. These areas would be eligible for special treatment in
transmission facility siting. We prefer the approach in the draft House
Energy Policy Act of 2003.
A major impediment to the construction of new transmission
facilities, especially in the form of new transmission lines, remains
the siting and permitting process. In the past, transmission lines were
built primarily to meet state requirements to serve a utility's native
loads. However, new transmission facilities, in some locations, are no
longer likely to be used to provide service to a particular utility's
customers or a regulator's constituents, but for other purposes (such
as the support of regional, multi-state, power markets).
Some state commissions and local authorities may be less likely to
authorize the development and construction of new transmission
facilities if they are used for purposes that do not directly benefit a
particular utility's customers or regulator's constituents. Therefore,
we support the provision in the draft House Energy Policy Act of 2003
to provide Federal backstop transmission line siting authority for
lines vital to wholesale interstate electricity commerce where states
have failed to act.
It is clear that additional transmission capacity is required to
meet growing electricity demand. However, the current infrastructure
can and should be enhanced as well. Deploying the technologies to do so
creates fewer siting issues. There are technologies available today
that can increase power flow capacity and enhance the controllability
of the existing transmission infrastructure. These technologies will
assist operators of the transmission system in meeting consumer demand
in the most efficient way.
Transmission voltage, capacity, and control enhancements require
significant investment in new equipment, but do not necessarily require
new rights-of-way. Addition of multiple conductors per phase and
transmission of power at a higher voltage (i.e., 765kV) may be options
under the right circumstances. In addition, other low environmental-
impact technologies are proven alternatives to the protracted process
of power line construction and avoid many of the contentious issues
associated with siting. These technologies can be implemented rapidly
and efficiently and include the following:
Increasing the transmission and distribution line capacity
through the use of higher voltages and/or larger conductor
size.
Utilizing high voltage direct current (HVDC) transmission to
nearly double capacity, better control of power transfer, and
improve overall system stability. Such technology is already in
use in the northwest, southwest and northeast.
Adding peaking power units at substations, where power goes
from sub-transmission to primary distribution, can enhance
system efficiency and reliability.
Improving power factor through the use of, for example,
capacitors or synchronous condensers. This has been
successfully done throughout many areas of the nation.
Undergrounding of transmission and distribution cables is an
alternative in places where the right of way is not available.
Building intelligence into the grid through the installation
of Flexible AC Transmission System (FACTS) technologies and
wide area controls capable of increasing the power on
stability-limited lines by as much as 40%, as well as enhancing
system reliability, ensuring higher levels of security, and
dynamically improving system controllability.
Using real-time dynamic rating systems of transmission lines
based on actual weather conditions and line currents, which can
increase the power of thermally limited lines by up to 15%.
Applying new analytical software models to better calculate
stability and thermal limits in real-time, which can provide
increased power transfers by up to 10%.
Our national transmission policy should encourage investments in
and deployment of these low environmental impact technologies.
transmission investment incentives
Section ____32 of the staff discussion draft legislation calls for
a Federal Energy Regulatory Commission (``FERC'' or ``the Commission'')
rulemaking on transmission infrastructure improvement. We support this
provision.
The draft calls for FERC to provide a rate of return that attracts
new investment. The allowed rate of return for regulated transmission
system assets investment is typically 3-4 points over prime. The rate
of return for a deregulated market would need to be approximately 6-8
points over prime. We are pleased to see that the Federal Energy
Regulatory Commission has awarded higher rates of return for
transmission for entities that join Regional Transmission Organizations
(RTOs) and has asked for public comment on this matter.
The proposal calls for FERC to consider performance and incentive
based rates. Incentive or performance-based rates should be used to
encourage transmission investments. Performance based rates have
reduced congestion costs where implemented and resulted in lower rates
for consumers. These incentives should encourage technology investments
to: improve reliability; increase availability; enhance controlability;
reduce congestion; improve power factors; increase energy efficiency;
and improve customer service.
transmission organizations/rtos
Section 407 of the staff discussion draft addresses Regional
Transmission Organizations (RTOs). We prefer the approach in the draft
House Energy Policy Act of 2003.
In part to encourage the efficient expansion of the transmission
system, and to ensure regulatory certainty, FERC issued a series of
regulations designed to facilitate the development of Regional
Transmission Organizations (``RTOs''). Under FERC Order 2000, RTOs
would be responsible for, among other things, transmission planning and
expansion consistent with applicable state and local siting
regulations. This is particularly important to bring regional
perspectives to transmission planning and siting decisions. The
Commission requires RTOs to accommodate state efforts to create
multistate agreements to review and approve new transmission
facilities. The regulations also include transmission rate incentives
designed to facilitate the development of new transmission facilities.
FERC has been implementing such rates on a case-by-case basis. FERC-
approved RTOs also should focus on the deployment of new transmission
technologies.
net metering and real-time pricing
Section ____72 of the staff discussion draft addresses net metering
and Section ____73 of the staff discussion draft addresses real-time
pricing and time of use metering. We support these provisions.
NEMA supports net metering to encourage small distributed
generation including renewables.
Real time pricing and the associated time of use meters are needed
to increase demand responsiveness. A market cannot function well
without demand response. Current electricity markets behave with a
``hockey stick'' shaped curve of price versus demand, where the costs
increase modestly for most demand ranges, but rapidly for the highest
demands as less efficient generation is brought online. Studies show
that modest demand reductions would result in significant cost
reductions that could be shared broadly across customers.
conclusion
Congress must take decisive action to ensure that the interstate
transmission grid will continue to reliably serve consumers of electric
energy, and that adequate capacity is ensured. To achieve this goal,
the nation should adopt a holistic approach to transmission policy that
not only facilitates the development of new transmission facilities,
but also recognizes and encourages the role of technology in expanding
transmission capacity from existing facilities. Accordingly, NEMA
recommends that the foundation of any new transmission policy should
rest upon the creation of a regulatory structure that: (1) promotes the
use of technology to protect and enhance the integrity and reliability
of the existing interstate transmission grid in the near-term; (2)
removes siting and permitting impediments that currently serve as a
barrier to the construction of new facilities; and (3) ensures, through
the use of rate incentives and tax policy that investments in new
transmission facilities generate a competitive return for the
investment made.
______
Utility Workers Union of America,
Washington, DC, April 15, 2003.
Hon. Pete V. Domenici,
U.S. Senate, Washington, DC.
Re: Senate Energy Bill
Dear Senator Domenici: The Senate Energy and Natural Resources
Committee is considering major energy legislation that will revise the
very structure of electricity markets. The Utility Workers Union of
America (UWUA) is very worried that the Electricity title (Title XII,
in the initial draft) presents grave risks for consumers. Should this
legislation pass, there is the real likelihood that rates will rise
higher than they otherwise would, especially for residential and small
business customers. The reliability of supply may also be in jeopardy.
For close to 100 years, investor-owned distribution companies that
directly serve customers have primarily been under state jurisdiction.
State commissions not only set rates, but they (or companion state
agencies) insure that there is adequate generation supply and oversee
siting of transmission facilities. The system has worked remarkably
well. Throughout the 20th century, the United States enjoyed some of
the lowest-priced and most reliable electricity in the world. This was
true not only in comparison with other industrial countries, but even
less-developed countries with very low labor costs and cheap
hydroelectric supplies.
At the state level, restructuring efforts reached a high-water mark
about two years ago. The meltdown of the California market caused a
number of states to repeal or back track on their restructuring plans.
Restructuring has also not succeeded in other states that haven't had
such spectacular failures and press coverage as California. In most
restructured states, small consumers have been unable to find
competitive suppliers willing to sell to them. Rates have jumped
significantly in Texas; in Massachusetts (where one company just
received a 410% increase in its default service rates); and other
states where markets are open to competition. Consumers are not gaining
anything but confusion and uncertainty. Prices have also become far
more volatile.
Restructuring places supply at the risk of unregulated players who
respond solely to the interests of stockholders, not to regulatory
mandates or the needs of consumers.
In this context, UWUA urges the Senate not to pass the Electricity
title. In particular:
Repeal of PUHCA will eliminate essential public protection:
The Public Utilities Holding Company Act was adopted in the
1930's, the last time this country experienced the types of
accounting tricks and market manipulations recently seen with
the Enron crisis. This is not the time to remove existing
restrictions that limit the ability of holding companies to use
the assets of regulated distribution companies to launch risky
new ventures. As recent experience proves, unregulated power
marketers and brokers can cost consumers billions, as well as
putting the livelihoods and pension plans of their own
employees at great risk.
FERC should not be given enhanced jurisdiction, particularly
not at the expense of state regulatory authority: Provisions of
the energy act that would give FERC any additional authority
over entities not currently regulated at the federal level
(municipally owned utilities, power marketing authorities,
federal entities, etc.); that would force open access to
transmission lines and assets currently reserved for native
load; or that would allow FERC to grant ``incentive'' rates of
return to transmission owners are ill-advised. The latter
``incentive'' proposal would simply shift billions of dollars
from consumers to owners of transmission. Given FERC's
extraordinary failure to protect California consumers from
flagrant market manipulation, despite the pleas of a broad
range of elected and appointed officials, expanding FERC's
jurisdiction puts consumers at needless risk. States have
proved to be far more effective in insuring just and reasonable
rates, and insuring reliable supply.
FERC strongly believes that the market is the best protector of
consumer interests. But one hundred years of state regulation proves
that states do a better job of protecting consumer. FERC's policies of
the past few years prove it is more interested in vindicating its
procompetition views than actually keeping rates down.
On behalf of the 50,000 men and women of UWUA who fully understand
the value of inexpensive and reliable electric supply, I urge you not
to adopt the Electricity title.
Sincerely,
Donald E. Wightman,
National President.
______
American Public Power Association,
American Public Gas Association,
April 16, 2003.
Hon. Pete Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: Our associations represent the locally-owned gas
and electric distribution utilities that serve more than 80 million
residential and commercial customers. We recognize and appreciate your
leadership and strongly support your committee colleagues as you move
forward to pass energy legislation that is vital for our nation's
economic success. We have every confidence that the Senate's final
product will be a balanced one that treats consumers of both natural
gas and electricity in a fair and equitable manner.
Given the ongoing revelations of manipulation and abuse that have
taken place in electricity markets, we believe it is essential to
provide natural gas consumers with protections from similar abuses.
Specifically, we urge you to support limited amendments to the Natural
Gas Act that would extend and strengthen consumer protections in these
areas: penalties, manipulative trading practices, market transparency,
and refunds. While the reasons are obvious why APGA strongly supports
this change, it is also becoming more important for NRECA and APPA
members who increasingly rely on natural gas to generate electricity.
As pipeline customers, all of our members should be entitled to
consumer protections under the NGA that are similar to those afforded
consumers under the FPA.
We understand that some interests have already weighed-in against
such consumer protection provisions, arguing that the fundamental
structure of the NGA should remain unchanged. We agree about the need
to keep the fundamental provisions of the NGA intact. Making the four
above-referenced changes to the NGA to bring about parity and
consistency between the two acts, however, does not constitute a
``fundamental'' change of the NGA structure. Rather such changes simply
further the overriding purpose of the NGA to protect natural gas
consumers from paying excessive rates.
Absent the same upgrades for the NGA that the Senate now proposes
for the FPA, the Federal Energy Regulatory Commission (FERC) will
continue to be handicapped in its ability to protect natural gas
consumers. This fact was recognized by FERC Chairman Pat Wood in
testimony before your committee last month when he specifically
supported these changes to the NGA. FERC Commissioner Bill Massey
reinforced this support at that same hearing.
After all is said on the matter, the primary purpose for both acts
is still to protect consumers. On behalf of more than 3,400 cities and
towns and the many communities served by consumer- and municipally-
owned utilities, we request that you support these common sense and
much-needed protections for the customers of both natural gas and
electricity.
Sincerely,
Alan Richardson, President.
Glenn English, Chief Executive
Officer,
National Rural Electric
Cooperative Association.
Bob Cave, President,
American Public Gas
Association.
______
Statement of Hon. Bill Richardson, Governor of New Mexico,
on Behalf of the Western Governors' Association
Thank you, Mr. Chairman and Senator Thomas, for your thoughtful
proposals to amend federal law governing electric power regulation.
This is an issue of intense interest to Western governors. The
region is still recovering from the 2000-2001 Western electricity
crisis and there is significant concern about the intended and
unintended consequences of the Standard Market Design proposed by the
Federal Energy Regulatory Commission (FERC).
In our testimony to this Committee in 2001, we related three areas
of agreement among Western governors on federal electricity
legislation.
1. Federal electric system reliability legislation needs to
be enacted to ensure that present voluntary regional
reliability standards can be enforced. Such legislation should
recognize and defer to standards developed and enforced in the
Western Interconnection. States should have a primary role in
overseeing the standards setting and enforcement processes.
2. FERC should not be granted the power of eminent domain for
electric transmission line siting, even in a backstop mode.
There is no evidence in the West that states have ever blocked
the permitting of an interstate transmission project. There is
no evidence nationwide that states have systematically abused
their responsibilities to balance transmission needs with other
public needs in decisions on the siting of transmission
facilities.
3. The federal government should not intrude into the retail
electric decisions of states. In our testimony to you in June
2001, Western governors opposed federal legislation that would
expand FERC's authority into retail electricity decisions. With
FERC's release of its proposed Standard Market Design rule in
July, our concerns about FERC intrusion into retail electricity
decisions have been greatly amplified.
We continue to maintain these positions.
In the following testimony, we provide important background on the
unique elements of the Western Interconnection and then offer
observations on the 13 topics on which you requested comment.
undue elements of the western interconnection
In crafting legislation, the Committee should keep in mind that
North America is served by three essentially electrically-separate
power grids. Within the Western Interconnection, the western states,
western Canadian provinces and northwest Mexico are fully integrated.
However, there are few ties between the Western Interconnection and the
other interconnections. Generators are synchronized within
interconnections but not between interconnections.
The geography of the system is important, because it defines the
practical maximum extent of power markets and impacts of power outages.
An event in British Columbia can cause blackouts in Arizona, but an
outage in Arizona cannot impact states in the Eastern Interconnection.
The Eastern and Western grids have developed different features.
The Western grid is defined by long distances between generators and
customers (load centers). The Eastern grid more resembles a tight-knit
network of transmission. As a result, the maintenance of stable system
voltage is often the constraining factor in the operation of the
Western grid, while the thermal limits of lines is typically the
constraining factor in the Eastern grid.
Another reality differentiating the East and the West is the vast
ownership of land in the West by federal agencies. This land ownership
pattern often creates different transmission facility siting challenges
than in the East.
As a result of these differences, institutions and practices \1\ to
address electric power issues have evolved differently in the West than
in the East.
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\1\ For example, the Western industry has relied on rating the
capacity of transmission paths under different system conditions and
limiting the use of paths to their rated capacities. Because paths are
not similarly rated in the Eastern Interconnection, the industry relies
on Transmission Loading Relief (TLRs) in the East to force users to cut
back power transfers when reliability is threatened.
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We recommend that federal legislation recognize these electrical,
geographic and institutional differences and resist the temptation to
adopt federal government-centric, one-size-fits-all solutions. We
believe the experience in Western power markets over the past several
years has illustrated the limitations of policy made in Washington,
D.C. for the West.
regional energy services commissions
The Staff Discussion Draft includes a Subtitle B--``State
Coordination'' and proposes that states be provided authority to ``. .
. enter into agreements to establish Regional Energy Services
Commissions (RESC)''. This provision would potentially confer upon
RESCs: 1) authority currently held by states, like transmission siting;
and 2) Federal Energy Regulatory Commission authority related to
regulation of the wholesale trade of electricity. FERC would have
jurisdiction for resolving disputes among RESCs and participating and
non-participating states, as well as between RESCs.
The Western Governors commend the Committee for moving from the top
down, centralized model proposed by FERC in its Standard Market Design
NOPR, to a more regional model. While the Western states have just
begun to analyze the pros and cons of the RESC provisions, this change
of direction from Washington, D.C., is welcome.
To fully understand the implications of the RESC concept, it would
be desirable for Congress to first clarify state and FERC jurisdiction
over such issues as the transmission component of bundled retail sales
and transmission to serve native load. Such clarification is critical
to understanding the scope of Section 404(b) which allows the
Commission to ``affirm, modify, or set aside such State regulatory
order or ruling in whole or in part if the Commission finds that the
State regulatory authority's order or ruling would result in undue
discrimination in the provision of the transmission of electric energy
and/or sale of such energy at wholesale . . . or results in unjust or
unreasonable rates, charges or classifications . . .''
Our initial review of the Staff Discussion Draft raises numerous
questions that need to be addressed before proceeding. For example:
Why is five percent of U.S. electricity load the minimum
threshold for establishing a RESC?
Can there be one-state RESCs?
Will multiple RESCs be allowed in the Western
Interconnection?
How are the RESCs to be funded?
Why would states, which have territory in two regions, be
prohibited from participating in RESCs in both regions?
What are the specific grounds for the Secretary of Energy to
disapprove an RESC?
In Section 403(a), what does ``primary jurisdiction'' mean?
Market power review and monitoring functions could reside
with the RESC. Where does the responsibility for market
mitigation actions reside?
Section 403(b) provides for the RESC to develop enforcement
mechanisms. Where does the authority to implement such
enforcement mechanisms reside?
Is the intent of the Staff Discussion Draft to leave FERC
with authority over electricity decisions whenever any state
objects to a decision of a RESC or does not agree to join an
RESC?
If an RESC does not address any of the items listed in
Section 402(a), would FERC assert jurisdiction under Section
406 regardless of whether or not such functions would otherwise
be under FERC jurisdiction? For example, if an RESC elects not
to take one type of action (e.g., recommend preemption of state
jurisdiction over bundled transmission service), does Section
406 grant FERC the authority to preempt state law? Or, if an
RESC finds that the costs of an RTO exceeds the benefits, can
it disapprove an RTO under Section 407? If it disapproves an
RTO that is not cost-effective, can FERC assert jurisdiction
over the RTO proposal under Section 406?
What is the role of the RESC in overseeing the operation of
an RTO after it has been approved?
Certain features of the RESC proposal, when combined with other
provisions in the Staff Discussion Draft, are clearly not acceptable.
For example, granting FERC the power to preempt state siting laws
unless the RESC assumes the power to preempt state siting laws is a
non-starter.
As noted previously, the Western Governors are encouraged by the
shift in policy direction represented by the discussion draft. In fact,
WGA's existing policy calls on Congress to ``allow states to create
regional mechanisms to decide regional power issues, including but not
limited to, the creation and operation of regional transmission
organizations, reliability of the western power grid, transmission
system planning and expansion, maintenance requirements and market
monitoring''. Before proceeding with any provision on regional
governance, however, it is important for the Committee to understand
how Western states interact today on electricity issues and what steps
they have taken to address future regional issues since the 2000-01
electricity crisis.
Interstate cooperation on electricity issues occurs in the West at
three levels: among the governors; among the state commissions
established to regulate the electricity industry; and among the state
energy siting agencies and programs. At the level of the governors, the
Western Governors' Association and its energy arm, the Western
Interstate Energy Board, address policy issues as directed. This
interaction and analysis has included extensive public and private
participation and led to a series of policy resolutions and reports on
the Western Electricity Interconnection (see ``Conceptual Plains for
Electricity Transmission in the West'' and ``Financing Electricity
Transmission Expansion in the West: A Report to the Western
Governors'').
In 1983, the Committee on Regional Electricity Cooperation (CREPC)
was formed to facilitate voluntary cooperation among Western state and
Western Canadian provincial utility regulatory commissions and energy
agencies on issues of common interest. This group has met regularly
since that time to address issues and interact with the Federal Energy
Regulatory Commission. CREPC has kept the region's commissions and
energy agencies abreast of policy, regulatory and technical issues and
serves as the primary forum for interstate cooperation on electricity
policy issues in the West.
In 2002, the Western Governors and concerned federal agencies
entered into a ``Protocol Governing the Siting of lnterstate
Transmission Lines in the West''. Under the Protocol, the states and
federal agencies agree to collaborate in the review of siting proposals
and permit requests from the time of their submission in order to
identify and resolve siting issues as quickly as possible. To date, no
new transmission proposals have been offered so we have not yet had an
occasion to use the process. We are confident that the West's long
record of cooperation will help ensure that any future use of the
process provided in the Protocol will be successful. It has been the
West's experience that federal agency delays are the most significant
impediment to siting of transmission lines in the West. The governors
believe the Protocol will result in a marked improvement in future
siting activities.
Western governors have recognized that additional regional
cooperation may be necessary to address increasing demand for
electricity, prevent recurrences of the 2000-2001 crisis, and
capitalize on the region's vast fossil and renewable energy resources.
The governors submitted a proposal for a regional information and
planning mechanism with the U.S. Department of Energy in May 2002.
Secretary of Energy Spencer Abraham responded positively to the
proposal in June 2002 and indicated his willingness to fund the
development of such a system, appropriations permitting, in FY 2003.
The purpose of this initiative is to ensure that public and private
decisionmakers are fully informed about the Western electricity market
in order to enhance public interest monitoring and regulation of market
activities and to help producers and consumers deal with market
fluctuations more effectively than they were able to in the Western
electricity crisis.
Furthermore, in December 2002, the governors asked WGA (WIEB) and
CREPC to explore and propose a regional decision-making mechanism for
their consideration. The Department of Energy has agreed to support
this project as well. The purpose of this initiative is to explore how
the states might address future interstate policy issues that affect
the operation of the Western Interconnection in a more formal manner
than the informal, voluntary collaboration provided by CREPC. This
initiative is just getting underway.
The Western Governors commend the Committee for recognizing the
regional and state nature of the nation's electricity markets. We hope
to work closely with you, Chairman Domenici, Senator Bingaman, Senator
Thomas and others to reach consensus about this proposal. Given the
complexity of the proposal, and the unique aspects of different regions
of the nation we find it difficult to express optimism that this
proposal could be fully vetted in the apparently very short timeframe
before your Committee must act on energy legislation. In the interim,
we suggest that Congress should clarify state and FERC jurisdiction
over such issues as the transmission component of bundled retail sales
and transmission to serve native load, and the Committee should
instruct the U.S. Department of Energy and FERC to cooperate with
states within the nation's regional electricity markets on the
development of appropriate regional governance models, which may vary
according to the needs of each region. Through such a program of
cooperation and assistance, reliable and economical regional governance
mechanisms are much more likely to emerge. As noted, the Western
Governors have already directed that a Western model be explored.
reliability standards
We are pleased that Senator Thomas' bill includes reliability
provisions that will meet the needs of the West and the nation. On
behalf of the Western Governors, I would like to thank Senator Thomas,
and his staff, again for their leadership and support on this issue. If
the Congress takes no other action this year on electricity issues, we
urge you to enact these reliability provisions. The proposal in the
Staff Discussion Draft to make a Regional Energy Services Commission
the regional reliability organization, as opposed to playing an
oversight role in the setting and enforcement of reliability standards,
is particularly problematic.
Since 1997, Western Governors have urged the enactment of federal
reliability legislation to provide a legal underpinning for enforcing
reliability standards. As a stop-gap measure, the West has implemented
a system of contracts to make standards enforceable. Most control areas
in the West have executed the contracts, a few have not. However, such
a contract enforcement system is not a long-term substitute for federal
legislation.
In 1997, 2001, and again last year, Western Governors called for a
new approach to setting and enforcing reliability standards that
includes a public process for setting standards, review of standards by
states, application of standards to all users of the grid, enforcement
of sanctions for non-compliance with the standards, mandatory
membership by operators of the grid in regional reliability councils,
and joint state/federal oversight of establishing and enforcing
reliability standards. In 2000, the governors urged the ``organization
of regional advisory bodies of affected states and Canadian provinces
to advise regional and North American organizations and the Federal
Energy Regulatory Commission and appropriate Canadian and Mexican
regulatory authorities . . . FERC should defer to the advice of such
regional advisory bodies when advisory bodies cover an entire
interconnection.''
Through extensive on-going collaborative efforts between the
Western states/provinces and the Western electric power industry, three
principles have been developed that guide our views of federal
reliability legislation.
(1) Deference must be given to standards adopted within and
for the Western Interconnection.
(2) The implementation and enforcement of standards must be
delegated to the West.
(3) States must have a role in the process.
Over a three-year period, Western states, provinces and industry
worked to streamline and consolidate existing industry grid management
institutions into one new entity, the Western Electricity Coordinating
Council. Western Governors called for the expeditious establishment of
the new institution. Last April, the new institution was formed. WECC
was designed to rapidly implement the provisions of federal reliability
legislation and is prepared to do so as soon as such legislation is
enacted.
Through extensive work with the North American Electric Reliability
Council (NERC), the central elements of what the West needs are
included in the NERC consensus legislation that the Senate passed last
year, thanks to Senator Thomas' leadership. The NERC language provides
for deference to standards that cover an entire interconnection. It
provides for delegation of implementation and enforcement functions to
a regional entity, such as the WECC, that is much closer to the issues
than a North American body or FERC. It provides for a state advisory
role and enables FERC to defer to such advice when given on an
interconnection-wide basis. This approach builds on existing technical
expertise in the industry and states and does not require the
establishment of a large new federal bureaucracy.
The reliability provisions of the Thomas bill meet the needs of the
West and we urge their adoption. Given the uncertain future of the
Regional Energy Services Commission concept, we recommend that the
Committee keep the language in the Thomas bill related to the creation
of Regional Advisory Bodies.
open access
Western governors believe that all segments of the Western
industry, including investor-owned utilities, public power, federal
power marketing administrations, power marketers and brokers, and
independent power producers, should participate in the competitive
wholesale electricity market. Congress should ensure that federal
institutions, such as the power marketing administrations, participate
in regional efforts to promote wholesale competition. This may include
participation in cost-effective Regional Transmission Organizations.
transmission siting and preemption of state siting law
We are disappointed that the staff draft proposes to take the
Committee down the unproductive path of federal preemption of state
electric transmission siting laws. The proposed transfer of these
powers from states to RESC's is likewise problematic unless it is truly
voluntary and not compelled by threat of federal preemption. The
continued emphasis on preempting state siting authority is particularly
discouraging given the fact that no evidence has been presented in any
forum that we are aware of that justifies granting FERC such preemptive
powers, even in a backstop role. Senator Thomas' approach, which
focuses on getting the federal government's house in order on
transmission permitting, is much more appropriate.
Western governors have a long record of proactively addressing the
transmission needs in the Western Interconnection. We recognize that an
adequate transmission system is necessary to maintain the reliability
of the grid and enable competitive wholesale electricity markets.
The record in the West provides no evidence supporting the need for
new centralization of land use decisions that are more properly made in
the West based on intelligent tradeoffs of needs and values. We urge
the Committee to keep in mind that no western state has ever denied a
permit for an interstate transmission line. The idea of federal eminent
domain for electric transmission is a solution looking for a problem.
The major challenge to siting of transmission in the West rests
with federal land management agencies. The federal government owns vast
tracts of land in the West (e.g., approximately 83% of the land in
Nevada, 65% of Utah, 63% of Idaho, 53% of Oregon, 50% of Wyoming, 46%
of Arizona, 45% of California, 36% of Colorado, 34% of New Mexico, 29%
of Washington, and 28% of Montana.) If it accomplishes its goals, the
preemption language, in fact, may provide a perverse incentive to site
more transmission on private lands, further exacerbating the decrease
in private lands in the West.
Few new transmission lines have been proposed in the West over the
past decade due to increased reliance on natural gas fired generation
near load centers and uncertainty created by FERC policies. The
President's Executive Order 13212 directing federal agencies to
expedite energy-related projects provides needed direction. However,
agencies need adequate resources to execute their responsibilities.
States also recognize that timely action is essential in the modern
competitive electricity market.
The 2001 WGA ``Conceptual Transmission Plan'' recommended that all
siting review processes be streamlined and coordinated to enable timely
construction of transmission lines. State review processes should
address both local and Western Interconnection needs, and federal
agency review processes should be coordinated internally as well as
with State and Tribal authorities. The 2002 report, ``Financing
Electricity Transmission Expansion in the West'', reinforced the need
for pro-active transmission planning and collaborative action on
transmission permitting as important ingredients for project financing.
We have acted on these recommendations. Last summer, 12 Western
governors, including all governors in the Western Interconnection,
signed the Protocol Governing the Siting of Interstate Transmission
Lines in the West to coordinate and collaborate on the review of
proposed interstate transmission lines. We are pleased to report that
the Secretaries of the Interior, Agriculture, and Energy and the
Chairman of the White House Council on Environmental Quality also
signed the protocol.
The protocol is a constructive step in recognizing the regional
impacts of major transmission additions. When coupled with appropriate
direction and funding of federal land management agencies, we believe
the Protocol will get the job done. Unlike the approach in the Staff
Discussion Draft, our approach does not create new centralized
bureaucracy at DOE or FERC. Our approach is to make existing government
agencies work, not add new layers of government review. We would be
pleased to report to you in a year on the progress made under the
protocol.
We urge the Committee to not include eminent domain provisions in
its energy bill.
transmission investment and transmission cost allocation
Western Governors have not adopted a collective position on
transmission investment incentives or transmission cost allocation.
However, we would caution that such incentives are not free. The costs
of such incentives will be borne by our citizens and businesses.
Western Governors have worked on transmission financing for several
years. Beginning with the WGA Transmission Roundtable in May 2001,
Western governors have been concerned about the issue of financing new
transmission. At our request, in February 2002, Western stakeholders
delivered a report to governors on transmission financing titled
Financing Electricity Transmission Expansion in the West. The report
reached consensus on several points, including:
Confidence in cost recovery, including a reasonable return
on investment, is the key to financing transmission expansion.
Uncertainty over the future structure of the industry and
recovery of transmission investment costs have contributed to a
lack of investment in recent years.
Due to the long lead-time required for transmission
construction, further investment to expand the transmission
infrastructure in the western states may be needed now to bring
economic and strategic benefits to customers in the future.
There are two distinct models for identifying transmission
expansion projects, securing the necessary capital investment
and providing for the recovery of the investment costs. These
are the market-driven model and the total system cost model.
The two models could co-exist and transmission projects
could be financed through a combination of both models. The
approach used should be determined on a project-specific basis.
Since the report, each of the nascent RTOs in the West has
developed transmission financing approaches. These efforts continue to
be refined.
puhca
Western governors have not taken a collective position on
amendments or repeal of the Public Utilities Holding Company Act.
purpa
Western governors have not taken a collective position on
amendments to the Public Utility Regulatory Policies Act. However, we
do note that it seems inappropriate to condition the elimination of the
``must purchase'' provisions of PURPA on the existence of ``competitive
wholesale markets'' or the existence of retail competition. The
existence of competitive wholesale markets remains an issue of much
dispute and few states in the West have or are likely to endorse retail
competition in the near term.
net metering and real-time pricing
Net metering is an appropriate electricity policy. Every state in
the West already has some form of net metering. If the Committee
retains the provision, it should allow each state PUC to decide the
nature of such policy in the context of state law.
Western governors have identified demand response as a critical
element for well-functioning electricity markets. During the 2000-2001
Western electricity crisis, many novel demand response programs were
put in place. The evaluation of the efficacy of specific programs
continues. If the Committee retains the provision, it should allow each
state PUC to decide the appropriateness of such policy in the context
of state law.
renewable energy
Significant progress is being made in the West to expand the
generation of electricity from renewable resources. Several states have
adopted aggressive Renewable Portfolio Standards. Other states have
additional programs in place to increase renewable energy generation
like financial incentives and generation disclosure requirements.
Western governors agree on the need to extend and expand the
existing renewable energy production tax credit. The credit has been
particularly helpful in expanding the development of wind resources in
the West. As additional wind generation is deployed, the cost of wind
generation decreases. Similar improvements can be expected if the
deployment of solar, geothermal and biomass generation technologies
accelerates. Although not within the purview of this Committee, we
would urge you to work with the Senate Finance Committee to include a
production tax credit in final energy legislation.
Although not part of the electricity provisions of pending bills,
the governors also support the development of new advanced clean coal
technologies.
market transparency, anti-manipulation, enforcement
Much has been learned from the Western electricity crisis of 2000-
2001. The Committee is to be complimented for focusing on the core FERC
functions of market monitoring and enforcement. FERC's performance in
these critical areas needs to be improved and should be a higher
priority than seeking to expand jurisdiction into areas of state
responsibility.
In addition to the reforms proposed thus far, Western governors
believe that a robust information and planning system is necessary to
ensure that adequate infrastructure is in place to avoid future crises.
Comprehensive and up-to-date data are critical to assure resource
adequacy. We would encourage the Committee to direct the Department of
Energy and FERC to assist the West in developing such an information
and planning system.
______
Statement of Michehl R. Gent, President and Chief Executive Officer,
North American Electric Reliability Council
My name is Michehl Gent and I am president and chief executive
officer of the North American Electric Reliability Council (NERC).
NERC is a not-for-profit organization formed after the Northeast
blackout in 1965. NERC's mission is to ensure that the bulk electric
system in North America is reliable, adequate, and secure. NERC works
with all segments of the electric industry as well as customers and
regulators to ``keep the lights on'' by developing and encouraging
compliance with rules for the reliable operation and planning of these
systems. NERC comprises ten Regional Reliability Councils that account
for virtually all the electricity supplied in the United States,
Canada, and a portion of Baja California Norte, Mexico.
NERC supports the reliability provisions (Section 104) of S. 475,
the ``Electric Transmission and Reliability Enhancement Act of 2003,''
with minor technical changes. The reliability provisions of S. 475 are
similar to the reliability provisions that the Senate adopted last year
as part of H.R. 4. They are also largely the same as the reliability
provisions included in Subtitle C of the legislation approved last week
by the House Energy and Air Quality Subcommittee, the ``Energy Policy
Act of 2003.''
With or without Congressional guidance, the electricity industry is
changing in fundamental ways. These changes are disrupting the
mechanisms, relationships and incentives that have long ensured the
reliability of the North American electricity grid. To ensure that
these changes do not jeopardize the reliability of our interconnected
electric transmission system, we must shift from a system of voluntary
compliance with reliability standards to a system of mandatory
compliance. NERC and a substantial majority of other industry
participants believe that the best way to do this is through an
independent, industry self-regulatory organization to set and enforce
mandatory reliability rules, subject to oversight within the United
States by the Federal Energy Regulatory Commission.
Section 104 of S. 475 embraces this concept and contains largely
the same language that we understand the House and Senate conferees
agreed to during the conference on H.R. 4 in the last Congress. NERC
requests that you make minor changes to the language in Section 104, to
track the language on governance of regional entities that is contained
in Section 7031 of the bill the House Subcommittee approved last week.
I have attached specific suggested language for the revision to this
testimony (Attachment 1).* NERC will be pleased to work with Committee
members and Committee staff on the language.
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* Attachments 1 and 2 have been retained in committee files.
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NERC has appeared before Committee on a number of occasions,
testifying in support of reliability legislation. The Senate adopted
NERC-supported reliability language in 2000 (S. 2071) and again in 2002
(as part of H.R. 4). Today I will focus on two questions: (1) why
reliability legislation is needed now; and (2) how Section 104 of S.
475 meets this need. I will also provide NERC's views on the
reliability provisions (Title XII, Subtitle D) contained in the staff
draft dated March 25, 2003.
why is reliability legislation needed now?
NERC sets the reliability standards by which the grid is operated
from moment to moment, as well as the standards for what must be taken
into account by those that plan, design, and construct an integrated
system that is capable of being operated reliably. The NERC standards
do not specify how many generators or transmission lines to build, or
where to build them. They do indicate what planned and unplanned
contingencies the system must be able to meet to ensure that it can
retain its integrity under a broad range of actual supply, demand and
equipment outage conditions. We attribute the reliability of the
present system to these standards, which have been in practice for
decades.
The interconnected bulk electric system is subject to any number of
unexpected and uncontrollable events, as a matter of course. Severe
weather may knock down transmission lines, lightning strikes may cause
short circuits, mechanical equipment may fail due to fatigue or
overloading, generating plants may suffer breakdowns, fuel supplies can
be disrupted, human error can lead to the outage of equipment, or we
may inadvertently operate in an unstudied state. To that list of
everyday occurrences, we now have added the threat of terrorist
activity directed at the bulk electric system. The bulk electric system
is designed and operated generally in what we refer to as a ``first
contingency'' status, that is, the system must be able to withstand the
loss of the single largest element (generator, transmission line,
transformer, etc.) and still remain stable and secure. Otherwise,
because of the instantaneous nature of electricity, we would risk
cascading outages with severe economic and public safety consequences
that could occur in a matter of seconds.
I have attached to my testimony a table describing five notable
occasions when we did have such a cascading outage: November 9, 1965 in
the Northeastern United States and Eastern Canada; July 13, 1977 in New
York City; July 2, 1996 in the West; August 10, 1996 in the West; and
June 25, 1998 in the Upper Mid-West and western Ontario (Attachment 2).
The scope and duration of these outages underscore why we must take all
reasonable steps to prevent such widespread cascading outages where
possible, and why we must have solid restoration plans when outages do
occur. Mandatory reliability rules and an effective means to monitor
and enforce compliance with them are the major component of those
reasonable steps.
NERC's rules, which are not now enforceable, have generally been
followed by participants in the electricity industry, but that is
starting to change. As competitive, economic and political pressures on
electricity suppliers increase and as the traditional mechanisms,
relationships, and incentives for ensuring reliability are altered,
NERC is seeing an increase in the number and severity of rules
violations. Moreover, new issues are arising that demand an institution
focused on reliability that can act fairly, but decisively, and in a
timely manner.
Let me give you an example. Traditionally, integrated utilities
operated their generators to supply both the ``real'' (MW) and
``reactive'' (MVar) power necessary to maintain reliable operation of
the transmission system, and charged for these services as part of the
regulated cost of service. (It's worth noting here that control of
flows and voltages on an electric system is not accomplished by valves
and switches, as in gas or telecommunications systems, but by
controlling the real and reactive power outputs of generators.) These
``services'' provided by generators included such things as spinning
and non-spinning reserves and system voltage support. Now, with the
generation function separated from the transmission function in many
cases, these ``services'' are no longer provided by a single,
integrated entity, but must be arranged and paid for separately through
tariffs and contracts with generators. To assure that this is done, we
need enforceable standards that require transmission operators
(including RTOs) to make adequate provision in their tariffs and
contracts for these essential reliability services. How these
arrangements are made can be the subject of filings with FERC or other
regulators, but they must be made. Absent such enforceable standards,
the reliability of our interconnected grids will be at serious risk.
To accommodate the changes taking place in the industry, NERC is
rewriting all of its reliability standards according to a new
``functional'' reliability model that sets out measurable and, under
Section 104 of S. 475, enforceable requirements for entities that are
responsible for performing critical reliability functions. These new
standards will place uniform requirements on those that have the
responsibility for maintaining the minute-to-minute balance between
supply and demand, for seeing that power flows remain within the
physical limits of the system, and that grid voltages stay within
tolerance.
Let me give you another, very different example of why this
legislation is needed. NERC plays a critical role in protecting our
industry's critical infrastructure from both physical and cyber
attacks. Since the early 1980s, NERC has been involved with the
electromagnetic pulse phenomenon, vulnerability of electric systems to
state-sponsored, multi-site sabotage and terrorism, Year 2000 rollover
impacts, and most recently the threat of cyber terrorism. At the heart
of NERC's efforts has been its ability to marshal] the industry's best
experts on the design and operation of electricity systems in North
America, and serve as the industry's point of contact with various
federal government agencies, including the National Security Council,
the Department of Energy, the Nuclear Regulatory Commission, the
Federal Bureau of Investigation, and now the new Department of Homeland
Security, to reduce the vulnerability of interconnected electric
systems to such threats.
I know that this Committee understands how vitally important this
function is. Yet, NERC's continuing ability to serve this function
cannot be taken for granted. NERC traditionally has been funded by
contributions from its member Regional Councils, which are in turn
funded by their member organizations. New entrants and the pressure of
competitive markets have made this funding mechanism increasingly
unsatisfactory. A new funding mechanism is needed that properly and
fairly supports NERC's activities, including its activities related to
critical infrastructure protection. Section 104 of S. 475 would address
this issue by authorizing FERC to certify an electric reliability
organization that, among other things, has established rules that
``allocate equitably reasonable dues, fees and other charges among end
users for all activities under this section.'' See proposed new Federal
Power Act section 215(c)(2)(B).
section 104 of s. 475 would provide for an organization capable of
protecting the reliability and the security of the north american
electricity grid
We need legislation to change from a system of voluntary
transmission system reliability rules to one that has an industry-led
organization promulgating and enforcing mandatory rules, backed by FERC
in the United States and by the appropriate regulators in Canada and
Mexico. Section 104 of S. 475 would do this. Under its provisions:
Reliability rules would be mandatory and enforceable.
Rules would apply to all owners, operators and users of the
bulk power system.
Rules would be fairly developed and fairly applied by an
independent, industry self-regulatory organization drawing on
the technical expertise of industry stakeholders.
FERC would oversee that process within the United States.
This approach would respect the international character of
the interconnected North American electric transmission system.
Regional entities would have a significant role in
implementing and enforcing compliance with these reliability
standards, with delegated authority to propose appropriate
regional reliability standards.
A broad coalition joins NERC in supporting this approach to
legislation, including the Western Governors Association, the National
Association of Regulatory Utility Commissioners, the National
Association of State Utility Consumer Advocates, the American Public
Power Association, the Canadian Electricity Association, the Edison
Electric Institute, the National Rural Electric Cooperative
Association, the Institute of Electrical and Electronics Engineers, and
the Western Electricity Coordinating Council.
Right now a hole exists in the Federal Power Act, because FERC does
not have direct authority over reliability matters and does not have
jurisdiction over the entities that own almost one-third of the bulk
power system. Having an industry self-regulatory organization develop
and enforce reliability rules applicable to all owners, operators and
users of the bulk power system under government oversight, as Section
104 of S. 475 would do, takes advantage of the huge pool of technical
expertise that the industry has been able to bring to bear on this
subject over the last 35 years. Having FERC itself set the reliability
standards through its rulemaking proceedings, even if based on advice
from outside organizations, would require FERC to develop or acquire
technical expertise and experience that it does not now have, and would
dramatically expand FERC's workload at perhaps the worst possible time.
The electric industry is in a great state of flux, as regional
transmission organizations are forming and reforming, and vertically
integrated companies are separating and selling off various portions of
their business. Change is happening at different paces in different
places. With all the uncertainty as to who will ultimately operate and
plan the interconnected transmission system, it is more important than
ever that an industry-led self-regulatory organization be created to
establish and enforce reliability standards applicable to the entire
North American grid, regardless of who owns or manages which portions
of the grid, and regardless of whether the grid is being used for the
new markets that are emerging or in more traditional ways. Both market
models are likely to exist side by side for a considerable period of
time. The self-regulatory reliability system authorized in Section 104
of S. 475 is indifferent to industry structure and can help ensure that
grid reliability is maintained, even while new market structures and
new RTOs are being formed. Because FERC will provide oversight of the
electric reliability organization in the U.S., FERC can ensure that the
organization's actions are fair and balanced and closely coordinated
with FERC's evolving market policies.
The industry self-regulatory organization authorized in Section 104
of S. 475 also addresses the international character of the
interconnected grid. There is strong Canadian participation within NERC
now. Having reliability rules developed and enforced by a private
organization in which varied interests from both countries participate,
with oversight in the United States by FERC and with equivalent
activity by provincial regulators in Canada, is a practical and
effective way to develop the common set of rules needed for the
reliability of the international grid. Otherwise, U.S. regulators would
be dictating the rules that Canadian interests must follow--a prospect
that would be unacceptable to Canadian industry and government alike.
Or, regulators on either side of the border might decide to set their
own rules, which would be a recipe for chaos. Efforts are also under
way to interconnect more fully the electric systems in Mexico with
those in the United States, primarily to expand electricity trade
between the two countries. With that increased trade, the international
nature of the North American electricity market will take on even more
importance, further underscoring the necessity of having an industry
self-regulatory organization, rather than FERC itself, set and enforce
compliance with grid reliability standards.
the reliability provisions in the staff draft are not adequate
NERC does not support the reliability provisions contained in the
staff discussion draft dated March 25, 2003. Although much of the
reliability language in the staff draft is the same as that in S. 475,
the staff draft's introduction of the concept of regional energy
services commissions (RESCs) substantially changes and muddles the
reliability provisions. Assigning reliability enforcement authority to
RESCs, as the March 25 draft does, substitutes a brand new governmental
entity, with no technical competence or experience whatsoever, for the
industry-led enforcement, subject to government oversight, that is the
essence of the S. 475 reliability provisions. The RESCs apparently
would not need to meet any of the requirements for receiving delegated
enforcement authority that other regional entities would need to meet.
Introducing RESCs into the reliability context also raises a host of
unanswered questions concerning the intended relationships among FERC,
the electric reliability organization, and the RESCs. It appears that
public utilities in States with RESCs are exempted from the coverage of
the reliability provisions (which will be in Part II of the Federal
Power Act). It is not clear whether the ERO would need to submit its
funding requirements to the RESCs, since the RESCs are intended to have
rate responsibility within their regions. The staff draft also
eliminates the regional advisory body, putting in its place the RESC.
NERC urges that the necessary exploration and development of the
RESC concept for use in other areas to which it may be more suited not
delay prompt approval by Congress of urgently-needed reliability
legislation..
conclusion
NERC commends Senator Thomas for the leadership he continues to
provide on attending to the critical issue of ensuring the reliability
of the interconnected bulk power system as the electric industry
undergoes restructuring. A new electric reliability oversight system is
needed now. The continued reliability of North America's high voltage
electricity grid and the security of the consumers whose electricity
supplies depend on that grid are at stake. An industry self-regulatory
system is superior to a system of direct government regulation for
setting and enforcing compliance with grid reliability rules. The
language of Section 104 of S. 475, with the clarification of the
regional governance issue, presents a sound approach for ensuring the
continued reliability of the North American electricity grid. It is
also an approach that has widespread support among industry, state, and
consumer interests. The reliability of North America's interconnected
transmission grid need not be compromised by changes taking place in
the industry, provided reliability legislation is enacted now.
______
Statement on Behalf of the Utility Coalition Advocating
Renewable Energy
The Utility Coalition Advocating Renewable Energy (UCARE) \1\
submits this testimony supporting the inclusion of a national renewable
energy portfolio standard (RPS) in any energy legislation to be passed
by the Senate. A RPS will help diversify America's energy sources while
creating jobs, promoting economic development, enhancing the
development of domestic energy sources and reducing air pollution
emissions. Because renewable energy can help meet many of our critical
national needs, we believe a meaningful RPS should be part of our
national energy policy and adopted by the 108th Congress. During the
107th Congress, the Senate passed an energy bill that included a RPS,
however, Congress adjourned without resolving the differences between
the House and Senate. We encourage the Senate to again include a RPS in
its comprehensive energy legislation.
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\1\ UCARE is a coalition of utilities consisting of PacifiCorp, WE
Energies, Minnesota Power and PG&E Corp. that supports the enactment of
a federal renewable portfolio standard.
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Thirteen states have enacted some form of minimum renewable energy
requirements. The Department of Energy's Energy Information
Administration (EIA) projects in their Annual Energy Outlook 2003 that
5.2 gigawatts of new renewable electric generating capacity through
2025 will be added as a result of these State mandates. According to
EIA, a number of States with renewable energy portfolio standards in
place are projected to add significant amounts of renewable capacity,
including Massachusetts (1,112 megawatts), Texas (1,001 megawatts),
Nevada (778 megawatts), California (623 megawatts), Minnesota (399
megawatts), New Jersey (340 megawatts), and New York (335 megawatts).
Other States with smaller mandate requirements include Arizona, Hawaii,
Iowa, Illinois, Montana, Oregon, West Virginia, and Wisconsin. Most of
the new capacity is expected to be constructed in the near term--47
percent by 2003 and more than 60 percent by 2005.
A federal program is needed to build on these State efforts to
assist in mitigating a number of our national energy problems including
energy supply shortages, fossil fuel price increases and price
volatility, air pollution and climate change. While states are
demonstrating that renewable energy standards can work, a patchwork of
state programs with different requirements can create inefficiencies
and will not provide the benefits associated with a national program.
For example: utilities operating in more than one state will be subject
to different renewable energy targets, different enforcement mechanisms
and trading systems. It would be much more efficient and less costly to
implement if national rules with common trading market mechanisms were
in place.
A RPS will help stabilize electricity prices, reduce natural gas
prices, reduce emissions of carbon dioxide and other harmful
pollutants, create jobs and promote economic development.
Improve energy diversity: According to the EIA, over 70
percent of our electricity was generated from fossil fuels
(coal, gas and petroleum) in 2000 with only 2 percent from non-
hydro-electric renewable energy sources (7 percent currently is
provided from hydro-electric generation). A federal RPS, by
adding to the percentage electricity that all states would
receive from renewable energy sources, will diversify our fuel
mix for the future enhancing the reliability of energy supplies
for our nation.
Reduce price volatility: By encouraging a greater share of
the nation's electricity to come from renewable energy sources,
a nationally-implemented RPS will create competition with other
energy sources keeping prices down. Most new electricity
generation in the future is expected to be fueled by natural
gas. By 2020 EIA projects natural gas to increase to 32%
(double its current level) of total electricity generation. The
uncertainties surrounding our country's ability to meet this
demand can lead to shortages and price volatility.
Improve our environment: A federal RPS would significantly
reduce the emissions of carbon dioxide, nitrogen oxides, and
sulfur dioxide. Electricity generation is a leading source of
U.S. carbon emissions, accounting for over 40% of the total
emitted in the United States. According to the Union of
Concerned Scientists (UCS), a federal RPS could reduce 27
million metric tons of carbon emissions a year by 2020.
Promote economic development: A RPS would have significant
economic benefits by creating a local market for renewable
energy technologies adding to new capital investment and
creating jobs.
The Senate should adopt a market-based renewable energy portfolio
standard (RPS) requiring all retail utilities to gradually increase the
portion of electricity produced from renewable energy resources such as
wind, biomass, geothermal, and solar energy by a certain percentage
over a period of time. Utilities should meet the RPS requirement either
by generating sufficient renewable energy electricity to meet the ratio
or by purchasing tradable renewable electricity credits that would be
created and tracked. The RPS should employ market prices through credit
trading and spread the cost of supporting renewable generation more
evenly across the retail electricity market.
There are a number of principles that should be addressed in a RPS:
The requirements of a RPS need to apply across the board to
all electricity providers. The standard should apply to all
retail electricity suppliers, including all public and
cooperatively owned utilities;
The RPS should include tradable renewable credits with a
mechanism that limits the cost of a credit;
There must be an enforcement mechanism;
The RPS has to be meaningful, the ``requirements'' need to
be high enough to trigger market growth;
Renewable energy resources should at the very least include
solar, wind, ocean, geothermal, biomass, landfill gas and
incremental hydro.
In conclusion, a national RPS would make the U.S. energy supply
more reliable and more secure. The Senate last year took a good first
step and we encourage you to expand on our efforts and enact a RPS in
energy legislation in the 108th Congress.
______
Statement of the American Forest & Paper Association
summary of the american forest & paper association's statement
The Administration's National Energy Policy calls for
doubling energy output from Combined Heat and Power (CHP) units
by 2010.
Existing and future CHP facilities will be in jeopardy if
the Public Utilities Regulatory Policy Act (PURPA) is repealed
prior to the development of open markets where an independent
party determines access to the grid.
Currently, CHP represents 7 percent of total electricity
capacity and 9 percent of generation. Almost 60 percent of CHP
generation in the forest products industry is from biomass and,
thus, is climate friendly. CHP power is also highly efficient
power and helps expand the supply of affordable electricity in
an environmentally-friendly way.
On-site CHP power generation is critical to the
profitability and competitiveness of manufacturing facilities.
The increased efficiency that occurs to the manufacturing
process as a result of on-site generation frequently means the
difference between profitability or not.
To maintain existing CHP, and expand it in the future,
facilities must have access to the grid and the ability to
purchase back-up power at non-discriminatory rates. Since many
states continue to have monopoly electric utilities that own
and control both the transmission and generation of
electricity, CHP power would not get access and purchase
opportunities without PURPA.
We strongly recommend inclusion of the Carper-Collins/CHP
amendment language that passed the Senate on a voice vote in
the 107th Congress. The language establishes market conditions
by which utility obligations under PURPA would end and provides
certainty for both utilities and CHP operators.
In addition, the House Energy and Commerce Subcommittee on
Energy and Air Quality approved PURPA language that refines the
Carper-Collins amendment and accommodates the concerns of CHP
producers, and we urge the Senate Committee to consider this
language as an appropriate balance between the needs of
utilities and industrial generators of electricity.
Finally, we support removing those restrictions in PUHCA
that limit needed investment by American companies, but believe
that reporting and other requirements in PUHCA that protect
consumers and investors should remain in place to prevent
market abuse and manipulation.
The American Forest & Paper Association (AF&PA) appreciates the
opportunity to provide comments on the proposed electricity legislation
under consideration by the Senate Committee on Energy and Natural
Resources. AF&PA is the national trade association of the forest and
paper industry and represents more than 240 member companies and
related associations that engage in or represent the manufacturers of
pulp, paper, paperboard and wood products. America's forest and paper
industry ranges from state-of-the-art paper mills to small, family-
owned sawmills and some 9 million individual woodlot owners.
The U.S. forest products industry is vital to the nation's economy.
We employ 1.5 million people and rank among the top ten manufacturing
employers in 42 states with an estimated payroll of $50 billion. We are
the world's largest producer of forest products. Sales of the paper and
forest products industry top $230 billion annually in the U.S. and
export markets.
Energy is the third largest cost for the forest products industry,
making up more than 8 percent of total operating costs. Recent energy
price increases are severely impacting our competitiveness. One of the
ways we address this huge cost issue is to produce as much of our
electricity as possible through on-site cogeneration or Combined Heat
and Power (CHP). Although the industry is nearly 60 percent self-
sufficient using biomass, natural gas, coal, fuel oil and purchased
electricity to balance our energy needs. Forest products companies
spent over $2.1 billion on purchased electricity in 2000. Importantly,
the industry also sells more than 12 million megawatt-hours annually of
electricity to the transmission grid--the equivalent of a mid-sized
utility.
Since 1997, employment at U.S. paper and paperboard mills has gone
from 222,400 to 178,000--a decrease of almost 20 percent. While these
losses have been caused by a variety of factors, the additional
pressure of the current energy crisis could result in further mill
closures and job losses. This situation would be far worse, had it not
been for the forest product industry's commitment to fuel efficiency
and independence over the past three decades. Since 1972, this industry
has reduced its average total energy usage by 17 percent, reduced its
fossil fuel and purchased energy consumption by 38 percent, and
increased its energy self-sufficiency by 46 percent.
energy policy legislation and combined heat and power
Any change in energy policy clearly must take into account the
needs of consumers and producers. It also needs to address the needs of
those who have already taken positive steps to make energy consumption
more efficient. The President's National Energy Plan calls for a
doubling of energy output from CHP units by 2010. CHP is the
cornerstone of the Administration's plan to improve energy efficiency
and expand sources of electricity generation in an environmentally-
friendly way. This goal of expanded CHP power, increased efficiency and
environmentally-friendly power will not be met without the assured
access to the grid that is afforded by the Public Utility Regulatory
Policies Act of 1978 (PURPA).
The primary function of a CHP unit is to support manufacturing
operations that require both electric power and steam or other useful
thermal energy. Nonetheless, this electricity represents a critical
component of the nation's electricity supply portfolio. Currently, CHP
represents 9 percent of total electricity generated nationwide. Almost
60 percent of CHP generation in the forest products industry is from
biomass and, thus, is climate friendly. CHP power is also highly
efficient power, reaching efficiency levels of 80 percent, which is at
least twice as efficient as conventional power generation. This high
level of efficiency occurs because our manufacturing processes use both
the heat and the steam, while traditional generation units vent steam
into the atmosphere. These efficiencies have also led to significant
reductions in air emissions.
Successful development and full implementation of black liquor and
biomass gasification programs would make the forest products industry a
net exporter of renewable electricity--removing some 18 million tons of
carbon emissions from the air and generating nearly 30 gigawatts of
CHP-based electricity. This represents enough energy to power two-
thirds of California's summertime peak. These initiatives entail
substantial risk for an already capital-intensive industry. Much R&D
remains to be done to prove the technologies can work without adversely
impacting mill operations. Continued cooperation with the federal
government is crucial to reducing risk to a level that will allow
significant industry participation.
why purpa is important
PURPA was enacted to help reduce U.S. dependence on foreign oil and
encourage fuel diversity. It is one of the most successful federal
policies in promoting energy efficient generation and renewable energy.
CHP technologies make use of diverse fuel resources, including
renewables, thus lessening the nation's dependence on foreign oil.
Additionally, CHP units typically are diverse in size and
geographically dispersed. Their dispersal throughout the grid means
greater efficiency through reduced line losses, and improved system
reliability through less dependence upon central generation units.
Their smaller size also allows for continual adaptation to, and
adoption of, improving technologies. For these reasons, CHP has been a
successful addition to the nation's power supply portfolio.
In order to maintain existing CHP, and expand it in the future,
facilities must have a market to sell the power they cannot use in
their operations. Since many states continue to have monopoly electric
utilities that own and control both the transmission and generation of
electricity, CHP power would not get meaningful access to the grid
without the federal requirement under PURPA. In addition, CHP units
must be able to purchase back-up power at non-discriminatory rates.
Many industries responded to PURPA by investing billions of dollars in
new on-site CHP generation to provide electricity primarily for their
manufacturing processes and, occasionally, to the electrical grid.
Under PURPA, electric utilities are required to interconnect and
purchase power from ``Qualifying Facilities,'' or QFs, and they are
obligated to sell standby, back-up and maintenance power to such
facilities on a non-discriminatory basis. This dual guarantee of a
place to sell excess power and to purchase backup power has made it
possible for more industries to install the necessary equipment and
develop the ability to generate electricity for their own needs, in
spite of monopoly utility markets.
The power production facilities of a manufacturing operation are
generally sized to meet the optimal demand. When the facility
experiences a technical problem it must either divert the excess energy
to the grid or shut down the power plant. When the manufacturing
production process requires more energy than can be produced on site,
then electricity is purchased from the local utility. The seamless
integration of these QFs benefits not only the manufacturer, but also
the local utility by giving them access to additional power to meet
unusually high demand for power. If Congress restricts the current
access to the grid that PURPA provides, many of these facilities will
be economically harmed.
purpa's role in a transitioning market
While some regions of the country have moved to a more competitive
environment, many have not. Even in those regions where competition has
been introduced, it is often limited to a few players that dominate the
market, thus depriving small generators of meaningful access to willing
buyers and sellers. In the face of monopoly and transitioning markets,
there must be an assurance of access to the grid. Without such a
requirement, utilities could simply refuse to provide access or make
the cost of access either so expensive or so difficult that connection
to the grid would be impossible. Thus, the opportunity to fully utilize
CHP assets would disappear, and the monopoly utility will dominate the
market.
Even with PURPA in place, many QFs, including CHP plants, are still
having problems selling power into the electric grid. For example, in
the Northwest and California, utilities have put up roadblocks to power
being sold to the grid or to power transmission to third parties. In
the Southeast, where monopolies control vast transmission and
distribution systems stretching over several states, utilities
regularly exercise their market power through unreasonable surcharges,
interconnection standards and fees, and ``shell game'' pricing for
backup power sales. QFs frequently face obstacles, such as overly
burdensome requirements for interconnection studies and long delays,
resulting in projects being cancelled or abandoned because the cost of
access is too high.
obligation for purchase and sale of qf power
FERC has correctly recognized that even in a state that is
scheduled to be open to retail competition, there is no guarantee that
a fully functioning competitive market for QFs to sell power into will
develop. Congressional energy policy legislation should approach PURPA
from a similar perspective. Care must be taken to ensure that CHP power
is not blocked from the grid as an unintended consequence of reforms to
PURPA. The PURPA obligation to purchase is the critical factor that
allows manufacturers to contribute to a more diverse energy supply for
this nation. If the purchase requirement is eliminated in advance of a
truly competitive market place, then many existing CHP assets will
become uneconomic, and future CHP development will stall because
financing for CHP units is highly dependent on access to the grid.
Similarly, the importance of a federal guarantee for back-up power
at just and reasonable rates cannot be over-emphasized in states that
remain dominated by monopoly utilities. Without it, QFs would be
captive to unregulated monopolies that could charge what they wish.
Even in states that have implemented some form of electric
restructuring, tariffs and regulations often continue to favor
incumbent utilities, and viable options for back-up power often are not
offered by competitive suppliers. The QF must be assured of receiving
back-up power on a nondiscriminatory basis and at just and reasonable
rates, especially if the utility is the ``provider of last resort''
serving retail load. To the extent that utilities have an obligation to
serve retail loads, they also should continue to have the obligation to
provide back-up power to QFs on a nondiscriminatory basis. Once there
is a truly competitive retail market, and QFs can buy back-up power in
the open market, then, and only then, will the back-up power guarantee
no longer be essential to existing and future CHP power generators.
assessment of senate legislative proposals
The purchase and sale requirements of PURPA should not be repealed
without consideration of the conditions in the market where the QF is
located. The draft Senate Committee language and S. 475 both reflect
major changes from the Senate passed energy bill in the 107th Congress,
which contained the language offered by Senators Carper and Collins.
The Carper-Collins amendment ensured that CHP technology would remain
viable in transitioning electricity markets. Specifically, the language
established an appropriate transition from current laws protecting CHP
and other small generation plants from abuses of monopoly market power
by utilities. PURPA has been critical in allowing CHP plants that serve
industrial and commercial facilities to exist in an otherwise monopoly
market. As retail and wholesale electricity markets become open to
competition these provisions become unnecessary.
The Carper-Collins/CHP amendment passed the Senate on a voice-vote
after a motion to table was rejected by a 60-37 vote. It recognized
that not all of the nation's electricity markets are the same and
rejected draconian, one-size-fits-all approaches to ending PURPA's
obligations that run be counter-productive to maintaining and
increasing CHP usage. By establishing market conditions under which
PURPA obligations would end, the amendment provided certainty for both
utilities and CHP operators.
Further, we have significant concerns about the newly proposed
Regional Energy Services Commission (RESC). While we understand that
the genesis of this proposal emerges from frustrations with recent
actions of the FERC, we believe the approach will be counter productive
to the creation of competitive electricity markets and will make
interconnection between different regions of the country more rather
than less difficult. It threatens to increase the energy costs of
American manufacturers and make them less competitive. More
specifically, giving a new untested regional authority the ability to
terminate the Federal obligation to purchase and sell electricity under
PURPA is completely counter to the intent of the Carper-Collins
amendment that was overwhelmingly support by the Senate last year.
We strongly recommend inclusion of the Carper-Collins/CHP amendment
in this legislation to guarantee that CHP plants will have meaningful
and continuing access to willing buyers and sellers of power before
current PURPA provisions are eliminated. In addition, the House Energy
and Commerce Subcommittee has adopted refinements to the Carper-Collins
language to the legislation it approved on March 19th. Industrial users
and generators of electricity support the House subcommittee passed
provisions relating to PURPA and urge the Senate Committee to consider
this language as an appropriate balance between the needs of utilities
and industrial generators of electricity.
other issues
A transmission grid operated in a fair and non-discriminatory
manner is essential to industrial consumers whether they produce their
own power, or whether they are simply a purchaser of electricity. Our
goal is a transmission system that allows buyers of electricity as much
access to sellers of electricity as possible. Industrial customers
recognize that until we achieve the open transmission system, the
utilities who own monopoly transmission and distribution facilities
will still possess and exercise market power. These utilities have
often used their government-granted monopoly power to the detriment of
industrial users by favoring their own power generation over other--
often lower priced power--produced by others.
Generally speaking, AF&PA supports the idea that new transmission
capacity is needed in some, but not all, areas of the country, and
there needs to be a reasonable and timely approach for siting and
building of new transmission lines. The House Subcommittee bill has a
modest approach for transmission siting and should be considered going
forward to ensure that consumers' capacity needs are met as quickly as
possible. However, we oppose efforts to require transmission investment
incentives. We believe FERC currently has the authority to use
incentives where they are needed. We are concerned that efforts that
essentially require incentives for new transmission will unnecessarily
increase prices to consumers.
Finally, we find almost daily stories in the press about utilities
allegedly manipulating energy markets. There have been countless
instances where utilities have shifted debt from unregulated affiliates
to those affiliates subject to state regulations, thus forcing costs to
be borne by consumers. While we support removing those restrictions in
PUHCA that limit needed investment by American companies, we also
believe that reporting and other requirements in PUHCA that protect
consumers and investors should remain in place to prevent market abuse
and manipulation. Rules are needed to address the operational
unbundling of generation, transmission, system control, marketing, and
local distribution functions. The need for federal authority to address
market power and anti-competitive activities is as essential today for
avoiding such abuses as it was 70 years ago.
conclusion
Industrial users and congenerators recognize and fully support the
need for more electricity generation and transmission. PURPA has been--
and will continue to--be an essential law. It encourages the adoption
of new technologies. It has produced a broader, more efficient, more
environmentally favorable base of electricity generation. Because of
PURPA, electricity has been added in smaller increments, thus not
burdening users with paying for generation that proved to be much
larger than necessary. And the cost of building that generation was
funded by private capital. The National Energy Plan, including the goal
of doubling CHP units by 2010, will be seriously undermined by efforts
to repeal PURPA where open markets are not in force and no independent
party determines access to the grid.
Any changes to PURPA must be made with a full recognition of their
potential impact on existing CHP assets as well as plans for future
expansion of CHP. The access to the grid afforded by PURPA and the
rights for back-up and standby power, are essential in markets and
regions of the country where competitive markets are not yet
functioning effectively. In the spirit of moving toward more
competitive markets in the future, the Congress should, at a minimum,
ensure that this power generation is not disadvantaged by monopolistic
markets by making the changes we have suggested.
______
Summary of Testimony of Alden Meyer, Director of Government Relations,
Union of Concerned Scientists
Investments in domestic renewable energy sources, together with
continued efficiency improvements, can:
reduce the vulnerability of our energy system to disruption
of supplies and price shocks;
create skilled jobs for American workers, and export
opportunities for U.S. companies;
reduce emissions of harmful air pollutants;
provide fuel diversity and price stability benefits for
electricity consumers.
In spite of these compelling environmental, economic, and security
benefits, renewable energy technologies continue to face many market
barriers, which unnecessarily keep them from reaching their full
potential. A national Renewable Electricity Standard for electricity
that requires utilities to gradually increase the portion of
electricity produced from renewable resources such as wind, biomass,
geothermal, and solar energy is needed to overcome these barriers.
Recent analyses by UCS and the Energy Information Administration
demonstrate that the United States could affordably generate at least
20 percent of our electricity from non-hydro renewable energy by 2020.
Even using very conservative assumptions on renewable energy costs, EIA
found that a 10 percent RPS would result in net savings for consumers
on their electricity and natural gas bills throughout the 2002-2020
period. Increasing the renewable energy standard to 20 percent by 2020
would result in greater fuel diversity and environmental benefits
compared to the 10 percent standard, and would still provide savings to
energy consumers.
The public overwhelmingly supports this policy. A survey conducted
last year by Mellman Associates found that when presented with
arguments for and against a 20 percent renewable energy standard, 70
percent of voters support it, while only 21 percent oppose it.
With appropriate policies, renewable energy technologies can
provide Americans with the clean and reliable electricity they desire,
while also saving them money, contributing to our nation's energy
security and achieving significant reductions in harmful emissions.
The net metering and renewable energy production incentive
provisions included in the current draft bill before the committee are
laudable and deserving of support. But by themselves, these provisions
will not get the job done. A strong, market-friendly renewable
electricity standard is required to realize the full potential of
America's renewable energy resources. Such a standard should be
included in any bill this committee reports to the full Senate.
Statement of Alden Meyer, Director of Government Relations,
Union of Concerned Scientists
i. introduction
The Union of Concerned Scientists (UCS) is a nonprofit organization
of more than 60,000 citizens and scientists working for practical
environmental solutions. For more than two decades, UCS has combined
rigorous analysis with committed advocacy to reduce the environmental
impacts and risks of energy production and use. Our clean energy
program focuses on encouraging the development of clean and renewable
energy resources, such as solar, wind, geothermal and biomass energy,
and on improving energy efficiency.
We favor the adoption of policies to increase; the use of renewable
energy resources in our nation's electricity generation mix. Such
policies are needed to meet our future electricity needs, diversify our
electricity supply, reduce the vulnerability of our energy system,
stabilize electricity prices, and protect the environment.
Specifically, we endorse a renewable electricity standard, sometimes
also known as a renewable portfolio standard--a market-based mechanism
that requires utilities to gradually increase: the portion of
electricity produced from renewable resources.
The electricity industry penetrates every sector of the economy and
our lives. It keeps our food fresh. It lights up the darkness. It
powers the manufacturing process. It runs life-giving medical systems
and mind-enriching information systems. It helps warm us in the winter
and cools us in the summer.
As important as electricity is to the economy, the tragic events of
September 11 have brought renewed attention to how vital and connected
our energy system is to national security. The vulnerability of the
energy infrastructure to attack has been increasingly recognized as a
significant issue, with terrorist threats reported to nuclear power
plants and natural gas pipelines, and heightened security implemented
at dams, power plants, refineries, liquefied natural gas tankers and
terminals, and the electrical grid.
Electricity use also has a significant impact on the environment.
Electricity accounts for less than three percent of U.S. economic
activity. Yet, it accounts for more than 26 percent of smog producing
nitrogen oxide emissions, one-third of toxic mercury emissions, some 40
percent of climate-changing carbon dioxide emissions, and 64 percent of
acid rain-causing sulfur-dioxide emissions.
Unfortunately, there are no quick fixes to make the United States
energy independent, ensure price stability, or clean up the air we
breathe. However, investments in domestic renewable energy sources,
together with continued efficiency improvements, can gradually reduce
our dependence on imports and reduce the vulnerability of the U.S.
energy system to disruption of supplies or to attack. Investments that
increase fuel diversity strengthen the ability of our economy to
withstand supply interruptions or price shocks from any one fuel
source. Investments in indigenous renewable energy sources keep money
circulating and creating jobs in regional economies, and create export
opportunities. And of course, investments in clean air benefit everyone
that breathes the air.
By investing in renewable energy, our nation promotes a host of
important public goods: national security, fuel diversity, price
stability, universal and reliable electric service, economic
development, and a healthier environment. Most importantly, investing
in renewable energy can provide all these benefits and reduce
electricity costs.
In this testimony, we review the potential for renewable energy and
how it can help promote these public goods. We then present the
renewable energy standard for electricity as the best policy mechanism
for reducing market barriers and stimulating the development of
renewable energy resources. Finally, we review three recent studies
that show we can significantly improve our efficiency and increase the
contribution of renewable energy to our electricity mix, while lowering
consumer energy bills.
ii. renewable energy potential, benefits, and barriers
The United States is blessed by an abundance of renewable energy
resources from the sun, wind, and earth. The technical potential of
good wind areas, covering only 6 percent of the lower 48 state land
area, could theoretically supply more than one and a third times the
total current national demand for electricity. An area just over one
hundred miles by one hundreds miles in Nevada could produce enough
electricity from the sun to meet annual national demand. We have large
untapped geothermal and biomass (energy crops and plant waste)
resources. Of course, there are limits to how much of this potential
can be used economically, because of competing lard uses, competing
costs from other energy sources, and limits to the transmission system.
The important question is how much it would cost to supply a specific
percentage of our electricity from non-hydroelectric renewable energy
sources. As this testimony will later show, recent analyses demonstrate
we could affordably generate at least 20 percent of our electricity
from non-hydro renewable energy by 2020.
The benefits of renewable energy are as plentiful as the resource
itself--environmental improvement, economic development, and increased
fuel diversity and national security.
Harnessing renewable energy conserves natural resources for future
generations, and reduces the environmental and public health impacts of
mining, refining, transporting. burning, and disposing of wastes from
fossil fuels, as well as reducing air emissions. Renewable resources
also provide insurance against increased costs from stricter
environmental regulations in the future.
Renewable energy provides new economic development opportunities,
especially in rural areas that are rich in wind and biomass resources.
According to the U.S. Department of Energy, generating 5 percent of the
country's electricity with wind power by 2020 would add $60 billion in
capital investment in rural America, and create 80,000 new jobs.
Renewable energy technologies also offer the potential for a very large
export market, as many countries around the world are increasing their
use of renewable resources.
Renewable energy technologies diversify our energy resource
portfolio, reducing exposure to energy supply interruptions and price
volatility, which can affect the entire economy. Indeed, Stephen Brown,
director of energy economics at the Dallas Federal Reserve Bank, notes
that ``nine of the 10 last recessions have been preceded by sharply
higher energy prices.'' Two years ago, soaring natural gas prices was
one key factor in the California energy crisis that caused rolling
blackouts and cost energy consumers billions of dollars. There are now
significant indications that the natural gas price volatility
experienced during 2001 was not an isolated event. Just last week, as
the composite price of March natural gas on the New York Mercantile
Exchange,jumped 65 percent in one clay, the Wall Street Journal
reported industry observers as saying that ``the U.S. is entering a
prolonged period of higher natural gas prices, and the days of $3
natural gas, which lasted from the mid-1980s until about 2000, may be
gone.''
There is also a growing recognition that renewable energy and
efficiency can enhance energy security. An official banner at the
Administration's Renewable Energy Summit in the fall of 2001 read:
``Expand Renewable Energy For National Security.'' James Woolsey,
former head of the Central Intelligence Agency, Robert McFarlane,
President Reagan's former national security advisor, and Admiral Thomas
Moorer. former chair of the Joint Chiefs of Staff, together wrote
Congressional leader September 2001 urging enactment of minimum
standards for renewable fuels and electricity, along with an increase
in energy efficiency funding, in order to increase national security.
In spite of these compelling environmental, economic, and security
benefits, renewable energy technologies continue to face many market
barriers, which unnecessarily keep them from reaching their full
potential.
Renewable energy has made great strides in reducing costs, thanks
to research and development and growth in domestic and global capacity.
The cost for wind and solar electricity has come down by 80-90 percent
over the past two decades. However, like all emerging technologies,
renewable resources face commercialization barriers. They must compete
at a disadvantage against the entrenched industries. They lack
infrastructure, and their costs are high because of a lack of economies
of scale.
Renewable energy technologies face distortions in tax and spending
policy. Studies have established that federal and state tax and
spending policies tend to favor fossil-fuel technologies over renewable
energy. A recent study by the Renewable Energy Policy Project showed
that between 1943 and 1999, the nuclear industry received over $145
billion in federal subsidies vs. $4.4 billion for solar energy and $1.3
billion for wind energy. Another study by the non-partisan
Congressional Joint Committee on Taxation projected that the oil and
gas industries would receive an estimated $11 billion in tax incentives
for exploration and production activities between 1999 and 2003. In
addition to these subsidies, conventional generating technologies enjoy
a lower tax burden. Fuel expenditures can be deducted from taxable
income, but few renewable technologies benefit from this deduction,
since most do not use market-supplied fuels. Income and property taxes
are higher for renewable energy, which require large capital
investments but have low fuel and operating expenses.
Many of the benefits of renewable resources, such as reduced
pollution and greater energy diversity, are not reflected in market
prices, thus eliminating much of the incentive for consumers to switch
to these technologies. Other important market barriers to renewable
resources include: lack of information by customers, institutional
barriers, the small size and high transaction costs of many renewable
technologies, high financing costs, split incentives among those who
make energy decisions and those who bear the costs, and high
transmission costs.
Some have called for future support of renewable energy through
``green marketing,'' selling portfolios with a higher renewable energy
content (and lower emissions) to customers who are willing to pay more
for them. We strongly support green marketing as a means to increase
the use of renewable energy and reduce the environmental impacts of
energy use. Surveys show that many customers are willing to pay more
for renewable energy, and pilot programs have shown promising, but not
overwhelming results.
Green marketing is not a substitute for sound public policy,
however. There are many barriers to customers switching to green power,
not the least of which is inertia. More than fifteen years after
deregulation of long-distance telephone service, half of telephone
customers still had not switched suppliers, even though they could get
much lower prices by doing so. A recent study by the National Renewable
Energy Laboratory projects that in an optimistic scenario, green
marketing could increase the percentage of renewable energy in our
electricity mix from about 2 percent today to only about 3 percent in
ten years.
With green electricity, the benefits of any individual customer's
choice accrue to everyone, not the individual customer. Green customers
gets the same undifferentiated electrons and breathe the same air as
their neighbors choosing to buy power from cheap, dirty coal plants,
creating a strong incentive for people to be ``free riders'' rather
than pay higher costs for renewable resources. People recognize this
public benefits aspect of green power. While they consistently say they
are willing to pay more for electricity that is cleaner and includes
more renewable energy, they overwhelmingly prefer that everyone pay for
these benefits to relying on volunteers. A deliberative poll by Texas
utilities found that 79 percent of participants favored everyone paying
a small amount to support renewable energy, versus 17 percent favoring
relying only on green marketing.
iii. the renewable energy standard
A number of complementary policies should be enacted to reduce
market barriers to renewable energy development:
Extending production tax credits of 1.7 cents per kWh and
expanding them to cover all clean, renewable resources
(excluding hydropower);
Enacting a federal public benefit fund to match state
programs for energy efficiency, renewable energy, research and
development, and protecting low-income customers;
Adopting national net metering standards, allowing consumers
who generate their own electricity with renewable energy
systems to feed surplus electricity back to the grid and spin
their meters backward, thus receiving retail prices for their
surplus power production;
Increasing spending on renewable energy research and
development.
The deployment of all these policy solutions will be required to
truly level the playing field for renewable energy. However, we believe
that a national Renewable Electricity Standard for electricity--also
known as a Renewable Portfolio Standard (RPS) is the cornerstone of any
comprehensive policy approach to stimulate renewable energy
development. A national RPS can diversify our energy supply with clean,
domestic resources, It will help improve our national security,
stabilize electricity prices, reduce natural gas prices, reduce
emissions of carbon dioxide which are heating up the earth and threaten
to destabilize the climate--and other harmful air pollutants, and
create jobs--especially in rural areas--and new income for farmers and
ranchers.
For these reasons, we believe a national RPS should be included in
any electricity bill reported by this Committee.
The RPS is a market-based mechanism that requires utilities to
gradually increase the portion of electricity produced from renewable
resources such as wind, biomass, geothermal, and solar energy. It is
akin to building codes, or efficiency standards for buildings,
appliances, or vehicles, and is designed to integrate renewable
resources into the marketplace in the most cost-effective fashion.
By using tradable ``renewable energy credits'' to achieve
compliance at the lowest cost, the RPS would function much like the
Clean Air Act credit-trading system, which permits lower-cost, market-
based compliance with air pollution regulations. Electricity suppliers
can generate renewable electricity themselves, purchase renewable
electricity and credits from generators, or buy credits in a secondary
trading market. This market-based approach creates competition among
renewable generators, providing the greatest amount of clean power for
the lowest price, and creates an ongoing incentive to drive down costs.
Thirteen states--Arizona, California, Connecticut, Iowa, Maine,
Massachusetts, Minnesota, Nevada, New Jersey, New Mexico. Pennsylvania,
Texas, and Wisconsin--have enacted minimum renewable energy
requirements. But energy production creates national economic and
environmental problems that need national solutions. The U.S. Senate
recognized this need last year when they passed the first-ever national
renewable energy standard with strong bi-partisan support. As part of
comprehensive energy legislation (H.R. 4), the Senate passed a 10
percent by 2020 renewable energy standard that, if signed into law,
would have saved consumers money on their energy bills and resulted in
the U.S. increasing its total home-grown renewable power to over 74,000
megawatts (MW). This level of renewable development would produce
enough electricity to meet the needs of 53 million typical homes.
The RPS is the surest mechanism for securing the public benefits of
renewable energy sources and for reducing their cost to enable them to
become more competitive. It is a market mechanism, setting a uniform
standard and allowing companies to determine the best way to meet it.
The market picks the winning and losing technologies and projects, not
administrators. The RPS will reduce renewable energy costs by:
Providing a revenue stream that will enable manufacturers
and developers to obtain project financing at a reasonable cost
and make investments in expanding capacity to meet an expanding
renewable energy market.
Allowing economies of scale in manufacturing, installation,
operation and maintenance of renewable energy facilities.
Promoting vigorous competition among renewable energy
developers and technologies to meet the standard at the lowest
cost.
Inducing development of renewables in the regions of the
country where they are the most cost-effective, while avoiding
expensive long-distance transmission, by allowing national
renewable energy credit trading.
Reducing transaction costs, by enabling suppliers to buy
credits and avoid having to negotiate many small contracts with
individual renewable energy projects.
Some people have asked why hydropower is not eligible to earn
renewable energy credits in most RPS proposals. The primary reason for
not including hydro is that it is a mature resource and technology. In
most cases, it is already highly competitive. It will not benefit
appreciably from the cost-reduction mechanisms outlined above, and an
RPS that included hydro would produce negligible, if any, increases in
hydro generation.
Some people have also expressed concerns about the variable output
of renewable sources like solar and wind, and believe that an RPS would
affect the reliability of our energy system. However, the electric
system is designed to handle unexpected swings in energy supply and
demand, such as significant changes in consumer demand or even the
failure of a large power plant or transmission line. Solar energy is
also generally most plentiful when it is most needed-when air-
conditioners are causing high electricity demand. There are several
areas in Europe, including parts of Spain, Germany, and Denmark, where
wind power already supplies over 20 percent of the electricity with no
adverse effects on the reliability of the system. In addition, several
important renewable energy sources, such as geothermal, biomass, and
landfill gas systems can operate around the clock. Studies by the EIA
and the Union of Concerned Scientists show these nonintermittent,
dispatchable renewable plants would generate about half of the nation's
non-hydro renewable energy under a 10 percent RPS in 2020. Renewable
energy can increase the reliability of the overall system, by
diversifying our resource base and using supplies that are not
vulnerable to periodic shortages or other supply interruptions.
iv. benefits of a renewable portfolio standard
Three recent studies, one by the U.S. Energy Information
Administration (EIA) and two by the Union of Concerned Scientists, show
that a 10 percent RPS by 2020 is easily achievable and can stimulate
economic development and increase energy security, while reducing
consumer energy bills as well as local and global environmental
hazards. Increasing the RPS to 20 percent by 2025 would result in
greater diversity, environmental, and economic development benefits
compared to the 10 percent standard, and would still provide savings to
energy consumers. When combined with energy efficiency measures and
additional renewable energy policies, the RPS can significantly lower
consumer energy bills.
EIA Analysis: The EIA study was conducted at the request of Senator
Frank Murkowski, as the Senate considered inclusion of the RPS as part
of comprehensive national energy legislation (S. 1766). As part of
their analysis, the EIA examined the costs of using the RPS to achieve
levels of 10 percent (both with and without the sunset provision in S.
1766) and 20 percent renewable electricity supplies by the year 2020.
The EIA scenarios found benefits to consumers from increasing
renewable energy use despite including a number of assumptions that are
extremely unfavorable to renewable energy. Many of these assumptions
were examined and rejected by the Interlaboratory Working Group--made
up of experts from the National Renewable Energy Lab, Oak Ridge
National Lab, Pacific Northwest Lab, Battelle Memorial Institute, and
Lawrence Berkeley National Lab--in their Scenarios for a Clean Energy
Future (IWG, 2000). In some of the most important such assumptions, EIA
Used higher cost and worse performance assumptions for most
renewable technologies than recent experience or projections by
the Electric Power Research Institute and DOE;
Arbitrarily increased the capital cost of wind, biomass, and
geothermal technologies by up to 200 percent in a given region
after a fairly small amount of the regional potential is met;
more than 90 percent of the highest value wind resources in the
US, for example, are assigned a capital cost multiplier of 200
percent; and
Limited the penetration of variable output resources like
wind and solar power to 15 percent of a region's electricity
generation; in parts of Germany, Denmark and Spain, wind power
is already providing more than 20 percent of total electricity
generation.
These assumptions, and others, led to projections of very high
renewable energy prices in high renewable energy penetration scenarios.
With the availability and penetration of the lowest cost wind and
biomass resources assumed to be sharply limited, higher RPS levels in
ETA's version of the model require deploying more expensive renewable
resources.
Despite these overly conservative assumptions for renewable energy
cost and availability, EIA still found that the 10 percent RPS would
have virtually no impact on retail electricity prices. Figure 1 * shows
that, in 2020, electricity prices would be only one-tenth of one cent
per kilowatt-hour higher than business as usual under a 10 percent FPS.
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* Figures 1-7 have been retained in committee files.
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Even these small increases in electricity prices are largely
offset, however, by lower natural gas prices. Diversifying the
electricity mix with renewable energy helps stabilize electricity
prices by easing pressure on natural gas prices and supplies. Under a
10 percent RPS, ETA found that average consumer natural gas prices are
2.2 percent lower than business as usual in 2010, and 1.9 percent lower
in 2020. These lower prices would save gas consumers $1.7 billion per
year by 2020 (2000 dollars, 8 percent discount rate).
In the key results section of its report, EIA recognizes this
benefit of increased renewable energy use by noting that ``the retail
electricity price impacts of the RPS are projected to be small because
the price impact of buying renewable credits and building the required
renewable energy is projected to be relatively small when compared with
total electricity costs and to be mostly offset by lower gas prices
that result from reduced gas use.''
However, EIA did not report on the extent to which these lower
natural gas prices offset higher electricity costs. By adding total
residential, commercial and industrial energy expenditures, it can be
seen that total non-transportation energy costs would actually be $2.7
billion lower in 2010 and only $1.5 billion or 0.3 percent higher in
2020 under the 10 percent RPS than under business as usual (Figure
2).\1\ The net present value savings of the RPS scenario would be $6.7
billion compared to the business as usual case (2000 dollars, 8 percent
discount rate).
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\1\ Results obtained through personal communication with Laura
Martin at EIA, on March 7, 2002. Tables available upon request.
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A 10 percent RPS would also help reduce emissions from power
plants. Under an RPS, carbon emissions from power plants would be 23
million metric tons or 3 percent lower than business as usual in 2010
and 53 million metric tons or 7 percent lower in 2020, according to
EIA.
``No Sunset'' Case: The EIA report also examined a 10 percent RPS
by 2020 without a key provision included in the original RPS proposed
in S. 1766--a 2020 sunset date. ETA found that this sunset provision
would cause electric generators to chose an alternative compliance
mechanism rather than develop additional renewable energy sources in
the later years of the requirement. If the sunset provision was removed
from S. 1766--as was effectively the case in the RPS passed by the
Senate--EIA found that there would be a significant impact on the costs
and benefits of the RPS.\2\ EIA results show that under a 10 percent
RPS with no sunset, average retail electricity prices would be
unchanged through 2020 compared to business as usual. Average consumer
natural gas prices would be 2.3 percent lower than business as usual in
2020. With no change to consumer electricity prices, lower natural
prices result in savings for consumers on their electricity and natural
gas bills throughout the 2002-2020 period (Figure 3). Total non-
transportation energy costs would be $3.1 billion lower in 2010 and $3
billion lower in 2020 under the 10 percent RPS than under business as
usual (Figure 2). Removing the sunset provision from the 10 percent
national standard would also nearly double total energy consumer
savings to $13.2 billion through 2020.
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\2\ The sunset does not actually have to be removed, but it must be
at least ten years after the date at which the renewable energy ramp-up
ends, in order to allow generators that come on-line late in the RPS
ramp-up enough time to recover their costs. Otherwise, no renewable
energy generation would be added in the last few years of the RPS, and
suppliers would instead buy proxy credits from or pay penalties to DOE.
The early sunset thus produces less renewable generation and higher
costs.
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EIA 20 percent analysis: Results from the ETA analysis also show
that increasing the renewable energy standard to 20 percent by 2020
would result in greater diversity and environmental benefits compared
to the 10 percent standard, and would still provide savings to energy
consumers.
Under a 20 percent RPS, ETA results show virtually no impact on
retail electricity prices compared to business as usual through 2015.
In 2020, electricity prices would be just two-tenths of one cent per
kilowatt-hour higher than business as usual.
By diversifying the energy mix even further with a 20 percent RPS,
EIA results show an even greater impact on natural gas prices and
supplies. Average consumer natural gas prices are 3 percent lower than
business as usual in 2010 and 3.6 percent lower in 2020. These lower
prices would save gas consumers $3.3 billion per year by 2020.
Similarly to the 10 percent RPS case, EIA results show that lower
natural gas prices more than offset the very small increases in
electricity prices caused by adding more renewable energy sources to
the generation mix. Total consumer energy savings would be $5.7 billion
over the next 18 years.
According to EIA, a 20 percent by 2020 RPS would also result in
greater carbon emissions savings from power plants. Carbon emissions
would be 43 million metric tons or 6 percent lower than business as
usual in 2010 and 76 million metric tons or 10 percent lower in 2020.
UCS Analysis: The Union of Concerned Scientists. in Renewing Where
We Live: A National Renewable Energy Standard Will Benefit Americas
Economy, investigated the costs and benefits of a 10 percent RPS by
2020 RPS combined with an extension of the Federal renewable energy
production tax credit as passed by the Senate in March 2002.
Our analysis used the U.S. Energy Information Administration's NEMS
computer model, with scenarios run for UCS by the Tellus Institute. We
based our business-as-usual scenario on Annual Energy Outlook 2002
(EIA, 2001), the EIA's long-term forecast of U.S. energy supply,
demand, and prices. The year 2000 is the last year of history in the
model, which makes projections through 2020. We modified several NEMS
assumptions for renewable energy, generally in line with the IWG Clean
Energy Future analysis, in order to model these technologies more
accurately.
We found that the national portfolio standard and renewable energy
tax credits passed by the Senate would reduce long run energy costs to
consumers. Total annual consumer energy bills (not including
transportation) would be $100 million lower than business as usual in
2010, and $3.8 billion or 1 percent lower in 2020 (Figure 4). The
present value of total consumer savings would be $7.8 billion between
2002 and 2020. if taxpayer costs from the tax credits and increased
federal research and development funding for renewable energy are
included, total consumer savings would be $2.8 billion.\3\ Increased
competition from renewable energy leads to lower natural gas prices,
which more than offset the slightly higher costs of generating
renewable electricity in the United States.
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\3\ Last year's House and Senate energy bills included renewable
energy tax credits worth between $2.6 billion (Congress' estimate) and
$5.2 billion (UCS' estimate) over the next 10 years. The bills also
included 10 years' worth of subsidies for fossil fuel and nuclear power
totaling about $9.1 billion in the Senate bill and $28 billion in the
House bill. (Note: these dollar figures are not discounted.)
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UCS analysis found that under a 10 percent RPS, the United States
would increase its total home-grown renewable power to over 74,000
megawatts (MW) by 2020. The majority of this development would be
powered by America's strong winds, with significant contributions from
biomass and geothermal. This level of renewable development would
produce enough electricity to meet the needs of 53 million typical
homes.
Renewable energy development resulting from the Senate-passed RPS
would bring significant economic benefits to the United States. Through
2020, the national standard would produce
$17 billion in new capital investment;
S1.2 billion in new property tax revenues for local
communities;
$410 million in lease payments to farmers and rural
landowners from wind power.
UCS also found that the increased use of renewable energy in the
United States would reduce air pollution from power plants, Nationally,
the renewable energy standard will reduce about 27 million metric tons
of carbon emissions a year by 2020. The renewable standard will also
reduce harmful water and land impacts from extracting, transporting,
and using fossil fuels.
In the future, natural gas is projected to fuel much of the new
electricity generation built in the United States without additional
policies for renewable energy. This increase in demand for natural gas
may lead to natural gas prices that are higher and more volatile than
those used in our base case analysis. Based on these assumptions, UCS
also examined the effects of a 10 percent RPS on an alternative
scenario where wholesale natural gas prices are 35 percent higher by
2020.
UCS found that the more expensive natural gas is, the greater the
savings will be from reducing natural gas use through a renewable
energy standard. In the scenario that we analyzed, total consumer
energy bill savings through 2020 from the renewable standard would more
than double to $17.6 billion. Renewable energy generation and related
economic development benefits would also increase significantly if gas
prices were higher.
In Clean Energy Blueprint: A Smarter National Energy Policy for
Today and the Future, the Union of Concerned Scientists investigated
the costs and benefits of two energy efficiency and renewable energy
scenarios, compared to business as usual. We did not examine RPS-only
scenarios, as in Renewing Where We Live or as EIA did, but looked at a
20 percent RPS in combination with other renewable energy and energy
efficiency policies.
We examined a scenario consisting primarily of the policies in the
Renewable Energy and Energy Efficiency Investment Act of 2001 (S.
1333), sponsored by Senator Jeffords. 1n addition to a 20 percent RPS,
S. 1333 would have established a federal public benefit fund and net
metering. We also assumed that research and development spending on
renewable energy and efficiency would increase 60 percent over three
years to levels recommended by the President's Committee of Advisors on
Science and Technology.
We also investigated the costs and benefits of the RPS with an
expanded suite of renewable energy and energy efficiency policies. In
addition to the above policies, these included:
Production tax credits of 1.7 cents per kWh for renewable
energy would be extended and expanded to cover all clean, non-
hydro renewable resources, helping to level the playing field
with fossil fuel and nuclear generation subsidies.
Combined heat and power: Incentives would be provided and
regulatory barriers removed for power plants that produce both
electricity and useful heat at high efficiencies.
Improved efficiency standards: National minimum efficiency
standards would be established for a dozen products; generally
to the level of good practices today. In addition, existing
national standards would be revised to levels that are
technically feasible and economically justified.
Enhanced building codes: States would adopt model building
codes established in 1999/2000, as well as new more advanced
codes established by 2010.
Tax incentives would promote efficiency improvements for
buildings and equipment beyond minimum standards.
Industrial energy efficiency measures. Industry would
improve its efficiency by 1 to 2 percent per year through
voluntary agreements, incentives, or national standards.
Like Renewing Where We Live, this analysis used the U.S. Energy
Information Administration's HEMS computer model, with scenarios run
for UCS by the Tellus Institute. For this report, we based our
business-as-usual scenario on Annual Energy Outlook 2001 (EIA, 2000).
The year 1999 is the last year of history in the model, which makes
projections through 2020. The efficiency policies were developed by and
modeled by the American Council for an Energy Efficient Economy. The
calculated energy savings were used to adjust the AEO forecasts. The
energy efficiency costs were annualized and added to the results. Once
again, we modified several NEVIS assumptions for renewable energy,
generally in line with the IWG Clean Energy Future analysis, in order
to model these technologies more accurately and applied these
modifications to both the business-as-usual scenario and the Clean
Energy Blueprint.
Combined with increased research and development, S. 1333 would
save consumers a total of $70 billion between 2002 and 2020, with
savings reaching $35 billion per year by 2020. Under a higher-gas-price
scenario, cumulative savings would reach $130 billion between 2002 and
2020. In 2020, monthly bills for a typical household would be $34 per
month under S. 1333, compared to $38 per month under business as usual
and $25 per month under the Clean Energy Blueprint,
Carbon dioxide emissions from power plants would be nearly one-
third lower than under business as usual by 2020, while sulfur dioxide
emission levels would be 8 percent lower and nitrogen oxide emissions
15 percent lower.
When combined with the energy efficiency and additional renewable
energy policies included in the Clean Energy Blueprint, the economic
and environmental benefits of the RPS are even greater. Under the
Blueprint, total energy use would be 19 percent lower than business as
usual by 2020 and only 5 percent higher than 2000 levels, due to
increased energy efficiency in homes, offices, and factories. Natural
gas use would grow by 8 percent from today's level, but be 31 percent
less than business as usually 2020. Coal-tired electricity generation
is 61 percent below business as usual in 2020 and 53 percent lower than
today's levels.
Oil use would be reduced by 5 percent, saving over 400 million
barrels per year by 2020. More oil Would be saved over the next 18
years than is projected to be economically recoverable from the Arctic
National Wildlife Refuge over 60 years. The Clean Energy Blueprint did
not include oil savings from increased energy efficiency and renewable
energy use in the transportation sector. Another recent UCS study,
Drilling in Detroit: Tapping Automaker Ingenuity to Build Safe and
Efficient Automobiles, has shown that fuel economy improvements in cars
and light trucks would provide significant oil savings (UCS, 2001). If
these savings were combined with the savings from the Clean Energy
Blueprint, the United States would save more than 15 times the oil
available in the Arctic Refuge at 2001 oil prices (Figure 5) and total
oil use would be 9 percent lower in 2010 and 23 percent lower in 2020
than under business as usual. The combined net savings to consumers
would increase to over $150 billion per year by 2020 and $645 billion
between 2002 and 2020.
Non-hydro renewable energy sources (wind, biomass, geothermal, and
solar) would produce 20 percent of the nation's electricity by 2020.
Energy efficiency measures would offset projected growth in electricity
use. Combined heat and power plants would meet 39 percent of commercial
and industrial electricity needs. Thus, the Clean Energy Blueprint
would eliminate the need for 975 of the 1,300 new power plants the
administration's National Energy Policy says we need by 2020, and
retire 180 existing coal plants and 14 nuclear plants, reducing the
number of vulnerable energy facilities.
By 2020, because of lower electricity demand and because natural
gas is used both to generate electricity and to produce useful heat,
overall natural gas generation is 33 percent lower than business as
usual in 2020. The Blueprint's efficiency and renewable energy policies
reduce natural ;as prices by 27 percent by 2020, saving businesses and
homes that use natural gas nearly $30 billion per year.
Under the Clean Energy Blueprint, net energy savings would grow to
$105 billion per year by 2020, totaling $440 billion between 2002 and
2020 (total savings between 2002 and 2020 are in 1999 dollars using a 5
percent real discount rate.) A typical family would save $350 per year
in lower energy bills by 2020 (Figure 6).
The Clean Energy Blueprint would reduce power plant carbon
emissions two-thirds by 2020 compared to business-as-usual projections
(Figure 7). Sulfur dioxide emissions, which are the primary cause of
acid rain, and nitrogen oxide emissions, a major cause of smog, would
both be reduced more than 55 percent.
The Clean Energy Blueprint would reduce the need to drill for
natural gas and to build some significant portion of the over 300,000
miles of new pipelines called for in the administration's National
Energy Policy. It would also reduce the need to mine, transport, and
burn 750 million tons of coal per year by 2020 compared to business-as-
usual projections. Moreover, energy efficiency measures and renewable
energy facilities can be deployed faster than new fossil and nuclear
energy supplies could be developed.
vi. conclusion
Survey after survey has shown that Americans want cleaner and
renewable energy sources, and that they are willing to pay more for
them. A survey conducted last year by Melhrnan Associates found that
when presented with arguments for and against a 20 percent RPS
requirement, 70 percent of voters support an RPS, while only 21 percent
oppose it.
The combination of EIA and UCS studies demonstrate that with
appropriate policies, renewable energy technologies can provide
Americans with the clean and reliable electricity they desire, while
also saving them money, contributing to our nation's energy security
and achieving significant reductions in harmful emissions.
The net metering and renewable energy production incentive
provisions included in the current drag bill before the committee are
laudable and deserving of support. But by themselves, these provisions
will not get the job done. A strong, market-friendly renewable energy
standard is required to realize the full potential of America's
renewable energy resources.
For all of these reasons, we respectfully urge that as the
Committee moves forward with its development of national energy
legislation, you support inclusion of a renewable portfolio standard.
Thank you.