Text of
Printed Hearing
The Committee on Energy and Commerce
W.J. "Billy" Tauzin, Chairman
Electricity Markets: California
Subcommittee on Energy and Air Quality
March 22, 2001
10:00 AM
2322 Rayburn House Office Building
<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:71504.wais]
ELECTRICITY MARKETS: CALIFORNIA
=======================================================================
HEARINGS
before the
SUBCOMMITTEE ON ENERGY AND AIR QUALITY
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MARCH 20 and MARCH 22, 2001
__________
Serial No. 107-6
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U.S. GOVERNMENT PRINTING OFFICE
71-504 WASHINGTON : 2001
_______________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
Office
Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2250
Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia BART STUPAK, Michigan
BARBARA CUBIN, Wyoming ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York DIANA DeGETTE, Colorado
ROY BLUNT, Missouri THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia BILL LUTHER, Minnesota
ED BRYANT, Tennessee LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Energy and Air Quality
JOE BARTON, Texas, Chairman
CHRISTOPHER COX, California RICK BOUCHER, Virginia
STEVE LARGENT, Oklahoma RALPH M. HALL, Texas
Vice Chairman TOM SAWYER, Ohio
RICHARD BURR, North Carolina ALBERT R. WYNN, Maryland
ED WHITFIELD, Kentucky MICHAEL F. DOYLE, Pennsylvania
GREG GANSKE, Iowa CHRISTOPHER JOHN, Louisiana
CHARLIE NORWOOD, Georgia HENRY A. WAXMAN, California
JOHN SHIMKUS, Illinois EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico BART GORDON, Tennessee
JOHN SHADEGG, Arizona BOBBY L. RUSH, Illinois
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York THOMAS M. BARRETT, Wisconsin
ROY BLUNT, Missouri BILL LUTHER, Minnesota
ED BRYANT, Tennessee JOHN D. DINGELL, Michigan
GEORGE RADANOVICH, California (Ex Officio)
MARY BONO, California
GREG WALDEN, Oregon
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Hearings held:
March 20, 2001............................................... 1
March 22, 2001............................................... 91
Testimony of:
Breathitt, Hon. Linda K., Commissioner, Federal Energy
Regulatory Commission...................................... 33
Cooper, Mark, Director of Research, Consumer Federation of
America.................................................... 137
Freeman, S. David, General Manager, Los Angeles Department of
Water & Power.............................................. 108
Hall, William F., Vice President Western Region, Duke Energy
North America.............................................. 122
Hebert, Hon. Curt L., Jr., Chairman, Federal Energy
Regulatory Commission...................................... 22
Keese, Hon. William J., Chairman, California Energy
Commission................................................. 94
Kline, Steven L., Vice President, Federal, Governmental and
Regulatory Relations, Pacific Gas and Electric Company..... 112
Lloyd, Alan C., Chairman, California Air Resources Board..... 101
Makovich, Lawrence, Senior Director, Cambridge Energy
Research Associates........................................ 130
Massey, Hon. William L., Commissioner, Federal Energy
Regulatory Commission...................................... 39
Pope, Jim, Electric Utility Director, Silicon Valley Power... 116
(iii)
ELECTRICITY MARKETS: CALIFORNIA
----------
TUESDAY, MARCH 20, 2001
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Energy and Air Quality,
Washington, DC.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2123, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Cox, Largent,
Burr, Whitfield, Ganske, Norwood, Shimkus, Shadegg, Bono,
Walden, Boucher, Wynn, Waxman, Markey, McCarthy, Barrett, and
Dingell (ex officio).
Also present: Representative Harman.
Staff present: Jason Bentley, majority counsel; Andy Black,
policy coordinator, Sue Sheridan, minority counsel; and Hollyn
Kidd, clerk.
Mr. Barton. The Subcommittee on Energy and Air Quality
hearing on the electricity markets in California with testimony
from the three commissioners in the Federal Energy Regulatory
Commission will come to order.
Today we are going to turn our attention to the electricity
problem in California and the West generally. We are going to
explore what has brought us to this stage, what is being done
to address it, what steps remain to be taken. This is not an
academic exercise or an inside-the-beltway game. The issue is
real.
Yesterday California was subject again to rolling
blackouts. The State was short of power. The California
independent system operator, or ISO, ordered utilities to drop
500 megawatts. That is enough electricity to power roughly
500,000 homes.
This lasted approximately an hour. For an hour, people sat
in the dark with computers shut down and manufacturing plants
idle. Today will bring even more blackouts. The question is why
and what can be done about it.
The answer is simple, yet it is not simple to do. There is
not enough supply to supply demand in the State of California.
California's peak demand exceeds its ability to supply
electricity.
The electricity deficit in California will continue through
this summer, into September, and quite probably into next year,
as well. The problem has spilled over to States outside of
California, to clients in the Pacific Northwest and leaving
some without even the promise of payment, while customer costs
have risen and all-important water reservoirs in the West are
draining lower and lower.
This summer they tell us is going to again be a deficit in
terms of rain in the West, and additional generation is not
available by other means.
There have been market structure problems in California. We
are all familiar with the California law that was passed in
1996 that helped to cause the problem. There have been acts of
God bringing high temperatures in the summer and cold
temperatures in the winter. There have been low rainfalls,
which you have already spoken of, and snowpacks, making
hydroelectric generation not as available as it would be
normally.
But there has also been a fundamental failure to understand
that power plants and transmission expansion lines have to be
constructed and they need to be built. The Federal Government
does not site power plants or transmission lines, States do.
Our ability at the Federal level to help in this regard is
limited. The Federal Power Act gives the Federal Energy
Regulatory Commission, or FERC--three Commissioners are here
today--jurisdiction over only about half of the wholesale sales
being conducted in the West today.
As it should, the Federal Energy Regulatory Commission is
taking a hard look at the recent history of some of these
wholesale sales. But again, the FERC only regulates
approximately half of these sales. If the rates they do
regulate do not appear to be just and reasonable, it is the
FERC's job to understand why and to do something about it.
FERC has requested more information on certain sales, and
has suggested that refunds are in order if they cannot be
properly justified. The FERC has taken other actions to
streamline processes and direct the State of California to
reform programs that have gone awry.
The Bush administration, in its 2 months in office has been
active, as well. One of President Bush's first acts was to
extend the emergency electricity sales for 2 weeks, giving
California time to enact reform legislation to help maintain
its existing electricity supply.
At the request of the Governor of the State, Governor Gray
Davis, President Bush issued an executive order directing
Federal agencies to expedite permits relating to construction
of new plants in California. In response to that executive
order, the Environmental Protection Agency has issued permits
for three new power plants in the past month. In response to a
request by the State of California, EPA has provided other
assistance, clarifying rules relating to operation of backup
generators.
President Bush and Secretary Abraham of the Energy
Department have engaged in discussions with the government of
Mexico about increasing electricity imports from Mexico. Again,
at the behest of Governor Davis, Secretary Abraham has sent a
letter to the FERC asking that the agency act on his request
for an extension of the waiver for qualifying facilities from
certain fuel requirements. FERC approved the qualifying
facilities waiver last Wednesday, I am told.
After hearing the testimony of this panel and the second
panel on Thursday, it is my intention to poll the subcommittee
members to see whether we should work on an electricity
emergency piece of legislation in the next several weeks.
I want to be clear on this point: If there are some things
that can help California and the West by taking legislative
action, I am more than prepared to do that. In fact, I have had
discussions with the White House on that point within the last
week.
But we need to be cognizant that what we do legislatively
should actually have the ability to help the problem, both in
the short term and in the long term. To pass a bill out of this
subcommittee simply to say that we have done something, if it
does nothing in reality, is worse than not doing anything at
all.
So the hearing today with the chairman and our two
commissioners and our hearing on Thursday could quite possibly
result in a legislative action item coming up in the next 2
weeks. It could also result in us making a determination,
again, on a bipartisan basis and in conjunction with DOE and
the White House, that legislatively there is not a need to do
anything because it will not alleviate the problem.
But if we come away as a result of the hearing record and
make a determination that something could be done to help, it
will be done.
I want to thank the members of the FERC for coming today.
They are still shorthanded. We have two empty chairs, one on
the right and one on the left. I don't know if that is by
design or not. But the three that are here, as we would say in
Texas in high school football, are keepers. They are good
folks, and I expect a good, fact-based hearing today.
With that, I yield to my ranking member, the gentleman from
Virginia, Mr. Boucher, for an opening statement.
Mr. Boucher. Thank you very much, Mr. Chairman. I
appreciate your scheduling this hearing today and the one that
we will hold on Thursday of this week in our continuing
examination of the problems affecting the western electricity
markets, and for inviting today each of the three commissioners
of the Federal Energy Regulatory Commission to offer their
testimony. I want to join with you in extending a welcome to
each of them.
I particularly appreciate Chairman Barton's willingness to
work with interested members on our side to ensure that we hear
from the full range of parties who have expertise bearing on
the serious problems that affect the electricity markets in the
western region.
I do not envy the FERC the role that it has in having to
make these decisions. The Commission is obligated by law to
review the wholesale aspects of California's electricity
restructuring arrangements, and yet, it really has only very
limited ability to affect the fundamentals of that State's
competition plan.
Almost any action that the Commission takes or declines to
take is going to be opposed by someone, and the stakes, in
fact, are very high for consumers and for investor-owned
utilities in the States on the West coast.
Last November, the Commission determined that it must
modify its prior orders approving the wholesale aspects of
California's restructuring plan. That decision was based on the
Commission's finding that wholesale prices in the State in many
instances were no longer just and reasonable, a point on which
the commissioners apparently were in agreement.
There was less accord, however, with respect to the proper
remedy for that problem. That is one of the matters that I
think it will be useful for our subcommittee to examine with
the commissioners this afternoon.
Of particular interest to the subcommittee is the question
of whether the FERC has sufficient authority under the Federal
Power Act to address the present and anticipated future
problems in the wholesale power markets in the western region.
I am also interested in whether the Commission's authority
to address regional transmission matters is adequate. Of
specific concern are the possible ramifications of California's
current efforts to acquire the transmission assets of the
investor-owned utilities, an event that some suggest might
place thousands of miles of transmission lines beyond the
jurisdiction of FERC, and the opinion of the commissioners on
whether that would be the result of California's acquisition of
these assets would be welcome.
I would respectfully suggest to my colleagues on the
subcommittee that in considering whether Congress should
attempt to legislate a solution to California's problems, we
must take a careful and deliberate approach. Congress must
provide the FERC with adequate statutory authority to address
the problems that arise in wholesale markets, including charges
by generators that are beyond the just and the reasonable,
other inappropriate abuses of market power by electricity
generators, and the management of transmission lines in a
manner which impedes the effective functioning of wholesale
markets.
It is appropriate as well for this subcommittee to conduct
oversight to ensure that the Commission does its job. It is
quite another matter, however, for Congress to attempt to
devise specific remedies to a complex situation that is
characterized by constant change. Since that undertaking would
prove difficult, and since Congress has, at best, a mixed
record in fashioning legislative responses in previous energy
crises, I think we must proceed with caution.
Above all, we must avoid taking any action that would
exacerbate the current circumstance or undermine the efforts of
the State of California to remedy a problem which was, in
significant part, its own creation.
That said, we will welcome suggestions from the
Commissioners and from our witnesses at the hearing on Thursday
of statutory changes which may be needed to empower the FERC to
take such steps as it may deem necessary to ensure the
effective functioning of wholesale markets, both markets
specifically on the West coast, and wholesale markets generally
around the Nation.
We will also carefully examine the actions taken by the
FERC to this point with reference to the California market to
determine whether its orders target the complete range of
transactions that may involve an abuse of market power.
I have some particular concerns in this regard which I
think we will address, Mr. Chairman, at a later point during
this hearing.
I want to join with you in welcoming these witnesses, and
thank them for taking the time to share their opinions, advice,
and explanations of the actions they have taken with us this
morning, and along with you, I look forward to their testimony.
Mr. Barton. I thank the gentleman.
The gentleman from Illinois, Mr. Shimkus, is recognized for
an opening statement.
Mr. Shimkus. Thank you, Mr. Chairman. A lot of this has
been covered, so I would like to submit my opening statement
for the record and just follow up on the issue that I know we
will get to in the hearing, which is on the debate on price
caps, which I am avidly opposed to, because I feel that price
caps do not work. They neither spur new generation nor do they
lessen demand.
Price caps do not allow the market forces to work. If we
cap wholesale rates, like how California capped the retail
rates for individual consumers, how do you encourage
conservation? How do you affect the other side of the equation,
not just the supply, but the demand?
Governor Davis has said there is a solution to the crisis,
and that is raising the retail rates. Unfortunately, that is
not politically popular, and that is something we need to be
careful of, especially in California, a government getting too
involved in the market and then making decisions based upon
politics. It distorts the market, and while the decision may
appear good in the short run, it could have devastating effects
in the long run.
With that, Mr. Chairman, for the sake of time, I will yield
back and wait for the responses.
Mr. Barton. I thank the gentleman from Illinois.
The distinguished ranking member of the full committee, the
gentleman from Michigan, Mr. Dingell, for an opening statement.
Mr. Dingell. Mr. Chairman, thank you for your courtesy. I
commend you for holding these hearings.
In recent months, extensive attention has been paid to the
flaws in California's electric restructuring plan and the
efforts undertaken by the Governors, the State legislature, and
the Federal Energy Regulatory Commission, FERC, to address the
resulting problems.
With the passage of time, it has become clear that
California's difficulties are having a profound effect on other
western States who have become involuntary participants in this
experience with retail competition.
Today's hearing is particularly significant for the
subcommittee because we will be hearing from the three
commissioners of the Federal energy agency to whom Congress has
given primary responsibility for maintaining viable wholesale
electricity markets. Since 1935, the Federal Energy Regulatory
Commission and its predecessor, the Federal Power Commission,
have been charged with ensuring that power rates are just and
reasonable and that the grid is operated in a nondiscriminatory
fashion. This has not always been easy, and it is especially
difficult now, as the electrical industry undergoes a period of
replaced change.
Today, however, we focus on more narrow issues: The
Commission's role in approving California retail competition
plans, its decision late last year that the State's plan was
not operating in conformity with the Federal Power Act, and its
recent efforts to decide what the Act requires FERC to do to
restore order to western electricity markets, and thereby
protect consumers.
It is widely accepted now that the California problem is
again in its own legislature, and that the problems in the
electricity supply for California were created in California by
Californians. The effort to remedy the resulting fiasco must
begin in that State.
There are probably things that must be done at the Federal
level. However, the role FERC has played in this matter is also
worth reviewing. In 1996, FERC approved the California
utilities' requests to participate in the system established by
the State's new restructuring law. The Commission clearly
understood that at the time, that in issuing an approval, it
was making something of a calculated risk.
FERC characterized the proposal before itself at that time
as a work in progress, which provided only, and I quote, an
acceptable basis for going forward.
Two, last summer, as prices in California began to spike
and the reliability of service degenerated, FERC was drawn into
the maelstrom of California's troubles. On December 15, 2000,
FERC amended its earlier order. It stated that ``Flaws in the
State's plans, coupled with an imbalance between supply and
demand, have caused and continue to have the potential to cause
unjust and unreasonable rates,'' in direct violation of the
Commission's mandate under the Federal Power Act.
That mandate, contained in section 206 A says, ``Whenever
the Commission shall find any rate charges or classification
demanded, observed, charged, or corrected by any public utility
subject to the jurisdiction of the Commission is unjust,
unreasonable, unduly discriminatory or preferential, the
Commission shall determine the just and reasonable rate,
charge, classification, rate, regulation, rule, practice, or
contract to be thereafter observed and in force and shall fix
the same by order.''
The discussion of issues in the December order is
particularly instructive for all, especially the subcommittee,
because it goes to the heart of the Commission's authority and
to its responsibility under the Act to ensure wholesale markets
function in a fair and reasonable manner.
In separate occurrences, and concurrences, Chairman Hebert
and Commissioner Massey took reasoned but altogether opposing
views on the price caps, about which I am sure we will hear
more today.
I would note, however, that the law is not a matter of
opinion for the Commissioners. The law requires certain
actions, which we expect will be taken in a suitable and proper
fashion in conformity with law. I do not envy the work of the
Commission since any action FERC undertakes is going to be
criticized by somebody, somewhere. The situation presents a
constantly moving target, complicated by litigation pending in
Federal court and by California's attempts to acquire its
private utility transmission lines, and other things.
In closing, I would like to offer the Commissioners a
modest suggestion. Retail State plans to embrace retail
competition have thrust themselves upon FERC, and this leaves
FERC with difficult questions involving State-initiated hybrids
that are neither traditional nor fully competitive regimes. The
Power Act is not a static document, and it falls to FERC to
decide how to apply the law to a changing landscape, but to
apply the law nonetheless, which is its function.
It is also important to FERC to recognize that to date, the
Congress has not authorized the Commission to promote retail
competition. The Commission has certain specifically enumerated
enunciations by the Congress which are set forth here in the
law.
It is not FERC's job to encourage or to save retail
competition experience or experiments. Instead, Congress has
vested the Commission with the unique responsibility for
ensuring the soundness of wholesale power markets, and until
that changes, this should and must remain the primary focus of
the Commission's efforts until the Congress has afforded them
different authorities, different duties, and different powers.
Mr. Chairman, thank you.
[The prepared statement of Hon. John D. Dingell follows:]
PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MICHIGAN
In recent months, extensive attention has been paid to the flaws in
California's electric restructuring plan and the efforts undertaken by
the Governor, the State Legislature, and the Federal Energy Regulatory
Commission (FERC) to address the resulting problems. With the passage
of time, it has become clear that California's difficulties are also
having a profound impact on other western states who have become
involuntary participants in this experiment with retail competition.
Today's hearing is particularly significant for the Subcommittee
because we will be hearing from all three Commissioners of the Federal
agency to whom the Congress has given primary responsibility for
maintaining viable wholesale electricity markets. Since 1935, the
Federal Energy Regulatory Commission and its predecessor, the Federal
Power Commission, have been charged with ensuring that power rates are
just and reasonable and that the grid is operated in a
nondiscriminatory fashion. This has not always been easy, and it is
especially difficult now as the electric industry undergoes a period of
rapid change.
Today, however, we focus on more narrow issues--the Commission's
role in approving the California retail competition plan, its decision
late last year that the State's plan was not operating in conformance
with the Federal Power Act, and its recent efforts to decide what the
Act requires FERC to do to restore order to western electricity markets
and thereby protect the consumer.
It is widely accepted now that California's problems began in its
own legislature, and that the effort to remedy the resulting fiasco
must begin in the State. However, the role FERC played is also worth
reviewing:
(1) In 1996, FERC approved the California utilities' request to
participate in the system established by the State's new restructuring
law. The Commission clearly understood at the time that in issuing an
approval, it was taking something of a calculated risk. FERC
characterized the proposal before it as ``a work in progress'' which
provided only an ``acceptable basis for going forward.''
(2) Last summer, as prices in California began to spike and the
reliability of service degenerated, FERC was drawn into the maelstrom
of California's troubles. On December 15, 2000, FERC amended its
earlier order. It stated that flaws in the State's plan, coupled with
an imbalance between supply and demand, ``have caused, and continue to
have the potential to cause, unjust and unreasonable rates''--in direct
violation of the Commission's mandate under the Federal Power Act. That
mandate, contained in Section 206(a) says:
``Whenever the Commission . . . shall find that any rate,
charges, or classification demanded, observed, charged or
collected by any public utility . . . subject to the
jurisdiction of the Commission . . . is unjust, unreasonable,
unduly discriminatory or preferential, the Commission shall
determine the just and reasonable rate, charge, classification,
rule, regulation, practice, or contract to be thereafter
observed and in force, and shall fix the same by order.''
The discussion of issues in the December order is particularly
instructive for the Subcommittee, because it goes to the heart of the
Commission's authority--and responsibility--under the Act to ensure
wholesale markets function in a fair and reliable manner. In separate
concurrences, Chairman Hebert and Commissioner Massey took reasoned,
but altogether opposing, views on the wisdom of price caps, about which
I am sure we will hear more today.
I do not envy the Commissioners' task, since any action FERC
undertakes will be criticized in some quarter. The situation presents a
constantly moving target, complicated by litigation pending in Federal
court and California's attempt to acquire its private utilities'
transmission lines.
In closing, I would like to offer the Commissioners a modest
suggestion. Recent state plans to embrace retail competition have
thrust upon FERC difficult questions, involving state initiated hybrids
that are neither traditional nor fully competitive regimes. The Power
Act is not a static document, and it falls to FERC to decide how to
apply the law to a changing landscape.
But it is important for FERC to recognize that to date the Congress
has not authorized the Commission to promote retail competition. It is
not FERC's job to encourage or to save state retail competition
experiments. Instead, Congress has vested the Commission with unique
responsibility for ensuring the soundness of wholesale power markets,
and until that changes, this should remain the primary focus of the
Commission's efforts.
I thank the Chairman.
Mr. Barton. I thank the gentleman for his opening
statement.
In order of appearance, the next statement would be from
Mr. Whitfield of Kentucky, but Mr. Cox of California has a
leadership meeting and has asked if he could go out of order,
so we will recognize Mr. Cox and then resume regular order.
Mr. Cox.
Mr. Cox. I appreciate your courtesy, Mr. Chairman. Out of
courtesy to the other members, I will make my statement very
brief, but I did not want to fail to extend my gratitude to the
panelists who are testifying today. They have a responsibility
for a great deal of what affects us in California and affects,
in consequence of that responsibility alone, the entire Nation.
Yesterday afternoon I was in Southern California when
rolling blackouts occurred. I was at the moment scheduled to
take a facility tower tour of Broadcom, one of our Nation's and
the world's most significant players in the new economy.
It struck me as particularly ironic that the chairman and
CEO of this company spent the hour before our meeting using a
letter-opener to open paper mail, sitting by a window so he
could get some sunlight to read. The entire company, of course,
could not function during this period of time, and the same was
true for nearly a million people throughout the State for that
hour.
It is a Third-World experience in California to have this
going on, and it is entirely unnecessary. This is a man-made
catastrophe. It is not happening in other places that did not
have California's legislative restrictions.
So I urge you, as you take a look, for example, at
California's application for your approval, which they must
receive if they are going to go forward with their plan, to
permit them to acquire the transmission system in California,
that you consider just how wrong-headed the States' response
has been so far.
What California is doing is not limited to California
alone. It will affect the rest of this country. It is a
significant share of our Nation's economy already, but as we
speak, that share is slipping somewhat.
From my experience, taking these facility tours, which I
have been doing a fair amount of of late, it has never failed
that the executives point out that their incremental decisions
about where to locate their new facilities, where to locate
their new responsibilities, and so on, are all taking place
outside of California because of the uncertainty. Sometimes the
decisions they make, once they decide not to stay where they
are, are not always limited to the United States.
So this is hurting our country in that respect, as well.
Neighboring States have sent their legislators to my office to
complain about the dislocating impacts California's mess is
having on the rest of the region.
So we have to ask ourselves why it is the Federal
Government should, in any way, try and encourage this wrong-
headed response by the State of California.
In particular, it concerns me that we have this blunt
instrument of rolling blackouts, which treats all possible uses
of electricity as if they are exactly the same, because the
State cannot pick; it does not know when we could use price
signals to force conservation.
Not all uses of electricity are equally important, but in a
big, variegated economy such as California, it is the only way
those choices can be made rationally is through a market
distribution system. That is the one thing that California
refuses to permit. It is the one thing the Governor refuses to
permit.
The acquisition at a cost of billions of dollars of the
State's power grid is not going to produce a single drop more
of energy or a single bit more of electricity. It is all an
elaborate Rube Goldberg mechanism to shift the costs from
ratepayers to taxpayers, as if they are different people. It is
an enormous amount of waste when there is much work that needs
to be done.
I very much appreciate your being here at this hearing to
help us work through the problem. The problems in California
could not be more real. They are going to be equally real, but
just bigger and more sustained this summer when, as the
Department of Energy tells us, summer energy demand is going to
outstrip California's supply by as much as 5,000 megawatts.
That is about one-twelfth of our total demand.
So this is a serious, serious issue that deserves all the
attention, Mr. Chairman, that this committee is giving it.
Mr. Barton. I thank the gentleman from California.
We are going to go now to another gentleman from California
who represents part of Los Angeles, the Honorable Henry Waxman,
for an opening statement.
Mr. Waxman. Thank you very much, Mr. Chairman.
Mr. Chairman, we are now only 3 months into the Bush
administration. Already a clear question is facing our country:
Will President Bush look out for consumers and our national
interest, or will he simply do what oil, gas, mining, and
electric utility companies tell him to do?
There are, of course, times when one policy can serve both
industry and the public, but sometimes choices have to be made
and only one interest can be served. So far in the early days
of this administration, the oil, gas, and mining industries are
routing the American people and getting every penny's worth of
the millions they donated to Republican campaign committees
last year.
Last week, oil and coal lobbyists broke out the champagne
to celebrate an early and major victory. They convinced the
President to break his campaign promise to support legislation
to comprehensively clean up dirty, polluting power plants.
This was no easy feat. The President had made the promise
clearly and publicly. His hand-picked administrator at the
Environmental Protection Agency reaffirmed the promise as early
as last month, and it appears he came remarkably close to
talking about his promise in his first address to the Congress.
Then, with an impressive swiftness and effectiveness, the
oil and coal companies demanded the President back down, which
he promptly did. Just today EPA administrator Whitman has
announced she is pulling back long overdue standards to protect
the public from arsenic in drinking water.
Now we are on round two. As everyone knows, California has
had a disastrous experiment with a State-wide electricity
deregulation law. The result of that law has been skyrocketing
energy bills and rolling blackouts across the State. Other
western States, including Oregon and Washington, are beginning
to feel the effects, also.
Clear and seemingly easy choices have to be made.
Electricity generators should be prohibited from gouging
consumers. Supplies should not be arbitrarily held back from
utilities. Measures that spur immediate conservation should be
implemented, and the Federal Government, through the Federal
Energy Regulatory Commission, should be ensuring that
reasonably priced supplies are available to western families.
But the oil and gas companies and electric utilities do not
see it this way. They do not want gouging to be investigated or
limited, and they do not want the Federal Government to
interfere in what is becoming a very lucrative business
opportunity.
On top of that, the oil and gas interests want California's
failed attempt at deregulation to provide a new excuse for
drilling for oil in the Arctic National Wildlife Refuge.
In October 2000, candidate Bush campaigned in Southern
California and promised that if elected President, he would
help California's energy crisis. At the time, FERC was
resisting the idea of regional wholesale price caps, and
candidate Bush reassured California voters by saying, ``I
believe so strongly that part of this region is going to suffer
unless you have a President who is willing to tell the FERC to
do what is right for the consumer.''
Well, California is suffering. A year ago, wholesale prices
for electricity ranged from $12 per megawatt hour to $29 per
megawatt hour. Now, thanks to a completely dysfunctional
deregulatory scheme, recent wholesale prices ranged from $429
per megawatt hour to $565 per megawatt hour.
Think about that. In less than a year, we have gone from
$29 to $565 for the same amount of electricity.
Last week, the Governors of Oregon, California, and
Washington joined together and asked that a cost-based price
cap be imposed for power purchased in the smog market for 1
year. This is what most people believe is needed to protect
western families.
It is not a radical or unprecedented idea. In fact, there
are wholesale price caps in effect today in three ISOs in the
East. Candidate Bush would no doubt have agreed, but now we are
dealing with President Bush and an administration that I fear
looks to utility lobbyists to decide policy.
The industry lobbyists do not want anything to do with
cost-based price caps. This is one of those situations where if
you are not with us, you are against us. That is how it is for
western families. If nothing is done, power that cost $7
billion in 1999 will cost consumers $70 billion this year.
I look forward to listening to today's witnesses. I hope to
work with them and my colleagues to lend a helping land hand to
western families. Thank you very much, Mr. Chairman.
Mr. Barton. We thank the gentleman from California.
We go to the gentleman from Kentucky, Mr. Whitfield, for an
opening statement.
Let me make an announcement. We are not timing opening
statements today. We are not going to have opening statements
on Thursday; it is a continuation. So the Chair is being very
lenient with the 3-minute rule today on opening statements.
Mr. Whitfield.
Mr. Whitfield. Thank you, Mr. Chairman. I want to welcome
members of FERC here, and particularly I want to welcome Linda
Breathitt, former Chairman of the Public Service Commission in
Kentucky, and also from my hometown. So I am sure that she will
solve this problem in short order, Mr. Chairman.
I was going to say that I am glad that at this point we
have not tried to politicize this issue, and it looks like we
are keeping in that same spirit.
But I think all of us recognize that FERC alone cannot
solve the energy crisis facing California. I do not think there
is anyone who thinks there is a simple answer to the problem.
Our friend, the gentleman from California, Mr. Waxman,
tried to place a lot of blame on the Bush administration. Maybe
they deserve some of the blame. But I think if you are going to
do that, you also have to look at the Clinton Administration
and what they did on encouraging the use of natural gas.
California has one of the most complex, difficult permit siting
procedures of any State in the country, so we have not had a
lot of generation plants built in California.
Then they adopted a law that you cannot enter into long-
term contracts, but you have to go to the spot market.
So if we are going to try to place some blame around here,
I think there is plenty of blame to go around. But I think the
real purpose of these hearings is to try to come up with a
comprehensive solution, not a short-term fix.
We have talked about people, some Governors who wanted
price caps. I know in February of this year, eight western
Governors wrote a letter to the FERC asking that there not be
price caps. So price caps might be a short-term answer, but
they are not a long-term solution.
I think that is why we are, or I certainly am. I am excited
about listening to the testimony today from these three
Commissioners who have legal responsibility in this area, who
have studied the problem and maybe can come up with some
recommendations that will help us put together a long-range
solution to the problem.
Mr. Barton. We now turn to the gentleman from
Massachusetts, Mr. Markey, for an opening statement.
Mr. Markey. Thank you, Mr. Chairman.
Yesterday Energy Secretary Abraham delivered an address in
which he warned that we were in a national energy crisis, and
that we could have blackouts and brownouts in California and
elsewhere around the country.
The Secretary warned that over the next 20 years, energy
demands could increase by 62 percent for natural gas, 32
percent for oil, 45 percent for electricity.
The administration's solution to the situation is focused
so far almost entirely on increasing production: Drill the
Arctic National Wildlife Refuge, build more refineries, build
more oil and gas pipelines, build more power plants. Indeed,
Secretary Abraham is calling for 1,300 new electric power
plants to be built over the next 20 years.
We have yet to hear the Secretary mention the word
``automobile, SUV, light truck.'' We wait with bated breath his
mention of where we put all the oil that we consume in the
United States. Two-thirds of it goes into gasoline tanks.
Perhaps at some point in the next year or so, the Secretary of
Energy will mention that, and some recommendation as to what we
can do to make our society more efficient.
While President Bush said yesterday that our current energy
problems are caused by supply and demand, I have yet to see any
evidence that this administration is focused on the demand side
of the equation at all, for our Nation's demand in electricity,
the subject of today's hearing, is nothing more than the sum
total of all the refrigerators, air conditioners, space
heaters, water heaters, and other appliances that consume
electricity.
In 1997, 11.8 percent of all the electricity used in
residences was used for air conditioning, and 12.9 percent was
used for refrigerators; 11.4 percent was used for space
heating, 9.2 percent was used for lighting, and 43 percent was
used for other appliances, clothes dryers, TVs, dishwashers, et
cetera, et cetera. That is all electrical generating plants
are, just all of these appliances plugged in consuming the
electricity.
Now, if we decide to make all these appliances more
efficient, double their efficiency, then we do not need to
build new power plants. So do we look first to automobiles,
SUVs, and air conditioners and other appliances, or do we look
first to the Arctic pristine wildlife refuge? Is it the God-
made preserve that should be looked at first, or the man-made
set of appliances?
Are we a technology society? Do we pride ourselves as being
the technology committee, and do we look at those technologies
in terms of what we can do to improve their efficiency? Or do
we look at what God made and say, let us destroy that further,
before we ask any questions about that which pushes the demand
up there?
Now, the Bush administration right now is reviewing an
appliance efficiency rule adopted by the outgoing Clinton
Administration. If the Bush administration decides to weaken or
repeal that rule, they will take our electrical generating
problems and make them much worse.
Over the next 30 years, the new efficiency standards are
estimated to eliminate the need to build 91 new 400-megawatt
power plants, with air conditioning standards alone eliminating
the need for 53 new power plants. By the way, in California in
the summer, one-third of all electricity is just to keep the
air conditioning going. What if we just doubled the efficiency
of air conditioners? What a revolution that would be.
By the way, all the other efficiencies combined would be
240 power plants that would not have to be built.
But, what is the response from the administration? Well,
here is their plan. They plan to cut the Department of Energy's
budget by 6.8 percent, and they are going to cut the budget for
energy efficiency funding by more than 30 percent, so energy
efficiency is going to be cut in the Bush budget. That is
exactly the wrong way of dealing with the underlying supply and
demand problem.
In addition to reassuring that we become more energy-
efficient, we also need to assure that we have fair and orderly
wholesale and retail markets. Last year when the committee was
considering the Federal electricity restructuring legislation,
I tried to offer an amendment that would have helped to
reinvent the Federal Energy Regulatory Commission, transforming
it from a rate regulator to a market regulator that would be
able to more effectively police the evolving competitive
markets in California and around the country.
My amendment would have given Federal regulators the tools
that they are going to need to address market power abuses in
the emerging competitive markets. As the markets become
national and not just individual States, which is what they
were for the first 100 years--we have moved now to a national
market. We need national market regulation.
But there was widespread opposition to my amendment from
the electric utility industry and from members on the other
side of the aisle. There is no market power problem, I was
told. We should not be giving FERC any more authority in this
area. We should leave it to the States.
Well, we ended up doing nothing. What happened? Last fall,
an investigation by the FERC staff revealed that the California
market was seriously flawed and caused unjust and unreasonable
rates for short-term energy to be charged. The FERC also
observed that the California energy regime provided an
opportunity for sellers to exercise market power when supply is
tight.
Unfortunately, it was not until last week that FERC finally
took action against two companies for alleged withholding of
generation to drive up prices. Is this type of activity limited
to these two companies or, as Commissioner Massey suggested,
might it be more widespread and pervasive, which is deeply
troubling?
I know there are many factors that combined to produce
California's perfect storm. Some, like the amount of rainfall
in the West coast, are beyond our control. But when we see
evidence of market power abuses that result in excessive and
artificial levels of market volatility, it seems to me we
should act quickly and decisively.
Markets are built on public confidence, and right now the
public has little reason to have confidence in the
dysfunctional market that has been permitted to develop in
California. Hopefully, this hearing will help bring us a step
closer to solving that problem and hopefully our Nation's
problems.
Mr. Barton. We will hear next from the gentleman from North
Carolina, Mr. Burr, for his statement.
Mr. Burr. I always cherish the fictional readings of Mr.
Markey and the opportunity to hear what could be, what will be,
and what has been, though it is not in a world that I
necessarily see.
Mr. Chairman, I want to thank you, and I want to thank our
witnesses for their willingness to come in. We deal with a
very, very tough issue. I am pleased that our current slate of
FERC commissioners is able to join us today to discuss the
Commission's beliefs as to how this crisis came about, what
remedies they have prescribed, and those they might see fit to
add to them which might cure this situation.
While it may be difficult to remedy a short-term fix for
the coming summer months, I am open to any and all
considerations laid upon the table. However, it will take a
good deal of convincing to make me believe that temporary
wholesale price caps, absent retail rate increases by the State
and other potential State-mandated requirements, will help
correct the current imbalance between supply and demand.
Yes, it is real. We are all aware of the reasons for the
generation scarcity: unseasonable cold temperatures in the West
and northwest this winter; less-than-expected amounts of
rainfall and snow amounts; lack of additional generation in the
northwest States; mandatory divestiture of generation owned by
California utilities; restrictions on hedging their price risk.
The list goes on.
What is at the heart of this problem is the fact that
California never fully deregulated its industry, which sends
mixed signals to investors, regulators, and to customers. The
former Chairman of FERC said this before he left:
``California's market is clearly flawed by design. It will be
very difficult to reform, but reform it must, and reform it
can.''
That is a very telling statement from somebody who was
supportive of the direction for so long that it was headed in,
but who faced the reality that it was flawed. It cannot work.
That is what ``flawed'' means.
I will be interested to hear from our Commissioners what
signals the wholesale price cap, with a continued retail rate
freeze, might continue to send, whether intended or unintended,
to end use customers; what conflict of interest might arise
from State ownership of transmission assets as it relates to
its participation in an RTO; and how has FERC handled this
wholesale price episode differently than the midwest price
spikes in the late 1990's.
Finally, Mr. Chairman, let it be known that we can debate
all we want to about the States' role or the Fed's role in
resolving this dilemma. The fact of the matter is that it will
require tough decisions at both levels that might not be as
politically saleable as some would prefer.
Quality leadership, though, requires us--in the final
analysis, short-term political gains do not outweigh the long-
term interests and needs of constituents and of the residents
of California.
Mr. Chairman, again, thank you. I yield back the balance of
my time.
Mr. Barton. I thank the gentleman from North Carolina.
We would now like to hear from the gentlewoman from
Missouri, Congresswoman McCarthy, for an opening statement.
Ms. McCarthy. Mr. Chairman, thank you for continuing this
series of hearings and allowing this subcommittee to hear
firsthand from the important decisionmakers in the energy
industry such as those we have before us today, and those we
will hear from on Thursday.
The continued blackouts are a reminder of why this
committee needs to remain vigilant in its oversight of the
problems in California so that we can do our best to avoid
repeating them in other parts of this country.
We have heard significant debate in this subcommittee over
the past 2 years on abuses of market power, as well as what is
just and reasonable.
I am very interested in learning more about the recent
decisions for which it was determined that prices nearly ten
times what they were a year ago are deemed just and reasonable
as a gauge for determining if market power abuses have
occurred.
Prices like these raise basic affordability issues. People
just are not going to be able to pay these bills, even if the
State is protecting some small consumers. Because there are
many stakeholders who have called for a regional price cap, and
nearly as many who feel that there should not be one, I am
interested in what Commissioners feel about another alternative
being discussed, such as a cost-based or cost-plus pricing
mechanism, at least for a short time, to return some stability
to the market.
Thank you again, Mr. Chairman. I return the balance of my
time in order to get to their important testimony.
Mr. Barton. I thank the gentlewoman.
The gentleman from Georgia, Mr. Norwood, is recognized for
an opening statement.
Mr. Norwood. Thank you very much, Mr. Chairman. As you are
well aware, much of our country's focus recently has been on
California, and very deservedly so.
However, the current crisis within the energy industry in
the Golden State is not merely a California problem. I believe
it is pretty critical for us to impress this fact upon the
American people. California's energy crisis has had direct and
far-reaching effects on the entire region and consumers in
Oregon and Washington, Arizona, Utah, Idaho.
There has been much speculation and discussion as to the
principal causes that have contributed to the energy problems
California faces today. Although rising costs of natural gas
and exceeding electricity demand over supply, lack of rainfall,
and unforeseen weather conditions have exacerbated this
situation, Californians' electricity market structure, capping
of rates in the retail market while allowing the wholesale
market rates to fluctuate, all of this has proved unworkable.
Electricity is the lifeline of our economy. It is far too
important to the entire public interest to move with hasty,
unproven plans for restructuring that industry. An electricity
problem such as the one in California on a national scale could
potentially unnerve the entire country economically, proving
catastrophic.
I believe the failure of restructuring efforts in
California should serve as a yellow light to this Congress as
we examine proposals to restructure the industry at the Federal
level.
Mr. Chairman, I do appreciate your leadership of this
committee. Thank you for making members aware of the critical
importance of examining the problems in California as part of
enacting an effective national energy policy.
I do hope before we finish meeting, someone can explain to
me why those mean old manufacturers of air conditioners and
refrigerators do not make them more energy-efficient. I just
cannot imagine that they would not do anything but sell more.
So maybe we can get somebody to explain to me why we produce
air conditioners and refrigerators that use so much
electricity, because Mr. Markey thinks that solves the entire
problem.
I look forward, Mr. Chairman, to hearing the testimony
today from our FERC Commissioners on these issues, and hope we
can work together to determine whether lessons can be learned
from the current situation in California so that we may avert
similar crises in the future.
Thank you, Mr. Chairman.
Mr. Barton. I thank the gentleman from Georgia. Mr. Markey
is not here. I'm sure he will return for the questions.
It might just be those mean old manufacturers, they realize
if they made them more efficient, some people could not afford
to buy them, and they might just have to sweat. There is a
reason the market works.
Mr. Norwood. Nobody has thought of that. That is amazing.
Mr. Waxman. It could be, Mr. Chairman, that unless the
government sets a standard, that one manufacturer does not want
to be at a competitive disadvantage by having to pay to make
sure their product is more efficient. That is why government
needs to come in there and set a level playing field in order
to protect the public interest.
Mr. Barton. I am sure in air conditioning that the standard
that would be accessible for the mansions in Beverly Hills,
where people make $5 million a year, would be the same standard
that is made in Waco, Texas, where my mother lives and exists
on an income of perhaps $15,000.
Mr. Waxman. I think air conditioners ought to be made more
efficient, no matter where they may be.
Mr. Barton. You have to have air conditioning that people
can afford.
The gentlewoman from California.
Mrs. Bono. Mr. Chairman, thank you for your ongoing
interest in helping address California's energy crisis. Your
concern is deeply appreciated by those of us most affected by
the struggle.
I would like to welcome the Commissioners from FERC, and I
look forward to their testimony today. Unfortunately, Congress,
FERC, and the administration are faced with a challenging task
of addressing a problem that is mostly in the hands of State
officials. However, the Federal Government cannot and must not
shirk its responsibilities.
FERC's December 15 order provided the State with a
framework by which it could begin to rebuild its foundation. It
was these Commissioners before us who urged the State to enter
into long-term contracts, eliminate its single-market clearing
price system, and expedite the siting of additional power
plants.
While certain aspects of its order were not immediately
addressed, the State did recognize the value of these
pronouncements and has undertaken efforts to employ them. In
addition, I was pleased to see the Commission commit itself to
discharging its authority to order refunds for unjust and
unreasonable rates charged by generators.
While I believe that wholesale price caps are not
beneficial for our long-term needs, I do believe and further
encourage FERC to exercise its authorities to call into
question the wholesale rates.
I understand that FERC has jurisdiction over only 40
percent, or over 47 percent of California's generating
facilities. Therefore, we must be mindful that any actions
taken by FERC will factor in the 53 percent it has no
jurisdiction over.
In addition, generators must be able to earn a rate of
return which allows them to recover their operating expenses,
make reasonable profits, and have the financial capability to
invest in capital expenditures, which will bring on a much
needed increase in our supply.
I believe we can both encourage an increase in supply and
ensure just and reasonable rates, but we will never achieve
stability without encouraging investments in both supply and
transmission. Transmission of natural gas and electricity has
been the unheralded and least-talked about issue during this
crisis.
Without an adequate system by which to transport this
electricity, new facilities are for naught. If we don't have
reliable and plentiful sources of natural gas for all these new
gas-fired generators coming online, we will never see the
benefits of these plants because we will not be able to turn
them on.
Therefore, I strongly urge California to expeditiously
integrate itself into a West-wide RTO. I have stated before,
and I do so again, that this is not a matter of quality of
life, but of life itself.
Thank you. I look forward to hearing the testimony. I yield
back, Mr. Chairman.
Mr. Barton. Thank you.
The gentleman from Iowa, Mr. Ganske, is recognized for an
opening statement.
Mr. Ganske. Mr. Chairman, I am interested in moving on to
the testimony, so I yield back.
Mr. Barton. We have the presence of Congresswoman Harman,
who is not a member of the subcommittee. She will be allowed to
give an opening statement after all the subcommittee has been
allowed to.
Mr. Largent, the vice-chairman, is recognized for an
opening statement.
Mr. Largent. Thank you, Mr. Chairman. Every hearing this
subcommittee has had or will have is crucial to developing a
comprehensive energy policy, but I believe that today's and
Thursday's hearings will prove to be an essential element in
creating that blueprint.
We are fortunate to have with us this afternoon the
chairman of FERC, Curt Hebert, and two FERC Commissioners,
Commissioners William Massey and Commissioner Linda Breathitt.
Welcome to the subcommittee.
Mr. Chairman, the lead headline in today's Los Angeles
Times is ``Rolling Blackouts Hit California as State Gets Hint
of Summer Heat.''
For those who did not read the article, I will read a few
excerpts: ``Southern California was plunged into daytime
darkness Monday as summer-like weather and a drastic drop in
supplies forced the first deliberate State-wide blackouts since
World War II.
``A series of rolling outages which could resume today
began about noon, extending from San Francisco to San Diego and
continuing into early evening. In all, power was cut to more
than 1.3 million customers.''
There was also an enlightening quote in the article from
one of our witnesses for Thursdays hearing, Mr. David Freeman,
general manager of the L.A. Department of Water and Power.
Mr. Freeman states, ``Despite months of dire electricity
problems and screaming headlines, Californians still do not
seem to grasp the underlying problem: There is a shortage of
electricity in this State. That is a fact. The general public
does not seem to believe it, but it is true.''
Mr. Chairman, there are a number of proposals floating out
there calling for some type of Federal intervention to
alleviate California's current crisis, some with merit, some
without. But ultimately, Californians are going to have to heed
Mr. Freeman's admonition that there is a shortage of
electricity in the State, and act accordingly.
Mr. Chairman, I yield back.
Mr. Barton. We thank the gentleman.
The gentleman from Oregon, Mr. Walden, is recognized for an
opening statement.
Mr. Walden. Thank you very much, Mr. Chairman.
I found the comments of my colleague, the gentleman from
Massachusetts, intriguing, of course as we all do every
hearing. But I also find it interesting this administration has
been on the job for 2 months, about 2 hours and 55 minutes, and
it was the last administration's Department of Energy which
could not safeguard our nuclear secrets, and admitted that it
was asleep at the wheel when it came to the energy problem
facing the United States.
There is plenty of blame to point around here. What we need
to do is focus on what are the real issues at the heart of
California's debacle, what impact is that having throughout the
region, what can FERC do to make sure that consumers are not
getting ripped off, and to fully use Federal law to make sure
that the rates being charged are reasonable and prudent.
We also have to look long-range, something that I think has
not been done. We cannot have the kind of growth in
California's economy at 29 percent, and then have a subsequent
reduction in actual power supply, and not expect we are going
to reach out to the other regions to consume power that becomes
a diminishing resource.
We have a heck of a mess on our hands. In the Northwest we
are now facing what will most likely be the worst water year
since they began keeping records in 1929. This summer, when we
would normally ship surplus power to California to meet their
energy-starved needs, we may indeed be in a deficit situation
ourselves. We may overrun the biological opinion on saving
salmon in the Columbia River so as to keep the BPA from going
bankrupt, and so as to keep the lights on to the extent that we
can.
What we have to do is to look at how to streamline
relicensing rules as they affect hydro facilities. Some 45
percent of the hydro capacity in California, 73 percent in the
Northwest, has to be relicensed in the next 15 years. I am
going to continue to press FERC on how there are ways to
streamline that and what can be done.
We need to encourage conservation. We need to encourage
California to do what the Bonneville Power Administration has
done, which is buy down demand. We are doing that in the
Northwest. We are shutting down industries.
I do not like it. In my hometown there are 1,285 people out
of work at the aluminum plant that will probably never come
back because we are buying down demand so power can go
elsewhere. That is a head-in-the-sand mentality we have to use
right now, but it does not make any sense in the long term.
The Vice President, with whom I met with the Northwest
delegation earlier today, said we need between 1,300 and 1,900
new power plants over the next 20 years. That takes into
account conservation measures in terms of demand.
Surely we can do more. I would join my colleague from
Massachusetts in trying to do more on conservation. I believe
in it strongly. That still means we need 65 plants a year
online.
In California, according to the study, Mr. Chairman, that
is going to be presented later to our committee, California
probably has one of the most difficult, time-consuming, and
costly power plant approval processes in the Nation. We ought
to address this. California has to address its problem, because
it is killing our economy. Thank you, Mr. Chairman.
Mr. Barton. The gentleman from Arizona, Mr. Shadegg, is
recognized for an opening statement.
Mr. Shadegg. Thank you, Mr. Chairman.
I ask unanimous consent to insert my full opening statement
in the record.
Mr. Barton. Without objection, it will be included.
Mr. Shadegg. Mr. Chairman, I will be brief. I would like to
associate myself with the comments of my colleague, the
gentleman from Oklahoma, Mr. Largent, and my colleague from
Oregon. It is clear that we have an energy crisis in this
country.
Flying out here on the plane today, I noticed there is a
lot of coverage of this issue and of the President's emphasis
on it, and a lot of skeptics saying no, we really do not have
an energy crisis. Experts are saying the President is placing
the wrong emphasis on this problem.
I want to make a few points clear. And I want to be brief
and look forward to the testimony of the witnesses here today.
First of all, I think Americans do need to understand we
clearly have no comprehensive energy policy in this country.
When we do not have one, we will find ourselves in the kind of
situation we are in.
No. 2, the allegation that the problem that is occurring in
California is the result of deregulation is itself absurd. Any
time that we cap retail rates but leave wholesale rates
uncapped, that is not, in fact, deregulation, and we will not
produce the kind of proper market forces.
Many of the solutions that are proposed here today call for
us to adopt some form of either cost-based price caps or some
other type of price caps. Two of the Commissioners that appear
before us make strong arguments on both sides of that issue.
I would urge our committee that this is the key issue. If
we make the wrong decision on this issue--and I lean against
any kind of cap, because I don't believe it will produce the
right result--but if we make the wrong decision here, the
consequences will be very, very significant.
In Arizona, we do not have increasing energy prices. In
Arizona, we do not have a shortage of power plants under
construction. Indeed, we have a number of plants under
construction and even more plants on the drawing board. I
believe that imposing so-called temporary price caps will send
exactly the wrong signal.
It is interesting that in the testimony of both
Commissioners, who argue each side of the price cap issue, they
both point out that the real cause of the problem is a lack of
the construction of new generating capacity and a lack of the
construction of new transmission capacity, and yet reach
absolutely opposite results.
I believe price caps will lead not to the construction of
additional generating capacity and not to the construction of
new transmission capacity, but will lead to the opposite
result, even if they are imposed only on existing facilities,
because the message will be sent clearly, just like the message
of California's deregulation, that we are not truly
deregulating and we are not going to allow market forces to
apply.
I welcome the testimony of our witnesses, and I appreciate
your calling this hearing, Mr. Chairman.
Mr. Barton. I thank the gentleman.
[Additional statements submitted for the record follow:]
PREPARED STATEMENT OF HON. W.J. ``BILLY'' TAUZIN, CHAIRMAN, COMMITTEE
ON ENERGY AND COMMERCE
Mr. Chairman: I'd like to commend you for holding this hearing on
the California energy situation. I think our previous two hearings have
shed a lot of light on this complex and troubling issue. I am confident
that the more we learn from California's mistakes, the more likely it
becomes that we will reach a common conclusion on the best remedies for
the West's energy problems.
California's problem is primarily one of supply and demand. Last
summer's peak load in the Cal ISO was around 45,000 megawatts. This
summer it's predicted to be another 2,000 plus megawatts higher. Last
summer's available imports during that peak were around 4,500
megawatts, about half what they were the year before, and they're
expected to be even lower this summer. Just yesterday, and again today,
Californians went without power because temperatures were too high.
What's going to happen this summer?
California, alone, needs about 5,000 megawatts of new generation to
bring their grid back into balance. This summer, the entire West is
only expected to get about half of that. Where do Californians think
that power is going to come from?
I applaud California's recent efforts to conserve electricity. In
addressing an energy supply problem, it is important to look at forces
affecting demand and find innovative ways to improve efficiency. The
fact that California has resorted to mandatory conservation orders,
however, should convince consumers of two things: (1) that California
does not have a functioning electricity market, and (2) that the State
has an electricity supply problem.
In the long run, this Committee can help increase the supply of
electricity. We will do that first by passing a national energy policy,
which will promote the availability of all fuels. Second, we will pass
electricity restructuring legislation that facilitates better wholesale
competition.
This Committee cares deeply about what is happening out West. I
hope these two days of hearings will explore what can and should be
done to get California's electricity supply back on track. I am
concerned about the prospect of State ownership of anything. I hope
that California, and the West generally, can create a regional
marketplace that will attract much needed capital investment in
infrastructure. You do that by allowing market forces to function and
by giving investors regulatory certainty.
I look forward to hearing what our FERC Commissioners and other
witnesses have to say.
______
PREPARED STATEMENT OF HON. BILL LUTHER, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF MINNESOTA
Mr. Chairman, thank you for holding this important and timely
hearing today. Rotating blackouts are again occurring throughout
California and this situation may have the potential to spread to other
parts of the country as the summer approaches.
What troubles me about the current debate is that some
Administration officials and industry representatives seem to be using
this crisis to simply advocate more drilling and exploration in
pristine wilderness areas. It is clear that we cannot simply drill our
way out of dependence of foreign oil. It is also clear that simply
advocating for increasing domestic drilling will do nothing to
alleviate the near term problems in Western energy markets.
I am pleased that we will be able to hear testimony today from the
Chairman and two Commissioner's of the Federal Regulatory Energy
Commission. The FERC has issued a number of recent orders attempting to
address the volatility in Western markets and they may have further
plans to devise remedies. I look forward to their assessment of the
situation and testimony at today's hearing.
Thank you and I yield back the balance of my time.
Mr. Barton. All members of the subcommittee that are
present have been given an opportunity for an opening
statement, so the chairman would welcome the distinguished
member from California from the full committee, Congresswoman
Harman, for an opening statement.
Ms. Harman. Thank you, Mr. Chairman. I appreciate the
opportunity to come and learn more about a subject that affects
my district and every district in California, and I think
increasingly, every district in the United States.
I just wanted to make a few comments based on knowledge
that I do have, and then I look forward to the testimony.
First of all, this issue is not partisan. I think today's
comments make that clear. The rolling blackouts that California
is experiencing do not just occur in Democratic or Republican
households, or do not avoid even green households, they are
happening to everybody.
Second of all, although this problem is centered in
California for the moment, it is beginning to affect the whole
western region, and a problem like this or this identical
problem could be felt all over the United States.
Third of all, I feel that part of the answer is better
technology and better efficiency. I agree with Mr. Markey. But
I also agree with some comments that you made that we have to
be sure that new standards are fair to everyone, not just
certain folks with more assets. I think we can design standards
that could be fair to everyone.
But most important, and the point I wanted to make as an
observer to these witnesses, is that I have in front of me 42
U.S. Code section 7172. This concerns the jurisdiction of FERC,
the Federal Energy Regulatory Commission. In subsection B, it
makes clear that FERC has jurisdiction over the establishment,
review, and enforcement of rates and charges for the
transmission or sale of electric energy.
In subsection (c) it makes clear that FERC has jurisdiction
over the establishment, review and enforcement of rates and
charges for the transportation and sale of natural gas by a
producer or gatherer, or by a natural gas pipeline or natural
gas company, and so we have before us an agency which can help
solve this problem, and I hope that we all focus as much as
possible on solving this problem. That is what our constituents
want, and I believe that is what your excellent subcommittee is
capable of doing. Thank you for letting me sit in.
Mr. Barton. We thank the gentlewoman from California.
All members not present will have the requisite number of
days to put their opening statements in the record, and as
announced earlier Thursday, which is a continuation of today's
hearing, Mr. Boucher and myself will give a brief opening
statement, and Mr. Dingell and Mr. Tauzin. The others will put
their statements in the record today.
We want to welcome the Federal Energy Regulatory Commission
to the subcommittee. We are not going to time you. This is an
important issue, and we want to give you an opportunity to
elaborate, each of you.
We are going to recognize the Chairman first, the Honorable
Curt Hebert, and we will go to the gentlelady from Kentucky
Commissioner Breathitt, and then Commissioner Massey will be
the cleanup hitter. We are going to set the clock at 10 minutes
simply to kind of give you an idea of how long you have been
testifying, but we want to give you a chance to elaborate.
So, Chairman Hebert, welcome to the subcommittee. Your
statement is in the record in its entirety, and we recognize
you to elaborate on it.
STATEMENT OF HON. CURT L. HEBERT, JR., CHAIRMAN, FEDERAL
ENERGY REGULATORY COMMISSION
Mr. Hebert. Thank you, Chairman Barton, and thank you to
the 5members that are here. I appreciate you giving us this
opportunity to appear to discuss a topic of electricity markets
in California.
Wholesale and retail electricity markets in California are
currently in a state of stress. Wholesale prices have increased
substantially for a variety of reasons. Consumers are implored
to conserve as much as possible, and utilities are facing
growing financial problems. As a result many now argue that we
need to turn to cost-based regulation instead of relying on
market-driven principles and solutions.
First, in my view, price caps are not a long-term solution.
We need to promote new supply and load reductions. Market
prices are sending the right signals to both sellers and
buyers, at least those not subject to a rate freeze. Market
prices will increase supply and reduce demand, thus correcting
the current imbalance in the marketplace. A price cap imposed
through regulation or legislation will have exactly the
opposite effect.
Second, infrastructure improvements are greatly needed in
California and throughout the rest of the West. We need to
create the appropriate financial incentives to ensure that new
generation is built, the transmission system is upgraded, and
that new gas pipelines are built.
Finally, we need a regional transmission organization, or
RTO, for the West. California is not an island. It depends on
generation from outside of the State. The shortage in and
prices in California have affected the supply and prices in the
rest of the West. A West-wide RTO will increase market
efficiency and trading opportunities for buyers and sellers
throughout the West.
Consistent with these three points, the Federal Energy
Regulatory Commission has been aggressively identifying and
implementing market-driven solutions to these problems by
stabilizing wholesale energy markets, by identifying additional
short-term and long-term measures that will increase supply and
delivery infrastructure as well as decrease demand, by
promoting the development of a West-wide regional transmission
organization, and by monitoring market prices and market
conditions.
Let me highlight some of the Commission's recent actions.
In January the Commission issued an order finding the PX in
violation of a Commission order issued earlier in the month.
The prior order required the PX to change its rules on payment
to generators when their prices exceeded $150 per megawatt
hour. The January order found that the PX's failure to comply
with this change was imposing excessive charges on California
consumers. In the past 2 weeks, the Commission has taken
additional steps to mitigate prices in California, specifically
the prices charged in California's spot markets during Stage 3
emergencies and in January and February of this year.
After examining prices charged in these periods, the
Commission identified many transactions that warranted further
investigation. The Commission required these sellers to either
refund certain amounts, or offset these amounts against amounts
owed to them, or provide additional justification for their
prices. Specifically, the Commission required potential refunds
or offsets of approximately $69 million for January and $55
million for February, based on the market clearing price that
would have occurred if the sellers had bid their variable costs
into a competitive single price auction.
Also this month the Commission staff issued a proposal on
how the Commission should monitor and mitigate prices in
California's wholesale spot power markets. This proposal is
based on monitoring and mitigating prices on a before-the-fact
basis instead of through after-the-fact refunds. After
receiving and considering public comment, the Commission
intends to implement appropriate changes to its current market
monitoring and mitigation requirements by May 1, 2001.
Last Wednesday the Commission issued an order seeking to
increase energy supplies in California and the West. The
Commission implemented certain measures immediately. For
example, the Commission streamlined regulatory procedures for
wholesale electric power sales; extended and broadened
regulatory waivers for qualifying facilities under PURPA;
authorized market-based rates for sales, onsite generation and
sales of demand reductions; expedited the certification of
natural gas pipeline projects into California and the West; and
urged all licensees to review their FERC-licensed hydroelectric
projects in order to assess the potential for increased
generating capacity.
The Commission also proposed and sought comment on other
measures, such as incentive rates for new transmission
facilities and natural gas pipeline facilities completed by
certain dates this year or next.
Also last week the Commission ordered two California power
sellers to make refunds of over $10 million unless they can
justify their actions. Specifically the Commission said the
utilities needed to demonstrate that power outages at part of
their facilities in April and May of 2000 were not extended for
the improper purpose of raising prices for power from their own
facilities.
Mr. Chairman and members of this committee, I have been
Chairman for only about 2 months. These and other recent
actions demonstrate my commitment to ensuring that energy
markets in California and the West bring consumers the energy
they need at reasonable prices. During this same time I have
also emphasized the need for the Commission to act on pending
applications filed by RTOs across the country enabling the
Commission to issue two important RTO orders last week and
others very soon. RTOs are a critical element in increasing the
efficiency and competitiveness of power markets nationwide.
My fellow Commissioners and I have our differences on
policies, but our actions these past 2 months demonstrate our
shared commitment to the priorities of improving western
markets and facilitating formation of RTOs. As long as we keep
moving toward competitive and regional markets, I am confident
that the present energy problems, while serious, can be and
will be solved. I am also confident that market-based solutions
offer the most efficient way to move beyond the problems
confronting California and the West.
Mr. Chairman, I would ask you and the members of the
committee to allow me to present my testimony in full into the
record. I also have an attachment A, which would demonstrate to
you, that I would like to attach as part of my testimony and
have in the record, what this Commission has been doing.
Mr. Barton. Without objection, so ordered.
Does that conclude your oral statement?
[The prepared statement of Hon. Curt L. Hebert, Jr.
follows:]
PREPARED STATEMENT OF HON. CURT L. HEBERT, JR., CHAIRMAN, FEDERAL
ENERGY REGULATORY COMMISSION
I. OVERVIEW
Mr. Chairman and Members of the Subcommittee: Thank you for the
opportunity to appear here today to discuss the topic of electricity
markets in California. Wholesale and retail electricity markets in
California, and throughout much of the West, are in a state of stress.
Wholesale prices for electricity have increased substantially for a
variety of reasons in the last year. California power consumers face
near-daily pleas to conserve. California load-serving utilities are
under severe financial stress. Companies supplying wholesale power into
California are unsure how much, or even whether, they will be paid for
their supplies.
While the situation in California is not representative of other
parts of the country that are successfully developing competitive
markets, it nevertheless underscores the fundamental infrastructure
problems facing the country. The demand for electricity continues to
expand while supply fails to keep pace. The development and licensing
of new hydroelectric capacity--which provides much of the existing
power supply in the West--is nearly exhausted. Very little fossil-fired
generation has been added in many regions of the country over the last
few years, and in California no major plants have been added in the
last decade. And the existing electric transmission grid is often fully
loaded and, absent necessary expansion, is often incapable of
delivering power to those regions where it is valued the most.
I would like to make three main points with respect to these
problems and to identify the steps the Commission is taking to address
these problems.
First, price caps are not a long-term solution. We need to promote
new supply and load reductions. Market prices are sending the right
signals to both sellers and buyers (at least those not subject to a
rate freeze). Market prices will increase supply and reduce demand,
thus correcting the current imbalance. Capping prices artificially will
have exactly the opposite effect.
Second, infrastructure improvements are greatly needed throughout
the West and especially in California. We need to create the
appropriate financial incentives to ensure that new generation is
built, that the transmission system is upgraded and that new gas
pipelines are built.
Finally, we need a regional transmission organization (RTO) for the
West. California is not an island. It depends on generation from
outside the State. The shortages and the prices in California have
affected the supply and prices in the rest of the West. The Western
transmission system is an integrated grid, and buyers and sellers need
non-discriminatory access to all transmission facilities in the West. A
West-wide RTO will increase market efficiency and trading opportunities
for buyers and sellers throughout the West.
Consistent with these three points, the Commission continues
aggressively to identify and implement solutions to the problems:
<bullet> First, in recent months, the Commission has issued a number of
orders intended to restore market stability. The Commission has
acted to move utilities out of volatile spot markets to enable
them to develop a portfolio of risk reducing and creditworthy
contracts.
<bullet> Second, the Commission has recently adopted or proposed a
range of additional measures that will increase supply and
delivery infrastructure, as well as reduce demand for
electricity in the Western Interconnection.
<bullet> Third, the Commission is continuing to work with market
participants on developing, as quickly as possible, a West-wide
regional transmission organization. Such an organization will
bring a regional perspective and offer regional solutions to
regional problems.
<bullet> Fourth, the Commission is monitoring market prices and market
conditions with the goal of ensuring long-term confidence in
Western markets. Moreover, the Commission's staff has proposed
a new plan to monitor and, when appropriate, mitigate the price
of electric energy sold in California's spot markets on a
before-the-fact basis, instead of addressing prices through
after-the-fact refunds. The Commission intends to act on this
proposal by May 1, 2001.
By itself, however, the Commission can contribute only a small part
of the solution to today's energy problems. A more comprehensive and
permanent solution requires the involvement of the states and other
federal agencies and departments. I am encouraged by all of the hard
work and effort undertaken in recent months by the State of California
and other Western states. The issues are difficult and the stakes are
high. While reasonable minds can differ over the appropriate solutions
to these problems, the Commission is committed to resolving these
problems deliberatively.
An attachment to my testimony provides details on the Commission's
major actions concerning California's electricity markets, particularly
the Commission's original orders approving California's restructuring
plan and recent Commission orders or decisions relating to California's
markets, including enforcement actions.
II. HOW DID WE GET INTO THIS SITUATION?
A. Legislative Design
The State of California has been widely questioned for its
restructuring legislation (A.B. 1890), enacted in 1996. While mistakes
were made, California is to be commended for realizing that consumers
are better off if supply and pricing decisions are based on market
mechanisms, not bureaucratic fiat. The premise of this legislation is
that consumers will enjoy lower rates and increased service options,
without compromising reliability of service, if electricity providers
are motivated to serve by market forces and competitive opportunities.
There were two major flaws in California's market design. First,
the three utilities were forced to divest almost half of their own
generation, and buy and sell power exclusively through the spot markets
of the California Power Exchange (PX). This prevented the utilities
from hedging their risks by developing a portfolio of short-term and
long-term energy products. Second, the State mandated a retail rate
reduction and freeze, eliminating any incentives for demand reduction,
discouraging entry by competitors for retail sales and, more recently,
threatening the financial health of the three utilities by delaying or
denying their recovery of billions of dollars in costs incurred to
provide service to retail customers.
However, California's situation does not demonstrate the failure of
electricity competition. To the contrary, it demonstrates the need to
embrace competition fully, instead of tentatively. Other states, such
as Pennsylvania, have been successful in implementing electricity
competition. California needs to move forward on the competitive path
it has chosen, allow new generation and transmission to be sited and
built, and allow its citizens to benefit from the lower rates, higher
reliability, and wider variety of service options that a truly
competitive marketplace can provide.
B. Other Factors
Until last year, California's spot market prices were substantially
lower than even California's mandated rate freeze level. This allowed
the California utilities to pay down billions of dollars of costs
incurred during cost-of-service regulation. However, several events
resulted in higher spot electricity prices beginning last summer. Those
events included one of the hottest summers and driest years in history,
as well as several years of unexpectedly strong load growth. Other
factors influencing prices recently include:
<bullet> Unusually cold temperatures earlier this winter in the West
and Northwest;
<bullet> California generation was unavailable to supply normal winter
exports to the Northwest;
<bullet> very little generation was added in the West, particularly in
California, Washington and Oregon, during the last decade;
<bullet> environmental restrictions limited the full use of power
resources in the region;
<bullet> scheduled and unscheduled outages, particularly at old and
inefficient generating units, removed large amounts of capacity
from service; and
<bullet> natural gas prices increased significantly, due to higher
commodity prices, increased gas demand, low storage, and
constraints on the delivery system.
Taken together, these factors demonstrate that the present problems
in electricity markets are not just ``California'' problems. Normal
export and import patterns throughout the West have been disrupted.
Reserve margins throughout the West are shrinking. Already this winter,
when the demand for electricity is relatively low, Stage Three
emergencies in California have become commonplace.
III. THE COMMISSION HAS TAKEN IMPORTANT STEPS TO HELP
These problems require bold and decisive action. Both the federal
government and state governments have critical roles to play in
promoting additional energy supply and deliverability and decreasing
demand. Through its authority to set rates for transmission and
wholesale power and to regulate interstate natural gas pipelines and
non-federal hydroelectric facilities in interstate commerce, the
Commission can take a range of measures to promote a better balance of
supply and demand, but its jurisdiction is limited. The Commission can
set pricing policies which encourage entry, but it is state regulators
that have siting authority for electric generation and transmission
facilities, as well as authority over local distribution facilities
(both for electricity and natural gas). These authorities can go a long
way in improving the grid for both electricity and natural gas. More
importantly, state regulators have the most significant authorities to
encourage demand reduction measures, which can greatly mitigate the
energy problems in California and the West.
A. Promoting Market Stability
In an order issued on December 15, 2000, the Commission adopted a
series of remedial measures designed to stabilize wholesale electricity
markets in California and to correct wholesale market dysfunctions. The
Commission recognized that the primary flaw in the California market
design was the requirement for the three California utilities to buy
and sell solely in spot markets. The Commission concluded that the
foremost remedy was to end this requirement and allow the utilities,
first, to use their own remaining generation resources to meet demands
and, second, to meet much of their remaining needs for power through
forward contract purchases. This measure freed up 25,000 MW of
generation that the utilities owned or controlled, which could be used
directly to serve their load without having to sell it into the PX and
buy it back at a much higher spot price. Our action returned to
California the ability to regulate over one-half of its peak load
requirements.
B. The Commission's Latest Efforts
Earlier this month, the Commission took further steps to mitigate
prices in California, specifically the prices charged in California's
spot markets during Stage Three emergencies in January of this year.
After examining prices charged in these periods, the Commission
identified many transactions that warranted further investigation. The
Commission required these sellers to either refund certain amounts (or
offset these amounts against amounts owed to them) or provide
additional information justifying their prices. Specifically, the
Commission required refunds or offsets of approximately $69 million
dollars, or all prices charged during Stage Three Emergency hours in
excess of $273 per megawatthour. This analysis seeks to use a proxy
price based on the market clearing price that would have occurred had
the sellers bid their variable costs into a competitive single price
auction.
The California Independent System Operator (ISO) and the California
Electricity Oversight Board (``California parties'') had asked the
Commission to require larger refunds. However, the Commission explained
the difference between their approach and the Commission's. First, they
included over $170 million for refunds from non-public utility sellers,
such as the Los Angeles Department of Water and Power. The Commission
has no authority to order refunds from these sellers. Second, they
included refunds for sales during all hours of January; the Commission
limited its approach to Stage Three Emergency hours, when the supply-
demand imbalance is most severe and sellers know their power is most
needed. Third, they used a pay-as-bid approach instead of the
Commission's proxy market clearing price approach and they used prices
only ten percent above variable costs. Finally, they included refunds
for December 2000; the Commission will address the December
transactions in a separate order. In sum, the Commission's approach
fully protects consumers from possible exercises of market power during
emergency conditions while still providing clear price signals
encouraging sorely needed new generation and load reductions.
Also this month, the Commission's staff issued a proposal on how
the Commission should monitor and mitigate prices in California's
wholesale spot power markets in the future. This proposal is based on
monitoring and mitigating prices on a before-the-fact basis, instead of
through after-the-fact refunds. Comments on the staff's proposal are
due on March 22nd. After receiving and considering public comment, the
Commission intends to implement appropriate changes to its current
market monitoring and mitigation requirements by May 1st.
Just last week, the Commission issued an order seeking to increase
energy supplies and reduce energy demand in California and the West, to
the extent of its jurisdictional authority. The Commission implemented
several measures immediately, including:
<bullet> streamlining filing and notice requirements for various types
of wholesale electric sales, including sales of on-site or
backup generation and sales of demand reduction;
<bullet> extending (through December 31, 2001) and broadening
regulatory waivers for Qualifying Facilities under the Public
Utility Regulatory Policies Act of 1978, enabling those
facilities to generate more electricity;
<bullet> expediting the certification of natural gas pipeline projects
into California and the West; and,
<bullet> urging all licensees to review their FERC-licensed
hydroelectric projects in order to assess the potential for
increased generating capacity.
The Commission also proposed, and sought comment on, other measures
such as incentive rates and accelerated depreciation for new
transmission facilities and natural gas pipeline facilities completed
by specified dates, blanket certificates authorizing construction of
certain types of natural gas facilities, and greater operating
flexibility at hydroelectric projects to increase generation while
protecting environmental resources.
Finally, the Commission stated its intent to hold a one-day
conference with state commissioners and other state representatives
from Western states to discuss price volatility in the West, as well
other FERC-related issues recently identified by the Governors of
Western States. The conference will be held in Boise, Idaho, on April
6th.
Also last week, the Commission ordered two utilities (AES
Southland, Inc., and Williams Energy Marketing & Trading Company) to
show why they should not be found to have increased power prices in the
California market and potentially compromised the reliability of the
transmission network in violation of tariffs on file under the Federal
Power Act. The Commission stated that the two utilities extended
outages at certain generating facilities from April 25 through May 11,
2000. These facilities are owned by AES, which sells the power to
Williams for resale. The shut down forced the ISO to purchase power
from other generation units also owned by AES, and whose power is also
resold by Williams, at prices greatly in excess of the market price or
the variable costs of operating the units. Williams and AES must
explain why either or both should not make refunds totaling $10.84
million. Williams also must explain why it should not be precluded from
receiving a market-based rate for AES' Southern California facilities
for one year.
IV. PRICE CAPS WOULD MAKE THINGS WORSE
Some advocate price caps or cost-based limitations as a temporary
way to protect consumers until longer-term remedies alleviate the
supply/demand imbalance. The issue of price caps in the West has been
raised on rehearing of the Commission's order of December 15, 2000,
and, accordingly, is pending before the Commission. For this reason, I
cannot debate the specific merits of price caps for California or the
West. However, I will reiterate briefly the views I have stated
publicly on this issue.
As a general matter, price caps do not promote long-term consumer
welfare. Price caps will not increase energy supply and deliverability
or decrease demand. Instead, price caps will deter supply and
discourage conservation. At this critical time, legislators and
regulators need to do everything they can to promote supply and
conservation, not discourage them.
This viewpoint is based on experience, not just economic theory.
The summer of 1998 illustrates the point. Then, wholesale electricity
prices in the Midwest spiked up significantly. The Commission resisted
pleas for immediate constraining action, such as price caps.
Subsequently, suppliers responded to the market-driven price signals,
and today the Midwest is not experiencing supply deficiencies.
In short, price caps can have long-term harmful effects because
they do not provide appropriate price signals and may exacerbate supply
deficiencies. Supply and demand cannot balance in the long-term if
prices are capped.
In the context of California, today we have market prices and
barely adequate supplies. If we reduce prices below market levels,
supplies will go elsewhere, risking greater reliability problems. Price
caps will only aggravate the supply-demand imbalance.
In addition, capping prices based on individual seller costs likely
would require lengthy, costly and contentious evidentiary hearings.
Litigating such a rate case for one seller requires a significant
commitment of resources. Concurrently litigating such cases for scores
of sellers in the West would be overwhelming both for the Commission
and the industry. Moreover, neither buyers nor sellers would be sure of
the prices until the conclusion of this litigation. This delay in price
certainty would be unfair to customers and discourage new investments
by suppliers.
Many leaders share these views. In a letter to the Secretary of
Energy, dated February 6, 2001, eight Western governors expressed their
opposition to regional price caps. They explained that ``[t]hese caps
will serve as a severe disincentive to those entities considering the
construction of new electric generation, at precisely the time all of
us--and particularly California--are in need of added plant
construction.''
In the face of the current challenges, we all must have an open
mind to any proposals that may mitigate the energy problems in the
West. I remain unconvinced that price caps will help solve the problems
and I do not believe they are in the long-term interest of consumers.
Price caps will only serve to drive investment and supplies to those
markets without caps, harming consumers in the long-term.
V. CONCLUSION
The Commission remains willing to work in a cooperative and
constructive manner with other federal and state agencies. The
Commission will continue to take steps that, consistent with its
authority, can help to ease the present energy situation without
jeopardizing longer-term supply solutions. As long as we keep moving
toward competitive and regional markets, I am confident that the
present energy problems, while serious, can be solved. I am also
confident that market-based solutions offer the most efficient way to
move beyond the problems confronting California and the West.
Thank you.
Commission Staff Summary of Major Orders On California Restructuring
I. OVERVIEW
The Commission began addressing the California restructuring in
1996. Initially, the Commission's approach was largely deferential to
State decisions affecting wholesale power market matters within FERC's
jurisdiction. However, as problems started surfacing and then
heightened significantly in the Summer of 2000, the Commission no
longer deferred to State decisions affecting matters within the
Commission's jurisdiction. The resources devoted by the Commission to
California's restructuring were significant from the beginning and, in
recent months, have increased steadily. In all, the Commission has
issued over 80 orders involving California's restructuring, including
over 30 amendments to the ISO tariff and 25 amendments to the PX
tariff. This year alone, the Commission has issued over 20 orders
involving California's wholesale power markets.
The following sections address the most significant of the
Commission's California initiatives, without citations to concurring or
dissenting statements of individual Commissioners.
II. INITIAL AUTHORIZATION OF CALIFORNIA RESTRUCTURING
California's efforts to restructure its electric industry began in
1994. Extensive hearings and negotiations in proceedings before the
California Public Utilities Commission (CPUC) resulted in a final CPUC
restructuring order issued in December 1995. The California legislature
took up the subject next and this led to the unanimous enactment of
Assembly Bill 1890 (AB 1890) in September 1996. FERC noted in its
subsequent orders that California was the first state to enact a
comprehensive restructuring plan and made it clear that FERC would give
great weight to the decisions made in the state legislation.
The major features of AB 1890 included: (1) creation of an ISO and
PX by January 1998 and simultaneous authorization of retail
competition; (2) creation of the California Electricity Oversight Board
with members appointed by the Governor and legislature; (3) a
competitive transition charge for the recovery of the traditional
utilities' stranded costs; and (4) a ten percent rate reduction for
residential and small customers, and a rate freeze for all retail
customers.
At California's request, the Commission considered the various
aspects of California's restructuring in stages, resulting in a series
of FERC orders as details were added to the restructuring plans.
On November 26, 1996, the Commission accepted the filings of
Pacific Gas and Electric Company (PG&E), Southern California Edison
Company (SoCal Ed), and San Diego Gas and Electric Company (SDG&E)
(collectively, Companies) seeking approval for those aspects of the
restructuring subject to FERC's jurisdiction. 77 FERC para. 61,204
(1996). The Companies' proposals reflected the CPUC's orders and AB
1890. The Commission's order approved the transfer of operational
control of transmission facilities to the ISO, the overall framework
for establishment of the ISO and PX, and the jurisdictional split
between the transmission and local distribution facilities of the
utilities. The Commission largely approved the California market design
as filed and provided guidance on matters that needed further support
by the companies in order to gain final approval under the Federal
Power Act (FPA).
However, the Commission determined that it could not accept the
proposed role of the Oversight Board in the governance or operations of
the ISO and PX, or appellate review of ISO board decisions, because the
Oversight Board's role was not limited to matters subject to State
jurisdiction and concerned matters within the Commission's exclusive
jurisdiction. Thus, the Commission did not approve a permanent role for
the Oversight Board. Instead, the Commission approved only an initial
start-up function for the Oversight Board, to expedite the
establishment of the ISO and PX initial governing boards.
In March 1997, as supplemented in August 1997, the ISO and PX
submitted Phase II of the restructuring proposal, including
organizational and governance documents, an Operating Agreement and
Tariff for each, a Transmission Control Agreement, and other materials
and explanations previously required by the Commission. The Commission
addressed these filings in an order dated October 30, 1997,
conditionally authorizing limited operation of the ISO and PX. 81 FERC
para. 61,122 (1997). The Commission reiterated, and provided additional
guidance on, its findings on the Oversight Board.
In that order, the Commission also addressed the Companies'
requests for market-based rates, which they filed at the direction of
the CPUC. The Commission accepted the Companies' market-based rates, in
part, due to the plans of PG&E and SoCal Ed to divest significant
amounts of their generation. 81 FERC at 61,546-47.
III. EARLY ACTIONS ON PRICE CAPS
Shortly after the ISO and PX commenced operations on March 31,1998,
prices for ancillary services in the ISO's markets increased
significantly. See AES Redondo Beach, L.L.C., et al., 84 FERC para.
61,046 (1998), order on reh'g, 85 FERC para. 61,123 (1998) (October 28,
1998 Order), order on further reh'g, 87 FERC para. 61,208 (1999) (May
26, 1999 Order), order on further reh'g, 88 FERC para. 61,096 (1999),
order on further reh'g, 90 FERC para. 61,148 (2000). The ISO proposed
price caps as a solution. In an order issued July 17, 1998, the
Commission authorized the ISO for an interim period to reject bids in
excess of whatever price levels it believed were appropriate for the
ancillary services it procures. On rehearing, the Commission explained
that, as the procurer of ancillary services, the ISO had the discretion
to reject excessive bids. The Commission also stated that a purchase
price cap is not an ideal approach to operating a market and that it
did not expect the cap to remain in place on a long-term basis. October
28, 1998 Order, 85 FERC at 61,463. The Commission also directed the ISO
to file a comprehensive proposal to redesign its ancillary services
markets. AES Redondo Beach, L.L.C., et al., 85 FERC para. 61,123 at
61,462 (1998).
The Commission later approved a filing by the ISO authorizing the
ISO to adopt a purchase price cap for its imbalance energy market at
whatever level it deemed necessary and appropriate. California
Independent System Operator Corporation, 86 FERC para. 61,059 (1999).
In an order approving the ISO's ancillary services market redesign,
the Commission allowed the ISO to retain the authority to specify
purchase price caps for ancillary services and imbalance energy until
November 15, 1999. May 26, 1999 Order, 87 FERC at 61,817-19. The ISO
had proposed to raise and eventually eliminate existing price caps on
ancillary services and imbalance energy upon the implementation of
several redesign elements, but in the interim, it planned to maintain
the then current $250/MWh purchase price caps. The Commission directed
the ISO to eliminate the price caps by November 15, 1999, with the
caveat that the ISO could file for an extension of its price cap
authority if its experience with the market reforms over the summer
indicated serious market design flaws still existed.
In September 1999, by direction of the ISO's Governing Board, the
price caps were raised from $250 to $750. On September 17, 1999, the
ISO filed proposed tariff revisions to extend for one year, until
November 15, 2000, its authority to cap ancillary services and
imbalance energy prices. The proposal gave the ISO the discretion to
lower the price caps to $500 effective June 1, 2000, if the ISO
Governing Board determined that any of three specific conditions were
met. The proposal also gave the ISO discretion to lower the price caps
by an unspecified amount in the event that it determined that the
markets were not workably competitive. The Commission accepted the
proposed tariff provisions in November 1999, giving the ISO the
opportunity to complete its market redesign and to test its reforms
under summer peak conditions. See California Independent System
Operator Corporation, 89 FERC para. 61,169 (1999), reh'g pending.
IV. DEVELOPMENTS ON GOVERNANCE
On November 24, 1998, the Commission found the ISO and PX not to be
in compliance with its prior orders on the role of the Oversight Board.
85 FERC para. 61,263 (1998). The Commission denied the ISO's request to
defer enforcement of its prior orders, and directed the ISO and PX to
revise their bylaws to be consistent with the Commission's
determinations. The Commission again provided guidance on the proper
sphere of action by the Oversight Board.
On August 5, 1999, the Commission granted a petition for
declaratory order by the Oversight Board. The Commission said that the
modified governance structures contained in proposed state legislation
would comply with federal law. Under this proposed legislation, the
Oversight Board's activities were narrowed to include, e.g., an
appellate function on matters affecting the general welfare of the
State's electric consumers and the right to confirm only those ISO and
PX board members representing end-users. This proposed legislation was
subsequently enacted.
V. LAST YEAR'S ACTIONS
On July 26, 2000, the Commission ordered a fact-finding staff
investigation on technical or operational factors, regulatory
prohibitions or rules (Federal or State), market or behavioral rules,
or other factors affecting the competitive pricing of electric energy
or the reliability of service in electric bulk power markets. The
Commission directed its staff to report its findings to the Commission
by November 1, 2000.
On August 23, 2000, the Commission issued an order initiating a
formal hearing on the justness and reasonableness of the rates in
California's spot markets. 92 FERC para. 61,172. This action meant that
refunds could be ordered as of the refund effective date of October 2,
2000, if rates were found to be unjust and unreasonable. The
investigation was initiated partly in response to a complaint by SDG&E
asking for the emergency imposition of a price cap to protect consumers
from extreme price increases. The Commission simultaneously instituted
an investigation into whether the tariffs and institutional structures
and bylaws of the ISO and PX were adversely affecting the efficient
operation of competitive wholesale electric power markets in
California.
On November 1, 2000, the Commission issued an order proposing
measures to remedy the problems identified in a Commission Staff Report
on Western Markets and the Causes of the Summer 2000 Price
Abnormalities. 93 FERC para. 61,121. The Commission sought comment on
its proposed remedies.
Beginning in mid-November, the ISO began experiencing repeated
emergency conditions forcing it to serve increasingly large portions of
its load through its imbalance energy market. On December 8, 2000, the
ISO filed a tariff amendment seeking expedited consideration of tariff
revisions to address these conditions. Most significantly, the ISO
sought immediate implementation of an interim price mitigation proposal
based on a concept that was proposed in the November 1 Order, rather
than continuing its $250/MWh price cap, to encourage greater
participation of generators in its markets. The mechanism would pay
sellers their bids even if their prices exceeded that level but their
bids would not set a market clearing price to be paid to all sellers in
the market. The Commission approved the tariff revisions in an order
issued December 8, 2000. 93 FERC para. 61,239.
Also on December 8, 2000, the Commission issued an order waiving
certain regulations pertaining to QFs, effective for the period
December 8 through December 31, 2000, to allow certain QFs to sell
additional power to load located in California to help alleviate the
supply-demand imbalance in California. 93 FERC para. 61,238.
On December 15, 2000, the Commission issued an order adopting many
of the remedies proposed in its November 1, 2000 order. 93 FERC para.
61,294. It ordered specific short- and long-term measures to remedy the
dysfunctional California bulk power markets.
First, the December 15 order eliminated the requirement for
California's investor-owned utilities to sell all of their generation
into and buy all of their energy needs from the PX. The buy/sell
requirement resulted in an over-reliance on spot market purchases and
created an excessive exposure to short-term price fluctuations. The
Commission also ordered the termination of the PX's wholesale rate
schedules effective as of the close of the April 30, 2001 trading day.
This resulted in 25,000 megawatts of generation, either owned by or
under contract to the three California utilities, being returned to the
utilities for direct sales to retail customers subject to State
regulation, instead of being sold to, and repurchased from, the PX.
In addition, the order addressed the problem of underscheduling,
directing utilities to schedule 95 percent of their transactions in
advance of real time, to reduce the reliance on the ISO's real-time
market. A penalty was imposed for loads that exceed the prescheduled
amount by more than five percent.
The order also established a $150 per MWh breakpoint mechanism
intended to help ensure just and reasonable rates from January 1, 2001
until May 1, 2001, until long-term measures could be put in place. The
single price auction was modified so that bids above $150 per MWh would
not set the market clearing prices paid to all bidders. Public utility
sellers (primarily the investor-owned utilities) that bid above this
breakpoint were required to file weekly transaction reports with the
Commission. Sellers were made subject to potential refund liability if
the Commission finds they sold power at prices that were not just and
reasonable.
The order directed Commission staff to develop a comprehensive
market monitoring and mitigation program to replace the $150/MWh
breakpoint mechanism and to be in place by May 1, 2001. The order also
rejected calls for price caps or cost-based rates, stating that the
remedies adopted by the Commission were ``designed to help alleviate
the extreme high prices being borne by Californians, but also to ensure
that sellers continue to have incentives to sell into California and
sufficient incentives to build sorely needed new generation and
transmission necessary to provide reliable service in the future.''
VI. THIS YEAR'S ACTIONS
On January 8, 2001, the Commission issued an order clarifying the
December 15 order. 94 FERC para. 61,005. The Commission reiterated a
directive for the PX to terminate its wholesale rate schedules
effective April 30, 2001, but clarified that the order was not intended
to preclude the PX from continuing its market for bilateral forward
contracting.
On January 29, 2001, the Commission issued an order finding the PX
in violation of its December 15 order by not implementing the $150 per
MWh breakpoint, and it required immediate recalculation of wholesale
rates by the PX. 94 FERC para. 61,085.
On February 1, 2001, the Commission staff issued a report on
generating plant outages in California, focusing on whether unplanned
maintenance or outages occurred to raise prices. Staff did not find
evidence suggesting that the companies audited were scheduling
maintenance or incurring outages in an effort to influence prices.
Rather, the report concluded that the types of problems encountered
(i.e., turbine seal leaks) are common considering that these facilities
had been operating above normal levels and were 30 to 40 years old.
Also on February 1, 2001, the Commission Staff released a study
looking at power markets in the Northwest during November and December
2000. The report found, in sum, that the Northwest power markets saw
increased demand through the 1990s, without increased generation
capacity. In November and December of 2000, the market was driven by
extreme cold, high natural gas prices and low storage levels, and by
low water, precipitation and stream flow levels. These conditions were
made worse by a large number of plant outages and environmental
constraints, and a general atmosphere of market uncertainty.
On February 14, 2001, the Commission issued an order addressing the
creditworthiness tariff provisions proposed by the ISO. 94 FERC para.
61,132. The credit ratings of PG&E and SoCal Ed had deteriorated
significantly, resulting in the inability of the utilities to meet the
existing creditworthiness standards. The ISO proposed to amend its
tariff to lower the creditworthiness standards. The order accepted the
ISO's amendment for purposes of allowing PG&E and SoCal Edison to
continue to schedule their own generating resources to serve their
load. The order held, however, that the utilities could continue
purchasing through the ISO from third-party suppliers only if they
obtained financial backing from creditworthy counterparties.
On March 9, 2001, the Commission directed 13 jurisdictional sellers
of power into the ISO and PX short-term markets in January to either
make refunds for certain power sales (or offsets against accounts
receivables) or provide further justification of their prices. 94 FERC
para. 61,245. The Commission reached this decision after reviewing
generators' transaction reports and reports by the ISO and PX, and
finding that certain transactions exceeded a Commission-determined
market-clearing proxy price for Stage 3 emergency hours in January. The
proxy price was based on data including average natural gas prices,
average NO<INF>X</INF> allowance costs, and variable operation and
maintenance costs.
Public utility sellers with transactions above the January proxy
price of $273/MWh must notify the Commission on or before March 23,
2001 that they will either: (1) refund the excessive amounts or offset
such amounts against any amounts due or owed to them; or, (2) supply
further data to justify transactions above this level. The Commission
will determine a proxy clearing price for each month through April
2001. Commission staff will issue notice of the proxy price within 15
days of the end of each month.
Also on March 9, 2001, the Commission's staff issued a proposal on
how the Commission should monitor and mitigate prices in California's
wholesale spot power markets in the future. This proposal is based on
monitoring and mitigating prices on a before-the-fact basis, instead of
through after-the-fact refunds. Comments on the staff's proposal are
due on March 22nd. After receiving and considering public comment, the
Commission intends to implement appropriate changes to its current
market monitoring and mitigation requirements by May 1st. These changes
will supersede the $150 breakpoint mechanism currently in effect.
On March 14, 2001, the Commission issued an order seeking to
increase energy supplies and reduce energy demand in California and the
West. The Commission implemented certain measures immediately. For
example, the Commission streamlined regulatory procedures for wholesale
electric power sales, extended (through December 31, 2001) and
broadened regulatory waivers for Qualifying Facilities under the Public
Utility Regulatory Policies Act of 1978, authorized market-based rates
for sales of on-site and back-up generation and sales of demand
reductions, expedited the certification of natural gas pipeline
projects into California and the West, and urged all licensees to
review their FERC-licensed hydroelectric projects in order to assess
the potential for increased generating capacity. The Commission also
proposed, and sought comment on, other measures such as incentive rates
for new transmission facilities and natural gas pipeline facilities
completed by certain dates this year or next. The Commission also
announced that it intends to meet with state regulators this Spring.
Also on March 14, 2001, the Commission ordered two utilities (AES
Southland, Inc., and Williams Energy Marketing & Trading Company) to
show why they should not be found to have inflated power prices in the
California market and potentially compromised the reliability of the
transmission network in violation of tariffs on file under the Federal
Power Act. 94 FERC para. 61,248. The Commission stated that the two
utilities extended outages at certain generating facilities from April
25 through May 11, 2000. These facilities are owned by AES, which sells
the power to Williams for resale. The shut down forced the ISO to
purchase power from other generation units also owned by AES, and whose
power is also resold by Williams, at prices greatly in excess of the
market price or the variable costs of operating the units. Williams and
AES must explain why either or both should not make refunds totaling
$10.84 million. Williams also must explain why it should not be
precluded from profiting from outages of AES' Southern California
facilities for one year.
Mr. Hebert. It does, Mr. Chairman.
Mr. Barton. We would like to hear next from Commissioner
Breathitt. Your statement is in the record, and, again, we are
going to set the clock at 10 minutes. We will at least let you
know that, but we do want you to have the full ability to
elaborate on your written statement.
STATEMENT OF HON. LINDA K. BREATHITT, COMMISSIONER, FEDERAL
ENERGY REGULATORY COMMISSION
Ms. Breathitt. Thank you, Mr. Chairman.
Good afternoon, Mr. Chairman and members of the
subcommittee, and Mr. Whitfield, whose State and hometown we
both share. I appreciate this opportunity to appear before you
today to discuss the energy crisis in California and the
worsening conditions of electricity markets throughout the
West. This crisis is affecting the lives and well-being of
millions of citizens and threatening the existence of thousands
of businesses. In addition, the extraordinarily high prices for
electricity and the extreme shortages of supply are creating a
consumer backlash against newly restructured electricity
markets. I fear the move toward a competitive electricity
marketplace will be severely affect ed by this crisis and could
even be suspended by States that fear what is happening in the
West.
For months the Commission has been grappling with and
attempting to resolve the market disruptions in California and
elsewhere in the West. I believe our actions to date have been
significant and appropriate and will ultimately improve the
long-term situation in the western electricity markets.
However, I am becoming increasingly concerned about the near-
term problem, particularly about what will happen this summer
in California.
I believe yesterday's blackouts and today's are a harbinger
of what is to come. The predictions I am hearing for this
summer, including prolonged blackouts, supply shortages and
even higher prices, are very alarming. In fact, a spokesman for
the California ISO said that yesterday was, ``clearly the worst
day we have ever had in California.''
I am concerned that our actions to date, and those of
California officials, will not improve the immediate situation
in California. All of us together, FERC, State officials,
Members of Congress and the administration, may have to begin
exploring other shorter-term remedies to address the
disruptions and volatility in these markets. It is imperative
that the Commission place all available options on the table
for consideration and prepare itself to make even tougher
decisions necessary to resolve these problems.
My written testimony discusses some of the causes of the
energy crisis, including high production costs, increased
demand and scarcity of generation. It is becoming increasingly
apparent that the causes of the California energy crisis are
not only State-specific, but regional in nature. We can no
longer just look at California. It is now necessary to consider
and understand the conditions throughout the entire Western
Interconnection. Electricity markets in the West are
interrelated, and the solution to these problems will likely be
regional in scope.
My written testimony also discusses several decisive
actions taken by the Commission over the past several months to
address these market distortions and instances of potential
market power abuses. These include establishing specific
remedies for the California market, launching an investigation
of California marketers whose sanctions appear to have inflated
electric prices in California, and requiring certain sellers in
the California market either to refund potential overcharges
totaling $124 million or to provide additional cost
justification.
In addition, we have scheduled a conference on April 6 in
Boise, Idaho, with Western State Commissioners to discuss price
volatility in these markets and to identify additional
regulatory remedies that may be necessary.
Mr. Chairman, I would like to ask that a copy of the notice
for the meeting we are having in Boise on April 6 be entered
into the record.
Mr. Barton. Without objection, so ordered.
Ms. Breathitt. Going forward, I believe the Commission may
need to have a greater role in the siting of new
infrastructure, because shortages of generation and
transmission will no longer be single-State issues, and this
would likely require an amendment to the Federal Power Act.
Furthermore, I believe the formation of regional transmission
organizations in the West is vital to the ultimate resolution
of market disruptions and for expansion and enhancement of the
transmission grid.
With respect to the possible State purchase of the
investor-owned utilities transmission system, I believe the
issue is not so much who owns the transmission system in
California. The issue is that the transmission system needs to
be operated on an open, nondiscriminatory basis with full
access, and it needs to be part of a regional grid.
To address volatile natural gas prices, I would urge
California regulators to limit the incentive for natural gas
purchasers to gravitate to the spot market. The Commission will
continue to do its part to get adequate pipeline infrastructure
to California, but California needs to also assess whether
there is sufficient intrastate capacity to take gas from the
border to the market.
And finally, I support the Commission's initiative to
explore the feasibility of easing certain operating constraints
for jurisdictional hydroelectric projects, but only if we can
do so without compromising important environmental resources.
In conclusion, I believe that competitive and open
wholesale bulk power markets are still attainable and should
remain the objective of Congress, energy regulators and State
legislators throughout the country, and I look forward to
working with this subcommittee and others to address these
significant issues.
[The prepared statement of Hon. Linda K. Breathitt
follows:]
PREPARED STATEMENT OF HON. LINDA BREATHITT, COMMISSIONER, FEDERAL
ENERGY REGULATORY COMMISSION
Mr. Chairman and Members of the Subcommittee: I appreciate this
opportunity to appear before you today to discuss the energy crisis in
California and the worsening conditions of electric systems and markets
elsewhere in the Western United States. I believe it is not only
appropriate, but necessary, that we meet at this time to examine a
crisis that is affecting the lives and well-being of millions of
citizens and threatening the very existence of thousands of commercial
enterprises throughout the West.
The magnitude of this growing crisis, and its potential disruptive
capability, cannot be overestimated. The extraordinarily high prices
for electricity and the extreme shortages of supply are creating a
consumer backlash against newly restructured electricity markets.
Unfortunately, the move toward a competitive electricity marketplace
will undoubtedly be affected by this crisis and could even be suspended
if other states, fearful of what they are seeing in the West, terminate
their restructuring efforts. For these reasons, I welcome the interest
and involvement of Congress in this matter and I look forward to
working with you to address these problems.
For many months, the Federal Energy Regulatory Commission has been
grappling with and attempting to resolve the California energy crisis.
We are now taking specific action, as well, to address problems in
other parts of the West. I believe our actions to date have been
significant and appropriate and will improve the long-term situation in
the Western electricity markets. I am becoming increasingly concerned,
however, about the near-term problem, particularly what will happen
this summer in California. The predictions I am hearing for prolonged
blackouts, supply shortages and even higher prices are alarming, to say
the least.
I am very concerned that, even as important as they are, our
actions to date, and those of California officials, will not improve
the immediate and near-term situation in California. We may have to
explore other short-term remedies to stem the damaging disruptions in
these markets. Indeed, over the past several weeks we have received
letters from members of the California Congressional Delegation,
governors of some Western states, and others urging immediate, short-
term action by the Commission, including the imposition of regional
price caps, to restrain the high wholesale costs of electricity in the
region. I believe it is imperative that the Commission place all
available options on the table for consideration. The solutions to
these problems will be as multi-faceted and complex as the causes. We
must recognize that fact and prepare ourselves to make the tough
decisions necessary to resolve the problems.
My testimony today will build on that theme by discussing some of
the apparent causes of the disruptions in Western electricity markets,
some of our important actions intended to relieve these disruptions,
and, what I believe to be, the appropriate role of the Commission in
addressing the volatilities and uncertainties that exist in these
markets. I will also briefly discuss recent actions taken by California
officials. In addition, I adopt the attachment to Chairman Hebert's
testimony which provides a description and summary of several important
orders issued by the Commission over the past five years regarding
California's restructuring plan and electricity markets. This summary
was prepared by Commission Staff and I believe it will provide you with
a sufficient framework for understanding the chronology and details of
FERC's key decisions and actions addressing California's restructuring
efforts, some of which were issued before I began my tenure on the
Commission.
The Commission has focused much of its attention over the past
several months in defining and understanding the causes of the market
disruptions and high electricity prices in California and throughout
the West. As expected, we found that multiple factors contributed to
the situation. A Commission Staff report completed in November 2000
found, among other things that: (1) market forces in the form of
significantly increased power production costs combined with increased
demand due to unusually high temperatures to create unstable conditions
in the West; (2) scarcity of available generation resources throughout
the Western region played a significant role; (3) existing market rules
worsened the tight supply-demand conditions by exposing the three
investor-owned utilities in California to the volatility of the spot
energy market without affording them the opportunity to mitigate price
volatility by hedging their positions in forward electricity markets;
(4) an underscheduling of demand and supply in the California Power
Exchange's day-ahead and hour-ahead markets increased the activity in
the more volatile real-time spot market operated by the California
Independent System Operator (ISO); and (5) unplanned outages of power
plants increased significantly during the summer of 2000.
It is becoming increasingly apparent that the causes of the
California energy crisis are not only state-specific, but are also
regional in nature. In other words, to fully understand the problems in
California, it is necessary to look at conditions in the entire Western
Interconnection. California has historically relied on imports to
supply 15 to 20 percent of its capacity needs during summer peak
periods, primarily from hydroelectric plants in the Northwest. Due to
increased demand elsewhere in the West and low water levels in
hydroelectric reservoirs in the Northwest, available imports into
California in 2000 were less than half what they were in 1999. As a
result, the California ISO had approximately 3,000 MW less generating
capacity available from outside the state in 2000 than in 1999. This is
but one example of the regional nature of the problem in the West.
I believe the Commission has taken bold and decisive actions,
within its jurisdiction, to remedy the extreme distortions in the
California markets and to address instances of potential market power
abuses. First, on December 15, 2000, we issued a major order
establishing a set of remedies for the California market. In an effort
to significantly reduce California's exposure to the volatile spot
market, we eliminated the requirement set by the California legislation
that the investor-owned utilities sell all of their generation into,
and buy all of their power needs from the California Power Exchange. In
effect, this action immediately returned 25,000 MWs to State
regulation. This should allow the IOUs to move their purchase power
needs to long-term bilateral contracts and to adopt a balanced
portfolio of contracts to mitigate cost exposure. We also adopted a
benchmark price of $74 per megawatt-hour for assessing prices of long-
term electric supply contracts. In an effort to reduce the real-time
spot market to only about 5 percent of peak load, we initiated a
penalty charge that would be imposed on any market participants that
under schedules load in day-ahead and other forward markets.
To ensure that prices in the ISO and PX spot markets are just and
reasonable, the Commission established an interim breakpoint mechanism
for sellers bidding into the spot market. Sellers bidding at or below
$150 per megawatt will receive the market clearing price. Sellers
bidding above that level will receive their actual bids, but the bid
will not set the market clearing price. In addition, these bidders will
be subject to certain reporting requirements and monitoring. Bids above
$150 are subject to refund pursuant to Section 206 of the Federal Power
Act. This breakpoint mechanism will be replaced on May 1 by a permanent
and comprehensive market monitoring and mitigation program which will
screen for market abuses.
On March 9, 2001, we issued an Order directing certain sellers into
the California market to either provide refunds totaling $69 million
dollars in excessive charges for electricity during January 2001 or
supply further cost or other justification for prices charges above a
proxy market clearing price established in the order. Similarly, on
March 16, 2001, we ordered potential refunds totaling $55 million
dollars in excessive charges for electricity during February 2001.
These Orders directing potential refunds are pursuant to our December
15, 2000 order establishing remedies for the California's wholesale
electric markets.
Last Wednesday, March 14, 2001, the Commission launched an
investigation of two California power marketers, Williams Energy Market
& Trading Company and AES Southland, Inc., and issued a Show Cause
Order directing the companies to explain why they should not be found
to have violated the Federal Power Act by engaging in actions that
inflated electric prices in the California market and potentially
compromising the reliability of the transmission network. If these
companies are found to have violated the terms and conditions of filed
tariffs, the Commission could direct the companies to return profits,
in excess of $10.8 million, and condition the companies' future market-
based rate authority.
Also on March 14, 2001, the Commission issued an order announcing
certain actions that we will take or propose to take to increase the
supply of electricity in the West. Our order examined both electric
supply-side and demand-side actions that could be taken, and how best
to assure the input of natural gas needed for electric power
production. We acknowledge that our authority is somewhat limited, but
the steps we plan or propose to take should help increase supply from
existing power sources and could provide regulatory incentives to build
new electric and natural gas infrastructure.
From my perspective, two aspects of the order are especially worth
noting. First, the order establishes a conference in which FERC
Commissioners will meet with Western state commissioners to hear their
views on how FERC can assist them in addressing the market disruptions
in the West. This type of interaction and coordination is important
since state regulators, not the FERC, presently have siting authority
for electric generation and transmission facilities. Moreover, state
regulators have the most significant authorities to encourage demand
reduction measures. I look forward especially to seek state
commissioners' advice on what the Commission can do with respect to
price volatility in the region. Although our March 14 order does not
focus specifically on the volatile wholesale prices in the West, I
believe that FERC has to examine all its options in that aspect of the
electricity markets as well. I will urge my state colleagues to be
forthcoming and candid with us as we examine together the extreme price
volatility in these markets and implementation issues associated with
any additional actions.
Second, our March 14 order supports and addresses the requests made
by California Governor Gray Davis and Secretary of Energy Spencer
Abraham for the Commission to extend our waivers of certain regulations
for Qualifying Facilities. In our order, we extended through December
31, 2001, our temporary waiver of operating and efficiency standards
and fuel use requirements for QFs, in order to allow them to increase
their generation. In addition, we found good cause to apply those
waivers to the entire Western System Coordinating Council (WSCC). In so
doing, we require that all additional output from those QFs be sold
exclusively through negotiated bilateral contracts at market-based
rates. This should benefit all parties and help serve load in the WSCC
at a time when generation resources are inadequate.
As I have stated, the Commission has taken important steps in these
orders to address the market disruptions in California and the West. If
these steps prove to be unsuccessful, the Commission must act quickly
to establish alternative remedies. As I have stated publicly on recent
occasions, I am maintaining an open mind and a willingness to implement
the structural or regulatory remedies that are required. We must strive
to stabilize the markets in the West before the summer peak period
begins and before the California market imperfections further worsen
the market problems that are already developing in the Northwest and
elsewhere in the Western Interconnection.
As we continue to monitor the situation in the West, the Commission
will continue to examine its role in these matters and to take
appropriate action when necessary. One important aspect of the
electricity system in the West and elsewhere in the country in which
the Commission's jurisdictional role is restricted as it pertains to
the siting of new transmission and generation facilities. Currently,
under the Federal Power Act, the Commission has no role in the
permitting and siting of these new facilities. I am beginning to
believe this may need to be changed. FERC may need to have a greater
role in the siting of new infrastructure, because shortages of
generation and transmission likely will no longer be just single state
issues. I believe these shortages could become interstate commerce
issues that must be addressed by the Federal government.
Already we are seeing how a shortage of electric infrastructure in
California can affect prices and the efficient operation of the
interstate transmission grid. We've recognized that California is
experiencing a shortage of generation capacity. But the state's need
for new transmission infrastructure is also becoming an important
factor affecting the electricity markets. The last major transmission
line that was built in California was the California-Oregon
Transmission Project in 1993. The California ISO has identified a
number of transmission projects that will both increase import
capability and improve the reliability of the grid in various parts of
the state. In addition, the ISO has identified projects in the San
Francisco area that should be constructed in the next 2-3 years. These
projects, evidently, would relieve congestion along the major north-
south transmission path and improve the overall reliability of the ISO
grid. I am concerned that some of these needed projects may not be
built. My concern is heightened by delays such as are being experienced
by San Diego Gas & Electric's proposed Valley-Rainbow 500 kV Project.
Although this project was approved by the California ISO in May 2000,
it is being delayed because of local opposition. The ISO has determined
that this project or a comparable alternative is needed to reliably
serve load growth in San Diego beyond 2003. This is just one example,
but I believe that a federal role in transmission siting throughout the
country could be helpful in instances such as this, and could, in fact,
become necessary in the future.
With regard to transmission upgrade and expansion, I believe the
Commission's Order No. 2000, issued in December 1999, will create an
important regulatory framework. Order No. 2000 is intended to encourage
the formation of Regional Transmission Organizations throughout the
United States. The Order includes a specific functional requirement for
RTOs to develop a strategy for transmission planning and expansion. The
order also describes innovative pricing options that the Commission
would consider for RTOs. Such ratemaking mechanisms could provide
necessary incentives for the construction of new or enhanced
transmission facilities. I believe the formation of RTOs in the West
will be a significant benefit for many aspects of the electric markets
in that region, including the expansion and enhancement of the
transmission grid.
Due to the continuing convergence of the electric and natural gas
industries, problems that have affected the electric utilities in
California and the West also have been felt in the natural gas
industry. Furthermore, there is a clear nexus between the pressure to
capture all megawatts available and the increased use of hydroelectric
facilities in the West. I will first address natural gas issues.
I believe that there are both short-term and longer-term actions
that need to be taken on the natural gas front. In the short-term,
there appears to be an over-reliance on spot-market purchases of
natural gas. Our December 15th order found that a major cause of the
high electric prices in California was the over-reliance on the spot
market for electricity. In that order, the Commission recommended that
the IOU's put 95 percent of their load in forward markets to minimize
exposure to the price volatility of the spot market. I believe that the
same logic holds for the natural gas market.
It is my understanding that the California Public Utilities
Commission allows for recovery of gas costs that meet a benchmark
determined by the use of monthly spot market purchases. It is my
opinion that this policy creates an incentive to rely on spot market
purchases of natural gas. Accordingly, I would suggest that policies
should be in place that provide an incentive for natural gas buyers to
use risk management tools, such as price hedging, to decrease commodity
pricing uncertainties.
I strongly believe that regulators need to be careful to discern
the difference between hedging to reduce exposure to price volatility,
and mere speculating. It may be a fine distinction, but it is one that
is critical. Hedging can be a useful tool to decrease uncertainty,
while speculating to beat the market can increase the possibility of
risk. It could even be said that failing to hedge and, therefore, limit
the exposure to the vagaries of the spot market, is actually
speculating. Consequently, I would urge regulators in California to
look at the benefits that may accrue by limiting the incentive for
natural gas purchasers to gravitate toward the spot market.
The Commission's March 14th order on supply and demand issues
presented a number of longer term measures that the Commission is
taking or may take to increase the amount of interstate natural gas
capacity into California and the West. Specifically, the Commission has
realigned its staff to be able to respond as quickly as possible to
applications for new gas pipeline capacity for the West. Through this
order, FERC also is seeking comments on the need to provide rate
incentives to expedite construction of projects that will make
additional capacity available this summer on constrained pipeline
systems.
However, there is another California infrastructure concern that
should be resolved at the state level. While FERC has jurisdiction over
the siting of interstate natural gas pipelines, the states have siting
authority for intrastate facilities. Consequently, FERC can do its part
to get adequate pipeline infrastructure to California, the state needs
to assess whether there is sufficient intrastate capacity available to
take natural gas from the border to market.
The Commission is addressing the need for increased supplies
through the administration of its hydro licensing program, as well.
With hydropower comprising approximately 40 percent of the total WSCC
generation capacity, the Commission has launched an initiative to
explore the feasibility of easing certain operating constraints, such
as minimum flow and reservoir level requirements, that act to reduce
the energy production, peaking capacity, and other power benefits of
hydropower projects. These operating constraints serve to protect many
resources--such as resident and anadromous fish, water quality,
recreation, municipal and industrial water supplies, and agricultural
resources. The tension will be in finding a balance between greater
operational flexibility and the protection of environmental resources.
In addition, a more efficient use of available water resources at
licensed projects could contribute to meet the electric capacity and
energy needs of the Northwest.
The Commission's goal is to establish a methodology by which the
Commission can quickly identify projects where there is a potential for
more electricity to be generated with the least effect on resources,
and then to create a process by which we can quickly review requests
for modifications. The Commission's experience with emergency drought
conditions in California in the 1980s provides a general framework for
this exercise. The tension in will be in finding a balance between
greater operational flexibility and the protection of resources. In
order to achieve this objective, it will be necessary to seek the
cooperation not only of FERC licensees, but also federal, state, and
local resource agencies and other interested parties. In our March 14th
Order addressing supply and demand issues, we announced a staff
conference, to be held as soon as possible this spring. I will be
willing to support greater flexibility in cases where the reliability
of the system can be enhanced during this critical time, without
compromising important environmental resources.
As I have stated throughout my testimony today, I believe the
Commission is taking appropriate and important steps to address the
market disruptions in the West. I want to point to some actions that
are also being taken by California officials in their efforts to
address some of the problems in their state. For instance, Governor
Davis has: (1) implemented a limited-term rate reward program for
conservation efforts by residential, commercial and industrial
customers; (2) expedited the processing of applications for
certification for peaking and renewable power plants; (3) provided for
performance awards relating to the construction of power plants brought
on line prior to July1, 2001; and (4) modified emissions limits that
restrict the hours in which certain plants can operate.
In addition, as noted in Chairman Barton's March 12, 2001, letter
inviting me to testify before you today, the state has enacted
legislation and regulations facilitating state contracting for power.
The state is also considering other options, such as purchasing utility
transmission lines. Most of these actions, I believe, will have
beneficial long-term effects on California's electricity market. I
would like to comment briefly, however, on one of these measures. The
possible state purchase of the investor-owned utilities' transmission
systems has received a great deal of press coverage and discussion. In
my opinion, the issue is not so much who owns the transmission system
in California, or elsewhere for that matter. The real issue is that the
transmission system, whether public or private, needs to be part of a
regional grid. Only independent, regionally operated grids will ensure
competitive electricity markets that are open, efficient, reliable, and
free from discrimination. As we continue discussing this matter, what's
truly important is that California's transmission system remain as much
a part of the Western regional grid in the future as it is today.
In conclusion, I believe that competitive and open wholesale bulk
power markets are still attainable and should remain the objective of
regulators and legislators throughout the country. I remain confident
that we can implement appropriate short-term and long-term solutions to
current problems so that we can stay the course toward open and
competitive markets. Let me again say that I look forward to working
with this Subcommittee and others to address these significant issues.
Mr. Barton. We thank you.
We would now like to welcome Commissioner Massey, comes
from the great State of Arkansas.
Your statement is in the record in its entirety, and we
recognize you to elaborate on it.
STATEMENT OF HON. WILLIAM L. MASSEY, COMMISSIONER, FEDERAL
ENERGY REGULATORY COMMISSION
Mr. Massey. Thank you, Mr. Chairman and members of the
subcommittee. As we approach the second summer of a wildly
dysfunctional wholesale market in California and the West, we
stand at the edge of an abyss. We know the market will be
several thousand megawatts short of generation this summer. We
know that there is very little demand response that will dampen
high prices in this market. We have reason to believe that
market power is present in the market. The market monitors in
California have told us this time and time again, and
withholding of generation can be a highly profitable strategy,
as we know from the recent order that we issued involving two
sellers into California. We have already declared that the
California market is severely dysfunctional and is not
producing just and reasonable prices.
The dysfunctional nature of the market will not be remedied
by this summer and prices will soar even higher. Soaring prices
will not get even one more megawatt of generation built by this
summer. The price signal has been sent. Elementary school
children in Bethesda, Maryland, know that the West is capacity-
short now because of all the news programs on it.
A recent Wall Street Journal article detailed the concern
in Washington State about the loss of jobs caused by high
electricity prices. It is important to understand that while
prices had climbed to $400 or even $500 or higher in
California, they have recently been in the $50 range in the PJM
market. Many new generators want to enter the PJM market. They
are clamoring to do so because they are receiving the price
signal of a well-functioning market. Without effective price
mitigation out West, I fear a disaster in the making for the
summer.
I can see no constraint on prices for the summer under
current policy. I have no idea whether Professor Wallach, the
California market monitor, is accurate in his projection of a
$70 billion market in California for this year. It was $7
billion in 1999. If he is anywhere close to correct, it will be
a catastrophe.
We need a temporary time-out in wholesale markets out West.
FERC should consider capping prices in short-term markets in
the western interconnection at each generator's marginal
production cost plus a reasonable capacity payment in the range
of, say, $25. I would exempt new generation and impose a sunset
date perhaps tied to achieving a certain reserve margin in the
West.
Without some effective price control this summer, I fear
for the worst. What is more, the prices that arise in a
dysfunctional wholesale market, and that is what we have
declared it to be, are, according to the courts, unjust,
unreasonable and flatly unlawful. We have the statutory
obligation to ensure just and reasonable prices. There is no
exception for poorly functioning markets, in Federal law. There
is no exception for bad State law. There is no exception,
period.
FERC must take more forceful action to fulfill our
statutory obligation. We cannot risk the health of the western
economy for the philosophical purity of an unfettered price
signal. Our policy favoring markets must surely be tempered
with compassion and common sense at this critical time. Yes,
there is a supply shortage out West, a critical one, and there
is a critical price problem as well that appears to be getting
worse, not better.
That is the short term. Regarding long-term fixes, I agree
with my colleagues, we need a large western interconnection,
regional transmission organization, because California is not
an island. I am indifferent about who owns the California
transmission grid as long as they make a firm and lasting
commitment to participate in a regional transmission
organization. We must end overreliance on the spot markets. We
must work with the State to elicit a demand response when
prices get too high. We probably need to take the rules of our
best market, which is the PJM market that we function in right
here in this region, and we need to replicate that in
California. Among the rules are efficient congestion management
and a standing generation reserve requirement.
Mr. Chairman and members of the subcommittee, I also
appreciate Commissioner Breathitt's comments about the gas
market. The transportation differential for natural gas into
California has been at times exorbitant. That exorbitant
transportation differential, sometimes in the range of $20- to
$30 for delivering natural gas into California, then is
leveraged into the wholesale price of electricity because the
units that are on the margin are gas-fired units, and two-
thirds to three-fourths or even higher of their marginal
production cost is natural gas. We have got to get a handle on
that problem as well, and I appreciate Commissioner Breathitt's
remarks in that regard.
I look forward to your questions.
[The prepared statement of Hon. William L. Massey follows:]
PREPARED STATEMENT OF HON. WILLIAM L. MASSEY, COMMISSIONER, FEDERAL
ENERGY REGULATORY COMMISSION
Mr. Chairman and Members of the Subcommittee on Energy and Air
Quality: Thank you for the opportunity to testify on the subject of the
problems facing the California electricity market. The Federal Energy
Regulatory Commission has been moving the electricity industry to a
structure that relies on well-functioning wholesale markets to produce
an economic and reliable supply of electricity for the nation. In
supporting that policy, my expectation continues to be that markets
will produce consumer benefits and lower prices over the long term
compared to cost of service regulation. The recent events in California
and the West present a significant challenge to that expectation.
I am very concerned about the recent behavior of California's
electricity market and its effects on consumers there and throughout
the West. I cannot overstate the enormity of this market catastrophe.
Power that cost California $7 billion in 1999 increased to over $27
billion last year. Costs for 2001 may exceed $70 billion. This severely
threatens the political consensus necessary to sustain a market-based
approach to regulation, not just in California but across the country.
The Commission must act forcefully and decisively to reassure market
participants, policymakers and consumers that jurisdictional wholesale
markets will produce consumer benefits and just and reasonable rates.
Among other things, FERC must immediately declare a time out.
I. THE CAUSES OF MARKET DISRUPTIONS
A. Infrastructure
The western electricity markets are in the midst of a serious
market disruption. California has experienced extraordinarily high and
volatile electricity prices in the last ten months and has skated on
the edges of power outages for most of the winter. Other areas of the
West have also seen very high wholesale prices, in part due to the
problems in California. These are the symptoms of the problems. What
are the problems?
I think most observers agree on a number of factors that have
affected the electricity market in California and the West. First and
foremost among the causes is inadequate infrastructure. Whether it be
due to regulatory uncertainty, siting restrictions, process inertia, or
simply poor judgment, not enough generation has been built over the
last few years to keep pace with demand. There has also been a
significant lack of rainfall in the West such that normal hydroelectric
generation levels are unavailable. Transmission constraints, especially
along the notorious Path 15 in California, have played a role in local
supply shortages and high prices. The critical transmission
infrastructure has not kept pace with the needs of the electricity
market.
B. Market Design
California also suffered from a number of defects in market design.
For example, a combination of rules resulted in creating an incentive
for under scheduling in day ahead markets. Scheduling imprecision is to
be expected to some degree, but my understanding is that deliberate
under scheduling was done in the California PX day ahead markets by
both load serving entities and generators in order to affect market
prices. This forced the ISO to go into the real time markets to make up
the difference between what was scheduled and what was needed to keep
the system in balance. Under such conditions, the ISO paid very high
prices. Perhaps even more important, last minute resource imbalances
pose reliability concerns.
Another market design defect was placing entirely too much reliance
on the spot market. Spot markets and real time markets are almost by
nature volatile. By way of analogy, a traveler purchasing his ticket
while passengers are boarding the plane would expect to pay the highest
price. While the spot market is the appropriate venue to secure limited
portions of needed supply, it should not be relied upon for most or all
of the supply portfolio. Unfortunately, there were rather severe state
regulatory restrictions on the degree to which load serving utilities
in California could forward contract. Surely purchasers having access
to a balanced portfolio of long-term and short-term supply must be an
ingredient of well-functioning markets.
There has also been a lack of demand responsiveness to price. This
is a standard means of moderating prices in well-functioning markets,
but it is generally absent from electricity markets. When prices for
other commodities get high, consumers can usually respond by buying
less, thereby acting as a brake on price run-ups. If the price, say,
for a head of cabbage spikes to $50, I simply don't purchase it.
Without the ability of end use electricity consumers to respond to
prices, there is virtually no limit on the price that suppliers can
fetch in shortage conditions. This is a defect in virtually all U.S.
electricity markets.
Finally, there was a spike in natural gas prices in the winter that
drove up electric generation prices, because some of the least
efficient gas-fired generators were the marginal facilities to be
dispatched.
C. Withholding of Generation
I have been discussing what most observers generally agree have
been contributing factors to the market problems. Market manipulation
by some generators is also believed to have been present. On March 14,
2001, after a non-public investigation, the Commission issued an order
to show cause against Williams Energy and AES alleging the withholding
of RMR generation during April and May of 2000. The order seeks the
refund of over $10 million. While there is not universal agreement
whether widespread withholding has occurred, I believe there is enough
evidence to render this a reasonable suspicion. The Chairman of the
California ISO's Market Surveillance Committee, Professor Frank Wolak,
has repeatedly charged that the rapid escalation in price last summer
was caused by market power and withholding of generation. A recent San
Francisco Chronicle article, using data from the California ISO,
challenges the notion that supply was short during much of the price
run up. For example, California consumption grew only 4.75 percent in
2000 from 1999, and average peak demand was only 4.79 percent higher.
Demand growth was only 8.3 percent higher from May to August. I know
that some also allege that market power can only be exercised during
severe shortage conditions, but the ISO called only one Stage 3 alert
(reserves of only 1.5%) during all of the year 2000, and that was in
December. Yet prices soared beginning in June. The Commission has also
received studies, most notably from Professors Paul Joskow and Edward
Kahn, that indicated the market was manipulated by generators to drive
up prices. While there are surely some legitimate supply inadequacies,
I cannot help but suspect that some supply was withheld from the market
by sellers.
II. STATE GOVERNMENT ACTIONS
California is taking both short and long term measures intended to
resolve the current market crisis. What's needed foremost is to close
any gap between supply and demand. The state's program, as I understand
it, is taking some steps to address this objective. One of California's
major initiatives is entering long term contracts with generators to
assure a reasonably priced and reliable supply of electricity. FERC has
encouraged long term contracting. The state placed itself in the
position of power purchaser because of the credit problems of the
state's major utilities.
Unfortunately, the state is signing long term contracts at a time
when the spot market prices are very high and volatile and the market
has been dysfunctional. Long term contract prices are based on the
expectations of future spot market prices. California may be creating a
new stranded cost problem by signing contracts that are too long and at
too high a price. Long term contracts protect against volatility, but
they do not protect against high prices.
I am also aware that California is acting to speed up new supplies
of electricity capacity. The state has identified 32 potential sites
suitable for peaking plants that could be sited under the state's
emergency siting process, streamlined somewhat its review of new
plants, proposes to provide bonuses to plant developers to accelerate
plant construction, and is providing incentives for distributed and
renewable generation. These measures seem to be on target, although I
have no way of predicting whether they will be sufficient.
The state has also announced an energy conservation program that it
hopes will reduce peak load by 3,200 MWs this summer. This also is on
target. For the longer term, however, I would strongly recommend that
California, and indeed all states, explore ways of increasing the
responsiveness of demand to price signals. Without the ability of end
use consumers to respond to price, there is virtually no limit on the
price suppliers can fetch in shortage conditions. This does not make
for a well functioning market.
Instilling demand responsiveness into electricity markets requires
two conditions: customers must be able to see prices before they
consume, and they must have reasonable means to adjust consumption in
response to those prices. Accomplishing both of these on a widespread
scale will require technical innovation. A modest demand response,
however, can make a significant difference. A recent study by the
Electric Power Research Institute (EPRI) indicates that during this
past summer, a 2.5% demand reduction at peak times could have reduced
energy costs in California by $700 million. Other studies show that
price spikes can be reduced by 73% if just 10% of demand is on real
time pricing.
And once there is a significant degree of demand responsiveness in
a market, demand should be allowed to bid so called ``negawatts'' into
organized markets along with the megawatts of the traditional
suppliers. This direct bidding would be the most efficient way to
include the demand side in the market. But however it is accomplished,
the important point here is that market design simply cannot ignore the
demand half of the market without suffering the consequences,
especially during shortage periods.
The state of California is also actively exploring a purchase of
the transmission assets of the three major investor owned utilities.
Such an action, if it comes to pass, raises a number of issues. First,
will it help stabilize the electricity markets in California? The
answer to this is uncertain. Over time, I believe that state ownership
might help bring better coordination with public power transmission
owners, thereby improving grid operation. A state owned grid may
provide a better chance of making needed transmission improvements at
constraint points, such as the infamous Path 15 that is responsible for
substantial congestion in California.
The other major issue raised by a state purchase of the
transmission facilities is how will the Commission view the transfer?
The Commission has jurisdiction of such a transfer under section 203 of
the Federal Power Act. One of our major review criteria is the effect
of the transfer on competition. We would not view favorably any asset
transfer that is inconsistent with the requirements of regional
competitive wholesale markets. I am personally indifferent whether the
state or private interests own the transmission assets. I have strong
views, however, on how those assets are operated. The Commission should
consider conditioning the asset transfer on participation in a Regional
Transmission Organization with a more expanded scope than California.
This would ensure open access and efficient and non-discriminatory
operation of these critical strategic assets.
III. THE FEDERAL ROLE
The fundamental problems in the California market must be addressed
by short and long terms actions. Siting authority for bringing on new
generation and transmission facilities currently rests with state and
local authorities, as does the authority to improve the retail price
signals so that customers can respond better to market conditions.
There are, however, a number of actions that the can taken at the
federal level to fix the broken market in California and ensure well
functioning electricity markets throughout the nation. Some can be
achieved by the Commission under present authority, and some will
require legislation.
A. Commission Action Under Current Authority
The Commission should do all it can to narrow the gap between
supply and demand in the short term and bring immediate price relief to
consumers and businesses. Last week, the Commission issued an order
that is aimed at removing obstacles to increased supply in the western
United States. This order addresses modest short term actions. Among
them are: temporary waivers of operating and efficiency standards for
QFs, market based rate authority for sales from generation at business
locations, and authorizing customers to ``sell'' load reduction at
market based wholesale rates.
These quick fix measures, though well motivated, will not close the
gap between supply and demand substantially in the short term. Current
estimates are that California will be at least several thousand
megawatts short this summer. Moreover, it is generally agreed that
demand in California and elsewhere in the West is not responsive enough
to prices. So we will have a severe shortage of supply, and demand that
is not responsive to price signals. In these circumstances, what will
restrain prices? Absolutely nothing. California ISO market monitors
reported that in such circumstances last summer, there was no
constraint whatsoever on the prices generators could bid and still get
dispatched. The situation this coming summer may be worse by orders of
magnitude. The Commission has already found that the dysfunctional
market in California is not producing just and reasonable prices.
Addressing these problems is a long term endeavor. Unfortunately,
market participants are forced to purchase in today's markets, and at
prices that are arguably unlawful under the Federal Power Act.
1. Immediate Price Mitigation
I am very concerned with the economic effects of the current market
meltdown. The price shocks of short supply threaten serious economic
dislocation and harm in the region. Already, factories are closing and
utilities throughout the West are asking for exceptional rate
increases. Bonneville is doubling its rates to cover wholesale
purchased power costs: the City of Tacoma, Washington, has voted a 50-
70 % increase. State regulators are put in a tough spot. Refusing the
price increases could threaten their utilities with bankruptcy. But
allowing the rate increases could unleash a political backlash from
consumers who think the prices in the wholesale markets are a blatant
rip-off. An article in the March 13, 2001 Wall Street Journal reported
that the current western energy crisis could cut disposable household
income by $1.7 billion and cost 43,000 jobs over the next three years
in Washington state alone. Some fear that it could tip the whole region
into a recession. Moreover, the current volatile and high prices, which
may be worse by magnitudes this coming summer, are devastating consumer
and investor confidence in a market based approach to electricity
regulation.
Over the past three months, I have attended and spoken at two
separate conferences sponsored by the Western Governors Association
dealing with these issues. Scores of market participants and western
public officials spoke passionately and eloquently about the nature of
the problems they face. Certainly the issue of supply is a big problem
that must be addressed, but so is the issue of price. Without price
protection, there is huge concern out West about what the summer will
bring in terms of high wholesale prices and volatility. If the West
experiences another summer like the last, I fear for the future
viability of our policy favoring wholesale competition. It may suffer
irreparably.
The Commission must initiate a formal section 206 investigation
into the appropriateness of effective price mitigation in the Western
interconnection until the longer term solutions are in place and the
markets operate normally. This investigation would assess whether
conditions in the Western interconnection are preventing competitive
market operation, how long those conditions are expected to last, and
possible wholesale price mitigation. We would also inquire about how
any mitigation measures should be applied and how long they should
last. A specific sunset provision is important to maintain investor
confidence that price mitigation is temporary and imposed only to deal
with a poorly functioning market and to provide an incentive to ensure
that the market problems are addressed expeditiously. Most importantly,
a section 206 investigation would set a refund effective date 60 days
hence so that the Commission can protect consumers if our investigation
finds that prices are not just and reasonable.
It is time for FERC to call a time out from this broken western
electricity market. At this point, high prices that exceed production
and operating costs serve no useful purpose. Is it worth dragging down
an entire regional economy, or perhaps even the national economy, for
the theoretical purity of an unfettered price signal? I say no. FERC
should consider a temporary cost-based price cap on sales in the
Western interconnection. Such a price cap could be calculated on a
generator-by-generator basis at each generator's variable operating
costs plus a reasonable capacity adder perhaps in the range of $25/MWH.
New generation sources should be exempt. In addition, such a cap should
have a well specified sunset provision, tied either to a date certain
or the attainment of certain specific conditions, such as some measure
of adequate reserves.
Such a wholesale price cap would allow generators to recover all
their operating costs plus a return, so generators should have every
incentive to provide power to the grid. In addition, such a cap would
restore credibility to wholesale market prices, and thereby make any
retail rate increases politically saleable. Surely suppliers have
gotten the message by now that more supply is needed. They no longer
need such extreme signals.
2. Good Market Structure
Over the longer term, the Commission must insist on a good market
structure that will produce just and reasonable prices. The difficulty
is that good structure cannot be easily parsed between wholesale and
retail jurisdictions. A well functioning wholesale market is needed for
a well functioning retail market. For example, retail prices will
suffer if the wholesale market is not characterized by competition and
rational grid operation. Wholesale prices cannot be disciplined without
adequate generation and transmission facilities sited by state and
local officials, and without substantial numbers of retail customers
seeing accurate market price signals and having the ability to react to
them. This relationship means the Commission and the states must work
together. But the bottom line is that the Commission must insist on a
good wholesale market structure.
One key element of good structure in California and the West is a
single Regional Transmission Organization for the entire Western
interconnection. I firmly believe that RTOs consistent with FERC's
vision in Order No. 2000 are absolutely essential for the smooth
functioning of electricity markets. RTOs will eliminate the conflicting
incentives vertically integrated firms still have in providing access.
RTOs will streamline interconnection standards and help get new
generation into the market. A West-wide RTO will help ensure access to
the western power market, improve transmission pricing, regional
planning, congestion management, and produce consistent market rules
across the West. We know for a fact that resources will trade into the
market that is most favorable to them. Trade should be based on true
economics, not the idiosyncracies of differing market rules across the
region.
To realize these many potential benefits, RTOs must be truly
regional in scope--large and well shaped. Markets are regional in
scope--this has been well demonstrated recently as prices over the
entire West rose and fell with events in California. Thus, we need an
RTO that covers the entire West. At last Wednesday's Commission
meeting. Chairman Hebert indicated that he shares this objective, and I
welcome his commitment.
As mentioned earlier, the California market is defined by an over
reliance on the volatile spot market. The Commission has recently
encouraged substantial forward contracting by wholesale purchasers.
Although some progress has been made in this area, it does not appear
that significant forward hedging contracts will be in place for the
summer. Substantial reliance on forward contracts is a key element of
good market structure. The Commission must insist that this element is
in place.
Another element of good market structure is an ex ante assurance of
adequate generating capacity, including a reserve margin requirement.
The California market design called for no capacity obligations and
very little forward contracting. Presumably, it was expected that the
invisible hand of the market would ensure that capacity would show up
when needed. Yet, given that electricity cannot be stored, relying
solely on market signals for capacity could mean significant
fluctuations of price and capacity availability as supply and demand
adjust. The fundamental role that electricity plays in the social,
economic, health and public safety fabric of our society, however,
argues that substantial fluctuations in availability and price should
be minimized. One way of guarding against these fluctuations would be
to place an ex ante reserve requirement on the load serving entities
that they could meet however they see fit. This is the current practice
in PJM, and, given the level of capacity additions planned there,
suppliers seem to have confidence in that market design.
Markets also need demand responsiveness to price. Without the
ability of end use consumers to respond to price, there is virtually no
limit on the price suppliers can fetch in shortage conditions.
Consumers see the exorbitant bill only after the fact. This does not
make for a well functioning market. I addressed demand responsiveness
earlier in this testimony.
Good market structure also requires attention to efficient
congestion management, the sequence of bidding, reasonable market rules
and other details. It is generally recognized that the best functioning
wholesale electricity market in the United States is the Pennsylvania,
New Jersey, Maryland Interconnection, known as PJM. PJM has an
excellent market structure that incorporates virtually all of the
elements that I have mentioned. Market participants tell me that they
have great confidence in the PJM market design. PJM works. The
Commission should replicate the PJM structure in all U.S. wholesale
electricity markets, including California and the West.
Even with our best efforts to put in place well structured
electricity markets, however, there may be times when those markets
fail to do their job. When markets fail, the Commission must be
aggressive in ensuring just and reasonable prices. If the states cannot
depend on the wholesale market regulator to ensure reasonable prices
for consumers, then states will surely think twice before heading down
the restructuring path. Moreover, ensuring just and reasonable prices
is our statutory mandate, and there is no exception for dysfunctional
markets.
3. Mitigating Market Power
The task of ensuring reasonable prices in wholesale markets must be
addressed by FERC far differently now than under the old regime. It's
much harder now. Our focus is no longer on the costs of individual
companies. Instead, our focus is on markets and ensuring that they are
free of market power and have the needed components to function well.
This means that we must have the data, the analytic capability and the
manpower to do the job well. FERC has yet to instill confidence in this
policy area.
In order to protect against market power, the Commission must
identify and clearly define what constitutes an exercise of market
power. We must update our market power standards. Is it market power
when a generator regularly bids above its variable operating costs? I
say yes, but the record in our California proceeding indicates there is
no consensus on this issue. We need to develop clear standards for what
is not acceptable market behavior. We cannot expect players to follow
the rules when the rules haven't even been posted. We must ensure that
markets are adequately monitored, and that the monitoring and policing
task is equipped with the right data, and with sufficient manpower, to
do the job. And when market monitors in California and elsewhere tell
us that market power is being exercised, we must not ignore there
pleas. We must forcefully respond.
And finally, the Commission must aggressively intervene when the
markets are not producing reasonable prices. New electricity markets
need a lot of attention. They are just emerging from almost a century
of monopoly regulation. Moreover, the unique characteristics of
electricity make the markets exceptionally vulnerable to market power
and to the potential for breathtaking price run-ups when supply is
short. Billions of consumer dollars are at stake, so we must conduct
tough-minded investigations. We have to be willing to impose a time out
on markets that are not functioning. Even the venerable New York Stock
Exchange uses circuit breakers to mitigate exceptional price
fluctuations. When the stock market drops by a set percentage, the NYSE
halts trading. In fact, all of the world's most sophisticated commodity
markets have time outs.
The Commission must demonstrate through decisive action a more
forceful commitment to these tasks. This market crisis began last June
with California's clearly dysfunctional market. On December 15, we
found that the California market rules in combination with the
imbalance of supply and demand have caused, and will continue to cause,
unjust and unreasonable prices. High prices are rippling throughout the
West causing great alarm and economic pain for citizens. Yet, the
Commission has failed to provide any effective price relief. Our
statutory mandate requires more forceful action by the Commission to
resolve this crisis.
B. Federal Legislation
There also is a need for federal legislation to ensure that the
nation reaps the benefits of well-functioning electricity markets in
California and beyond. I would not advocate a legislative solution for
all of the causes of the recent problems in the California market. Many
market design flaws, the lack of hedging, and the lack of demand side
responsiveness can be addressed under existing authorities. But I do
believe that this experience has demonstrated that electricity markets
are inherently interstate in nature. Prices throughout the western
United States rose and fell with events in California. In order to
thrive, such markets must have an open, non-discriminatory, well
managed, and efficiently priced interstate transmission network that
links buyers and sellers of power. The existing patchwork of
inconsistent and outdated jurisdictional rules for this essential
interstate delivery system, coupled with splintered network management,
create obstacles and uncertainties that undercut the market. If buyers
and sellers lack confidence that electric power will be delivered
reliably and on reasonable terms and conditions, they will not commit
resources to those markets.
Legislation should facilitate the development of a reliable and
efficiently organized grid platform upon which vibrant wholesale
markets can be built. Jurisdictional uncertainties or anomalies should
be eliminated, the development of Regional Transmission Organizations
should be ensured, and the authority to site interstate transmission
facilities should reside with an interstate authority.
My recommendations for federal legislation fall into five broad
areas.
First, Congress should place all interstate transmission under one
set of open access rules. That means subjecting the transmission
facilities of municipal electric agencies, rural cooperatives, the
Tennessee Valley Authority, and the Power Marketing Administrations to
the Commission's open access rules.
In addition, all transmission, whether it underlies an unbundled
wholesale, unbundled retail, or bundled retail transaction, should be
subject to one set of fair and non-discriminatory interstate rules
administered by the Commission. This will give market participants
confidence in the integrity and fairness of the interstate delivery
system, and will facilitate robust trade by eliminating the current
balkanized state by state rules on what is essentially an interstate
delivery system.
Second, I continue to strongly believe that the development of well
structured Regional Transmission Organizations is a necessary platform
on which to build efficient electricity markets. The full benefits of
RTOs to the marketplace will not be realized, however, if they do not
form in a timely manner, if they are not truly independent of merchant
interests, or if they are not shaped to capture market efficiencies and
reliability benefits. While the Commission may have more authority
regarding RTOs than it has exercised thus far, I nevertheless recommend
that the Congress clarify existing law to authorize the Commission to
require the formation of RTOs and to shape their configuration.
Third, we need mandatory reliability standards. Vibrant markets
must be based upon a reliable trading platform. Yet, under existing law
there are no legally enforceable reliability standards. The North
American Electric Reliability Council (NERC) does an excellent job
preserving reliability, but compliance with its rules is voluntary. A
voluntary system is likely to break down in a competitive electricity
industry.
I strongly recommend federal legislation that would lead to the
promulgation of mandatory reliability standards. A private standards
organization (perhaps a restructured NERC) with an independent board of
directors would promulgate mandatory reliability standards applicable
to all market participants. These rules would be reviewed by the
Commission to ensure that they are not unduly discriminatory. The
mandatory rules would then be applied by RTOs, the entities that will
be responsible for maintaining short-term reliability in the
marketplace. Mandatory reliability rules are critical to evolving
competitive markets, and I urge Congress to enact legislation to
accomplish this objective.
Fourth, the FERC needs the authority to site new transmission
facilities. The transmission grid is the critical superhighway for
electricity commerce, but it is becoming congested due to the increased
demands of a strong economy and to new uses for which it was not
designed. Transmission expansion has not kept pace with these changes
in the interstate electricity marketplace. The Commission has no
authority to site electric transmission facilities that are necessary
for interstate commerce. Existing law leaves siting to state
authorities. This contrasts sharply with section 7 of the Natural Gas
Act, which authorizes the Commission to site and grant eminent domain
for the construction of interstate gas pipeline facilities. Exercising
that authority, the Commission balances local concerns with the need
for new pipeline capacity to support evolving markets. We have
certificated 10,000 miles of new pipeline capacity over the last six
years. No comparable expansion of the electric grid has occurred.
I recommend legislation that would transfer siting authority to the
Commission. Such authority would make it more likely that transmission
facilities necessary to reliably support emerging regional interstate
markets would be sited and constructed. A strong argument can be made
that the certification of facilities necessary for interstate commerce
to thrive should be carried out by a federal agency.
Finally, I recommend legislation that would give the Commission the
direct authority to mitigate market power in electricity markets. It
should be clear by now that, despite our efforts, market power still
exists in the electricity industry. The FERC, with its broad interstate
view, must have adequate authority to ensure that market power does not
squelch the very competition we are attempting to facilitate. However,
the Commission now has only indirect conditioning authority to remedy
market power. This is clearly inadequate. Therefore, I recommend
legislation that would give the Commission the direct authority to
remedy market power in wholesale markets, and also to do so in retail
markets if asked by a state commission that lacks adequate authority.
CONCLUSION
I stand ready to assist the Subcommittee in any way, and I thank
the you for this opportunity to testify.
Mr. Barton. Thank you, Commissioner.
We are going to have at least two rounds of questions and
perhaps more, depending on how many members stay. So we are
going to start the clock at 5 minutes for the first round.
Chair recognizes himself.
Each of you in your testimony in one way or the other
elaborated on the price caps, and some of you indicated why you
thought they might be necessary, and others explained why they
may not work. I would like the Chairman, and then if either of
the other two Commissioners want to comment, explain the
California price cap that the State put in last year and why it
did not work, and what would be different about a Federal price
cap if we were to put it in this year.
So we will start with you, Mr. Hebert.
Mr. Hebert. I am assuming, Mr. Chairman, I am assuming when
you are talking about the price cap, you are talking about on
retail level the prices that were placed into effect with it.
Mr. Barton. There was an ISO cap put in place by the State
last year, I am told, on wholesale. Now, I may be misinformed.
Mr. Hebert. The purchase price cap or the bid cap--I am
sorry. Well, as you know, I have been on record suggesting and,
in fact, time and time again saying that price caps put us in
exactly the wrong direction. I think they continue to do that.
It doesn't matter if we are talking about a State bid cap or if
we are talking about a price cap not only in California, but in
the Northwest. The real question that comes to mind is what are
we doing, if anything, to do one of two things that has to
happen? What are we doing to increase supply, and, in fact,
does that price cap accomplish that? Or what are we doing to
decrease demand, and, in fact, does that price cap accomplish
that?
Well, we know the answer to both of those questions is no,
the price cap is not going to do either of those things. As a
matter of fact, even more so than what they have seen on the
State side, what we saw with the FERC is as we move forward
with price caps, moving them down from 1,000, 750, 500, and
even 250, and then down to 150, we saw the average prices go
up. We saw supply never build itself up, never provide more
opportunity, never provide investment opportunity for
infrastructure.
It is funny because every time we talk about price caps,
Mr. Chairman, everyone--when you read it in the media, what
they would like you to do is make you think it is a simple
solution, but, quite frankly, it is not simple, and it is not a
solution. As you know, when we start capping the marketplace,
we start doing two things generally. One is sending the wrong
price signals, and two is--the second thing that we are doing
through that is not giving the proper demand signals. The
proper prices do not come to the marketplace.
Mr. Barton. But it is safe to say that what California
tried did not balance supply/demand, isn't that--for very long,
so----
Mr. Hebert. We currently have an imbalance in supply and
demand. The real question is how do we accomplish getting
beyond that. Congresswoman McCarthy was talking about her home
State of Missouri, great example of where FERC actually had a
shining moment, and actually where we did it right. And
actually my colleague here and I were on somewhat different
sides then on where we thought we needed to go. We had an
imbalance in the marketplace.
There was some suggestion to withdrawing market-based
authority. There was some suggestion to price caps, at that
point, certainly price mitigation. I had asked the Chairman at
that time, Chairman Dennis Eckhart, please let's not do that;
let's stay the course, let's send the price signals to
Missouri. Well, that was in 1999 Mr. Chairman. We have not
heard anything since then. You know why? Because they have got
the adequate supply.
Mr. Barton. Let me give Commissioner Massey and
Commissioner Breathitt a question. My 5 minutes is down to 51
seconds. First Commissioner Massey and then Commissioner
Breathitt.
Mr. Massey. Congressman, California capped retail rates so
low that alternative retail suppliers decided not to enter the
market, and I think that has been a problem. On the other hand,
I don't think it necessarily follows that an unfettered price
that results from a badly functioning market is the answer.
First of all, it is unlawful. Second, it is bad policy. I don't
support a long-term low price cap. I support a well-functioning
market, but I really worry about the summer.
I would also argue with respect to the demand side that
Congress has said wholesale prices must be just and reasonable.
So the price signal to the demand side of the market has to
operate within that just and reasonable range.
Mr. Barton. I am going to give Commissioner Breathitt a
chance here, but isn't it true that if you regulate the price
at the retail level so that there is an unlimited demand,
ultimately you cannot manage the wholesale level?
Mr. Massey. I agree, Mr. Chairman.
Mr. Barton. And Federal Government, it is my understanding
you don't--the Federal Energy Regulatory Commission, you have
no authority over retail prices.
Mr. Massey. No, sir, we don't.
Mr. Barton. That is the State or local issue.
Mr. Massey. That is right.
Mr. Barton. Commissioner Breathitt.
Ms. Breathitt. You were not misinformed. California ISO
does in their tariff have the prerogative to set a price at
which they will purchase energy for their imbalance and their
spot market needs, and so that started out at $750, went down
to $500, went down to $250, and then ended up at $150 soft cap
price. At the same time retail rates were not reflective of the
cost of energy. So when you cap the retail market, and you
don't have the same cost restraints on the wholesale market,
you end up with this distortion that has occurred and is
occurring now.
I hope that answers.
Mr. Barton. And again, at the Federal level your authority,
the Commission authority, is restricted to the wholesale.
Ms. Breathitt. Yes.
Mr. Barton. So if there is a solution at the retail, that
is not within the jurisdiction of the Federal Government.
Ms. Breathitt. Correct.
Mr. Massey. May I make a comment, Mr. Chairman?
Mr. Barton. And then Commissioner Hebert, and we will go to
Mr. Boucher.
Mr. Massey. I think part of the problem at the State level,
part of the unwillingness to flow through wholesale prices is
they believe the wholesale price is a rip-off. They don't want
to flow it through to retail customers. I think if we can
restore some credibility in wholesale prices, local
policymakers also will be willing to flow them through. They
should flow them through as long as they are just and
reasonable, but it really poses a dilemma for them because my
Commission has said prices throughout the summer and the fall
were at many times unjust and unreasonable.
It is very difficult to argue to State commissioners that
they ought to flow those through, although they may be required
to as a matter of Federal preemption.
Mr. Hebert. Mr. Chairman, I would like to point out two
things, and I think it is important for the committee to
understand. One is that when you move toward these price caps
in the spot market, you have got to understand indirectly what
you have done is you have penalized everyone who has made a
good decision and gotten it to the forward markets and properly
hedged and therefore may be reliable. So while we are trying to
move everyone into the forward market, what you do by capping
that price is quite the opposite, because you are saying move
to the forward market, but what you are doing is you are giving
spot market purchasers a forward market price so they have no
incentive to move to forward market.
Another thing that is very important, if you look at
California and what California did, when at a question of
reliability when times got tough, and when you add the lack of
an intersection, if you will, between the supply and the demand
curve, when they started to do this and they didn't cross, what
did California do? They didn't impose a cap. They went above
the cap. They went above the cap to get power, keep the lights
on. A cap is unworkable, it is impractical, it is not a
solution.
Mr. Barton. Gentleman from Virginia for 5 minutes.
Mr. Boucher. Thank you very much, Mr. Chairman.
I, again, want to thank each of our three witnesses for
your testimony and your attendance here this afternoon.
Mr. Hebert, I would like to spend a few minutes discussing
with you some of the provisions that are contained in your
March 9 order that suggest that certain transactions involve
prices that are not just and reasonable, and frankly, I have
some concerns that your order may not be directed toward the
full range of transactions that involve overcharges by the
generators during the month of January, which is the month that
your order was directed to. And in posing this question, let me
just review several facts with you.
In your order of December 15, you set a soft cap of $150
per megawatt hour, and sales above that cap then would have to
be justified under the terms of your December 15 order, and
presumably you believe that prices in excess of $150 per
megawatt hour were suspect and were potentially both unjust and
unreasonable.
Then in your order of March 9, you set a rate screen at the
level of $273 per megawatt hour, and you limited your order
only to the charges that were above that number that occurred
during the times of Stage 3 alerts. And so even charges that
were above that number that occurred at some time other than
during the Stage 3 alerts were not included in your March 9
order.
In the month of January there were 70,300 transactions that
were above the soft cap of $150 per megawatt hour. Only 13,000,
approximately, or 19 percent of that number, occurred during
the Stage 3 alerts.
And so with reference to your soft cap of $150, some 57,000
transactions were above the break point; that is, fully 81
percent of the transactions of those escaped any review in your
order. And then even applying your proxy number of $273 per
megawatt hour, fully 7,793 transactions in January escaped your
order and were exempted from your order by virtue of the fact
that they did not occur during the hours of Stage 3 alerts.
Now, it would seem to me that a price that is unjust and
unreasonable is unjust and unreasonable. It shouldn't matter
whether it happens during a time of Stage 3 alerts or at some
other time when that very high price is charged. And so my
first question to you today is why did you exempt these 7,793
transactions, the price of which was above your $273 rate
screen, simply because they did not occur within that very
narrow window when the Stage 3 alerts were in effect?
Mr. Hebert. It is a lengthy answer.
Mr. Boucher. That is okay. We have got some time.
Mr. Hebert. No, I will attempt to shorten it, but I
appreciate you asking the question because I will tell you,
Congressman, there has been a lot written on this issue lately
that, quite frankly, I wish people would read the orders
specifically and spend time with them. They would understand
how some of these things do work. I understand how tough that
is to do, but I will explain to you the best I can.
The $150 as we set up in the December 15 order was set up
to be a break point, and at the break point above the $150 you
would get an ``as bid'' pricing. Below it you would get the
market clearing price.
The reason the Commission did that at that time was
twofold. One, the Commission did not want to allow prices bid
above 150 to set the market clearing price. It would come back
down, so it got the average back down, if you will.
The other reason is the Commission wanted to make certain
that anything that came in over $150 was going to be subject to
a reporting requirement on a weekly basis to give us
information that might be necessary on a going-forward basis to
look and see whether or not they were just and reasonable. Now,
that is not to say that there was a suggestion that anything
above the $150, in fact, was per se unjust and unreasonable,
but that we would want to take perhaps a second look at it, and
we didn't want the clearing price to be set.
Well, as we move forward and you talk about the $273 proxy
price, that is a price that the Commission came up with to try
to mimic a market that would be working given working
conditions, working considerations. Now, obviously we know we
did not have a working market at that time.
There has also been some things mentioned and written that
perhaps there are some 70,000 transactions that were exempt and
we didn't look at. Nothing could be farther from the truth. We
looked at all those transactions, and, in fact, when we came up
with the proxy price that mimicked the market, what we said is
we aren't going to demand more of anyone over $273, in fact.
Mr. Boucher. Mr. Hebert, let me direct you precisely to the
question, if I may, because my time has expired, but we do need
an answer to this.
Mr. Hebert. I am trying.
Mr. Boucher. For purposes of this question, I am respecting
your proxy price of $273. I do have some questions about the
methodology for arriving at that, and if time permits in a
subsequent round, I will ask you about, it but for purposes of
this question, I will accept that. My question to you is
applying that price of $273 per megawatthour, why did you not
apply it to some 7,793 transactions that took place during the
month of January where the price charged by the generator was
above that number, but the transaction itself simply did not
fall within the time when the Stage 3 alerts were in effect?
Why did you not respect this screen number of $273 and apply
that to these some 7,793 transactions?
Mr. Hebert. As you know, there are several groups that,
one, we cannot apply our price to, public power, the power
marketing agencies, co-ops, munies. We have no jurisdiction
over those whatsoever.
Mr. Boucher. Did all of these fall within that category?
Mr. Hebert. I am not certain which numbers you are talking
about.
Mr. Boucher. Let me ask Mr. Massey if he would care to
comment on this matter. He perhaps has some knowledge about it.
Mr. Massey. Congressman, I dissented on that order not
because I disagree with providing refunds, but I thought the
order, by drawing the line that it drew, was arbitrary and an
abuse of discretion by the agency. If we are concerned about a
$273 bid in Stage 3 conditions, you would think we would be
even more concerned about a $273 bid that occurred when the
shortage situation was not nearly so great. To me, the line
that was drawn serves only one purpose, and that is to limit
the scope of refunds, and I objected to it on that basis.
For the refund order that was issued for the month of
February, this is a another order that just came out last
Friday, the new proxy price is $430. We are not concerned about
a bid of less than $430 whenever it occurs, and we are only
concerned about $430 bids that occur in Stage 3. We are not
concerned about the 14,168 transactions that occurred outside
of Stage 3, which is 56 percent of the transactions above $430.
It makes absolutely no sense, and it will not withstand
scrutiny on court review.
Mr. Barton. Mr. Hebert, and then we are going to have to go
to Shimkus.
Mr. Hebert. Thank you, Mr. Chairman.
I just need to correct a couple of things. One, I want to
make it very clear to Congressman Boucher that all
transactions, all 70,000, were subjected to the methodology
replicating competitive conditions, all 70,000. Now, you need
to make certain and understand that the Commission felt like we
should be clear and recognize that we should not depress prices
and eliminate scarcity price signals. It was very important
that we sent price signals to get the adequate supply there.
What we were worried about is a Stage 3 when reserves are at
1.5 percent, and the lights were about to go out, and that is
where we injected ourselves.
Mr. Massey. Can I just make one other comment?
Mr. Boucher. Mr. Massey.
Mr. Massey. There were only 2 hours of Stage 3 transactions
during the year 2000, 2 hours the whole year, but we declared
the market to be wildly dysfunctional for most of that period
of time.
Mr. Boucher. Well, let me say, Mr. Chairman, my time has
long since expired, and I am just going to conclude this with a
comment.
Mr. Barton. It was your first question.
Mr. Boucher. It was only my first question. I am going to
conclude this with a comment. I think we do deserve a more
complete answer about why the Commission decided not to find
that the transactions that were priced above this $273 figure
in January were unjust and unreasonable, when they were finding
that prices at that level were unjust and unreasonable during
the Stage 3 alerts? Why not do it during the entire month? I
think we deserve a more complete explanation of why the 7,773
transactions that were outside the Stage 3 alert hours that
were over that price were not also unjust and unreasonable, and
I am sure we will pursue that at greater length. Thank you.
Mr. Barton. Before we go to Mr. Shimkus, I just want to
elaborate on what Commissioner Massey said, I am told, in 2000,
because they basically let the--they let a clearing price set
the market, they never got--they didn't get to the Stage 3
shortage very often because at some price--they took whatever
was needed at some price, which should have been substantially
above 273. I mean, this is where we hear the horror stories of
1,500 and $2,000. So it is not a good answer, but that would
explain why they only had 2 hours of Stage 3 alerts.
Mr. Massey. Yes. Mr. Chairman, my concern is that if this
is our new standard, Stage 3 alerts above a certain price,
there were only 2 hours of those all of last year when prices
fluctuated wildly.
Mr. Barton. The gentleman from Illinois Mr. Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman. I am going to try to
get a couple of questions in. This is highly technical, and so
the answers get pretty long, and I don't ask technical
questions. But, Chairman Hebert, briefly, how would an RTO help
the situation in California? I think most of you had agreed it
would have, but if you could just tell me shortly how an RTO
would have helped.
Mr. Hebert. What the Commission recognized through Order
2000 is that, in fact, there were certain natural markets,
certain patterns of trading, certain flow paths that would
develop a North American grid. The question in the end is how
many regional transmission organizations do we end up with? We
would like to get as few as possible.
What we have found in the West, certainly found it through
reports that the staff has done, that you do have a natural
market there, and California is not an island in and of itself.
As a matter of fact, what California has found is that, quite
frankly, they are very dependent on friendly strangers. They
have to have help from the other jurisdictions. We even saw
during some off-peak periods and even some peak periods where
prices were up in neighboring communities such as Arizona, and
those prices and power would be needed, so the power wouldn't
get shifted back down to California.
The RTO has a natural opportunity to correct the problems
of the past means that California and the rest of the West is
going to have to work together, but I do want to make it clear
that it is not that we think California is really any different
than anyone else. The Commission has held and, quite frankly,
is moving forward with RTOs. We are making it clear. We think
it is important to have a southeastern RTO, to have a
northeastern RTO, but the same is true in the West, and we have
got to make certain as they plan transmission, electric
transmission, that they understand a good and bad decision in
Washington and in Arizona and in California probably has
ramifications to each other; and the same on natural gas
pipelines, and the same on siting generation, that we are all
in this together.
Mr. Shimkus. Thank you.
I bring this up because, as you know, I am from Illinois,
and in the Midwest we have four--three or four of our
utilities, and they are in different ISOs, and I know you are
reviewing that. And I think if you are--I think we are
receiving a message from the country in different parts that we
are going to need, you know, one honest broker partner in
regions, and I just say that as a concern how lessons can be
translated throughout the country and as kind of lobbying on my
behalf that if we could get down to some manageable number.
The L.A. Times article today, and I am going to go to Mr.
Massey, states the ISO had hoped--this is today's--the ISO had
hoped demand would start to subside and conservation would kick
in, but that did not happen, officials said. ``We have been
giving the conservation message since last May, and I am at a
loss about why it is not working as well anymore, spokesman Pat
Dorenson said.''
Do you know why the conservation is not working, the
conservation message is not working in the California market?
Mr. Massey. Most of the consumers have a flat rate and have
no opportunity to respond to any sort of price signal, even a
price signal that was within a reasonable--just and reasonable
range. That is problem No. 1.
Problem No. 2, I think that we need to work harder so that
the demand side of the market can bid in along with the supply
side of the market in real-time, so that a ``negawatt''--a
consumer willing to cut back--is paid a market clearing price,
the same as a megawatt. But thus far I think it is because they
simply do not see any sort of price signal at the retail level.
Mr. Shimkus. So good intentions do not translate into
quality decisions on demand without a price signal.
Mr. Massey. I think that there is the necessity for at
least some portion of the consumers to see a price signal that
arises from a reasonable--just and reasonable wholesale price,
and to have an opportunity to respond to that signal, and to
have the tools, the various new computer technologies, chip
technology that allow them to manage their load.
Mr. Shimkus. I am going to cut you off so I can get my last
question. It also deals with price signals. You have indicated
that new generation of sources should be exempt from price
caps, and you said that in your opening statement. Since new
and existing generation are often owned by the same entities,
won't this invite gaming or selling of uncapped capacity and
withholding cap capacity?
Mr. Massey. It could. We would have to watch that very
carefully, but I would exempt new generation because I want to
send a signal to the marketplace to encourage entry; and No. 2,
I would make this price cap temporary, tied to a reserve margin
in the West.
Mr. Shimkus. Thank you, Mr. Chairman. I yield back my time.
Mr. Barton. Gentleman from California Mr. Waxman.
Mr. Waxman. Thank you, Mr. Chairman.
Mr. Massey, the Governors of California, Oregon and
Washington requested that FERC establish a cost-based price cap
to purchase power in the spot market for 1 year. This is an
approach similar to what you have suggested in the past; isn't
that right?
Mr. Massey. It is, Congressman.
Mr. Waxman. Now, Secretary Abraham has criticized any kind
of restraint on wholesale prices because he claims it would
deter investment in new generation. I would like to know if you
think he is right, and is there a smarter way to do this that
can protect consumers while preserving incentive for
investment?
Mr. Massey. We must recognize that we face a debacle this
summer without some sort of price relief out West. We must
impose a temporary mitigation measure that is effective, that
carries out our statutory responsibility, and that exempts new
entry from the price cap. A badly dysfunctional market is not
an investor's friend either, and if there is a political revolt
out West because the prices are just too high, and consumers
rise up through initiated act or whatever and make bad
decisions, that won't help investors either.
Mr. Waxman. Well, I think that is a good point, and I think
if you look at it from that perspective, it is hard for me to
understand statements like that of Secretary Abraham when he
said price controls on electricity will lead to more blackouts.
Well, short-term price controls are not going to lead to more
blackouts. It looks like there is going to be more blackouts
because of the dysfunctional market; is that correct?
Mr. Massey. Well, stated the other way, an unfettered and
very high, exorbitant price between now and the summer will not
add one new megawatt of generation to the market for this
summer, not one.
Mr. Waxman. Well, how about this statement that it is a
myth that energy companies are withholding energy? Do you
believe that it is a myth that they are withholding energy?
Mr. Massey. We just found--the Commission just charged that
two companies were withholding last year. No. 2, the market
monitors out West, both inside and outside the ISO, have told
us time and time again that they believe there is withholding.
Professor Joskow from MIT, a very respected economist, has told
us that he believes that there was significant market power to
the tune of more than a billion dollars exercised in the
California markets that was exercised through withholding and
other means.
I think that we need to wake up and realize that this is a
dysfunctional market that is subject to being gamed and
manipulated by those who participate in it.
Mr. Waxman. Well, I have to say that I am concerned when I
see that your testimony, you say the current western energy
crisis could cut disposable household income by $1.7 billion,
cost 43,000 jobs over the next 3 years in Washington State
alone. Some fear it could tip the whole region into a
recession, and the current volatile and high prices may be
worse by magnitudes this coming summer. They are devastating to
consumers' and investors' confidence in the market-based
approach to electricity deregulation.
So when I see those kinds of statements, I just can't
understand how we get the views that are being expressed that
we want a deregulated market, and all we should do is just
remove the cap on the consumers and let them pay more. If we
remove the cap on what is charged the ultimate consumers, would
that lead to anything like conservation or lower prices, or are
they just going to pass on the charges?
Mr. Massey. Well, if the cost of power in California this
year is as high as it is projected to be, I don't know how you
flow that through quickly to consumers. You can't increase
their prices 4- or 5- or 6-fold. Ultimately, just and
reasonable prices ought to be flowed through to consumers, but
unless the wholesale price has credibility, unless it is a just
and reasonable, lawful price, State policymakers aren't going
to want to make retail customers pay it.
Mr. Waxman. On March 9, 2001, FERC issued an order to some
generators to either pay refunds or provide further
justification for their prices, and to many of us in the West,
this order was too little too late. The order eliminates
consideration for refund any sale below $273 a megawatt and any
sale that did not occur during a Stage 3 emergency. I know you
disagreed with this order. Would you explain why you disagreed
with it?
Mr. Massey. I disagreed because I felt like the order
artificially limited the scope of our review of just and
reasonable prices. The order only--it limits our review to
Stage 3 transactions, which are our severest conditions, and
only to prices above $273. For the month of February, we just
issued another order limiting our review to bids above $430
during Stage 3.
There were 14,168 transactions in which the bid was above
$430 that did not occur in Stage 3, and they get a free and
clear. This makes no sense.
Mr. Waxman. Do you think the FERC decision gives a formula
for generators to have a road map as to how they can charge
without FERC asking any questions whatsoever?
Mr. Massey. I think it makes clear that FERC is going to be
looking for the wallet under the lamp post with the light
shining, and nowhere else. And that concerns me.
Mr. Barton. The gentleman from Georgia, Mr. Norwood, is
recognized for 5 minutes.
Mr. Norwood. Thank you, Mr. Chairman.
Mr. Massey, let us see if we cannot say this so people can
understand it.
California does not have enough electricity. If they had a
lot more electricity, we simply would have perhaps lower rates,
and we would then not have the rolling blackouts. Correct?
Mr. Massey. Correct.
Mr. Norwood. Why don't they have enough electricity?
Mr. Massey. They have not built enough generation over the
past 10 years.
Mr. Norwood. Is that a legislative decision from the State
of California?
Mr. Massey. I don't think it is a legislative decision.
There was a lot of uncertainty in California about whether
there would be a market-based approach or not throughout the
nineties. I think new generation just did not enter.
Mr. Norwood. These folks who build transmission and
generating facilities do so for a reason, obviously. Why
wouldn't they want to go into such a large, wonderful market
like California?
Mr. Massey. It was not clear that there would be shortages.
But here we have a low hydro year in which California cannot
count on sufficient power from the Northwest, and it is shining
a spotlight on the need for new generation in the State.
Mr. Norwood. You are telling me that the people in this
industry were not aware that they potentially could run out of
power in California under certain circumstances, and therefore
the California legislature or the public service commission,
working with them, were not concerned about this over the last
10 years? Just all of a sudden this is a big surprise?
Mr. Massey. It is rather shocking that it is a big
surprise.
Mr. Norwood. Is California a State that lends itself to
making people want to come running in to build generation
facilities and transmission facilities, or is it a State that
makes it very difficult?
Mr. Massey. I think the generators would argue it is a
State that makes it very difficult. But that does not get me
off the hook in terms of just and reasonable prices. I still
have to ensure just and reasonable prices.
Mr. Norwood. Tell me what ``consumers have a flat rate''
means in California.
Mr. Massey. The consumers have their retail rates capped at
a certain rate. That means that very high wholesale prices that
have been paid in California, they are not getting flowed
through to most of the retail consumers, they are just building
up.
Mr. Norwood. Somebody thinks this is a good way to get the
consumer to conserve?
Mr. Massey. I don't think it is a good way.
Mr. Norwood. Obviously it does not work. I don't believe it
is working, is it?
Mr. Massey. It is not working very well.
Mr. Norwood. That is the kind of thing I am trying to get
at. California has been very helpful in bringing part of this
on themselves.
Mr. Massey. There is no question about that.
Mr. Norwood. That has nothing to do with the fact that we
all need to worry about this summer. But at this point, you
have to say for sure they brought a lot of this on themselves.
Part of the solution, and help me if I am wrong, would be
to build more transmission and build more generation?
Mr. Massey. Exactly. I agree with those comments.
Mr. Norwood. Now, explain to me, if I were an investor and
was going to spend billions of dollars to build more generation
and build more transmission, why I would do that if you were
going to put caps in place?
Mr. Massey. Transmission rates are generally capped most
everywhere. I think investors understand that. They sometimes
complain about the rates of return that they get.
Mr. Norwood. I think the chairman has pointed out, we have
a pretty serious problem of transmission in America.
Mr. Massey. Precisely.
Mr. Norwood. Is that connected to the caps they are
complaining about?
Mr. Massey. The transmission owners argue their rates of
return are not high enough, but I think for the most part
transmission will continue to be a regulated business that is
subject to price controls.
Mr. Norwood. Go to the generation end of it. California
could certainly use--and forgive me, Mr. Markey--two or three
nuclear plants right now in a bad way.
Mr. Massey. They could certainly use some new generation in
a bad way.
Mr. Norwood. I will bet you those folks who had their
business shut down at Mr. Cox's aluminum plant, I will bet they
would be happy to have that electricity right now, perhaps
wherever it came from.
Mr. Massey. That is correct.
Mr. Norwood. How are you going to get anybody to take
seriously an idea to go in there and spend billions to get the
generation capacity when we say to them, no matter what you do
or what it cost, baby, we know best what you can collect for
revenue?
Mr. Massey. But, Congressman, that is the Federal law, to
ensure just and reasonable prices. There is an oversight
respnsibility.
Mr. Norwood. That is not the same thing as caps, is it?
Mr. Massey. It was the same thing as caps for years and
years and years. Now we have moved to a market-based approach.
If the market is dysfunctional, the courts have told us time
and time again that the prices are unjust and unreasonable. We
have the obligation to ensure a well-functioning market. We
cannot get that in place by this summer. It is impossible.
Mr. Norwood. The last comment. One of the things that is
possible here, if it is a long, hot summer in California, there
could very well be some interesting results at the polls for
the State legislature. Sometimes that is not all a bad idea.
Thank you, Mr. Chairman.
Mr. Barton. All right. The gentleman from Massachusetts,
Mr. Markey, is recognized for 5 minutes.
Mr. Markey. It is a good idea, and I appreciate that
accent.
So we have had the worst drought in 100 years, the worst
drought in 100 years in the Northwest, but we are sending very
strong price signals to the clouds that we expect them to rain
a lot more. And the higher the price goes, the more we are
going to punish the electrical consuming public for the
drought.
Usually what we do out in the Midwest is we take care of
the farmers whenever there is a drought. Here, though, we send
strong price signals to the marketplace, notwithstanding the
fact that the consumers do not have any relief that they can
get.
Now, Chairman Hebert, at the subcommittee's September 11
hearing on the California energy situation, when he was asked
whether or not we should impose price caps to protect people
from the fact that it did not rain, he said, ``I have always
felt and always thought that if the truth kills Granny, then
let her die, but the truth has to be told here. Price controls
didn't work in the Nixon era, they didn't work in the Carter
era.''
Now, that doesn't sound exactly like compassionate
conservatism, because we know that Granny did not design this
system. We know Granny did not have anything to do with the
fact that it did not rain for a year in the Northwest,
notwithstanding the fact that I am sure she wishes that it did.
But she is going to get killed by the blackouts, by the
brownouts, by the rate increases.
Mr. Barton. Will the gentleman yield?
Mr. Markey. Yes.
Mr. Barton. The record will also show that the chairman who
held that hearing said he wanted to save Granny. I hope you
would put that in the record also.
Mr. Markey. Yes, the chairman from Texas stood solidly with
Granny on this issue. We have a bipartisan agreement that
Granny----
Mr. Barton. That is compassionate conservatism.
Mr. Markey. Granny should not have anything to do with
this. Also, I am sure it was a metaphor.
Mr. Barton. And Massachusetts is for Granny, we will
stipulate that Massachusetts is.
Mr. Markey. Granny is the key person in all of this, no
question about it.
So we also would like to state for the record that there
may not have been a lot of utility construction in California
in the last 5 years, but we also have to remember that it was
the utilities who were seeking stranded cost recovery which
said that they were expecting a surplus of electricity through
the year 2005. So that was their representation to the PUC in
California as the guise for their recovery of stranded cost
investment.
Now, Mr. DeLay and I have always cast a little bit of an
arched eyebrow toward that stranded cost argument in
legislation which we have introduced. But that notwithstanding,
I think there is a queen of spades here, and we should put it
right in front of the utilities which were trying to gain that
kind of a benefit.
You mentioned several long-term measures, Mr. Chairman,
such as RTOs, new electricity transmission improvements, but
these will take time. Commissioner Massey notes that the power
that cost $7 billion in 1999 increased to $27 billion last year
and is projected to cost $70 billion this year; from $7 billion
to $70 billion for the same power over a year's period.
Now, the demand, however, only increased 4.75 percent from
1999 to 2000. Now, if demand for Wonder Bread, for a $1.39 loaf
of Wonder Bread, went up 4.79 percent and the price increased
from $1.39 to $13.90 for a loaf of Wonder Bread, we would be
very concerned about that in our country, because that is what
is happening to electricity in California.
Now, under the Federal Power Act, are we not supposed to
disapprove prices that are unjust and unreasonable? It seems to
me that, by any definition, this is unjust and unreasonable
that a 4.7 percent increase in demand results in that kind of a
price spike.
Mr. Chairman, what are you going to do about it? Are you
just absolutely, unconditionally opposed to any kind of price
relief for consumers?
Mr. Hebert. How did I know you were coming to me?
First of all----
Mr. Markey. Because I don't want it to come to
Massachusetts. I don't want it to come to New York. I don't
want it to come east of the Mississippi. I don't want it to
come east of the Rockies.
Mr. Hebert. Part of the problem--and Chairman Barton, these
questions are not 5-second sound bites to answer. I want to
answer your question fully. So if you will give me just a
couple of minutes, I will address quite frankly some of the
things that you raised that I think are very important in your
opening statement.
But before I do that, let me defend my grandmother, both my
grandmothers, who I am fortunate to have. The exchange was
between the chairman and I, and I was trying to make a point
not about, if I remember correctly, price caps, but in fact
about market mitigation.
In fact, they did have a dysfunctional market. They needed
to do some positive things in California. In fact, they were
not. I was trying to make the truth very clear.
But let me answer your question. And it goes back to the
proxy price of $2.73, because I truly believe if it would have
been legal for me to sit down with you, Congressman Markey, and
say how can we frame this methodology, and I could have sat
down with you, I think you and I would have agreed what we came
up with is workable.
Let me tell you why. It is workable because what we did is
we looked at exactly what you pointed out that we need to be
looking at: inefficiencies, and how do we promote efficiency.
When we are looking at setting parameters on cost,
parameters on screening, a proxy price, if you will, should we
not probably look at inefficiencies and what the inefficient
unit is going to be at the margin, and if so, we should use
that?
In fact, that is what we did with our methodology, to give
some incentive back to say we need adequate supply, but quite
frankly, we need some new supply, which is also consistent with
your argument on refrigerators, air conditioners.
The reason it is important to understand this is that if we
can set this price at such a point that we say that we are
concerned whether or not they are going to intersect, whether
the lights are going to go out--because what we do know is in
fact that price caps are not working. I don't know how you
argue they do not work on the retail side and do not send
proper signals, but, by the way, let us set up an artificial
market on the wholesale side. That is a totally inconsistent
economics argument. We know this.
Why did you have the same demand, yet you had a problem
with outages? Well, you were exporting all types of energy to
Arizona. You were exporting energy, quite frankly, to BPA,
because you were doing a two-for-one trade in California on-
peak/off-peak. You were trying to refill some hydro facilities,
pump storage. So you had a lot of factors going into this why
you did not have the supply that you should have had.
But at the very end of this argument, when it comes to some
of the things that I think we all agree upon, bringing new
supply into the system while at the same time concentrating on
efficiencies, it proves that the methodology is correct. It
proves that we are going to give signals with scarcity. But we
are going to try to make certain that those lines are not going
to cross, that we are going to intervene; because what FERC
must do, while ensuring just and reasonable rates, is give
markets certainty. We cannot intervene all the time, we have to
give markets certainty.
Let me close by saying this. If we are concerned with
efficiencies and we know we need new supply, why would we not
send the proper signals to suggest that, look, we know there
are some 30,000 heat rate systems, some real dogs in
California. We know every time we replace one of those
generators, we replace them probably with a 7500 heat rate,
much more efficient system, and we would all be winners in the
end: California gets more supply; Californians and the rest of
America get cleaner air.
I think we are on the right track. It means we have to make
tough decisions and it means I will have to defend those, but I
think we are doing that.
Mr. Markey. I will just finish up, if I could, Mr.
Chairman.
It seems to me what the FERC is saying is that it is not
okay for the cornerstone to raise the price of bread to $13
apiece a loaf right before a snowstorm, when everyone descends
upon the corner store, but it is okay to charge $13 for a loaf
of bread at all other times. That is what you are saying about
this electricity crisis; that you are going to investigate the
blackouts and the brownouts and see if there is an
exploitation; but if the very same price is being charged every
other day of the week and month, that you are not going to
investigate, even though it is ten times higher than what
common sense and experience tells us it should be.
There is just something fundamentally wrong with that. I
just think if we do not do something, then we are going to see
the California economy and much of the West in very dire
conditions by the end of this fall with, unfortunately, a
ripple effect.
I will tell you when I know I have a problem, when Craig
Barrett, the chairman of Intel, says that he is not going to
expand in California, but he is going to look to Massachusetts
to expand Intel. Then we know that something is wrong, okay?
All I can tell you is that his comment is going to be
replicated by hundreds of other executives in California and
other States out West in the very near future if something is
not done.
Mr. Hebert. Congressman, I think that has everything to do
with that Sable Island project that we got done for you.
Mr. Markey. I appreciate that. Thank you.
Mr. Barton. Before I yield to the gentleman from Oklahoma,
we have been talking about markets. Let us just set the record
straight: In a classic supply demand market, as the cost of the
product goes up, the demand of it goes down. That is economics
101.
Mr. Hebert. Agreed.
Mr. Barton. We don't have that in California. We have a
retail market that is capped below the price of the wholesale
market. The wholesale market is infinity. It is infinity. It
does not matter what the wholesale market pays, they do not
pass it through to the retail, or at least most of the retail.
To draw the demand-supply curve for California is crazy.
You have demand below the cost of supply. It is just
irrational, except in the real world of what is going on in
California.
Mr. Largent for 5 minutes.
Mr. Largent. Thank you, Mr. Chairman.
I was listening to my friend, Mr. Markey, when he asked
you, Mr. Chairman, about are you going to offer any sort of
price relief. It turned my attention to Granny that we talked
about in his hypothetical question.
It made me think, I wonder how this debate would fall out
if the discussion was on a just and reasonable Federal tax cap;
in other words, the Federal Government would have to cap the
amount of taxes that we actually received every year. We could
not take any more than that.
I wonder how the debate would fall out on either side of
the aisle if we had a Federal tax cap and we said that the
Federal tax had to be just and it had to be reasonable.
Mr. Hebert. I like the idea.
Mr. Largent. I do, too.
I started thinking, if we really wanted to offer relief to
Granny, then we would be voting for things like the death tax
repeal and we would be voting for marriage penalty relief, and
perhaps even Mr. Markey's Granny would be in the 39.5 percent
marginal rate and would think that that would not be fair, and
we could offer her some relief in that respect, too.
My question is to you, Mr. Chairman; does the FERC have
some pretty objective measure in determining what is a just and
reasonable price?
Mr. Hebert. Congressman Largent, we do. That is what we are
trying to do by somewhat mimicking a market, quite frankly,
during a dysfunctional period of a market.
When we set up this proxy clearing price--and I know there
has been some suggestion that you had the 273 and then you have
the 430, and there may have in fact been some different
standard.
The standard is the same. You are going to look at a
weighted average on what the fuel costs were, you are going to
look at what the NOx costs were, which, as you would know going
into the $430 period, they were higher. Thus, the proxy price
is higher.
You also have the fixed cost of the system itself. Now, if
you look at that and try to say, well, but there is this
conversation out there about this $25 fixed cost rate with this
adder, why is that not a good idea? Well, it goes back to your
question? Have we got a methodology, will it work?
I think it will work. We do have a methodology. The reason
the $25 plus the adder does not work is, one, you have some
systems, hydrosystems, quite frankly, their fixed costs may in
fact be above $25.
If we look at the adder and look at it on a separate
transaction basis, we could manipulate that market by changing
the transactions, so it will not work. Not to mention if we are
going to go back to some type of cost-basing area, what you and
I understand is that we cannot do that on a daily, a monthly,
or even a yearly basis, because when we look at those systems,
we look at them generally on 20- and 30-year terms. You cannot
have a cost-based or cost-plus system and then come back in and
do what we call market mitigation, which is what we are
attempting to do, and what we are seeking comments on right
now. We cannot do both. It just will not work.
Mr. Largent. Mr. Massey?
Mr. Massey. Congressman, you asked a very good question. It
is one that I have struggled with, because the standard is a
vague standard, ``FERC shall ensure just and reasonable
wholesale prices.'' That is essentially all the law says.
The courts have said, and we must pay attention to what
they tell us or they reverse us, that if FERC is to move away
from a cost-based system, it must do so carefully, with
attention to the market design. In other words, FERC must
ensure a well-functioning market, and only if there is a well-
functioning market does FERC have the legal authority to assume
that prices are just and reasonable.
No. 2, the courts have also said that in a well-functioning
market, it is likely that producers over time will bid close to
their marginal costs.
Mr. Largent. Okay. That goes to the point of my question.
That is, you all have filed suit against two companies on this
very issue of just and reasonable prices. How can you hold
anybody liable for a standard you don't know?
Mr. Massey. It is an excellent question. We need to define
what market power is, what acceptable conduct in the market
is--we have not done a good job of that.
Surely they cannot have reason to believe that any price,
even the price of a dysfunctional market, is just and
reasonable. But I agree with you, we have not done a good job
of defining what just and reasonable means, what market power
is, what is the definition of it, and so forth.
Mr. Largent. I guess my point is that it seems
unconstitutional, frankly, that you hold somebody responsible
for a standard that you cannot define and has not been defined
yet, and yet you are going to take them to court and incur a
lot of legal costs in doing that, besides whatever other
penalties are going to be handed out, when there is no standard
defined in the first place.
I yield back, Mr. Chairman.
Mr. Barton. Before I yield to Mr. Wynn, I think in classic
economics, if you cannot meet the demand at any price, the
supply is infinity. You cannot get a just and reasonable price
if there is not some way to clear the market. I may be wrong on
that, but I think that is right.
Mr. Wynn is recognized for 5 minutes.
Mr. Wynn. Thank you, Mr. Chairman.
Let me ask first a quick question, a follow-up.
A lot of people are citing the November 1, 2000
investigation by FERC to suggest that there are no abuses in
the system. In light of your orders of March 9 and March 14,
would you say that that statement still holds true, or would
you back away from that statement?
Ms. Breathitt. Congressman Wynn, I would not agree with
your earlier statement that the November 1 order found that
there were no abuses in the system.
On December 15, we found that there were, and we set our
remedies in place to correct some of those abuses, particularly
with respect to the market design.
Mr. Wynn. So anyone running around saying now FERC has
found that there are no abuses would be really in error; is
that fair to say?
Ms. Breathitt. I would say so.
Mr. Wynn. Okay. Thank you. That really kind of clears it
up. People have said no, you are completely off base with that.
But it seems to me clearly, based on what you said, that it is
not the case.
This discussion has seemed to come down in my mind to a
statement of either caps or true price signals to encourage
conservation and stimulate generation. I recognize off the top
that generation is the key issue.
But I think that setting it up that way is really not
necessarily the most helpful way. It seems to me the issue is
caps versus gouging.
I want to go back to something that Mr. Massey said, that
elected officials would not flow through these price increases
because they thought they were a rip-off.
Do you stand by that statement, Mr. Massey? If so, why do
you believe that that is true--or why do you believe that
perception exists? Let me rephrase that.
Mr. Massey. I believe that perception because State
officials have told us that in hearings before us. I believe
that perception because I think the prices have been way too
high myself. I believe it because the Commission has declared
the market to be dysfunctional and declared prices to be unjust
and unreasonable.
I know that it is very difficult for local officials to say
to their retail consumers, we want you to pay a price that
Federal regulators have determined to be unjust and
unreasonable. That is very difficult for them to do.
Mr. Wynn. Thank you.
Now, Mr. Hebert, in light of that comment and in light of
your colleague's comments that there is evidence of abuses, Mr.
Massey then says that, well, these prices are way too high and
it is hard to pass through unjust prices. I guess I would pose
to you, if not caps, what? What is the mechanism that we use to
protect the consumer, not from the true cost, because I think
people will concede that consumers ought to pay the true cost--
and if that stimulates conservation for generation that would
be great--but how do we protect them from this unjust and
unreasonable cost that seems to exist in some abundance based
on the recent orders that you have issued?
Mr. Hebert. An excellent question. Let me try to clear it
up.
Before I speak directly to that, let me clear up one
conversation that took place a moment ago when Commissioner
Massey was talking to Congressman Largent. He was talking about
an abuse and some rates that were unjust and unreasonable.
When it comes to the Williams AES case, which is what was
being discussed, that was a tariff violation. It is a little
different. We can get into that more. But actually, that was a
little different than just rates being unjust and unreasonable.
We have got out for comment right now something that goes
to the heart of your question. That is, what direction will
FERC take to ensure just and reasonable rates during this
dysfunctional period? We are going to look at what anti- market
mitigation, immediate market mitigation, should take place; how
do we resolve that on a going-forward basis from May 1 forward?
That is out for comment right now. We are going to hear back
from parties soon, and we will be moving forward with something
on or before May 1.
But the reason it is important to at least make certain
there are price signals during scarce periods is because we do
know, and everyone in this room knows, I believe, there is an
imbalance of supply and demand. I don't know how long this
committee has been talking about this problem, but quite
frankly, we three have been talking about it for a very long
time and I think you have been engaged that entire time.
You have to ask yourself, if the price signals are clear
because they are so high, why in fact have they have not turned
a shovel on the first substantial generation unit in the State
of California?
Mr. Wynn. That is certainly a legitimate question. But to
go back to the flow-through question, to the extent that the
prices are not just and reasonable, why should the elected
officials pass through those costs, those inflated, perhaps
abusive, manipulative costs, on to the consumers in order to
suggest that this is a true price signal?
I wouldn't object to the true price signal being sent to
the consumer. The objection is to the inflated price signal
that a substantial body of evidence that you have presented
seems to suggests exists.
Mr. Hebert. Let me just tell you, I can't say why anyone in
any other appropriate jurisdiction may or may not be doing
something. I mean, I am within the realm of speculation there.
But I was a retail regulator for almost 6 years, and as much as
it disheartened me and as painful as it was, when costs were
prudently incurred, they were therefore passed on to the
consumer.
Mr. Wynn. We are beating the same horse. No one is
objecting to true costs being passed on to the consumer. What
we are objecting to is--you have disclosed evidence to suggest
that there were abuses, specific cases of tariff violations,
cases that merited a refund, 80 percent of which were excluded
from your order.
That suggests that there is a lot of gouging going on. If
that is true, what are you going to do about the gouging; not
the true price, not the legitimate price signal, but the
gouging that seems to exist?
Mr. Hebert. One, let me clear up the misinformation that
you were given. Of those transactions, as we have already said,
53 percent of the marketplace we do not regulate, so we could
not look at those transactions if we wanted to.
We certainly have not been able to look at transactions
that took place from October through the end of December,
because quite frankly, one, we have not set up a methodology,
and two, we have not gotten the adequate information. That was
the beauty of the $150 breakpoint where we would get the weekly
information, and we are going to do that.
Let me clear this up, as well. No matter what we are
talking about here, no matter how many times we want to talk
about price caps or market mitigation or anything else, there
is one way to solve the market power problem. When you have
more supply, you have less market power.
Mr. Wynn. But we still have to come back to what we are
dealing with.
I know my time is about up. If the chairman would indulge
me, I would like to ask Mr. Massey to respond on the question
of the 80 percent of the transactions that were excluded which
Mr. Hebert has suggested were justifiably excluded. That may or
may not be the case, but since I believe it was cited in your
dissent, I would like you to respond.
Mr. Massey. I don't think they were justifiably excluded. I
think the standard that the Commission chose limits the
availability of refunds, and it is illogical, as far as I am
concerned.
No. 2, I may be wrong about this, but I think the only
transactions that were reported to us were jurisdictional
transactions.
Mr. Wynn. Within your jurisdictions.
Mr. Massey. Yes. So I don't think it is true that 53
percent of those were nonjurisdictional transactions.
Mr. Hebert. I was actually speaking to the ISO's numbers in
that. Those numbers did include that.
Mr. Wynn. I would like to ask the other Commissioner.
Ms. Breathitt. Mr. Wynn, I voted for that order setting up
the refund methodology. From my understanding, from a tough day
to get an order out, in my conversations and briefings with
senior staff, the figure and transactions that the ISO asked us
to refund, once we took out the nonjurisdictional entities that
we do not regulate and we looked at the month of January only--
because their filing captured more transactions over several
months--it is my understanding that we captured 70 percent of
the transactions that the ISO filing would have captured if you
compare what we did in January to what they requested for the
month of January alone, backing out the nonjurisdictional
entities.
So we captured 70 percent of their figure. And I think it
is a point that I have been wanting to make this afternoon,
because if we look at just the numbers of transactions, we are
not comparing the same thing.
Mr. Wynn. Thank you, Mr. Chairman.
Ms. Breathitt. One more point. Starting in May, we will be
going to a more permanent market monitoring plan. And if I find
between now and May 1, when we go to that permanent one, that
the methodology that we are using now needs to be adjusted or
tweaked, I will be willing to do that.
Mr. Barton. The gentleman from Oregon is recognized for 5
minutes.
Mr. Walden. What percent of California's energy does FERC
regulate, Mr. Chairman?
Mr. Hebert. About 47 percent.
Mr. Walden. Forty-seven percent of that consumed by
California is under your regulation? California, then, has the
ability to regulate the other 53 percent under some sort of
wholesale price cap. Is that correct or not?
Mr. Hebert. Actually, so many of their transactions with
co-ops, communities, public power administrations, do not go
through our jurisdiction. They certainly have the ability
through the ISO to treat transactions accordingly, and that
would be within their realm, and certainly not ours.
Mr. Walden. Can you tell me, what is California doing in
terms of the wholesale controlled price on the power they do
have jurisdiction over? What have they chosen to do?
Mr. Hebert. At this point? I don't know what they are doing
at this point. We have somewhat changed the scheme of things.
They are moving around the PX now and not through the PX. We
have returned 25,000 megawatts back into the system. So I will
have to say they are making some very important strides in
California.
The one thing that they are not doing, where they are not
stepping up to the plate, is trying to get some new supply
online.
Mr. Barton. Will the gentleman yield?
Mr. Walden. Yes.
Mr. Barton. I am told that the State of California does not
have jurisdiction over municipal rates or co-op rates. Is that
true or not true?
Mr. Hebert. That is correct.
Mr. Barton. So at the wholesale level, if it is not FERC
jurisdictional, then it is not jurisdictional?
Mr. Hebert. That is correct.
Mr. Barton. Okay.
Mr. Walden. So, Mr. Chairman, are you saying that no one
has control over that that is not controlled by FERC?
Mr. Barton. They are subject to the----
Mr. Hebert. The point is if you are going to subject them
to a price cap, if we are, they will be free and clear of that
price cap.
Mr. Walden. The 53 percent.
Mr. Barton. They are subject to the market negotiations
between the supplier of the power, i.e., the municipal, and the
consumer, whether it be retail, the city council, or wholesale,
a commercial user, but they are not subject to FERC
jurisdiction and not subject to the PUC State of California
jurisdiction is my understanding.
Mr. Walden. So less than half of the power consumed in
California could be affected by rate caps?
Mr. Hebert. Correct. Which is one of the main reasons why
it is totally unworkable.
Mr. Walden. What could happen, then, to that being produced
in California? Is there anything that stops that rate from
spiking if you cap the wholesale market that you do have
jurisdiction over?
Mr. Hebert. You are saying, would there be anything that
would stop the 53 percent from spiking?
Mr. Walden. Correct.
Mr. Hebert. Not that I am aware of. And probably what it
would do is it might spike, but it will most assuredly be
exported somewhere other than California.
Mr. Walden. Can you elaborate on that? Why would it be
exported?
Mr. Hebert. If they are going to be subjected to perhaps a
25 percent adder, cost-plus cap, you can bet they are going to
maximize their opportunity cost somewhere else, which is one of
the reasons that you saw that while the demand curve was
somewhat constant between 1999 and 2000, they were not getting
enough supply in, partially because of caps in place and
partially because of weather.
Mr. Walden. Help me out here, because what I hear from some
is a price cap at the wholesale level that you have
jurisdiction over, the 47 percent or whatever it is, would have
a short-term positive impact.
What I hear you saying, though, is it could actually have a
short-term negative impact because the 53 percent that you do
not regulate could go elsewhere?
Mr. Hebert. In fact, that is absolutely true. The studies
that have been done by the staff also show that as the price
went down, the average price went up, which proves your point
out.
Mr. Walden. Say that again. What do you mean?
Mr. Hebert. As the average price from $750 went down to
$250, the average price per megawatt hour in the State of
California went up.
Mr. Walden. Price caps could actually drive up the cost of
power?
Mr. Hebert. They did in that case.
Mr. Walden. How broad a sample is that case? Is it a one-
time issue?
Mr. Hebert. I don't know the exact sampling. I can get that
for you. I will be glad to provide that for you.
Mr. Walden. Are you aware of any energy companies that had
proposed to add to the supply in the West or in California
that, since this talk of price caps, have decided to take their
money elsewhere?
Mr. Hebert. They seem to have some trouble entering into
long-term contracts at this point, although I have seen and
heard today--not seen, but heard--that they signed a contract
for, I think, 1,500 megawatts for this summer with Dynergy.
The important thing is what megawatts are going to be
brought on for the summer. But then again to get back to a
comment, actually, that was brought forth through some comments
that Secretary Abraham had made, if you look at the
opportunities that have been passed on, in other words, there
was a conversation and some testimony given by the Secretary
that was right on point, suggesting that in fact they could
have signed up for $55 a megawatt back in November.
If you look at that on an annual basis, that itself, had
they done it, would have saved $5 billion in California.
Mr. Walden. Who disallowed them from doing that long-term
contract?
Mr. Hebert. There are two sides to that story. One is that
in fact the State CPUC was not allowing them to move into the
forward markets and was pushing them into the spot market,
which quite frankly was very volatile, a very wrong move.
The other side of that is that they did not maximize their
opportunity within the forward markets as well.
Mr. Barton. The gentleman from Arizona, Mr. Shadegg, for 5
minutes.
Mr. Shadegg. Thank you, Mr. Chairman.
I was intrigued by my friend, Mr. Markey, when he talked
about trying to send price incentives to the clouds to induce
raining, and making fun of that whole series of thoughts, and
indeed making fun of the idea of sending price incentives at
all.
That line of questioning or commentary might be apropos if
the only problem here were lack of rain; but, of course, the
only problem is not a lack of rain, it is a whole series of
problems that have converged together at the same time.
He said he is worried about protecting Granny and thought
we needed to insulate Granny from the consequences of her
conduct, and that she did not create the system so she should
not be punished for it.
My concern here is that if we look at what happened in
California, I think we will see a series of bad decisions by
governmental bodies. And if we are to protect Granny, I believe
at the risk of making another bad decision by a governmental
body, that worries me.
Mr. Massey, I am fascinated by your testimony. I think,
quite frankly, at the end of the day I understand you basically
to say that you agree that the long-run price caps send the
wrong signal. You certainly have agreed here today that we have
artificially low retail prices in California, and indeed, I
think you called them ridiculous or absurd. You have used the
word ``dysfunctional'' a number of times to describe the market
in California.
You would agree with me in part that it is dysfunctional
because retail rates are capped and wholesale rates are not
capped. You would say that causes the market not to function,
would you not?
Mr. Massey. I think that is part of the problem.
Mr. Shadegg. You would also agree it is dysfunctional
because we have a lack of supply compared with demand; is that
right?
Mr. Massey. Yes.
Mr. Shadegg. You would agree that lack of supply is driven
by the reluctance of the people in California, and indeed the
governmental bodies in California, to site and allow the
construction of new power plants?
Mr. Massey. That has been true in the past. I don't think
it is true now.
Mr. Shadegg. I hope you are right. I would only note in a
poll taken in February, 57 percent of the people in California
say there is no energy shortage, even now. This is an article
from the March 10 newspaper discussing a proposed 550 megawatt
power project in Southgate, apparently located near Downey,
California, in the L.A. Basin, where they have dropped the plan
to build a plant.
It seems to me one of the things we have done is we have a
dysfunctional market in that the people of California, because
they have capped retail rates, capped at a ridiculously low
rate that they do not even realize there is a crisis. They are
turning down plants and they are saying--almost two-thirds of
them are saying there is no crisis.
So we have a dysfunctional market because there is a lack
of supply. We also have a dysfunctional market because we have
a lack of transmission. You would agree with that?
Mr. Massey. I think I would. I think Congress should
transfer that siting decision to FERC.
Mr. Shadegg. When I was traveling with the Chairman, we
were told the cost of building and siting a plant is anywhere
between 2 and 3 times as much as anywhere in the country, and
the time it takes is somewhere in the neighborhood of 10 times
as long as it takes elsewhere in the country.
Let me ask you, each of those problems involve government
kind of, I think, messing with the marketplace and distorting
the reality: retail caps, by their so-called deregulation;
failure to site plants; failure to site and construct
transmission.
As I understand the California law, it also caused one of
the problems we are here discussing today, which is the
overcharging, because the California law mandated, correct me
if I am wrong here, that the price be driven not by a mix of
long-term and short-term contracts, but, rather, be mandated by
the short-term spot market.
Is that not correct?
Mr. Massey. That is exactly right.
Mr. Shadegg. So all four of those are government-created
problems that create this dysfunctional market. You would agree
with that?
Mr. Massey. I do agree.
Mr. Shadegg. Okay. I am not sure that the right answer,
then, is to set other caps.
You said just a moment ago, in response to a question by
one of my colleagues, that one of the reasons why there was
inadequate construction of new generation was because there was
uncertainty through the nineties on whether California was
going to deregulate or not.
Mr. Massey. Yes.
Mr. Shadegg. Would you not agree that if you impose
wholesale price caps now, will there not be uncertainty in the
future as to whether or not those price caps, which you say are
going to be temporary, will not in fact become permanent or
long-term and therefore discourage future construction?
Mr. Massey. That argument is always raised. I think it
depends on how we do it and whether the marketplace senses that
we are in fact committed to long-term, market-based solutions.
I am myself, but I think it depends on how we do it.
If we exempt new generation, if we get----
Mr. Shadegg. That is the point. I have the idea of
exempting new generation, so I am encouraged to come in and say
I will go ahead and build new generation because they are
exempting me now. But how will they know 12 months from today
that this same Commission and Congress may say, no, prices are
still high; we are going to cap rates, but we won't price it if
you build it after next June rather than this June.
Mr. Massey. They all operate in a marketplace in which they
are very much aware that my Agency has the statutory obligation
to ensure just and reasonable prices.
Mr. Shadegg. That is a difficult point.
Mr. Massey. Yes.
Mr. Shadegg. That creates a problem.
Mr. Massey. They all know that.
Mr. Shadegg. They all know that government can make bad
decisions, and we have just cited four of them. I agree that
there is a problem with gouging or bad market incentives in the
past, but I am worried about repeating those in the future.
You said in your oral testimony, point blank, that price
signals have been sent. I think you said that in the context of
signals to outside producers to come in and build because the
prices are high. But you would agree with me that price signals
have not been sent to the people of California, when 57 percent
of them agree or believe that there is no shortage and when
they are turning down future power plants? You see both sides
of the price signal issue?
Mr. Massey. Of course. Of course. But I say again, my
agency has declared the market to be dysfunctional. We have
declared prices to be unjust and unreasonable.
It is extraordinarily difficult politically for State
policymakers to flow those through, although I think retail
prices are going to have to increase, and retail customers are
going to have to see a price signal.
Having said that, State policymaker decisions do not
relieve me of the obligation to ensure just and reasonable
wholesale prices. There is no exception in the law.
Mr. Shadegg. I understand that. You keep using the word
``dysfunctional market.'' I think we have all agreed that four
of the major factors that have caused this to be dysfunctional
are not greed on the part of the utilities, though that may be
there, but very bad government policies.
Mr. Massey. Yes.
Mr. Barton. Let the record show we gave you double time. We
reset the clock.
Mr. Shadegg. Let the record show I was not the only one who
got double time.
Mr. Barton. But you were one of the ones that got double
time.
The gentleman from North Carolina is recognized for 5
minutes.
Mr. Burr. Clearly, there was one hell of a precedent set
while I was gone. I will take advantage of it.
Let me read a statement that is attributed to the Governor
and just ask for your comment. The Governor said in his State
of the State speech on January 8, ``Never again can we allow
out-of-State profiteers to hold Californians hostage.''
Could I ask each one of you to comment as to whether you
believe that the Governor's statement is accurate as it relates
to the suppliers that have supplied that State?
Mr. Massey?
Mr. Massey. I will say that for a politician at the State
level that is trying to get a handle on the situation----
Mr. Burr. I am asking you to address whether the companies
who supply on a wholesale level fit the description that the
Governor of California referred to as them holding Californians
hostage.
Mr. Massey. No, I don't agree with that. I think there has
been some profiteering. I think there has been withholding. I
think there have been abuses that we have not ferreted out.
But to take that kind of swipe at an entire industry, I
don't agree with that.
Mr. Burr. We will get to some of the reasons that possibly
the price went up.
Commissioner Hebert?
Mr. Hebert. Again, I would rather not get into speculation
as to what he intended. But as to whether or not I agree with
that, I guess it depends on how we define profiteers.
Mr. Burr. He said profiteers--``to hold Californians
hostage.''
Mr. Hebert. I think it is inaccurate; inaccurate in that it
does not complete the subject class. If the subject class is
profiteers, then you have to include the in-state profiteers,
the munis, the co-ops; other people who were involved in this,
as well. So I think it is very unfair to segregate the subject
class.
But let me speak to something quickly in regard to that.
A moment ago my colleague, Commissioner Massey, was talking
about the rates and how we found many to be unjust and
unreasonable. Actually--and I don't have the language in front
of me--but I am pretty sure that the language was, we found
rates to be unjust and unreasonable at certain times during
certain conditions. It is a little different language there. I
know we are talking about semantics, but I think it is
important that you understand that.
Since we are talking about the profiteers, we have already
concluded that for half the marketplace, FERC cannot do
anything about it. As you know, through the December 15 order,
we put pressure, downward pressure if you will, to have less of
a spot market. A year ago, the spot market was nearly 100
percent in California. Now we are hoping it is somewhere near 5
percent.
So if you get the bilaterals out of the way, which is where
we are trying to press them toward--now we are talking about
capping prices, but we are talking about capping 5 percent of
the marketplace.
Mr. Burr. I can assure you, anyone who was in this
institution in the last Congress was very attuned to making
sure that we understand the definition of words. So I
appreciate your clarifying that.
Mr. Hebert. Thank you.
Ms. Breathitt. I believe the Governor may have felt that
way, but I think it was a generalization that I don't agree
with, although I concur with Commissioner Massey's comment that
while it was a generalization that I do not agree with, I do
think that there have been instances of market power abuse and
withholding.
Mr. Burr. I will go back over something my colleague, Mr.
Walden, commented on.
Last summer the volatility of the spot market reinforced
the need for utilities to be able to enter into bilateral long-
term contracts. Duke Power is my power supplier in North
Carolina. Duke offered to supply the needs to San Diego Gas and
Electric on a long-term basis at a price of $55 per megawatt
hour for 5 years.
In your opinion, tell me how an offer like that is
profiteering and holding Californians hostage. Now, that is not
ultimately what California paid for their power, because they
would not allow that contract to be entered into, but Duke
Energy was willing to sell for 5 years at $55 a megawatt, to
sign a contract with San Diego Electric.
Tell me how that is profiteering and holding Californians
hostage.
Mr. Massey. That sounds like a good deal to me. I am sure
that many of--that the utilities in California wish they had
those kinds of bargains available to them now. But of course
they don't, because the spot market is so high-priced it
affects the long-term price in forward contracts.
I think in retrospect, that looks like a pretty good deal.
Mr. Burr. Isn't it true that over the last decade
consumption has grown 25 percent and generation capacity has
gone down? Is that not a reality, or 29 percent?
Ms. Breathitt. Congressman, that is 5.5 cents a kilowatt
hour. Hindsight being 20/20, I am sure they would have loved to
grab that deal now.
I have been somewhat disappointed in my reading in the
trade press of the pace at which bilateral contracts are being
negotiated, and we had begun that process before a FERC ALJ,
and then it moved to the Treasury Department in the last days
of the Clinton Administration. Now those negotiations are
occurring at the State level, and we do not have a lot of
information on the success of moving the spot market into the
bilateral market for this summer.
Everything that I have read is that the contracts are
beginning in the fall, or even later than that. So I do not
know how successful that is.
Mr. Burr. Commissioner Massey said that hindsight is a
wonderful thing. I would tell you when you have a 25 percent
increase in consumption and you have a reduction in your
generating capacity, it does not take hindsight to realize that
potentially you are headed off of a cliff that actually we saw
this year.
Let me ask one last question, and then I know Commissioner
Hebert has something to add.
Mr. Barton. This round will be your last question.
Mr. Burr. We are several months into this crisis. Tell me
what California has done to increase the generating capacity
within their State; not relying on the outside, on the
profiteers and individuals who are holding California hostage,
but what specifically has California done to increase the
generation, the generation capacity within their State?
Ms. Breathitt. I have been told by FERC senior staff that
the California electricity siting authority has sped up their
review to 21 days, but that is just one level of the siting.
Then it has to go through all this local siting, and it gets
bogged down there.
So I have been told that they have sped up their siting
timeframes significantly at the State level.
Mr. Burr. What was their siting timeframe before, do you
know?
Ms. Breathitt. A year or 2. I don't know. It was a long
time.
Mr. Burr. It is amazing how efficient you can get when you
have a problem.
Commissioner Hebert, was there something you wanted to add?
Mr. Hebert. Let me add to this one thing that I think you
will find important.
One of the questions is what is California doing, but also
what have they not done? The things that FERC has asked them to
do to help us help them, if you will, that they have not done
is a congestion management plan has not been filed. They are
the only State yet not to file an RTO. There was a deadline
October 15; one, January 15. They have yet to file anything on
a regional transmission organization plan.
A governing board, that is inconsistent with the 12/15
order; the PX failure to implement on as-bid pricing. SoCal for
weeks failed to stop selling its own generation through the PX;
creditworthiness; a tariff provision the ISO failed to
implement properly; slow to move toward a more balanced
protocol, but they are moving there.
This announcement today with Dynergy is important. I am not
convinced California is doing everything it can to expedite
construction. It goes back to my point. They have not turned
the first shovel on anything meaningful.
But we got a letter today, actually, that I shared with my
colleagues, after we issued an order last week looking for
short-term and some long-term remedies for removing obstacles,
if you will; something that the FERC could do to aid and assist
California.
I received that today from Governor Gray Davis. I will be
glad to give you a copy.
And it says I understand if the FERC is willing to do
everything within its power to encourage the construction of
additional natural gas supply transmission lines to bring
needed natural gas and energy supplies to the State of
California for its possible usage, and plants and hope to bring
on line not later than July 1, 2001, including all activities
that will help expedite licensing and approval of such as a
resolution of environmental and other regulatory concerns will
help meet critical construction deadlines and will help relieve
the energy challenges we are facing.
The Federal Energy Regulatory Commission's assistance in
this regard will serve the public interest and help greatly to
meet the challenges that exist in the State of California. So
there is good news. We have got a good news letter here that
basically says that the Governor is thankful for action we have
taken to help them.
The other thing I would like to quote is the question you
asked about Duke and the $55 per megawatt hour, which is the
one that I quoted earlier, that actually Secretary Abraham had
brought out in his discussion, that would have saved $5 billion
over a 1-year period, but here is the opposite of that, too,
and this is the type thing that we don't think about, but I
must think about as the Chairman of the FERC.
At $55 a megawatt hour, chances are, December, January,
February, March, because of----
Mr. Barton. But they would have entered it willingly. They
would have just--their stockholders would have got on them at
the next meeting.
Mr. Hebert. The secret is a balanced portfolio.
Mr. Barton. They are probably happy that California didn't
take them up on it.
Mr. Hebert. Oh, they're probably ecstatic.
Mr. Barton. That is what they are celebrating in North
Carolina.
Mr. Burr. We celebrate every day in North Carolina.
Mr. Barton. Not celebrating the NCAA basketball tournament
from North Carolina's perspective.
Mr. Burr. We still have one small entry, Duke.
Mr. Barton. And Texas has none. I don't think we got even
past the first round.
Is LSU still in?
Ms. Breathitt. No, but Kentucky does play Duke Saturday
night.
Mr. Barton. Oh.
The gentleman from Virginia. We are going to do a second
round. I would ask if you let Mr. Boucher do his questions, and
if you all want to take a quick personal convenience break,
then I have got questions, Mr. Shadegg has got questions, Mr.
Markey has got questions. So we are going to do at least three
more questions. Mr. Boucher has got a pending engagement. I am
not going to let him go now, and if you want to take a quick
break, then we will come back.
Mr. Hebert. Mr. Chairman, we could take turns if that would
be convenient. I may stay gone longer than the rest.
Mr. Barton. We may want to ask all three of you the same
question.
Mr. Boucher.
Mr. Boucher. Thank you, Mr. Chairman. I just want to spend
a moment now talking about the methodology that the Commission
has employed in setting the rate screen, in the case of
January, $273 per megawatt hour; in the case of February, a
much higher number, $430 per megawatt hour; and this is the
number above which you then determine that the rates that are
charged for the transactions are unjust and unreasonable.
Now, I am told that there was a time in the not-too-distant
past when electricity at the wholesale level was being priced
at something on the order of $30 per megawatt hour. Now, maybe
that is low, but I am told that that, way back in the dark ages
of 1998-1999, was the price; and in view of that historical
record, one has to wonder if your methodology in arriving at
these numbers of $273 for January and $430 for February is
really based on an average of all of the costs of the utilities
in California, or whether you are only looking at the cost of
the most inefficient of the generators selling power into the
State.
Which is it? Is it the broader measure of all of the
utilities in California, or is it the more narrow measure of
only the most inefficient of those generators, and then if it
is the latter, how can you justify that? If--in fact, if it is
the latter, I would strongly encourage you--Ms. Breathitt,
taking you up on your suggestion that you would be willing to
look at this methodology and alter it if some alteration
appeared to be necessary as you begin to look at the months
that are subsequent to January.
So let me ask you the basis on which you have arrived at
this number. Is it an average of all utilities' costs, or is it
just the most inefficient ones?
Ms. Breathitt. We used three of--we used the top three most
inefficient power plants that were previously owned by the
three investor-owned utilities. For example, with PG&E, it was
their top three least efficient power plants, with SoCal Edison
and with San Diego.
Mr. Boucher. Why did you choose the least efficient plants?
Why did you not take an average of all of the utilities in the
State?
Ms. Breathitt. We then averaged those and came up with a
price for a combustion turbine, using those. But we used those
because in the tightest supply shortage, those units would be
called on to operate, and those units--because California is
under a market structure now, those units would have set what
we call the ``market clearing price,'' and that is how the
market is designed in California.
So we used those because those units would be called into
service, and the cost recovery would be based on the most
inefficient plants put into service.
Mr. Boucher. It would seem to me that at that time there
would be a lot of generators selling power into the State who
would have operating costs far below those most inefficient
generators. And would it not be unjust and unreasonable for
them to be selling power at a rate that is essentially the same
as the least efficient of these generators--at a rate that is
far below the rate that you were pegging for the least
efficient of these generators?
Why would it not be unreasonable for them to be selling
power at a lesser number than that? Why are you holding them to
the same standard?
Ms. Breathitt. They would have been selling power at a
lesser number than that, but we found that market power would
most be abused during that--the tightest supply demand
conditions, and one of our goals in setting up a market
mitigation plan was to capture transactions that would have
been--transactions that would most likely have involved the
abuse of market power.
Mr. Boucher. Mr. Massey, let me ask you for your comment on
this methodology. Do you have any problem with the way that
that proxy number is established?
Mr. Massey. Well, I do. I don't think we did what we said
we would do. We said in our December 15 order that when we get
the transaction information, the Commission will look at the
transaction information that is submitted and we will look for
market power, we will look for evidence of strategic bidding,
we will look for evidence of withholding and so forth. We
didn't do any of that. We simply set a threshold below which
the bidders get at free and clear, and it has the impact of
excluding most of the transactions that occurred during that
month over $150.
And the point I have made before--I know I sound like a
broken record, but if you are concerned about a $273 bid in
stage three, you would be even more concerned about a $273 bid
in stage two or stage one or where there weren't shortages at
all. So it is, I think, illogical; and it gets worse for
February where the price is $430, and the stage three
limitation has the impact of giving 14,168 transactions above
$430 a free and clear because they did not occur in stage
three.
Mr. Boucher. Well, I understand the concern you have, and
it is one that I share about limiting the orders just to the
transactions that occur in stage three. My question was really
directed more toward the formulation of the screen itself.
Mr. Massey. Oh, I think the formula was fairly generous as
well, looking at only the inefficient 18,000 BTU units.
Mr. Boucher. Would you agree that it would be sensible to
look at average operating costs of all of the utilities of the
State, not just the least efficient ones?
Mr. Massey. That is another way you could do it.
Mr. Boucher. Is it a better way to do it?
Mr. Massey. It perhaps is. You could look at all the
transactions. We have the actual data now, I think, before us.
We don't actually have to use a screen.
Mr. Boucher. So you could look at the actual operating
costs of each generator; is what you are saying?
Mr. Massey. Yes. The reason the Commission chose a screen
is because it is easy to administer but it is not necessarily
the most just way to go about it.
Mr. Boucher. Are you going to advocate some change in this
methodology as the determinations are made with regard to,
let's say, February and subsequent months, or maybe March and
subsequent months?
Mr. Massey. I am, and I am concerned if this methodology is
used for the period of time last year in which there is a
refund effective date, almost no transactions will qualify for
refunds because there were only 2 hours of stage three during
all of the year 2000, and I think, going forward, we have to
broaden our mitigation plan to hours other than stage three
alerts.
Mr. Boucher. Okay.
Thank you very much, Mr. Chairman.
Mr. Barton. We are going to take a quick--and I mean
quick--personal convenience break, and I want the audience to
let the testifiers have precedence on the facilities.
I am going to be back here by 5:15, so maybe 5:16. So if
you all will take a quick run for whatever you need to run for,
and then we will be back here in about 4 or 5 minutes.
We are in recess.
[Brief recess.]
Mr. Barton. I see two of the Commissioners--there is the
third. So if we could get our stars back and continue.
Okay, I want to apologize for keeping you past 5 o'clock,
but at the Republican leadership meeting with the Speaker this
afternoon, one of the items on the agenda anyway was what to do
in California; and I have been asked to make a presentation to
Chairman Tauzin later this week.
So we really--we have got to focus. So I--normally we
wouldn't keep you here this late, but these are not normal
times.
I want to put into the record a chart that was prepared by
EIA about retail electricity charges around the country, and it
shows that in Washington State from 1998 through the end of
calendar year 2000 the retail rate charged to consumers was
right at 5 cents a kilowatt hour. In Oregon it is fluctuating
around 6 cents a kilowatt hour; in Texas, between 7 and 8 cents
a kilowatt hour; in Michigan between 8 and 9 cents a kilowatt
hour.
Here in the PJM market, in the Atlantic, mid-Atlantic Coast
region it has been between 8 and 9 cents a kilowatt hour, and
in California it has been between 10 and 11 cents a kilowatt
hour. So we are talking a lot about a retail price signal.
I think the record--it is only fair to show that California
is paying some of the highest retail rates in the country.
Having said that, it is obvious that the market is still not
working, because the wholesale rates coming into that market
show the retail rate should be considerably higher than it is.
But we will put this chart into the record at the appropriate
point .
We have focused most of our attention so far today on a
debate about price caps, wholesale price caps, and who is for
it and who is against it, and whether they work or not; but it
has been pointed out by the Chairman, the FERC only has
wholesale jurisdiction over approximately 50 percent of the
market in California. The State of California, on the other
hand, has total jurisdiction on the demand side.
Now I would like to hear, first of all, is it your opinion
as commissioners at FERC--if the State of California wished to
put in a mandatory demand management program, does it have the
authority to do that?
Mr. Massey says yes.
Chairman Hebert says yes.
Ms. Breathitt. You are asking if the State has the
authority?
Mr. Barton. Does the State----
Ms. Breathitt. More so than we do, in my opinion.
Mr. Barton. Does the State of California have the authority
to put in a mandatory demand management program? Because, let's
be serious, you know, every one of you has testified--if not
today, at some point in the last month between some committee
of the House or the Senate--that you are not going to solve the
supply problem this summer. There is anywhere from a 5,000
megawatt peak load demand shortage--I hear as low as 2000; I
have heard as high 8,000. The average is around 4- to 5,000
that just ain't going to be there. So we need to look at the
demand side.
Now, Mr. Markey has got and Mr. Waxman has got some ideas
about efficiency standards for appliances--perhaps not a bad
idea, very tough to implement this summer. So my first question
for this round is, if the State wanted to, could the State put
in a mandatory demand management program that would cause
certain factories to shut down at certain times of the day,
protect that certain users, such as hospitals and schools and
low income--so that they took this demand supply shortage
situation and actually proactively tried to manage it?
Could the State of California do that if they wished to?
Ms. Breathitt. Yes, and it is my understanding from having
regulated at the retail level that there are protocols for
periods of outages, like the most critical--hospitals, nursing
homes, et cetera--would stay--would have access to power.
Mr. Barton. We will ask the State on Thursday. They have
several officials. We will ask them what they are doing on the
demand side, but I just want to get it on the record.
From a Federal perspective, every commissioner--Republican
and Democrat, there is unanimous agreement that the State could
manage its demand this summer if it wanted to, all right?
Mr. Hebert. Absolutely, and there are lots of different
ways to do it.
Mr. Barton. All right, second question.
On the supply side there are a number of small energy
suppliers, electricity suppliers, in California that are called
QFs, qualified facilities, under PURPA, I believe. Many of them
are shutting down not because their equipment is worn out, not
because of air quality constraints, but simply because they
have not been paid; and if they are a natural gas qualifying
facility, they don't have the money to keep supplying power
into the market if they don't get the money to pay for the
power they have already supplied.
What, if anything, could the FERC do to require the
qualifying facilities that have shown good faith, have put
power into the market in California which is on the order of
1,500 megawatts, to make sure that they are paid? Could you
tell the State of California to pay those bills, or is that
again a State decision whether to pay for those bills?
Mr. Massey. There is an argument that we could tell them to
pay those bills because of the special provisions of PURPA,
that those bills ought to actually have a priority in payment
because of PURPA.
I don't know whether that is the right answer, but I know
that there are strong arguments that my agency could direct a
payment.
Mr. Barton. So, Commissioner Massey, you say that the FERC
could say that those bills had to be paid?
Mr. Massey. I think there are good arguments that we could
say that.
Mr. Barton. You are not saying you would say it.
Mr. Massey. No.
Mr. Barton. Chairman, would you say that you could? Do you
agree there are good arguments where you could dictate the
State to pay those bills or the utility to pay those bills?
Mr. Hebert. Not directly, and let me tell you why.
The one thing we have done is, like the refunds we spoke
about, the refunds that came through January and February; we
said they could either refund or be held against accounts
receivable. Implicitly that is one way we can do something.
Now, obviously we can't reach out and touch those QFs, but
through the file rate doctrine, it is generally accepted and
legally accepted that wholesale charges prudently incurred, or
wholesale costs prudently incurred, shall be passed to the
ratepayers absent some preconditioned agreement between,
perhaps, the State of California and the utilities.
Mr. Barton. Okay.
Commissioner Breathitt.
Ms. Breathitt. Mr. Barton, I do not know the answer to your
question. If you would like me to, I will confer with some of
the attorneys back at the agency.
Mr. Barton. That is fine with me. Just get me the answer by
close of business Friday.
Ms. Breathitt. Okay.
Mr. Barton. We are going to make some decisions this
weekend.
Yes, sir.
Mr. Hebert. My guess is, Mr. Chairman, at some point, due
to the file rate doctrine, some judge somewhere, somehow, will
force those costs through.
Mr. Barton. Well, any part of a comprehensive plan to
minimize the shortage has got to put into play the existing
facilities that could provide power, if they could be paid for
the power they have already supplied and paid enough money to
operate this summer.
It is crazy to take 1,500 megawatts off the table. Most of
it is clean power, most of it is relatively new power. So that
is just--it is going away if we don't do something.
Mr. Massey.
Mr. Massey. I agree with you, Mr. Chairman. This is a
problem that has to be solved before the summer.
Mr. Barton. Last question, and then I will go to Mr.
Markey.
The fly in the ointment that nobody is talking about today
so far is the permitting process for new power plants in
California. Commissioner Breathitt said she talked about it, so
we will give her a halo for that.
What role, if any, does the Federal Government and the FERC
have in expediting or reviewing applications for new power
plants in any State--not just California, but specifically
California, but generally, any State? Is there a FERC role in
new plant certification permitting?
Ms. Breathitt. There is no role, Chairman Barton. We
attempted to carve out a role through the RTO process, to
consult with the RTO and its members and State----
Mr. Barton. But under current law, the FERC can't dictate a
permit application?
Ms. Breathitt. No. And in my opening statement, I advocated
a change in the Power Act.
Mr. Barton. Okay.
Mr. Hebert. Only one exception to that as to generation,
and that would be the licensing of a hydro facility.
Mr. Barton. On Federal lands perhaps that would be an
exception, too, would it not? If you wanted to build a new
power plant on Federal property in California, is that an
exception, or would that have to get a State permit?
Mr. Hebert. It is going to be a State permit and they are
probably going to have, quite frankly, substantial dealings
with the Department of Interior.
Mr. Barton. Okay.
Mr. Massey, Commissioner Massey.
Mr. Massey. I agree with those answers. Generally speaking,
we have no role with respect to certification of plants.
Mr. Barton. Okay.
Now, current law, there may be an exception, but generally
there is no Federal role. If you all were us--we can write law;
that is what this subcommittee does.
Would you want us, in an Emergency Electricity Act of 2001
to give the FERC the right to override all State permitting
requirements and set a time certain--not yes or no whether the
plant should be built, but set a time certain that the State
has to make a decision? Instead of its taking 3 years, 7 years,
whatever, we said the State of California and every other State
that is above the national average has to meet the national
average within 6 months so that all decisions are made within 6
months effective May 1 or June 1, 2001.
In other words, would you want us to change the law, if you
were us, on permitting? I want you to answer the question.
Mr. Hebert. I will be glad to start.
Mr. Barton. You can say yes or no. It is a real question.
Mr. Hebert. The real answer is, I don't know; and let me
tell you why.
Mr. Barton. Okay.
Mr. Hebert. And I will tell you the answer as I see it.
Siting of generation has been decided by States. There is a
long history there, and there is a reason. I have handled the
retail side of it, and here is the perplexing situation you get
yourself into. Who is to decide if California wants to say, we
don't want----
Mr. Barton. We will still let California say yes or no. We
are just going to say, they have got to say it sooner.
Mr. Hebert. No, but I am just saying, who is to say if they
decide they don't want new generation and, quite frankly, they
are going to embrace blackouts and brownouts; and they are
going to embrace two and three times their current retail
rates, as compared to someone perhaps maybe like a Texas, maybe
like a Mississippi.
Mr. Barton. Again, we are not dictating they have to say
yes; we are just saying in a time certain--Mississippi can make
a decision in 3 months, Ohio can make a decision in 6 months,
Texas can make a decision in 9 months; the great State of
California apparently can't make a decision in 3 years most of
the time.
Mr. Hebert. I guess the answer then changes to, if you are
going to cross the bridge and say we are going to make this
energy decision and make it a national and Federal decision,
then the answer would be yes. But----
Mr. Barton. We can make it temporary. We don't have to make
it permanent.
Mr. Hebert. I understand. But at the same time I do think
that is a part of the beauty of Order 2000 and the RTOs,
because understanding that the markets are national and
regional, we are going to try to promote some of that.
Mr. Barton. My time is way over.
Commissioner Breathitt, would you want an emergency
electricity act to require that the States make permitting
decisions in a time certain?
Ms. Breathitt. I think it would be cleaner to amend the
Federal Power Act, at least temporarily, giving siting
authority to FERC----
Mr. Barton. So you want the authority. You don't want to
just tell them they have got to do it; you want to do it?
Ms. Breathitt. I am----
Mr. Barton. You want to be the Power Queen of the West for
the next year. That's okay.
Ms. Breathitt. I wouldn't go that far.
Mr. Barton. All right. So you say, temporarily give the
authority to the FERC.
What about you, Commissioner Massey?
Mr. Massey. I think her comment was on transmission.
Mr. Barton. I am talking power siting.
Mr. Massey. On generation, you raise an interesting point
because FERC does not have the tools to ensure a just and
reasonable wholesale market, because so much authority is with
the States.
So, on an emergency basis, I think it is an intriguing
idea. However, if you set a time limit, you might just get
``no'' answers from the States.
Mr. Barton. I don't feel--I very strongly--I can't stand
here or sit here and say I want the Federal Government to make
all these decisions because California can't do it, you know. I
think States have the right to make bad decisions, and have
made good decisions; but when that--when a particular State's
particularly bad decisions over time impact the rest of the
region and to some extent the country, I think it is in the
Federal role to come in on a temporary basis perhaps and say,
you are going to have to expedite making those decisions, and
if we force you to in a constrained period, you might say, yes,
more than you have in the past.
Mr. Hebert. If I might just add two things----
Mr. Barton. My time is way over, so Mr. Chairman and then
Mr. Markey.
Mr. Hebert. Quickly, one is, don't hard-wire it, don't be
prescriptive if you are going to do it; and the second is--and
I have testified to the effect that some type of one-stop
shopping is a good idea.
Mr. Barton. So you are kind of leaning toward Commissioner
Breathitt's, let you folks do it for a while.
Mr. Hebert. No, I didn't say let us do it.
Mr. Barton. You said one-stop shopping.
Mr. Hebert. I am not suggesting that. I will do either,
but----
Mr. Barton. Set up a regional commission, let them do it?
Mr. Hebert. I do think the RTOs move in that direction.
Mr. Barton. Okay, my time has expired.
Mr. Markey for 5 minutes.
Mr. Markey. Thank you, Mr. Chairman.
Mr. Chairman, would you support immediate initiation of a
formal 206 investigation?
Mr. Hebert. Beyond what is going on now?
Mr. Markey. Yes, so that consumers could get a refund if
FERC found that prices aren't just and reasonable.
Mr. Hebert. I have been open to any and all considerations.
I have not seen the need at this point to initiate further 206
proceedings.
Mr. Markey. Commissioner Massey makes the case that we have
reached that point, that the conditions are there.
Where do you disagree with Commissioner Massey? What is
wrong in his analysis?
Mr. Hebert. Well, obviously we disagree on price caps. I
don't think there is any way to price-cap 5 percent of the
market and have any effect in a positive manner. If you are
going to have price caps, it is certainly evident that you are
going to have to have some type of 206.
Mr. Markey. So do you agree with Commissioner Massey that
widespread withholding may have occurred?
Mr. Hebert. I would rather speak to our December 15 order
and say that we found that market power may have existed during
certain conditions and certain periods.
Mr. Markey. Is it possible--if in your mind that widespread
withholding did occur, is that something that you think you
should look at?
Mr. Hebert. I think we continue to look at that. I think
that is our role.
Mr. Markey. Why not initiate a formal proceeding in order
to formally look at the question of whether or not energy
companies were deliberately withholding energy? Why doesn't
that make sense?
Mr. Hebert. Well, obviously I think the Commission is
moving in the right direction. I think we are moving in the
right direction as to market mitigation, sending the right
signals while making certain that a portion, that 5 percent of
the spot market, does not create a further problem.
Now, if I didn't believe that, then it may lend itself to
some type of further 206 investigation, but the fact I do
believe it moves me away from it.
Mr. Markey. I appreciate that, but Commissioner Massey is
saying that we are heading toward an abyss in the West this
summer, an electricity abyss. Don't you think it makes sense
for us to start now with a formal inquiry to make sure that
there is not systematic gaming going on by these companies,
because the profits are just so great that many companies might
just find them irresistible, because ultimately the penalty
that they might have to pay after the fact is small compared to
the profits which they are able to reap and tipping Western
consumers upside down.
Mr. Hebert. I understand your concern, and I am certainly
sympathetic to it, as well as to the people of California. That
is why this Commission has acted, we have acted in setting up a
proxy price. We are looking for comments to come in on what we
are going to do with market mitigation, and quite frankly--let
me make it clear one more time because I really need this to
sink in.
When you talk about me stepping in, the Commission stepping
in, we three, you are talking about half of the marketplace;
and now that we have pushed that 5 percent, we are not talking
about the bilaterals. So we are talking about 5 percent of the
spot market that perhaps we are going to intervene, and our
direction is that we are going to give the profit-price signal
while insulating against excessively and unjust and
unreasonable prices, and I think that is what we are doing.
Mr. Markey. Well, what is the test that you are using in
your mind as to how much worse it has to get before you will
commence a 206 proceeding? What additional evidence do you need
in order to convince you that Mr. Massey is correct in terms of
his analysis of this inexorable path toward the abyss which the
West is taking in this electricity marketplace?
Mr. Hebert. Let me be very careful in my comment because it
is subject to rehearing. So my mind is open and I am
considering.
But you are very good at trying to get me to say something,
quite frankly, that I am not going to be comfortable saying;
and I will just stand by the record and tell you that I think
the order speaks for itself, it is on rehearing, and we are
doing something.
Mr. Markey. Commissioner Massey, what is the nub of the
disagreement that you have with Mr. Hebert? What is it that you
disagree with him on in terms of your analysis of the crisis?
Mr. Massey. I think what it boils down to is a
philosophical disagreement about the role of my agency in
ensuring just and reasonable prices. I think that we have no
choice legally but to do so. In addition, it is the right thing
to do, and we can't rely on a dysfunctional market that will
not be fixed by this summer--and I think the law is clear on
that--and that, frankly, we are not fulfilling our legal
obligation.
Mr. Markey. Commissioner Breathitt, whom do you agree with
in this fight?
Ms. Breathitt. I have recently signaled my willingness to
look at the whole notion of price mitigation or capping the
market. What I would prefer to do, which didn't go as far as my
colleague, Commissioner Massey, in calling for a 206
investigation, is--and we are going to do this--is to have an
honest dialog with my State colleagues on April 6 in Boise. And
they have--the State commissioners want to talk to us about
price volatility in the West and what implementation issues
there are.
So I first wanted to talk to my State colleagues to see----
Mr. Markey. But what would you want to hear from them? What
is it that you could hear from them that would have you
agreeing with Mr. Massey, that would then trigger a 206?
Ms. Breathitt. What I would like to hear from them is that
there is broad enough support to move forward. In other words,
it would be very difficult to cap the market in three States
only; it would need to be West-wide. I would need to be assured
that there would be some participation of public power, because
there is a lot in the West that is public power, and they would
not be subject to that.
And I would also like to be assured that there was a way to
provide price mitigation to what is technically a bilateral
spot market. There is no mechanism in the West outside of
California.
Mr. Markey. Does the Federal Energy Regulatory Commission
usually wait for concurrence by the States before it initiates
a 206 inquiry into fair and reasonable prices?
Ms. Breathitt. It doesn't have to, but when you have got a
disagreement among Governors whose States this would occur in
and have something to say, quite frankly, about the matter, I
think it makes sense to confer with my State colleagues.
Mr. Markey. If I could ask one final question, do you agree
with Mr. Massey that we could be heading toward an electricity
abyss in the West this summer?
Ms. Breathitt. I don't know if I would use the word
``abyss.'' I agree with Commissioner Massey that we are
potentially headed for greater problems than we have thus far
seen.
Mr. Markey. Greater than today by a significant magnitude,
do you believe, in the middle of the summer?
Ms. Breathitt. Yes, yes. I think that we could have more
blackouts, that they won't just be rolling blackouts. And I
said in my opening statement, I think prices could go even
higher.
Mr. Markey. And when do you think we are going to reach the
last clear chance in terms of time before we will lose our
ability to deal with this summer issue? Do you think time is of
the essence? Do you think we are reaching that point?
Ms. Breathitt. I think time is of the essence.
Mr. Markey. Do you have a deadline in your mind--if I could
ask each of you, when do each of you think you have to make a
decision to avoid a real crisis in the West this summer? Do you
have a deadline in your own mind?
Ms. Breathitt. Whenever the heating season begins in the
West, and I am told it is late June, early June. It is
different from the East.
Mr. Markey. You think you have until then to decide?
Ms. Breathitt. At the farthest edge of it.
Mr. Markey. So you don't think you have to initiate----
Mr. Barton. The gentleman's time has expired.
Mr. Markey. Thank you, Mr. Chairman. Thank you for
indulging me.
Mr. Barton. It is a serious question, and it is what we are
wrestling with, how much time do we have to do anything if we
think there is something we can do.
Mr. Markey. Mr. Chairman, I am very concerned by the
answers that I am receiving from the Commission in terms of the
deadlines that I think are arriving.
Ms. Breathitt. Mr. Markey, I also don't know, if Bill and I
agree that this is the right thing to do, I have no idea what
the practicality of our wanting to go down that path would be
at the FERC.
Mr. Barton. Chairman Hebert, and then we go to Congressman
Shadegg.
Mr. Hebert. Real quick, Congressman Markey, a couple of
things.
I think the Commission has reflected on what our last clear
chance is, and I think that is what the market mitigation
filing is about, and we are looking for those comments where we
are going to hopefully have some plan that will mitigate any
concerns through an ex-anti--through an immediate market
mitigation plan on May 1 going forward. I think actually it
came in from the staff for 1 year.
Now, when you are asking me for a last clear chance, the
reason I can't accurately answer that for you is, I can market-
mitigate 5 percent of the spot market now, which is what we are
going to end up talking about.
But let me tell you what I cannot do and what this
Commission cannot do; and you know this. We cannot build
interstate pipeline. We can remove barriers, and we can make it
easier to do it, which is what we are doing and which is what
the letter is about. But then if I get them six pipelines, and
they don't have enough take-away capacity to deliver it once it
gets there, I can't do anything about that. I can't site
generation. This Commission cannot site transmission, can't
build it.
So we can mitigate. There are things we can do. I think we
are exercising our discretion, but so much of this, an
unbelievable amount of this, is outside of the control of this
agency.
Mr. Massey. May I have a 30-second comment.
The market mitigation plan only applies to the California
spot markets. If we are to deal with price volatility elsewhere
in the Western interconnection, we have to open a formal 206
investigation and set a refund effective date; otherwise, we
have no authority to take any action whatsoever to mitigate
price.
And we need to be doing that right now, because under the
statute that Congress passed, the earliest date is 60 days
hence from the time we open the investigation. So if we opened
it today, it would already be the middle of May before price
relief could be effective.
Mr. Markey. I think that you should initiate the proceeding
now, gather the evidence, proceed, and then if you decide, then
you already have fulfilled your legal requirements. If you
decide not to, nothing's been lost, but if you decide you have
to, then at least you are in a period of time where you might
be able to do some good.
Mr. Barton. The gentleman's time has expired.
The gentleman from Arizona for the last question.
Mr. Shadegg. I thank the chairman and I appreciate his
indulgence of my colleague, because I have a fair amount of
ground to cover myself.
Let me first say, my compliments to all three of you. Your
testimony here today and your written statements are some of
the most thoughtful I have seen while serving in Congress, and
I appreciate that. These are difficult problems that we are
dealing with.
I have a series of questions. The first one I want to
direct to you, Commissioner Massey.
You said in your testimony, and you repeated it in answers
today--maybe you said it just in answers today--that uncapped
high wholesale prices this summer will not create one
additional megawatt this summer. As I have read your testimony
and your comments here today, I don't know if there was price
gouging in the past. I think you are concerned about price
gouging in the future, and I am too, but I want to look at that
statement very carefully, ``uncapped high wholesale prices this
summer will not create one additional megawatt this summer.''
You would agree with me that a higher price, a higher
wholesale price, would incent the creation of additional
megawatts, at least at some point in the future when they can
be built; an assurance that you could recover the cost of what
you put into a plant will encourage people to come in and build
plants, right?
Mr. Massey. It will, but the constraint in Federal law is
``a just and reasonable wholesale price.''
Mr. Shadegg. I am glad you raised that, because one of the
comments I wanted to make during this series of questioning is,
I think we have given you a near-impossible task. How you
ascertain what a just and reasonable price is in the transition
between a regulated market and unregulated market is extremely
difficult. Indeed, I think the Congress may have given you an
impossible task.
When we had a regulated market, we knew how to figure out
what a just and reasonable price is. How we figure that out in
this circumstance, I don't know.
I want to go to a second argument I would have with your
assertion. You believe, for example, that one way to deal with
the immediate problem in California is the concept of
megawatts, that is, a large consumer of electricity coming back
and saying, we will agree not to use electricity or we will
agree to reduce our load or perhaps to reduce our load at
certain times of the day. That is the concept of the megawatt.
You would agree with me that in terms of producing an
additional megawatt of electricity to be used this summer, a
higher price for the wholesale cost of electricity would, in
fact, encourage the exchange of megawatts by consumers back for
others to use than a low price, would you not?
Mr. Massey. I would agree with that.
Mr. Shadegg. So, in point of fact, a high price, if it is
an uncapped high wholesale price, could in fact create
additional megawatts of electricity, even this summer?
Mr. Massey. I don't know whether it could this summer or
not. I think it depends on whether my agency and State agencies
can work together to try to create a more robust demand side
response between now and this summer.
The State of California has said that it hopes to come up
with a 3,200-megawatt demand reduction for the summer. Now, I
don't know how they are going to do that, but I commend them
for trying.
Mr. Shadegg. It takes me exactly to the next question I
want to ask Commissioner Breathitt. You really asked the
question, which we haven't discussed very much today, and that
is what I care the most about, solutions for this summer. For
example, you would agree with me, would you not, that creating
some kind of a link between retail prices and wholesale
prices--that is, getting rid of the unrealistic disconnection
or disconnect between retail prices and wholesale prices--would
be one thing we could do for the summer, wouldn't it?
Ms. Breathitt. Yes. I talked about earlier that retail
rates in California--and this is not in other parts of the
West--are not reflective of the cost of energy, and that retail
caps impede that; and in order for there to be a true picture
of the whole value stream from the wholesale cost to the retail
rate, if FERC gets involved in price mitigation at the
wholesale side, then the State of California needs to do their
part on the retail side.
Mr. Shadegg. Well, certainly then one thing this Congress
could do would be to do what it can to get rid of those
unrealistic retail price caps or encourage the State of the
California to begin to move those up to where they more
appropriately reflect the market.
You would also agree that another thing we could do for
this summer would be to encourage the megawatt concept that
Commissioner Massey has talked about?
Ms. Breathitt. Correct.
Mr. Shadegg. And that also would be encouraged by a higher
retail price and a higher wholesale price?
Ms. Breathitt. I don't know how that would encourage a
higher retail price. I think it just makes more megawatts
available to the marketplace, but I think it also has some
implications in terms of the work force.
Mr. Shadegg. Can you provide--and I don't have time here
today--but can you provide the committee with a list of other
solutions for this summer that we might be looking at, because
I am intensely interested in that and I don't think we have
focused that much on it in your testimony. I would ask that of
all three commissioners.
Commissioner Hebert, I want to make sure----
Mr. Barton. Would the gentleman yield on that? We need that
list sooner rather than later, like the end of this week,
sometime Friday.
Mr. Shadegg. I want to make sure I understood one of the
points you made about wholesale price caps. As I understood it,
you said one negative context or consequence of a wholesale
price cap, even a temporary one, this summer would be to
discourage the purchasers of electricity in California, the
wholesale purchasers, from looking at long-term contracts; is
that not correct?
Mr. Hebert. That is correct.
Mr. Shadegg. It will encourage them to look at short-term
contracts because they don't have to worry about managing out
into the future?
Mr. Hebert. Well, that is correct. In our December 15 order
we put pressure on them to try to move away from the spot
market toward the forward market. Now, if these entities are
going to have the ability to buy a spot market product at a
forward market price, why do they ever go to the forward
market?
Mr. Shadegg. I think it is a very good point.
I want to talk about another concept that we haven't
discussed here today of price caps. If we cap the prices--and
you are saying in the Western area; I will tell you in Arizona
if you cap just the prices in California, I am deeply worried.
If you cap them in the other--in a region, don't we still have
a problem of an unfairness to other areas where that
electricity might have been sold?
Mr. Hebert. Well, absolutely. What you are going to do is,
you are going to cut yourself off in the West from Canada and
Mexico.
Mr. Shadegg. Is there any reason to believe, or do you have
any authority--if you cap prices in the Western United States,
do you have authority to force people to sell in the Western
United States; or could they take the power they have and
simply say, well, I am not going to sell into California, I am
going to sell it somewhere else?
Mr. Hebert. That power is not vested in this agency. It is
vested in the Department of Energy.
Ms. Breathitt. But because of the Western interconnection,
the power can only move around in the West because it can't
cross into the eastern interconnection or to ERCOT. So when
people who propose price mitigation believe that, the only way
that it could be done fairly is if it were entirely in the West
so you don't have electrons unfairly flowing out of one State
into another one that isn't capped.
Mr. Shadegg. But you would agree with Commissioner Hebert
that that would cause a problem with regard to both Canada and
Mexico?
Ms. Breathitt. Only because power flowing into the United
States from Canada and from Mexico would not be subject to that
price mitigation.
Mr. Shadegg. Would not be subject to that price mitigation.
Wouldn't that encourage capital formation, that is, the
construction of plants outside the United States, encourage
someone to build a new plant just across the border in Mexico
or just across the border in Canada?
Ms. Breathitt. I don't know the answer to that.
Mr. Shadegg. I would suggest that it would have that
effect.
I thank you very much. I appreciate your testimony.
Mr. Barton. That concludes our questions. We are going to
have the second part of this hearing on Thursday where we have
officials from California and the private sector. At the close
of that hearing, I will sit down with Congressman Boucher and
interested members of the subcommittee and decide what, if
anything, we are going to do.
Mr. Hebert. Mr. Chairman, if I could have one point of
personal privilege----
Mr. Barton. You may.
Mr. Hebert. If you are looking at passing legislation,
could I get you to put together a piece for me to expunge from
all records any mention I have ever had of killing Granny.
Mr. Barton. Well, we certainly will allow you to put a
statement in the record that you love granting.
Mr. Markey. Can I say, once again, I know it is a metaphor;
I know it is not literal here. I want to make that clear, that
I understand.
Ms. Breathitt. Mr. Barton, when I was having a conversation
with Mr. Wynn and I was talking about the refund order, what I
meant to say was that I believe that we captured 70 percent of
the dollars, in comparing that to the California filing, not
the transactions.
Mr. Barton. Correct. Thank you.
We do want your thoughts on solutions, short-term and long-
term. We understand the reason we have more than one
commissioner is because honorable people can disagree honorably
on solutions and that is a good thing, not a bad thing. If we
all agreed up here, we wouldn't need 435 members of the House.
So it is a sign of vigor that there is a vigorous debate within
the FERC on these issues, and I want the record to show it is
not definitive that we are going to do something legislatively.
But it is definitive, if this subcommittee is going to act
to help the West on an emergency basis, it has got to do it
within the next month. We can't be debating this in June and
July. If we are going to do something, we have got to do it
starting next week, at least attempt to put the package
together.
So we will recess this hearing. It is going to reconvene
Thursday at 10 a.m.
[Whereupon, at 5:55 p.m., the subcommittee was adjourned,
to reconvene at 10 a.m., Thursday, March 22, 2001.]
ELECTRICITY MARKETS: CALIFORNIA
----------
THURSDAY, MARCH 22, 2001
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Energy and Air Quality,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2322, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Cox, Largent,
Burr, Whitfield, Shimkus, Wilson, Shadegg, Pickering, Fossella,
Blunt, Bryant, Radanovich, Bono, Walden, Boucher, Sawyer,
Waxman, Markey, and McCarthy.
Also present: Representative Harman.
Staff present: Jason Bentley, majority counsel; Hollyn
Kidd, legislattive clerk; and Sue Sheridan, minority counsel
Mr. Barton. The Subcommittee on Energy and Air Quality
second day continuing series of hearings on the electrify
market in California will come to order. We are waiting on the
ranking minority member to do the opening statements. By prior
agreement, myself and Mr. Boucher will give an opening
statement. I am going to go ahead and give mine and hopefully,
by the time I finish, Mr. Boucher will have arrived and we can
begin. I assume that all of our witnesses are here. I see the
Honorable Mr. Freeman making his way, with his cowboy hat. Is
Mr. Keese here? Hopefully he will arrive.
The lights went out again on Tuesday for half a million
homes and businesses in the golden State of California.
Newspapers are full of predictions that supply will not equal
demand for much of this summer.
Today, the subcommittee will continue its focus on the
electricity crisis in California specifically, in the West
generally. Tuesday, we heard from the three Commissioners of
the Federal Energy Regulatory Commission which oversees
wholesale markets in the country. Today, we will hear from
California State agencies, market participants, and market
observers, people on the ground in California who are trying,
to the best of their ability, to keep the lights on.
I want to welcome all of our witnesses today, and I look
forward to your testimony.
One witness before us today is the Chairman of the
California Energy Commission, Mr. Bill Keese, although he is
actually not here yet. He has been helpful to this subcommittee
before, and I will thank him personally when he arrives, for
being here.
His job is an important one, to use the current law and
State authorities to get new generation built. Hopefully he is
very involved in trying to further change the law and
regulations to streamline the California permitting process.
Time and again I am told that California is the toughest State
in the Union to site a new power plant. If that is still the
case in this time of crisis, the supply and-demand problem will
not go away very quickly.
In Chairman Keese's testimony, he anticipates 5,000
megawatts of potential new generation to be built and
operational this summer. Mr. Keese, to me, seems like a good
man, and I have heard from many people that he is doing all
that he personally can. However, I understand that these are
times when one is told by higher authority to give us a big
number.
According to his testimony, 25 percent of that 5,000
megawatts is to come from plants that are already approved; the
other 75 percent worries me. Even the staff of the California
ISO warns that peaking plants take longer to construct than the
State is suggesting, and some of these may never be ready at
all. One observer has said that the State's objections of new
generation for this summer are so rosy and hopeful that this
amounts to the most important faith-based initiative we have
ever heard. I hope this is not the case.
Dr. Lloyd, of the California Air Resources Board, makes his
first appearance before the subcommittee today. We welcome you,
sir. His job is also important, to do what the State can do to
keep plants that are already built operating in this vital
time, while protecting the environment. I am going to ask him
to give us a clear picture of what is happening today in terms
of the environmental regulations in California, why we have
gotten to where we have gotten, where there is such a problem
trying to comply with those regulations. I am going to also ask
if he believes that the State of California would need to have
any additional new authority in this area.
If some of the witnesses' speed in submitting testimony is
in any way an indicator of the State's speed at addressing
problems, I think I am beginning to understand why California
is what it is today. It is not just the State officials that we
have had problems with, even our friends in the private sector,
such as Mr. Kline of PG&E, was late getting his testimony. We
can't study the testimony and give it to our staffs and to our
members if it comes in after six o'clock the night before the
hearing. That is not a good way to do business.
We also have Mr. David Freeman here today, from the Los
Angeles Department of Water and Power. We welcome you, sir. You
are truly, in my mind, one of the heroes in the municipal power
agencies of your generation, so it is truly an honor to have
you here.
Mr. Freeman is on leave from the city of Los Angeles to
help Governor Davis establish a new system in which the State
is going to buy power on behalf of the incumbent investor-owned
distribution utilities. If that is not a real job, I don't know
what is.
Mr. Freeman. It doesn't pay too much, though.
Mr. Barton. I don't envy you in that effort, but I know
that you are trying the very best that you can to do it. Mr.
Freeman has a lot of experience in these issues, and I again
want to thank him for making the trip.
I welcome all of our witnesses here. I especially want to
call to the subcommittee's attention Mr. Larry Makovich. His
group, the Cambridge Energy Research Associates, continues to
offer some of the best analysis of the situation in California
to this day. His work, the work of his company, has been very
useful to me and other subcommittee members in giving us a
broad overview.
As we said on Tuesday, the Federal Government does not site
power plants or transmission lines, States do. The ability of
the Federal Government to help is limited, however, we do care
about what is happening in California and the West, and we do
want to do what can be done if what we do is a positive step in
the right direction. We certainly want to help California avoid
blackouts and deal with any blackouts that must occur.
If there are new supply related Federal authorities that
Congress should consider extending to the States in this
electricity crisis, the subcommittee wants to hear them today.
The time for addressing the expected summer supply problems is
upon us. If we are going to act legislatively, we need to begin
that process next week.
I am sending to the White House a list of ideas at the end
of this week, hopefully to consider on how to address the
problem. Perhaps we can work with the State authorities in
Sacramento on a bipartisan basis to do this.
I welcome you gentlemen here today. We are going to have a
good hearing. I would now like to turn to my ranking member,
Mr. Boucher, for an opening statement.
Mr. Boucher. Thank you very much, Mr. Chairman. I will be
brief in my comments this morning so that we can turn rapidly
to the testimony of our witnesses.
The testimony to be presented this morning involves that of
a wide range of parties with an interest in the western
regional electricity market. This subcommittee's deliberations
will be assisted substantially by the views of this morning's
witnesses concerning several key questions. First, has the
Federal Energy Regulatory Commission done enough to ensure that
the prices for wholesale power transactions are just and
reasonable, and what additional actions, if any, should be
taken by the FERC to address the problems that affect the
western regional electricity market?
Second, what measure of confidence should this Committee
take in the actions by the State of California, either actions
taken to-date or those that can be reasonably anticipated, to
address these concerns?
And, finally, what recommendations, if any, do our
witnesses have for Federal legislative approaches that now may
be necessary either to address the problems of California and
the Western States, or to prevent similar problems from arising
elsewhere?
I want to commend Chairman Barton for the careful and
thorough examination which this subcommittee has undertaken of
the western regional electricity problem. Through four
hearings, we have been given the opportunity to review the
malfunctioning of the market in detail, and a sound record has
been established upon which to decide what actions, if any,
this subcommittee should now take.
I thank the chairman for his cooperative approach, for this
careful review and, along with him, I look forward to the
witnesses' testimony.
Mr. Barton. Thank the gentleman for his statement. By prior
agreement with the minority, those are the only opening
statements that we are going to have today. All other members
that wish to put an opening statement in the record, if you
will submit it to us in writing, we will make it a part of the
permanent record of the hearing.
We are going to start with you, Mr. Keese, and we are going
to go right down the line, ending with Mr. Cooper. We will give
you 6 minutes. If it takes longer than 6 minutes, we will give
you a little bit longer than that. We have got seven other
witnesses, so we can't give you unlimited time, but we do want
to hear from you.
I said, as you were coming in, we do appreciate you coming.
You have got a very difficult job. I have heard nothing but
positive things about your attempts to keep the plants
operating and to get new plants sited, so we are very
interested especially in any ideas that you might have on how
we can help expedite the siting process.
Welcome to the subcommittee.
STATEMENTS OF HON. WILLIAM J. KEESE, CHAIRMAN, CALIFORNIA
ENERGY COMMISSION; ALAN C. LLOYD, CHAIRMAN, CALIFORNIA AIR
RESOURCES BOARD; S. DAVID FREEMAN, GENERAL MANAGER, LOS ANGELES
DEPARTMENT OF WATER & POWER; STEVEN L. KLINE, VICE PRESIDENT
FEDERAL, GOVERNMENTAL AND REGULATORY RELATIONS, PACIFIC GAS AND
ELECTRIC COMPANY; JIM POPE, ELECTRIC UTILITY DIRECTOR, SILICON
VALLEY POWER; WILLIAM F. HALL, VICE PRESIDENT WESTERN REGION,
DUKE ENERGY NORTH AMERICA; LAWRENCE MAKOVICH, SENIOR DIRECTOR,
CAMBRIDGE ENERGY RESEARCH ASSOCIATES; AND MARK COOPER, DIRECTOR
OF RESEARCH, CONSUMER FEDERATION OF AMERICA
Mr. Keese. Thank you, Mr. Barton. You have my written
statement, so if you will also enter that into the record, I
will be brief.
Mr. Barton. Without objection.
Mr. Keese. It is my pleasure to be here. And I would like
to focus my testimony this morning, California's efforts to
respond to the situation at hand--namely, a dysfunctional
electricity market brought on by a flawed deregulation plan in
1996.
Through the Governor's leadership, we have an aggressive
plan of attack. We are working nonstop, day and night, to
restore stability to the marketplace, bring down the prices,
and ensure that adequate electricity supplies are available now
and in the summer.
I am going to deal with the set of actions we are taking:
1) to increase energy supplies through expedited power plant
construction and other sources; 2) decrease energy demand and
increase energy efficiency; 3) expand the use of long-term
energy contracts; and 4) maintain the financial viability of
California's utilities. I will briefly hit each of these,
particularly focusing on generation.
I would like to say, as I start, that we hear a lot of
cliches about why California got in trouble last year--it was
inordinately hot, it was a low hydro year, we had unexpected
growth. Wrong, wrong, wrong.
Let me start with a myth. There are no generating
facilities under construction in California. We have six under
construction. We have three that will be completed by July 1.
Myth #2: With our high tech industry, we are an energy hog.
We have the lowest energy intensity in the West. Only Rhode
Island is lower in energy intensity than California.
Myth #3: Our environmental regulations and our reluctance
to approve power plant applications have created our current
shortage. We had no large major power plant submitted to the
Energy Commission during the 1990's. None. The two largest that
we licensed were not built because of economic reasons. Prices
were low in California. Had you built a plant in 1997, you
would have lost money in 1998, you would have lost money in
1999. However, with the certainty that has been assured in the
last few years, we now have 60 projects in front of us.
Let me, Mr. Chairman, make it clear, Governor Davis is not
interested in casting blame on anyone for the situation we have
inherited. Californians do not care who started the problem or
how it got started. They expect us to solve it and get the
State back on course. We fully intend to do that.
Let me talk about generation for a moment. In the past 2
years, the Energy Commission has approved 13 power plants, with
generating capacity of 8,400 megawatts. We currently have 15
more major power plants under review, for an additional 6,700
megawatts.
Roughly 15,000 megawatts in the process. A majority of
those that are in the process will be finalized by the end of
May of this year. We have a 1-year process at the Energy
Commission. Through an Executive Order issued by Governor Davis
last month, we now have an expedited siting process of 21 days.
Let me explain personally what that means.
The Palm Springs peaking plant as filed on March 16. I will
be holding a hearing on Tuesday. We will take it to the
Commission on April 4. It will be, if appropriate, approved.
Mr. Barton. If appropriate.
Mr. Keese. Governor Davis asked President Bush to direct
Federal agencies to expedite Federal permit reviews to go along
with us, and the President has issued a memorandum calling on
agencies to comply with our timetable, and we are very
appreciative of that effort.
Through all of these efforts, we anticipate bringing 5,000
megawatts online this summer. That is an aggressive goal. We
have not given up on it. We will work at it.
Let me deal with conservation initiatives. Governor Davis
initially called on Californians to reduce their energy
consumption by 7 percent. Last month, consumption was down by 8
percent, in our opinion. The State has vowed that when we are
in Stage II, we will reduce State usage of power by 20 percent.
We are on our way toward meeting that goal.
Specific measures of the conservation plan include an $800
million package for energy efficiency and renewable energy, and
aggressive conservation measures in State buildings. Let me
mention, the Governor announced his ``20/20'' program last
week, in which consumers who reduce their energy use by 20
percent will get a 20 percent rebate. That is his promise.
Earlier this week, we signed, at the Energy Commission, 12
grants and contracts for $9 million to install ``energy smart''
technology in commercial and industrial buildings. This itself
should save 93 megawatts.
On stabilization issues, getting our market back to where
it should be, we have made significant progress in the last few
weeks, particularly by reducing our reliance on the spot
market. On Tuesday night, Governor Davis announced that the
State, through the Public Utilities Commission, will take
immediate steps to restructure the contracts between our QFs
and the utilities. QFs will have the option of 5- or 10-year
contracts.
I am going to leave the details of the stabilization plan
to someone on my left who knows much more, Mr. David Freeman.
As you know, in the transmission area, we continue
negotiations with the utilities. We believe that acquiring the
transmission lines would enable the State to gain a valuable
asset, at the same time allowing utilities to regain their
financial solvency. The State's ownership would also ensure
that critical and necessary infrastructure improvement in
projects can be undertaken.
Where are we going from here? Mr. Chairman, I believe you
will see that we are aggressively pursuing every remedy
available to us in an effort to increase generation, reduce
demand and lower prices, but the Federal Government must
intervene to help us fix a dysfunctional electricity market by
reining in unacceptably high wholesale energy prices.
Earlier this month, the Governors of California, Oregon and
Washington called on the FERC to adopt a temporary cost-based
regional price cap that would allow generators to recover all
of their costs plus a reasonable rate of return.
While I understand this is a controversial proposal, there
are several points worth noting. First, the regional price cap
would be temporary in nature. Second, generators would have the
ability to recover all of their operating costs and receive a
return. This proposal embodies the kind of bold, decisive
action we are seeking from FERC. If FERC refuses to exercise
its full authority under the law to restore price stability, we
believe it is only appropriate for the Congress to do it for
them.
Mr. Chairman, California is determined to tackle the
problem at hand. We are working feverishly to reverse course.
At the same time, we need your assistance in partnering with us
to encourage a responsible plan of action on the part of FERC.
Thank you for being here. Thank you for allowing me to be
here, I would be pleased to answer any questions.
[The prepared statement of Hon. William J. Keese follows:]
PREPARED STATEMENT OF WILLIAM J. KEESE, CHAIRMAN, CALIFORNIA ENERGY
COMMISSION
Thank you, Mr. Chairman, for inviting me here this morning. I
appreciate the opportunity to testify before the Subcommittee in my
role as Chairman of the California Energy Commission (CEC).
I would like to focus my testimony this morning on California's
efforts to respond to the situation at hand--namely, a dysfunctional
electricity market brought on in large part by a flawed deregulation
plan in 1996.
The State of California, through the leadership of Governor Davis,
has developed an aggressive plan of attack. We are working nonstop to
restore stability to the marketplace, bring down prices and ensure that
adequate electricity supplies are available now and in the summer.
Towards this end, California has launched a comprehensive set of
initiatives in four fundamental areas: 1) increasing energy supplies
through expedited power plant construction and other sources of power
generation, 2) decreasing energy demand and increasing efficiency, 3)
expanding the use of long-term energy contracts rather than relying on
the volatile and expensive spot market, and 4) maintaining the
financial viability of California's utilities.
I will elaborate briefly on each of these issues, with a particular
focus on our generation development initiatives. But before proceeding
further, I would like to dispel a few myths surrounding California's
electricity situation.
MYTHS AND MISCONCEPTIONS
Myth #1: There are currently no new generating facilities under
construction in California. To the contrary, four months into the Davis
Administration, new power plants began to be approved. Thirteen have
been approved and six are under construction.
Myth #2: California, with its high tech industry, is an energy hog.
The reality is that California's per capita electricity usage ranks the
lowest in the Western region. Nationally, only Rhode Island uses
electricity at a lower rate per capita than California. Our state's
energy demand has grown at a rate of only 1.2% per year, which is
considerably lower than other Western states such as Oregon, Nevada,
Idaho, Utah, Arizona, Colorado and New Mexico.
Myth #3: California's environmental regulations and a reluctance to
approve power plant applications have created our current shortage.
While it is true that no major power plants were built in California
from 1986 to 1998, the reasons had nothing to do with environmental
regulations. The reality is that generation failed to keep pace with
supply because of over-reliance on the market to determine additional
need, as well as regulatory uncertainty associated with restructuring
and deregulation.
The enactment of the Energy Policy Act of 1992 spearheaded a
movement away from planning and toward a reliance on the market to
decide when additional power plants would be built. The 1992 law, and
resulting discussions on deregulation, introduced great uncertainty
into the generation development market and discouraged developers. This
factor, along with low energy prices during the mid-1990s, resulted in
no major power plants built in California.
CALIFORNIA'S CURRENT EFFORTS
Mr. Chairman, Governor Davis has made it clear that he is not
interested in casting blame on anyone for the situation we have
inherited. Californians do not care who started the problem and how it
got started. They expect us to solve it and get the state back on
course. We fully intend to accomplish this mission.
As I stated earlier, California has embarked on an aggressive
course of action in the areas of generation, conservation, and
stabilization. Let me touch upon each of these areas.
GENERATION DEVELOPMENT INITIATIVES
We are determined to develop additional energy supplies in an
expedited manner to meet this summer's anticipated demand. Towards this
end, an all-out effort is underway in California to bring new plants on
line and fully operational.
In the past two years, the Energy Commission has approved 13 power
plants with generating capacity in excess of 8400 megawatts. There are
currently 15 more projects under review with an additional 6700
megawatts of capacity.
Through an Executive Order issued by Governor Davis last month, the
Energy Commission has instituted a new streamlined review and licensing
process. Natural gas fired or renewable ``peaking'' power plants that
can be in full operation by the 2001 peak demand period and provide
power to California residents are eligible for an expedited permit
process. The Energy Commission will complete the permit process for
these emergency peaking facilities within 21 days. CEC staff is
currently utilizing this expedited process for several proposed peaker
power plants, including one in Palm Springs.
Another component of California's generation program centers around
financial incentives to plant owners and local governments. Developers
who can complete construction and bring plants on line before August 1,
2001, will receive an acceleration bonus of $1,000,000 for a 50-
megawatt facility. This applies to distributed-generator, co-generator,
or peaker power plants. In addition, local government agencies that
expedite the permitting process for the siting of new plants will
receive $10,000 per locally approved megawatt.
Additionally, Governor Davis asked President Bush to direct federal
agencies to expedite federal permit reviews for power projects. He has
granted this request and issued a memorandum calling on agencies to
comply with our timetable. The Davis Administration greatly appreciates
the President's cooperation with this effort.
Through all of these initiatives, we anticipate bringing 5,000
megawatts on line this summer. 1,640 megawatts will come from three
plants we have already approved, plus one plant that was licensed in
December 2000 under a previous expedited permitting procedure. We
expect to pick up approximately 3,800 megawatts through distributed
generation, cogeneration, peaker and renewable energy facilities.
Looking ahead to summer 2002 and beyond, we anticipate an additional
5,000 megawatts next summer and 10,000 megawatts by 2004.
The bottom line is that we are moving at warp speed to put new
generation on line by accelerating the permit process, providing
financial incentives and taking other measures under the Governor's
emergency authority. We fully expect to meet our goal of securing 5,000
additional megawatts this summer to meet the peak demand period.
CONSERVATION INITIATIVES
Last month, the State unveiled a conservation strategy that
includes, among other programs, appliance rebates, incentives to reduce
commercial lighting, and a public media campaign. Governor Davis
initially called on Californians to reduce their energy consumption by
at least 7% and pledged that the State would cut consumption by 20%
during Stage II alerts.
Mr. Chairman, California has answered the call. Our businesses and
consumers reduced energy consumption last month by 8%. Our data shows
that electricity demand went down by 2,578 megawatts in February. As a
result, the Governor is now asking Californians to conserve at least
10%.
Specific features of our conservation plan include the following
items:
<bullet> $800 million package of incentives and rebates for
conservation and efficiency efforts.
<bullet> Aggressive conservation measures in state buildings, resulting
in 200 megawatts of savings during energy emergencies.
<bullet> Comprehensive outreach and education campaign to reach
businesses, organizations, and millions of California
consumers.
<bullet> Partnerships with private sector businesses and organizations
to reduce energy use.
<bullet> Retrofitting government buildings for energy efficiency.
<bullet> Adoption of the strongest energy efficiency standards in the
world for residential and non-residential buildings and
appliances.
<bullet> Incorporation of energy efficiency, sustainable building
designs in new state building projects.
Additionally, just last week, California created an innovative
energy rebate program. The ``20/20'' program will provide a 20% rebate
to customers who reduce their electricity consumption this summer by
20% over last summer's levels. It is a voluntary program that will
cover both households and businesses in California. If only 10% of our
residents and businesses achieve the 20% reduction, it will reduce our
state's overall peak consumption this summer by as much as 2,200
megawatts, thereby eliminating the need to purchase as much as $1.3
billion in additional energy.
Finally, the Energy Commission earlier this week signed 12 grants
and contracts totaling over $9 million to install ``energy smart''
technology in commercial and industrial buildings throughout
California. These agreements will account for about 93 megawatts of
projected savings from buildings outfitted with demand responsive
building systems technology. With these grants in place, our state will
continue to be the national leader in energy efficiency.
STABILIZATION INITIATIVES
Over the last month, we have made significant progress in
stabilizing the market by reducing our reliance on the spot market. The
state's flawed deregulation scheme led to 30% of all electricity
purchases to be made on the spot market. The spot market represented an
inexpensive source of power during the first two years of
``deregulation''. However, we are currently paying between 500 to 900
times what we paid for electricity last year on the spot market. This
is in spite of the fact that the single greatest hour of electricity
usage in 2000 was actually lower than any peak demand period in 1999 or
1998.
Before I continue with the issue of spot markets, I would like to
call your attention to a recent development on an important matter
related to this week's blackouts in California. It has to do with our
efforts to keep ``qualifying facilities,'' or QF's, up and running.
As you know, QF's produce alternative forms of energy, such as
wind, solar, geothermal, biomass and cogeneration. QF's account for
roughly 25% of California's electricity.
Why did California experience blackouts earlier this week? The
primary reason centers around the fact that many of these QF's have not
been paid by utilities. As a result, they ran out of money and shut
down. California lost several thousand megawatts due to this action.
On Tuesday night, Governor Davis announced that the state, through
the California Public Utilities Commission (PUC), will take immediate
steps to restructure the contracts between QF's and utilities. QF's
will have the option of choosing 5- or 10-year contracts, and the
contracts will indicate that payment will be forthcoming starting April
1, 2001.
This effort, which is based on earlier negotiations led by State
Senators Jim Battin and Debra Bowen and Assemblyman Fred Keeley, will
ensure that QF's remain in operation and be made financially whole.
QF's are the only generators in California that are not being paid
for the power they have produced. Governor Davis strongly believes that
QF's have been good corporate citizens and that we have a moral
obligation to move quickly to fully compensate alternative energy
producers in California.
The PUC will take action on this proposal next Tuesday. We
anticipate a final resolution to this matter in the very near future.
Returning to the issue of spot markets, the Subcommittee should be
aware that California is mounting a major effort to greatly reduce
California's reliance on the spot market. Governor Davis earlier this
month announced the signing of 40 long-term contracts and agreements
between the State of California and companies such as Calpine, Duke,
Dynegy, Enron, Reliant, Williams, Sempra, Merrill Lynch, Morgan
Stanley, El Paso, Constellation, Panda, Cal Peak, Avista, PX BFM,
PacifiCorp, and Primary Power. The long-term contracts and agreements
are fairly evenly divided between three-year, five-year, and ten-year
lengths, with one contract for 20 years. Together they provide:
<bullet> A total of 629,000,000 megawatts in a diversified long-term
portfolio over the next ten years, with 5,000 megawatts
scheduled to come on line within 24 months and some as early as
this summer.
<bullet> An average of 8,886 megawatts per year over the next ten
years.
<bullet> 6,000 megawatts for this year, increasing to 10,000 megawatts
by 2004, and declining to 9,000 megawatts by 2010.
<bullet> An average price of $79 per megawatt for the first five years,
including ``superpeak'' periods. This is a 75% savings from
recent spot market prices.
<bullet> An average price of $61 per megawatt for the second five
years, including ``superpeak'' periods. This is an 80% savings
from recent spot market prices.
In addition, we continue to negotiate a plan to revitalize the
financial viability of the investor-owned utilities, which have been
virtually bankrupt by the unjust and unreasonable wholesale rates being
charged by generators and power marketers. The plan involves all three
utilities: Southern California Edison, Pacific Gas and Electric, and
San Diego Gas and Electric.
On February 23, 2001, Governor Davis announced an agreement in
principle with Southern California Edison. The State has agreed to
purchase the utility's transmission lines for an estimated $2.76
billion, which is 2.3 times the estimated book value, and to allow the
utility to issue bonds for a substantial amount of its debt. Southern
California Edison has agreed to do the following:
<bullet> Make payments of approximately $420 million from its parent
company, Edison International, to the utility.
<bullet> Commit the entire output of the parent company's Sunrise
Mission power project at low cost-based rates for ten years,
which has a value to ratepayers of $500 million over the next
two years.
<bullet> Provide cost-based rates from the generating facilities the
utility owns for another ten years.
<bullet> Grant to the State 99-year conservation easements over 20,000
acres of watershed lands the utility owns.
<bullet> Drop the utility's pending litigation against the California
Public Utilities Commission that could have resulted in
immediate higher electric rates for consumers if the utility
prevailed.
Negotiations continue with Southern California Edison, as well as
with the other two utilities, Pacific Gas and Electric, and San Diego
Gas and Electric.
We believe that acquiring transmission lines would enable the State
to gain a valuable asset while at the same time allowing utilities to
regain their financial footing. Under the plan, the State intends to
lease the transmission lines back to the utilities, which in turn would
assume day-to-day management of the transmission system. The State's
ownership of the transmission lines will also ensure that critical and
necessary infrastructure improvement projects are undertaken.
WHERE DO WE GO FROM HERE?
Mr. Chairman, California is aggressively pursuing every remedy
available to us in an effort to increase generation, reduce demand and
lower prices. We are fully prepared to meet the challenge head on. But
the federal government must intervene to fix a dysfunctional
electricity market by reining in unacceptably high wholesale energy
prices.
In addition to the serious economic harm to California and other
western states that will likely continue if stronger mitigation efforts
are not adopted by the Federal Energy Regulatory Commission (FERC), I
want to emphasize that the ``unjust and unreasonable'' prices being
charged by generators serve absolutely no useful end. They do nothing
to accelerate power plant construction in the short or long term.
Earlier this month, the Governors of California, Oregon and
Washington called on the FERC to adopt a temporary cost-based regional
price cap that would allow generators to recover all of their costs
plus a reasonable rate of return. Their request is based on a plan by
Commissioner Massey, who appeared before you earlier this week and
provided an overview of the proposal. If adopted by the FERC, this plan
would go a long way in protecting consumers and businesses from the
unpredictable nature of the current and add a much-needed dose of
stability.
While I understand the controversy surrounding this proposal, there
are several points worth noting. First, the regional price cap is
completely temporary in nature. Second, generators would have the
ability to recover all of their operating costs and receive a return.
For these reasons, I must take strong exception to the view that this
plan would discourage the development of new generation facilities. We
believe otherwise.
This proposal embodies the kind of bold, decisive action we are
seeking from the FERC. As Governor Davis has stated, high wholesale
electricity prices is an issue that falls squarely on the shoulders of
Washington. If the FERC refuses to exercise its full authority under
the law to restore price stability, we believe it is only appropriate
for the Congress to do it for them.
Mr. Chairman, California is determined to tackle the problem at
hand. We are working feverishly to reverse course. At the same time, we
need your assistance in partnering with us to encourage a responsible
plan of action on the part of the FERC.
Thank you for the opportunity to appear before you today. I look
forward to answering your questions.
Mr. Barton. It is my job to be here. You are here
voluntarily, and we appreciate that. I failed to mention that
Mr. Keese is the Chairman of the California Energy Commission,
so I want to give you the title. It took him about 8 minutes,
so we are going to set the clock for everybody else at 8
minutes. Feel free to give us back some time, but we want to
give you all the same opportunity.
We now want to hear from Dr. Alan Lloyd, who is the
Chairman of the California Air Resources Board. This is your
first appearance before the subcommittee. Again, we thank you
for voluntarily appearing. Your statement is in the record in
its entirety, and we recognize you for 8 minutes to elaborate
on it.
STATEMENT OF ALAN C. LLOYD
Mr. Lloyd. Hopefully I can save you 3 minutes. Thank you,
Mr. Chairman and members of the subcommittee. My name is Alan
Lloyd, and I serve as Chairman of the California Air Resources
Board. I am pleased to be here to provide an overview of
California's electricity challenge with respect to air quality
issues.
Governor Davis has embarked on a comprehensive strategy to
address the electricity situation. A major component of this
effort is to increase energy supplies by expediting the
construction of power plants and other sources of generation.
As of today, as Mr. Keese mentioned, 13 plants have been
approved, six are under construction, and three will be online
by this summer. Our goal is to bring 5,000 megawatts online
this year and 20,000 megawatts by 2004, to meet energy demands
this summer and beyond. A second component of our effort is to
maintain our existing generating capacity and allow it to
operate when needed.
Mr. Chairman, my main message is this: We can accomplish
these goals within the existing framework of California's air
quality regulations. Furthermore, environmental laws do not
pose a barrier in terms of our ability to bring new generation
online and ensure that existing power plants can operate at
maximum capacity. In short, we can increase energy supply in an
expedited manner while at the same time maintaining our
commitment to the environment.
Air pollution controls have been identified as a major
contributor to California's current energy challenge. That
perception is not accurate. Where air quality rules might have
affected or might have potentially affected the ability to
create power, we have moved swiftly to keep needed plants
online. Simply put, no essential electricity generation has
been curtailed due to air emission limitations. California
programs to protect public health are not a major factor in
electricity shortages experienced to-date.
Similarly, the allegation that environmental laws have
prevented bringing new electrical generation facilities online
is also erroneous. In the last 2 years, 13 major power projects
totally over 8,400 megawatts of additional capacity have been
fully permitted. Four of these units will be online this year.
Another 15 projects that comply with air quality requirements
are currently under review and can provide an additional 6,700
megawatts of capacity. All of these projects include the
necessary environmental offsets and utilize all required
emission controls. Compliance with air quality requirements
have proven to be both technically and economically feasible.
Finally, although existing air pollution laws and
regulations provide mechanisms for addressing our power needs.
Our processes can be streamlined. Governor Davis has used his
emergency powers to enable State and local agencies the ability
to apply flexibility and common sense to act quickly to ensure
that power generation will continue.
By issuing Executive Orders, Governor Davis has added
substantially to the State's ability to deal with our current
energy situation. These orders ensure that where statutory and
regulatory impediments exist, they will be swiftly addressed
and resolved. For example, for the Governor's action will allow
the operation of facilities that might otherwise face limits on
hours of operation. The expedited approval for new peaking
facilities and baseload units will provide emission credits to
new peaking plants.
The Governor's Executive Orders maintain all substantive
environmental protections. For example, new units must utilize
the best available control equipment, and must continue to
provide emission reduction credits to mitigate their emission
increases.
Permitting will take less time, but will not be less
protective. No single factor can explain the current energy
crisis, the matter obviously is far too complex. However, it
can be said with certainty that environmental laws are not to
blame. Under existing environmental programs and the policy
direction of Governor Davis, State and local regulators have
had, have used, and will continue to use flexibility to ensure
that power is supplied when needed and under environmentally
sound conditions.
While the review processes and decisionmaking timelines are
being streamlined, substantive environmental standards and
mitigation requirements have not been compromised.
In sum, the air quality regulatory system works. The
Governor's utilization of his emergency powers to expedite the
process of power plant siting while maintaining environmental
standards confirms that California can maintain its
environmental and economic objectives.
Thank you, Mr. Chairman, for the opportunity to testify
this morning.
[The prepared statement of Alan C. Lloyd follows:]
PREPARED STATEMENT OF ALAN C. LLOYD, CHAIRMAN, CALIFORNIA AIR RESOURCES
BOARD
INTRODUCTION
Thank you, Mr. Chairman and Members of the Subcommittee. My name is
Alan Lloyd, and I serve as Chairman of the California Air Resources
Board (ARB). I welcome the opportunity to provide an overview of
California's electricity challenge with respect to air quality issues.
SUMMARY
Over the past several months, Governor Davis has embarked on a
comprehensive strategy to address the electricity situation in
California. One of the major components of the State's plan centers
around increasing energy supplies by expediting the construction of
power plants and other sources of generation. Specifically, we are in
the midst of an aggressive effort to bring 5,000 megawatts on line by
this summer and 20,000 megawatts by 2004 in order to meet anticipated
energy demand this summer and beyond.
Mr. Chairman, my main message is this: We can accomplish this goal
within the existing framework of California's air quality regulations.
Furthermore, environmental laws do not pose a barrier in terms of our
ability to bring new generation on line and ensure that existing power
plants can operate at maximum capacity. In short, we can increase
energy supply in an expedited manner while at the same time maintaining
our commitment to the environment.
BACKGROUND
Air pollution controls have been identified as a major contributor
to California's current energy challenge. That perception is not
accurate. Air quality issues are a very small part of the State's
overall power production problem. Where air quality rules have affected
or might have potentially affected the ability to create essential
power, state and local regulators have moved swiftly and successfully
to keep needed plants on line. Simply put, no essential electricity
generation has been curtailed due to air emission limitations.
California's programs to protect public health are not a major factor
in the electricity shortages experienced to date.
No single factor can explain the current energy crisis. The matter
is far too complex. However, it can be said with certainty that
environmental laws are not to blame. Under existing environmental
programs and the policy direction of Governor Davis, state and local
air regulators have had, have used, and will continue to use, the
considerable flexibility included in California's regulatory programs
to ensure that power generating sources remain in operation under
environmentally sound conditions. While the review process and decision
making timelines have been streamlined, substantive environmental
standards and mitigation requirements have not been compromised.
HISTORY
Over the last several months, there has been an increasing focus on
environmental laws as contributors to the energy crisis. This concern
has taken two distinct forms:
1. The charge that environmental laws have prevented maximum
utilization of existing electrical generation facilities; and
2. The allegation that environmental laws have prevented bringing new
electrical generation facilities online.
There have also been charges that the State of California has not
been responsive enough in addressing the power issues, and has not been
willing to take the extraordinary actions needed to deal with how
environmental requirements have affected electricity production.
Mr. Chairman, I submit to you that these statements have diverted
attention from the true and complex causes of the current energy
situation. As a result, they have not contributed to productive efforts
to resolve it. I would like to briefly address each of these issues.
ACTIONS TO EXPEDITE REVIEWS AND PERMITS
Although existing laws and regulations provide mechanisms for
addressing our power needs, they can also require substantial time and
process. Governor Davis, through the exercise of his emergency powers
under state law, has significantly expanded state and local agencies'
ability to apply flexibility and common sense to act quickly to ensure
that power generation will continue.
By using his emergency powers and issuing Executive Orders,
Governor Davis has added substantially to the state's ability to deal
with our current energy situation. Executive Orders D-24-01, D-26-01,
and D-28-01 ensure that where statutory and regulatory impediments
exist--related to either the continued operation of an existing plant
or the construction of a new clean facility--they will be swiftly
addressed and resolved. The Executive Orders also provide that these
actions will be accomplished without sacrificing needed air quality
protections.
State and local agencies now have both the direction and the
authority they need to expeditiously review and approve permits. Under
the Governor's Executive Orders, they are:
<bullet> Allowing the continued operation of existing facilities that
might otherwise face limits on hours of operation.
<bullet> Expediting the review and permit approval for new peaking
facilities that have acquired the needed control technology and
mitigation, but need rapid processing to come on line quickly.
<bullet> Enabling new peaking plants to obtain emission credits needed
for permitting through the state, rather than arranging for
them through private transactions.
<bullet> Completing permit reviews and approvals for new large
facilities in as little as four months to enable new capacity
to begin construction expeditiously.
The Governor's Executive Orders maintain all substantive
environmental protections. For example, existing units must continue to
utilize all of the required emission control equipment, and must
provide funds to mitigate the impact of their increased hours of
operation. Similarly, new units must utilize the best available control
equipment and must continue to provide emission reduction credits to
mitigate their emission increases. Permitting will take less time, but
will not be less protective.
IMPACTS OF ENVIRONMENTAL LAWS ON EXISTING ELECTRICAL GENERATION
All central station electrical generating facilities are permitted
by local air pollution control districts under rules incorporated in
the State Implementation Plan (SIP). These permits reflect operator-
provided information, including factors such as intended hours of
operation and fuel type. This information has a direct bearing on the
facility's anticipated emissions. Based on operator-provided data,
emission limits are established through the air permits. It is these
operator-defined limits that have been at issue. In many cases, these
facilities are now in a position of having, or wanting to generate
additional electrical power in excess of the time periods assumed in
the original permitting process.
Despite this unanticipated high level of operation, through the
joint efforts of local air districts, the Air Resources Board (ARB),
and the California Energy Conservation and Development Commission
(CEC), as well as the assistance of the U.S. Environmental Protection
Agency (U.S. EPA), needed electrical generation has not been
interrupted. State law and local regulations provide several means to
address permit limitations without disruption of electrical generation
or unmitigated damage to air quality.
The ARB has assisted local air districts in addressing any
potential issues arising out of their efforts to maintain power
generation. ARB has maintained close coordination with the U.S. EPA to
ensure that state and local response to the energy situation does not
raise concerns at the federal level. We have approached the electricity
shortage with an environmentally sound balance of need awareness and
impact concern. U. S. EPA has indicated its understanding of the
complexities California is facing and has indicated a continued
willingness to assist.
At the Governor's direction, the ARB and air districts have been
able to balance the State's energy needs with the public's right to
clean air. Existing air quality regulations have provided the
flexibility to address expeditiously the unexpected power demands of
the State without material harm to air quality. These accommodations
have been completed in very short time frames and have ensured
continued power generation. This flexibility has been used numerous
times over the last six months to enable continued power production.
These have affected both large and small plants and are summarized in
Attachment 1.
The additional grants of authority to the Governor under the
Emergency Services Act augments existing statutes and increases the
ability of state and local agencies to work together in significantly
reduced time frames. Whether it is providing for an existing source to
operate beyond its permitted hours of operation or streamlining
certification of new peaking sources, the Governor's emergency
Executive Orders provide even greater flexibility in responding to
source specific generation issues than previously existed.
IMPACTS OF ENVIRONMENTAL LAWS ON BRINGING NEW ELECTRICAL GENERATION
ONLINE
All new proposed power plants must be constructed and operated in
compliance with applicable federal, state, and local air pollution
requirements. Within California, the 35 local air districts are
responsible for regulating emissions from stationary sources, including
power plants. At the state level, ARB is the agency charged with
coordinating efforts to attain and maintain federal and state ambient
air quality standards and comply with the requirements of the federal
Clean Air Act. To this end, ARB coordinates the activities of all the
districts in order to comply with the Clean Air Act.
Some have cited California's environmental laws as the reason new
power generation has not been built in recent years. However, a review
of CEC data demonstrates otherwise. Since April 1999, CEC has approved
13 major power projects (including one expansion) totaling over 8,400
MW of additional capacity. Six of these plants are under construction
and four of those six are expected to be on line this year, with start
dates spanning from July through November. Another 15 projects (new
sitings and expansions) are currently under review for an additional
6,700 MW of capacity. Lastly, there is still an additional 7,960 MW of
capacity that has been publicly announced and for which the CEC
anticipates receiving applications this year.
Some have also argued that costs of compliance with air quality
regulations are too substantial and must be relaxed to achieve needed
power generation. This argument is also flawed. Today, approximately
15,000 MW of new electrical generation has either been approved or is
in the licensing process. All of these projects have included the
necessary environmental offset packages and have incorporated all
required emission controls. Compliance with these requirements has
proven to be both technically and economically feasible.
To bring new, additional peaking facilities on line, Governor Davis
has created both a streamlined review process and an ARB-operated
emission offset bank. These actions will ensure that all necessary
peaking facilities can also be sited.
The CEC's siting process is designed to take 12 months. However, a
number of factors, other than environmental regulations, have recently
influenced individual project timelines. Over the last two to three
years, the actions of local activists, businesses, and others have
slowed the pace of some projects. In fact, power generators themselves
have utilized the siting process to hold up the licensing of a
competitor. Since 1997, competing companies have intervened in 12 of
the 21 projects proposed for licensing. Their participation has slowed
the process in at least four cases.
OPPORTUNITY FOR DISTRIBUTED GENERATION
Constraints on electrical generation capacity from central station
powerplants have caused increased interest in the use of distributed
generation (DG). DG is electrical generation at or near the place of
use. Governor Davis supports legislative action that will provide
incentives for distributed generation. Last September, the Governor
signed Senate Bill 1298, which directs ARB to establish a certification
program and adopt uniform emissions standards and general air quality
guidelines for DG technologies. By law, this program must be in effect
by January 1, 2003. ARB is on a fast track and expects to complete this
December--over a year ahead of schedule.
As the foregoing demonstrates, it is not environmental regulation
that has prevented the creation of additional power generation. Rather,
many factors have contributed to the current crisis. Among those is
also the fact that market participants can and do manipulate the
electrical power market by withholding capacity in order to maximize
their price of electricity.
Even the Federal Energy Regulatory Commission (FERC) agrees.
Although it found insufficient evidence of market manipulation by any
individual market participant:
``. . . there was clear evidence that the California market
structure and rules provide the opportunity for sellers to
exercise market power when supply is tight and can result in
unjust and unreasonable rates under the FPA--we reaffirm our
findings that unjust and unreasonable rates were charged and
could continue to be charged unless remedies are implemented.''
<SUP>1</SUP>
---------------------------------------------------------------------------
\1\ Order Directing Remedies for California Wholesale Market 91
FERC 61,294 December 15, 2000 (California Order 215 at pp. 33, 34).
---------------------------------------------------------------------------
CONCLUSION
The Air Resources Board is continuing its efforts to ensure that
California has the maximum electrical power output possible, while
still protecting public health and mitigating any adverse effects of
increased electrical output. This is being done within the confines of
existing law as recently expanded through the Governor's Executive
Orders. To quote Governor Davis, California is demonstrating that we
can cut red tape, build more power plants and continue to protect the
environment.
Our State's history reflects a pattern of success even in the face
of unparalleled challenges. California, the most populous state in the
nation, has made incredible strides in improving air quality and
protecting public health. At the same time, the State has enjoyed
immense population and business growth. During this current energy
situation, California will maintain its record of achieving a balance
among all the issues to ensure that a reasonable and successful
solution is achieved.
In sum, the air quality regulatory system works. The Governor's
utilization of his emergency powers to expedite the process of power
plant siting while maintaining environmental standards confirms that
California can maintain its environmental and economic objectives.
Thank you, Mr. Chairman, for the opportunity to testify this
morning.
Attachment 1
BACKGROUND PAPER ON FLEXIBILITY PROVIDED TO ENABLE EXPANDED OPERATION
OF EXISTING POWER PLANTS
March 16, 2001
SUMMARY: The Air Resources Board and local air districts have been
proactive and effective in working with power plant owners/operators
and the California Independent System Operator (ISO) to address
potential operating limitations resulting from existing air quality
permit restrictions.
BACKGROUND
--There are 35 local air districts in California responsible for
regulating emissions from stationary sources within their
jurisdictions, including power plants.
--District new source review (NSR) rules require major new or modified
sources of air pollution to install best available control
technology (BACT) and to mitigate any remaining emissions with
``offsets.''
--When originally constructed, many facilities voluntarily limited
their operating hours or fuel usage to keep emissions below
levels that would have triggered BACT and/or offset
requirements.
--Those choices reflected the original owner/operator's balancing of
forecasted electricity demand (i.e., potential profit), versus
the cost of controls at higher production levels. These
decisions also reflected the anticipated retirement of older,
less efficient and higher emitting units.
--Where chosen, operating restrictions were incorporated into each
facility's air permit and are subject to compliance action if
violated.
--Today, California power plants both need and want to operate longer
hours to meet the State's energy needs.
RECENT FACILITY OPERATIONS
--Due to the State's power shortage, the California Independent System
Operator (ISO) has requested that facilities operate more
frequently than they originally anticipated.
--As such, some facilities are exceeding, or expected to exceed, the
operating limits specified in their air quality permit.
--When it is determined that a facility may exceed its allowable
operating limit, the ISO, ARB, local air districts, and power
plant operators have negotiated operating agreements which
allow the facility's to help ``keep the lights on'' while
minimizing air pollution.
--Typically, the negotiated agreements provide for increased fuel use
or additional operating hours.
EXAMPLES OF SUCCESSFUL POWERPLANT NEGOTIATIONS
--AES Alamitos
--AES Huntington Beach
--AES Redondo Beach
--Duke Energy--Morro Bay
--Duke Energy--Oakland
--Los Angeles Department of Water and PowerReliant Energy--Mandalay
Unit 3
--Southern Energy Company--Potrero Peaking Turbines
See Attachment 2 for more detail.
Attachment 2
DETAIL ON SUCCESSFUL POWERPLANT NEGOTIATIONS
March 16, 2001
AES Alamitos
--AES operates the following facilities within the South Coast Air
Quality Management District: Huntington Beach, Alamitos, and
Redondo Beach.
--These facilities are subject to the District's RECLAIM NOx trading
program.
--The Alamitos facility exceeded its Year 2000 RECLAIM trading credits
(RTC) allocation and was issued a Notice of Violation by the
District.
--Based on available information, the Districts projected that the
Huntington Beach and Redondo Beach facilities would also exceed
their Year 2000 RTC allocations.
--The District and AES negotiated a settlement agreement based on the
principle of ``environmental dispatch'' (i.e., bringing cleaner
units on-line first).
--The settlement agreement also requires AES to: 1) install selective
catalytic reduction (SCR) or the equivalent on Alamitos units 1
thru 4, Huntington Beach units 1 thru 2, and Redondo Beach
units 5 and 6; 2) purchase sufficient RTCs to comply with
District rules; 3) deduct this year's excess emissions from
future year RTC allocations; and 4) provide $17M to mitigate
the impact of higher emissions.
Duke Energy--Morro Bay
--Duke Energy operates four utility boilers at its Morro Bay power
plant (two boilers rated at 345 MW and two rated at 170 MW).
--The permit to operate issued by the San Luis Obispo County Air
Pollution Control District limits the plant's NOx emission to a
cumulative of 3.5 tons per day.
--As a result of California's power shortage, the California ISO
requested that Duke Energy operate its Morro Bay facility more
frequently than allowed by the daily permit limit.
--On January 11, 2001, the District Hearing Board granted Duke Energy
an 30-day emergency variance that allows the facility to exceed
the daily emission cap during a Stage 1, Stage 2 or Stage 3
electrical emergency.
--The emergency variance also requires Duke Energy to pay a mitigation
fee of $7,800 per ton of excess NOx emissions.
--The District and Duke Energy are currently investigating the
feasibility of longer-term options to allow for extended
facility operation.
Duke Energy--Oakland
--Duke Energy operates six peaking combustion turbines at its Oakland
Power Plant.
--The operating permit issued by the Bay Area Air Quality Management
District limits the facility's annual hours of operation.
--As a result of the mid-January power shortage and need for additional
power, the operating restriction would not allow the facility
to operate to the extent it was needed.
--On January 18, 2001, Duke Energy submitted an application to the
District for a minor permit revision (increase limit to 877
hours per year), which would allow the facility to continue
operations.
--The District promptly reviewed the application and deemed it complete
on January 19, 2001. This action will allow the facility to
continue operating until a longer-term solution can be
identified.
--The District is in contact with Duke Energy to discuss the terms of a
possible agreement to allow operation in excess of the 877-hour
limit, as the turbines are expected to reach the limit in the
near future.
Los Angeles Department of Water and Power
--LADWP operates several power generation facilities within the South
Coast Air Quality Management District.
--LADWP is subject to the District's RECLAIM NOx trading program which
limits the facility's allowable operations.
--At the request of the ISO, LADWP operated their power generation more
than originally expected during the summer of 2000 to help
address California's power shortage.
--LADWP anticipated that it would deplete its RTC allotment before the
end of year 2000.
--The District and LADWP negotiated a settlement agreement which would
allow LADWP facilities to operate beyond the levels allowed by
their year 2000 RTC allocation.
--The settlement agreement includes the following mitigation measures:
--LADWP will install SCR emission control equipment on Haynes Unit
6 which meet a NO<INF>X</INF> emission limit of 7 ppm.
--LADWP will also install SCR on Valley units 1-3, Haynes units 3
and 4, Scattergood units 1-3, and Harbor units 6 and 7 if
deemed cost effective.
--LADWP will be liable to the District for the revenue resulting
from emission in excess of its RTC allotment. LADWP agreed
to provide a minimum of $14,000,000 to be used for
supplemental environmental projects which benefit the
residents of the South Coast Air Basin.
Reliant Energy--Mandalay Unit 3
--Reliant Energy operates a 120 MW natural gas-fired turbine peaking
power plant in Oxnard, CA.
--The permit to operate issued by the Ventura County APCD establishes a
limit on the facility's annual fuel consumption.
--Due to California's power shortage, the facility anticipated a need
to exceed its annual operating limit.
--On July 31, 2000, the facility entered into a compliance agreement
with the District which would authorize additional facility
operations (942 MMscf per year, equivalent to about 394 hours),
provided that: 1) Reliant would apply best available control
technology within one year; and 2) Reliant would pay an
emission mitigation fee of $4,000 for each hour of operation
above the permitted limit. The compliance agreement was
subsequently approved by the Ventura County Hearing Board on
October 5, 2000.
--On February 14, 2001, the District sent a letter to Reliant Energy
stating the enforcement requirements under which the District
would take no further action against Reliant Energy if the fuel
use limit were exceeded. The letter required Reliant Energy to
sell electricity generated using fuel in excess of the limit to
the California Department of Water Resources.
--On February 15, 2001, the District issued a letter broadening the
scope of the February 14, 2001 letter to allow electricity
generated using fuel in excess of the compliance agreement to
be sold to the ISO.
Southern Energy Company--Potrero Units 4, 5, and 6
--Southern Energy operates three oil-fired peaking turbines in the San
Francisco Bay Area.
--Permits to operate issued by the Bay Area AQMD limit operation of
each turbine to 877 hours per year. The limit was requested by
the prior owner to avoid costs associated with installation of
additional pollution control equipment and emission offsets.
--Southern Energy and the ISO informed the District that the facility
might need to exceed its annual operating limit to avert/reduce
the magnitude of firm-load shedding in California.
--The District exercised its enforcement discretion to allow Southern
Energy to operate its turbines for the remainder of calendar
year 2000 (December 15-31, 2000), subject to the following
criteria:
--The turbines may operate at the request of the ISO only under
specific circumstances:
--Potrero turbines are used as a last resort under emergency
transmission system conditions and to avert firm-load
shedding in the Greater San Francisco Bay Area.
Potrero turbines will operate up to 4 hours per day per engine,
only after declaration of a Stage 3 emergency.
--Southern must provide mitigation funds for excess emissions.
--Southern Energy shall pay civil penalties of $5,000 per turbine
per day for operation beyond permit limits.
--By June 1, 2001, Southern Energy shall provide the District with
an analysis of the feasibility of applying NOx controls on
the Potrero peaking units.
--As of January 1, 2001, the clock for the 877 hours per year permit
limit restarted. However, the turbines are expected to reach
the limits shortly. The District is in discussion with Southern
Energy regarding the possible terms of an agreement to extend
operating hours.
Mr. Barton. Thank you. I think that was exactly 5 minutes,
which is amazing.
We now want to hear from Mr. David Freeman, who is the
General Manager of the Los Angeles Department of Water and
Power, but he also has an additional duty, to coordinate the
contract negotiations for the State of California in purchasing
power on the open market for the incumbent utilities that are
on the verge of declaring bankruptcy.
Your statement is in the record in its entirety, Mr.
Freeman. We welcome you to the subcommittee.
STATEMENT OF S. DAVID FREEMAN
Mr. Freeman. Thank you. It is a privilege to appear before
you. In view of my multiplicity of duties, perhaps I should
simply say that I am a free man and I am testifying on my own
behalf this morning, so I won't get anyone in trouble, but I do
think I reflect the views of most Californians.
Let me first acknowledge, Mr. Chairman, our appreciation
for your coming to our State, putting in long hours of
hearings, and then having the miserable prospect of listening
to me late into the evening. I think that is above and beyond
your job and it is much appreciated.
Mr. Barton. It is actually a pleasure, and you always learn
by listening. I have enjoyed our conversations.
Mr. Freeman. That is correct, so I will try to be brief so
I can spend most of my time listening.
I also want to acknowledge the presence of two Members of
Congress who represent our area, Henry Waxman. It is a pleasure
to be before you. And as far as Congresswoman Jane Harman is
concerned, I think the record should show that she and I once
worked for the other side of the aisle. I don't know whether
everyone knows that or not.
Mr. Barton. Those are the good, old days, and you are
welcome to come back anytime you want.
Mr. Freeman. Well, what happened is that we passed and then
Mr. Dingell and company would straighten them out, and we would
spend long hours at the tune-in trying to get the legislation
straight. So, this is nostalgia for me.
Ms. Harman. Mr. Chairman, may I just make a comment, which
is we worked for the other body, not the other side of the
aisle.
Mr. Barton. I like the other side of the aisle better,
myself.
Mr. Freeman. I sit corrected. Let me first say that when we
talk about California, there ought to be a paragraph in each of
these stories saying, ``But not in Los Angeles.'' We are just
an old-fashioned utility, owned by the people of Los Angeles.
We kept our power plants. We added capacity while everybody
else was going to seminars on deregulation. We have 15 percent
reserves and then a little surplus. Our rates are stable. The
lights don't flicker. And we have a modest surplus that we
supply to the rest of the State from time to time.
Mr. Barton. At a modest profit, I am told.
Mr. Freeman. We learn from the Texans.
Mr. Barton. That is a good group to learn from.
Mr. Freeman. Amidst all the rabbit trails we chase, I think
there is a jugular issue here that needs to be stated, at least
my opinion of it, and that is that deregulation is a disaster
when there is a shortage. There is just no getting around it.
It is not that California did it wrong, it is just that this is
the oxygen of life, and when there is a shortage, the prices go
through the ceiling, especially when the Federal Energy
Regulatory Commission--which I had the privilege of serving as
Executive Aide to the Chairman in the early 1960's--does not do
its job.
The statute has not been changed, Mr. Chairman. Sam Rayburn
is turning over in his grave at what is happening now. That law
is on the books, and it is not being enforced. And it seems to
me that this Congress ought to either repeal the law or see
that it is enforced. It is not a discretionary thing.
Now, let me say to all these conspiracy-theory-types, they
are wrong. There is a real shortage. But the reason, as has
been explained here, is not environmental laws. Power plants
were not built in Utah or Montana or any of the other Western
States. It is what was explained about Chairman Keese, the
price was a dog-eat-dog competition price of 2.5 cents a
kilowatt hour in 1997, and the same capitalists would not
invest their money in a new power plant when they weren't going
to get a return at those prices. And so the power plants
weren't built in Utah and they weren't built in California.
And the new President is entirely correct, we have a
national energy problem, not a California problem. And I think
that one has to look at this and recognize that this is the
oxygen of life, natural gas and electricity, and the
marketplace just does not really do the perfect job, or an even
adequate job, for the producer or the consumer.
I don't know whether any other witness will say this to
you, but the reason we have a natural gas shortage is that the
market price got too low. Producers have said the same thing.
The market price was too low for electricity, so that we have
to have a hybrid system, in my opinion, where we let the market
fluctuate over a wide band, but have floors and ceilings,
because the volatility is what kills us. And it is a serious
lesson that I think needs--we need to put our ideology aside,
all of us. This is not an ideological issue, we are dealing
with the lifeblood of this civilization. And we do not have a
national energy policy, but the policy has to recognize that
just as in housing we supplement the market with some housing,
otherwise there wouldn't be any housing for poor people. We
supplement the market--the Federal Reserve supplements the
market with money. We have to have some presence to assure that
businesses can know what their price is going to be in the
future, and that drillers will know what they will get in the
future, or else they won't drill.
That is the burden of my testimony. Also, I want to say,
don't feel sorry for California. We are going to come through
this and be stronger than ever. I think that--I pray to you,
sir, I know you are sincere. You believe in State's rights. You
defended that issue a year ago, I recall, when people were
trying to rush through a bill. And I know this Committee is a
committee made up of people that are looking out for the public
interest.
We have underway in California a really large-scale effort
to move through this crisis and come out of it with a stronger
grid system, with stronger policies and, frankly, you will see
us ushering in the age of the fuel cell and the micro-turbine
and a whole set of new technologies. California will continue
to lead this Nation as it has in the past, in the field of new
technology and innovation.
And let us just do our thing and leave us alone, with
Federal legislation. If you can, help us; if you can't, make
the FERC do its job--and I understand how stubborn regulatory
agencies can be--but if you can't do that, at least my prayer
is, you let the Governor of the State go ahead with the various
programs that he has underway, a tremendous array of efforts
that will, I believe, contain this problem, and California will
emerge stronger than ever.
And my last plea, don't try to use California as an excuse
for messing up the Arctic Wildlife Refuge--please don't. The
people of California don't want that, and I don't think the
people of America want it.
Oil production has gone down steadily since 1970. The
supply side will not get us off all these imports. We have got
to get back to the statute that this Congress passed under the
leadership of Mr. Dingell and others in the 1970's, namely,
improving the mileage of cars and working on the demand side.
We are an old oil patch. We burned up the Prudhoe Bay oil
between the last crisis and this one, and we have to preserve
what is left of America the Beautiful. Thank you, sir.
[The prepared statement of S. David Freeman follows:]
PREPARED STATEMENT OF S. DAVID FREEMAN, LOS ANGELES DEPARTMENT OF WATER
AND POWER
The City of Los Angeles has an adequate supply of electricity at
stable prices. The reason is that we did not ``go down deregulation
road.'' We are still an ``old-fashioned'' utility owning our
generation, transmission and distribution, and maintaining 15 percent
reserves with a modest surplus from time to time.
Basic lesson of California's deregulation experiment is that it is
a disaster when there is a shortage of electricity especially when the
FERC fails to carry out its statutory duty to set ``just and
reasonable'' rates for electricity and natural gas transportation.
There is a real shortage, but the reason is not the environmental
laws in California. It is a fact that there was a surplus in California
before 1998. The wholesale price (about 2.5 cents per kWh) was too low
to encourage the construction of new power plants. No new power plants
were built in California, but they are not built in Utah either.
The surplus and the low prices discouraged new plants, while loads
grew. We ended up with the shortage and the high prices.The same is
true with natural gas where market prices at the wellhead fell to about
$2.50 per mmcf. Drilling slowed and now we have wellhead prices at
triple that amount.
There is a serious lesson to be learned from all this. A completely
free market for electricity and natural gas is too volatile for either
the producer or the consumer.
Deregulation can work over time only if the price is not allowed to
go so low that it does not reward new capital, and where the price is
not so high that it punishes the consumer and businesses alike.
Let us put all of our ideology aside and accept the fact that we
are dealing with the oxygen of life in a high-energy civilization. We
need a hybrid policy of ``floors and ceilings'' with a market price
fluctuating in between.
California has underway a program of massive conservation,
acceleration of power production, power purchases by the State, buy-out
of transmission lines and other facilities of the investor-owned
utilities to restore their financial health, and any rate adjustment
that may be necessary to assure that the State and the utilities can
pay their electric bills in the future. In addition, thelegislature is
in the process of enacting a California Power Authority that would be
the builder and conserver of last resort to assure that we move to a
surplus situation and maintain a surplus indefinitely.
We recognize that the current administration and various
legislators have their own opinion as to the California situation. My
personal plea is that you respect the principle of State's rights which
the new President has proclaimed.
Opinions and suggestions are certainly welcome and everyone can
profit from listening to the other person's point of view. But my
personal plea is that if the Federal Government is not going to help
us, the least it should do is to refrain from legislation that attempts
to tell us what to do.
We regret that FERC, under the previous administration, as well as
this one, doggedly fails to do its job. And we would appreciate the
Congress reviewing the Federal policy on wholesale prices and impose
controls on a cost of service basis during the period when the market
is clearly dysfunctional. We also appreciate any funds that would help
support our own very strong conservation efforts, but please don't use
the California energy crisis as an excuse to destroy the Arctic
Wildlife Refuge with drilling or any other sacrifice of this Nation's
natural beauty for any short-term inadequate production scheme.
The United States production of petroleum has gone steadily down
since 1970 despite periods of increased price and major subsidy. We
cannot produce our way out of energy shortages. It could come only
through a combination of major conservation and the development of
cleaner alternative sources, such as wind, solar, biomass, geothermal,
as well as natural gas and petroleum in areas where drilling is not the
enemy of America the beautiful.
Mr. Barton. Thank you, Mr. Freeman. Leave California alone,
huh? That might be a good motto.
We are going to hear now from Mr. Steven Kline, who is the
Vice President of Federal, Government and Regulatory Relations
for Pacific Gas and Electric Company. Your statement is in the
record in its entirety. We recognize you for 8 minutes, Mr.
Kline.
STATEMENT OF STEVEN L. KLINE
Mr. Kline. Thank you. Good morning, Mr. Chairman and
members of the subcommittee. This hearing comes at an
especially opportune time, with California experiencing rolling
blackouts in recent events. I would like to briefly share with
you our view of what the current situation is, how we got here,
and what, in our view, needs to be done both in the short- and
longer-term to resolve this crisis.
In terms of how we got here, or rather, where we are,
prices remain at very high levels as you have heard. February's
estimate average wholesale price in the wholesale market was
over $225 per megawatt hour. Supplies, you have heard, remain
extremely tight. Northwest hydro is at record lows, California
hydro is, at best, at 70 percent of normal levels.
On Monday and Tuesday, the California ISO ordered statewide
rolling blackouts, which is an extraordinary development under
any circumstance, but especially given that this is the low-
usage springtime period.
The outlook for peak usage summer period is especially dire
both in terms of price and supply, and the State's investor-
owned distribution companies and a number of small power
producers all teeter ever closer to bankruptcy.
How did we get here? I know you have heard a lot about
this, I am not going to belabor it, but clearly the problem is
fundamentally one of supply and demand. In addition, higher
natural gas prices across the country have led to higher
electricity prices.
I do want to stress that the problems in California are not
the result of the concept of opening markets. I don't believe
they are the result of the concept of deregulation. Basic
economics tells us that under any regulatory system, higher
demand, higher gas prices, shorter supply, will produce higher
prices--not necessarily the higher prices we are seeing in the
market today, but they would have produced higher prices, in
any event.
That said, California's approach to electric
restructuring--in essence, partial deregulation--made the
problem worse, and certainly contributed to the 500 to 1,000
percent wholesale price increases we have seen over the last 8
months.
The reasons, in more detail, are described in my written
testimony, require divestiture without contracts, total
reliance on spot market, inability to use bilateral contracts
or financial hedges, are designed to work in a system of
abundant supplies. As Mr. Freeman pointed out, California's
market structure clearly has not served customers well in a
period of short supplies.
And, finally, frozen retail prices have shielded consumers
from the real cost of electricity, including higher gas prices,
and they have nearly eliminated the signals in prices to make
energy efficiency investments and conservation, hence, demand
reductions real.
So, where do we go from here? California's energy crisis
cannot be resolved until supply and demand are back in balance.
In order to do that, we need to increase supply. We need
additional energy infrastructure, new clean and efficient power
plants, natural gas transmission and distribution, and high
voltage power transmission lines. In order to reduce demand, we
need energy efficiency investments and consumers ultimately
need to see accurate price signals. Over time, with
infrastructure investments and wise public policy, supply and
demand can be brought into balance, and the market will be
workably competitive again, as we believe wholesale prices
should then return to appropriate levels.
Having addressed that longer-term, let us talk about the
very short-term in the form of this summer. The challenge, in
our view, there is to moderate or limit electricity price
increases, while still sending the longer-term market signals
we all recognize we need.
In short, we need market-oriented solutions that attack the
supply problem first and encourage fast-track projects, as
Chairman Keese described, as well as demand-reduction
incentives which build on those that were initiated last
summer.
Even then, given the supply and demand imbalance we see, it
is not clear that these tools will fully mitigate the potential
economic impact, which leads us to the notion of temporary
price caps.
Historically, we have not supported price caps. In the
long-term, we believe they create market distortions and have
unanticipated and unintended consequences.
That said, based on our experience, we have come to
recognize that in cases where the power markets are clearly
broken--for example, where FERC has determined that prices are
not just and reasonable--short-term price caps may be warranted
and necessary.
We are very concerned that there is a good chance that
California and possibly other Western States are heading for a
meltdown this summer where, due to short supplies, the price of
power could increase from today's already high levels to
stratospheric levels this summer. That would inflict severe
hardship on households and economies of the Western States to
no good end; prices are already high enough to encourage new
generation and, as you have heard, that new generation is being
built as fast as it can be permitted and constructed not just
in California, but across the West.
In order to avoid such a meltdown, we think policymakers
should create a mechanism, which would allow either the
Secretary of Energy or the FERC to implement temporary price
caps, should these worst fears be realized. It seems only
prudent to start now to create such a policy tool and carefully
define how and when that tool can be used, including the
duration of use.
My prepared testimony sets out some thoughts on the
circumstances and limitations may be appropriate under those
circumstances.
What can be done now? State officials and stakeholders are
still working to craft a comprehensive solution. These efforts
are of paramount importance and are proceeding on an urgent
basis.
Beyond the necessary State actions, there is much the
Federal Government can do. Specifically, I believe, be prepared
to moderate prices this summer; encourage Regional Transmission
Organizations that are truly open and push open access
transmission systems across the country; accelerate permitting
of natural gas pipelines; streamline Federal agency review and
approval of energy infrastructure projects; encourage efficient
use of electricity through research and efficiency standards;
encourage continued development of renewable energy resources
by maintaining the existing renewables production tax credit;
and, finally, increase funding for low-income energy assistance
to help assure that those least able to pay continue to have
access to reliable energy.
Thank you for the opportunity to appear before you today. I
would be happy to answer any questions.
[The prepared statement of Steven L. Kline follows:]
PREPARED STATEMENT OF STEVEN L. KLINE, VICE PRESIDENT, FEDERAL
GOVERNMENTAL & REGULATORY RELATIONS, PG&E CORPORATION
INTRODUCTION.
Good morning Mr. Chairman, and members of the subcommittee. I am
Steven Kline, Vice President for Federal Governmental and Regulatory
Relations of PG&E Corporation. Thank you for the opportunity to testify
before you today, as you continue your examination of California's
electricity shortages and related price impacts across the West.
This hearing comes at an opportune time, with California
experiencing rolling blackouts in recent days. Let me share with you
what our current situation is; how we got here; and what in our view
needs to be done, both in the short and longer-term, to resolve this
crisis.
WHERE ARE WE?
As you know, wholesale electricity prices in California and the
West remain at unprecedented levels--the estimated average wholesale
price for February in California was $228 per megawatt hour, with no
relief in sight. Supply, both in terms of available megawatts and the
natural gas used to produce electricity, is extraordinarily tight.
Hydropower, in particular, continues to be short. At this point, it
appears certain that the availability of hydropower across California
and the Pacific Northwest will be substantially below normal. Our
utility currently forecasts hydro availability of about 70 percent of
normal and BPA continues to forecast hydro at around 60 percent of
normal.
As I mentioned, the California ISO ordered statewide rolling
blackouts because available supplies were inadequate to meet demand, an
extraordinary development to occur in the normally low usage
springtime. As we look to the peak usage summer season, the predictions
are dire. At best, according to the California ISO, the state will be
short 2 to 3 thousand megawatts for the summer, and that forecast may
not fully reflect current hydro conditions in the Northwest.
HOW DID WE GET HERE?
California's problem is fundamentally one of supply and demand:
statewide, between 1996 and 1999 electricity demand grew by 5,500 MW,
while supply grew by only 672 MW. The effects of this extreme imbalance
between supply and demand have been exacerbated by reduced hydropower
supplies and rapid economic and population growth across the West.
In addition, higher natural gas prices across the nation are
contributing to higher electricity prices.
The problems in California are not the result of the overall
concept of opening electricity markets to competition. Basic economics
tells us that under any regulatory system, wholesale power costs would
be substantially higher under the conditions I have just described.
That said, it is true that California's approach to electricity
restructuring, combined with short power supplies, have undoubtedly led
to the unexpected 500 to 1,000 percent wholesale power cost increases
experienced over the last eight months and to the resulting financial
crisis for the utilities.
California's restructuring approach required utilities to divest
their power plants and to purchase all of the power needed to serve
their customers on the volatile spot market. Further, until recently,
the use of long-term bilateral contracts or other price hedges were
also precluded. Designed to work in an environment of abundant power
supplies, California's market structure has not served customers well
under short supply conditions.
In addition, frozen retail customer prices have shielded consumers
from the real costs of electricity, nearly eliminating price signals to
make energy efficiency investments or to conserve, and thus reduce
demand.
WHERE DO WE GO FROM HERE?
California's energy crisis cannot be resolved until supply and
demand are back in balance. In order to increase supply, new clean and
efficient power plants must be sited and built, together with natural
gas transmission and distribution pipelines and high voltage power
transmission lines. In order to reduce demand, energy efficiency
investments need to be made <SUP>1</SUP> and customers need to see
accurate price signals. Over time, with infrastructure investments and
wise public policy, supply and demand can be brought into balance,
market forces will prevail, and wholesale prices should return to
appropriate levels.
---------------------------------------------------------------------------
\1\ Pacific Gas and Electric Company has long been a leader in
energy efficiency. The Company was honored to receive from the
Department of Energy and Environmental Protection Agency the Energy
Star award for ``Excellence in Consumer Education'' earlier this week.
---------------------------------------------------------------------------
In the very short-term, however, we anticipate major problems this
summer. The summer challenge is to somehow moderate or limit
electricity price impacts--while simultaneously sending the correct
market signals to promote supply-demand equilibrium. California and the
West will be scrambling to use all tools currently available to address
the problem. In California, that means 1) bringing power plants not
currently operating back on line; 2) siting and building additional
``peaking'' power plants in an expeditious manner; and 3) implementing
emergency demand reduction efforts. All three of these measures are the
best mechanisms available to address the very top of the demand peaks
that will occur--and to help mitigate prices without exacerbating the
supply problem.
In short, we must act immediately to provide market-oriented
solutions that attack the supply problem first and encourage fast-track
projects, such as is being done now with peaking units. In the interim,
a combination of supply and demand initiatives is imperative--
everything from the longer-term bilateral contracts being implemented
now between the state of California and suppliers, as well as demand-
reduction incentives which build on those that were initiated last
summer.
Even then, given the extent of the expected supply-demand imbalance
for this summer, it is not clear that these tools will fully mitigate
the potential economic impact. This leads us to consider legislation
that addresses temporary price caps in one way or another.
Historically, PG&E Corporation has not supported price caps; over
the long term, they create market distortions and have unanticipated
and unintended consequences. In a functioning market, they mask the
peak price signals that spur conservation, changes in usage patterns,
and investment in energy efficiency and new supply. Thus, price caps
often make matters worse.
That said, almost a year ago we recognized that in circumstances
where power markets are not fully competitive, short-term
implementation of price caps might be necessary. Therefore, we adopted
a corporate policy statement (attached) that addressed those
circumstances, which can be summarized as follows: where markets are
clearly broken--for example, where FERC has determined that prices are
not ``just and reasonable''--short-term price caps may be warranted.
With that context, I would like to address temporary price caps for
the Western energy market, for the summer of 2001. Based on what we
know today, there is a very good chance that California and possibly
other Western states are heading for a meltdown where--due to short
supplies--the price of power could increase from today's already
historically-high levels to sustained stratospheric levels for the
summer. That would inflict severe hardship on households and the
economies of the Western states to no good end; prices are already high
enough to encourage new generation, which is being built as fast as it
can be permitted and constructed.
In order to avoid that meltdown, policy makers should create a
mechanism, which would allow either the Secretary of Energy or the FERC
to implement temporary price caps, should worst fears be realized. It
seems only prudent to create the policy tool and carefully define the
circumstances under which that tool can be used, including the duration
of use. For example, any price cap should have an explicit start and
sunset date, for instance, May 1st and September 30th of this year. And
in order not to inadvertently discourage new, badly needed power
plants, the price cap should apply only to existing generation.
With respect to setting a price cap, it must be simple enough to be
easily administered, and it should allow suppliers to make a reasonable
profit. Most options being given serious consideration involve
benchmark rates that build up from a cost basis. Frequently discussed
are technology-specific caps that would cover suppliers' costs plus a
stipulated profit margin. Under this approach, caps would be set at
different levels based on the type of generating resource--natural gas,
coal, hydro, etc. Other options include fixed price caps at levels high
enough to accommodate input price fluctuations, such as variations in
the price of natural gas, or indexed caps equal to some multiple of
current input prices.
WHAT CAN BE DONE NOW?
State officials and stakeholders are still working to craft a
satisfactory resolution that assures reliability and public safety,
stabilizes retail rates to customers, addresses the longer-term
infrastructure needs while protecting California's environment, and
returns the State's utilities to financial health. These efforts are of
paramount importance and are proceeding on an urgent basis.
Beyond the necessary state actions, the federal government should
also do everything it can. Specifically, we believe the federal
government should:
<bullet> moderate prices for the summer;
<bullet> encourage Regional Transmission Organizations and truly open
access transmission systems;
<bullet> accelerate permitting of natural gas pipelines;
<bullet> streamline federal agency review and approval of energy
infrastructure projects;
<bullet> encourage efficient use of electricity through research and
efficiency standards;
<bullet> encourage continued development of renewable energy resources
by maintaining the existing renewables production tax credit;
and
<bullet> increase funding for low-income energy assistance to help
assure that those least able to pay are not left without access
to reliable energy.
Thank you for the opportunity to appear before you. I would be
happy to answer any questions you might have.
Mr. Barton. Thank you, Mr. Kline. We now want to hear from
Mr. Jim Pope, who is Electric Utility Director of the Silicon
Valley Power Authority in Santa Clara, California. Welcome to
the subcommittee for the first time. Your statement is in the
record. We will recognize you for 8 minutes to elaborate on it.
We apparently have a pending vote on the floor. We are
going to try to continue the hearing, so go ahead, Mr. Pope.
STATEMENT OF JIM POPE
Mr. Pope. Good morning. It is a privilege to be here. This
is my first opportunity to enjoy this exercise.
As you have heard, California is struggling, and struggling
makes you better, makes you tougher. Fixes are going to take
time, as you have heard. The Northern California Power Agency
is a strong proponent of a competitive wholesale power market,
as is Silicon Valley Power.
The Western power markets are dysfunctional and they lack
the conditions for a competitive market, and you have heard a
lot of examples of that.
While California's municipal utilities have fared well
during the crisis, we have not been insulated from this
dysfunctional market. Our utilities and our consumers have
suffered through blackouts and rate increases. NCPA and its
members have suffered economic hardships.
I have a customer that I recently shut two of the three of
their facilities because the recent blackouts caused their
furnaces to damage their product and they lost $2.7 million in
the January rotating blackouts. And they now are possibly going
to file bankruptcy.
According to the Los Angeles Economic Development Group,
$1.7 billion worth of economic loss was suffered by the State
in the rolling blackouts, two blackouts in January, and I
believe the blackouts we had last week probably doubled that
because we had the entire State rather than just Northern
California blacked out.
The municipals in the North have lost their summer
reserves. We have used hydro to keep the lights on in December
and January. We have operated our gas-fired power plants and
used up 20 percent of our energy credit or energy hours by the
Environmental Air Credit Rules in the month of January. We have
purchased power at the high market prices, and we have faced
rate increases. Some of our utilities, one like the Lassen
Municipal Utility District, may face 160 percent rate increase.
We have sold to the California ISO and we have not been
paid yet. But, as Mr. Keese pointed out, the State is taking
steps and we support the State streamlining of power plant
siting. We support the public ownership of transmission. We
support the supply side improvements of more generation.
NCPA members of Silicon Valley Power, Lompoc and Reading,
have power plants planned. I have got an RFP on the street for
four facilities in the city of Santa Clara to meet our growing
load. We believe that the air emission efforts can go further.
We support the energy conservation efforts. My customers
have curtailed over 30 megawatts of peak load last summer, and
are curtailing to the tune of 7 to 8 percent within the city of
Santa Clara, as is the city of Santa Clara.
State transmission acquisition: We support a transmission
Publico, and we support some improvement or replacement of the
California ISO, but we do have a couple concerns about the
State transmission acquisition.
It appears that the purchase price will be at a premium and
it will impact future transmission rates. Second, the municipal
utilities in Northern California and some in Southern
California have interconnection agreements with the investor-
owned utilities, and those must be respected in the
acquisition.
We must get the system upgrades and repairs done. I am the
Chairman of the Transmission Agency of Northern California, and
we are stepping forward with the Western Area Power
Administration to help offer assistance in those upgrades and
repairs.
The California ISO reform is critical. Transmission
additions on a statewide basis, our most critical congested
path is Path 15, which is the area in the center of the State
from essentially Modesto down to Fresno.
The Western Area Power Administration TANC in the State is
the fastest fix and, most recently, the ISO supported our
particular proposal at the California Public Utilities
Commission.
We need some appropriate Federal action. We need price
stabilizing rates in the West. You have heard a couple of
proposals. I don't really care what you call it, but we do need
something in the West to help us manage through this crisis for
an interim basis.
Non-jurisdictional utilities are part of the solution. The
municipal utilities make up a small share of the wholesale
markets. NCPA members in Santa Clara are net purchasers in the
wholesale market. Many of our sales have been at the request of
the ISO or the PX, and we were early and consistent supporters
of interim price protections. But there are no ``band-aid,''
``silver bullet'' solutions. The recent California experience
has taught us a number of critical lessons.
We believe FERC needs clear authority and direction on
Regional Transmission Organizations to promote truly effective,
regional and independent transmission management. Markets are
regional, and the transmission system must be run in a manner
that supports interstate commerce.
Current transmission constraints, like Path 15, must be
eliminated. Ultimately, RTOs should have clear authority and
responsibility to plan and expand the transmission grid.
Federal transmission siting authority is also needed.
While there is a need for institutions to ensure
independent grid management, these institutions should have
minimal market involvement.
FERC must establish clear and effective rules to promote
sustainable competitive markets prior to granting authority for
market-based rates. Reformatting FERC's role so that it is an
effective market monitor, with clear authority and direction to
detect and correct market manipulation or abuse is critical and
needed.
In conclusion, the municipal utilities have only one
master. We live the obligation to serve. We buy resources,
deliver resources for our citizen owners. NCPA, Public Power,
Silicon Valley Power, continue to be part of the solution in
the State of California and the West, and not part of the
problem.
We look forward to working with the subcommittee in
promoting these objectives. Thank you.
[The prepared statement of Jim Pope follows:]
PREPARED STATEMENT OF JIM POPE, GENERAL MANAGER, SILICON VALLEY POWER
ON BEHALF OF THE NORTHERN CALIFORNIA POWER AGENCY
Mr. Chairman, members of the subcommittee, thank you for this
opportunity to testify on the current electricity crisis and the
corrective steps that can be taken. I am Jim Pope, general manager of
Silicon Valley Power--the municipal utility serving the city of Santa
Clara, California. I am testifying today on behalf of the Northern
California Power Agency (NCPA).<SUP>1</SUP> I also serve as Chairman of
the Transmission Agency of Northern California (TANC),<SUP>2</SUP>
another municipal joint action agency that is the principal owner of
the California-Oregon Transmission Project, the publicly owned high
voltage transmission link between California and the Pacific Northwest.
---------------------------------------------------------------------------
\1\ NCPA is a nonprofit California join powers agency established
in 1968 to generate, transmit, and distribute electric power to and on
behalf of its fourteen members: cities of Alameda, Biggs, Gridley,
Healdsburg, Lodi, Lompoc, Palo Alton, Redding, Roseville, Santa Clara,
Ukiah, the Port of Oakland, the Truckee Donner Public Utility District,
and the Turlock Irrigation District; and seven associate members: cites
of Davis, Santa Barbara, ABAG Power, Bay Area Rapid Transit District,
Lassen Municipal Utility District, Placer County Water Agency, and the
Plumas-Sierra Rural Electric Cooperative serving nearly 700,000
consumers in central and northern California.
\2\ TANC is a joint exercise of powers agency organized and
existing under the laws of the State of California. Among TANC's
purposes is the provision of electric transmission facilities and
services for the use of its Members. TANC's Members are the California
Cities of Alameda, Biggs, Gridley, Healdsburg, Lodi, Lompoc, Palo Alto,
Redding, Roseville, Santa Clara, and Ukiah; the Sacramento Municipal
Utility District; the Modesto Irrigation District; and the Turlock
Irrigation District.
---------------------------------------------------------------------------
Today, in California, we are struggling to develop solutions that
will get us beyond the mistakes that have been made in restructuring
the electricity market. NCPA has long supported steps to foster and
promote sustainable and effective competition in the wholesale
electricity market. Regrettably, the market conditions needed to
sustain effective wholesale market competition are not present in
California. It will take time, courage and coordinated state and
federal efforts to develop and implement both the near-term stopgap
protections and the long-term solutions. NCPA looks forward to working
with our colleagues in the industry, the State, Congress and FERC to
advance the necessary measures to ensure a reliable and affordable
power system.
CAUSES OF THE CURRENT CRISIS
While there is no value in finger pointing, it is clear that many
factors contributed to the current crisis--a crisis that spills beyond
California's borders and infects the regional power market. At its
core, the California and associated Western power markets lack the
conditions necessary for a competitive market: multiple sellers, ease
of entry, free flow of commerce and price transparency. In California:
<bullet> There is a shortage of installed and operable generation in
California. This shortage has allowed market participants to
withhold generation, strategically bid and game the system to
maximize profits.
<bullet> There is a shortage of transmission capacity within the State.
Alleviating current transmission constraints between northern
and southern California would have prevented the recent rolling
blackouts. However, no party has both the responsibility and
authority to relieve such constraints.
<bullet> There is a shortage of transmission capacity to import
electricity products from outside California.
<bullet> The absence of a seamless, independent regional transmission
system impedes commerce and narrows the relevant market.
<bullet> From its inception, the Cal ISO and PX lacked the proper
rules, procedures and mechanisms to promote competition,
monitor market conditions and take corrective action.
Market forces can only serve to check prices when competitive
market conditions exist. In the absence of such conditions, sellers are
able to dictate prices without suffering competitive responses that
reduce sales and revenue. Whether generators in the state collected
scarcity rents or excess profits, the result is the same: power prices
that can devastate the economy. As recent experience in California
demonstrates, market based rates only work when competitive market
conditions exist.
CALIFORNIA MUNICIPAL UTILITIES HARMED BY DYSFUNCTIONAL MARKET
The general perception is that California's municipal utilities
have been insulated from the volatile market. While it is true that
California's municipal utilities retained the generation assets needed
to serve load, our consumers have been far from insulated from the
dysfunctional market. NCPA and its members:
<bullet> Voluntarily participated in the Cal-ISO load curtailment
programs and have been subject to rolling blackouts--even
though we had sufficient resources to meet our native load. The
cost to high-tech industries of variations in power quality or
unanticipated supply disruptions is severe. For example, a
silicon chip manufacturer in the area may be pursuing
bankruptcy due to the recent January rolling blackouts. These
blackouts caused their furnaces to shutdown and stopped
development of the silicon chips that caused them to lose $2.7
million of product.
<bullet> Have drawn down the reservoirs at our hydro projects to help
meet the electricity demands of the state, putting at risk our
ability to generate power at these projects during the critical
peak Summer months.
<bullet> Operated gas-fired combustion turbines at the sole direction
of the Cal-ISO, using 20 percent of available air emissions in
the first 20 days of January (at a time when the plants would
usually not operate)--again reducing our ability to operate the
plants during the Summer.
<bullet> Purchased power from the market at rates above what would
exist in a truly competitive market. Another NCPA member, the
Lassen Municipal Utility District, faces a 160% retail rate
increase as a result of the high price of its market purchases.
While Silicon Valley Power has sold surplus energy in the
market, we are net purchasers and should not be punished for
what benefit we may receive when we sell surplus energy. To do
anything else is fiscally irresponsible for our citizen-owners.
<bullet> Sold power to the Cal-ISO, for service to the state's
investor-owned utilities, for which we have since been told we
will not be paid.
As consumer-owned utilities, the effects of these developments will
be felt directly and exclusively by our consumers. We have no
stockholders to ``share'' in the pain.
california's efforts to right the ship
As outlined above, there are many factors contributing to the
current crisis. The State has taken, or is considering, a number of
short and long-term actions to address the current crisis. I would like
to share with you my views on those proposals.
1. Supply Side Improvements
All parties agree that California desperately needs generation
additions. State siting laws, emissions limitations, investor
uncertainty, and public opposition have all contributed to the
inadequacy of current generation resources.
However, my utility and the other utilities within NCPA have built,
and will continue to build, desperately needed generation resources.
The Lompoc municipal utility, located in Santa Barbara County, is
looking at building a plant in cooperation with NCPA. In the Bay Area,
my utility (Silicon Valley Power) and others are looking at new
resources. We have been in discussions with merchant plant developers
for over a year and now have a Request for Proposal (RFP) on the street
for four sites within the City each ranging from 50 to 150 Megawatts.
It is not impossible to build new resources. In order to succeed,
project developers must exhibit both environmental and community
sensitivity, and advance smart, cost-effective technology choices.
The Governor's Executive Orders streamlining the siting process and
providing greater flexibility in air emissions are important first
steps--to maximize use of existing resources, jump-start generation
additions, and show that the State is committed to adding generation.
California municipal utilities believe these efforts can go farther.
For instance, the short-term waivers of hourly emissions limits apply
only to those plants under contract with the State Department of Water
Resources. We believe the waiver should be expanded to include
generation units owned by municipal utilities that are not under
contract with the Department.
2. Energy Conservation Efforts
The Governor and the State Legislature are pursuing important
energy conservation efforts. Demand reductions are the quickest way to
meet our energy needs for this summer, and it is incumbent on all
parties to take part in this effort. For example, Silicon Valley Power
was able to reduce our peak demand in summer 2000 by 30 Megawatts
through our customers' energy conservation efforts. Additionally,
during the rotating blackouts in January 2001, we were able to reduce
our load by 20 Megawatts as requested by the PG&E and CA-ISO.
With service to more than a quarter of the State's consumers,
municipal utilities are pushing for a proportionate share of state
conservation funds to allow us to assist our consumers in reducing
energy demand even further.
3. State Transmission Acquisition
NCPA supports the formation of a non-profit, public transmission
entity--or Publico--to replace the California ISO and own and operate
the transmission facilities within the state. The State is pursuing
purchase of the private utilities' transmission facilities as a means
of restoring the financial health of the companies and providing
collateral to the state.
While a state purchase of the transmission assets of the IOUs can
work, we have serious concerns with the framework of the proposed
acquisition. We are working with the Governor and others to address the
following issues:
<bullet> Purchase Premium--NCPA and its members depend on the
transmission facilities of Pacific Gas and Electric, one of the
State's three investor-owned utilities, to move power from our
generation resources to our member communities. Paying 2.3
times the book value to acquire PG&E's transmission assets
could raise our transmission rates significantly and make our
consumers pay disproportionately for the financial rescue of
PG&E. It is possible for the state to both purchase these
assets at a premium, and avoid increasing costs associated with
transmission, either through targeting the acquisition premium
to IOU consumers or through other savings. There is a point,
however, when the purchase price will outstrip the anticipated
value. We hope that the purchase price stays within the range
that does not require transmission price, or tax, increases to
our consumers.
<bullet> Interconnection Agreements--NCPA and its members have
interconnection agreements with PG&E that outline the terms and
conditions of our transmission service. It is our expectation
that any final agreement to purchase the IOU transmission
system should respect and extend existing interconnection
agreements.
<bullet> System Upgrades/Repairs--We believe the state should give full
consideration to the upgrades and repairs necessary in the
existing transmission systems of the IOUs. Any final
negotiations over price should reflect those anticipated
projects and costs. The publicly owned electric systems of
California, through TANC and SPPCA, have offered to assist in
this endeavor.
<bullet> ISO Reform--We continue to work on reaching an agreement to
participate in the Cal-ISO or some future, similar
organization. To date, the complexity and costs associated with
Cal-ISO membership prevent municipal utilities from joining.
Reform of the Cal-ISO should be tied to a state purchase of the
IOU transmission system.
We believe these issues can be adequately and fairly addressed,
either through the purchase terms or through Federal Energy Regulatory
Commission review of the asset disposition under Section 203 of the
Federal Power Act.
Fair, open access to the transmission system is critical to our
industry and consumers as a whole. NCPA believes that it is possible to
use the IOU's financial situation to accomplish this public good. We
agree that this opportunity should not be missed and that a reasonable
framework can be designed to accomplish both goals.
4. Transmission Additions
The transmission system within the State is woefully inadequate. We
believe that the current system must be both upgraded and expanded. One
critical component of this effort is Path 15--the major link between
northern and southern California.
Had the current Path 15 transmission constraint been eliminated, we
could have avoided the rolling blackouts that Northern California
experienced last June and this January. Relieving this constraint--
building a third, 95-mile line between Los Banos and Gates--has been
identified by the Cal ISO as the top transmission priority in the
state.
Given the financial position of PG&E and the uncertainty about
transmission ownership, alternative approaches are needed to fast-track
this project.
It is NCPA's belief that, given the current situation, the best and
fastest way to move this project is to support the federal Western Area
Power Administration (WAPA) as it exercises its role as the lead agency
for the environmental assessment for the project. WAPA performed
initial environmental and engineering work on the project. That
experience and familiarity with Path 15 will expedite the process.
Additionally, WAPA should be authorized to work on the design,
engineering and land acquisition activities for this project. In
addition, WAPA's ability to acquire rights-of-way could help to
expedite the construction process.
It is not necessary for WAPA to either construct or own the line. A
myriad of options are available. However, the line needs to be built,
and WAPA is in a position to help start the process more quickly than
any other entity.
At this time, we, cooperatively though TANC, are working with the
State to secure support and financial assistance. However, we believe
that federal support is also warranted and appropriate. The
arrangements with TANC and WAPA, which were the last successful
constructors of high-voltage transmission in the State, give the
highest probability of success for this project.
APPROPRIATE FEDERAL ACTIONS
I understand that the response of this Administration and many in
Congress has been for California to get its house in order before
looking for federal assistance. I believe the State is taking positive
steps, however, I believe federal action is also needed.
In the short-term, NCPA supports the need for price stabilizing
rates for the entire western wholesale power market. Consumers and the
economy are bleeding, and we must apply a tourniquet. Imposing price
stabilizing rates is neither a cure, nor a long-term solution. However,
it is an appropriate step to provide interim relief until the long-term
steps can be taken to support a competitive wholesale market. We are
willing to work with all parties to design this interim measure in a
manner that will maintain incentives for building new generation. I
understand some have raised concerns about the treatment of non-
jurisdictional utilities in any FERC-applied interim rate. I would urge
you to consider the facts and not be distracted by any jurisdictional
red herrings:
<bullet> Municipal utilities make a small share of total wholesale
market sales in California--with the majority of our generation
dedicated to serving native load;
<bullet> NCPA members are net purchasers on the wholesale market. We
must attempt to recover our variable, fixed and opportunity
costs when we make sales to offset the high prices we pay when
we are purchasing. To do otherwise would be fiscally
irresponsible.
<bullet> Many of our sales have been at the request of the Cal-ISO or
PX to provide needed power--and these sales have reduced our
ability to operate our plants to serve native load consumers
this Summer;
<bullet> We were early and consistent supporters of interim price
protections--and have pledged to voluntarily abide by any
interim pricing structure.
Another near-term step that the federal government can take is to
support the upgrades to Path 15 through clear authorization for WAPA to
participate in this project as a partner, and by providing the initial
funding that would be fully repaid by either the state, or the ultimate
owner of the line.
I hope, however, that we look beyond short-term ``band-aids'' and
take actions that address the underlying problems that plague the
Western market.
The recent California experience has taught us a number of critical
lessons:
<bullet> Without clear authority on RTOs, FERC accepted inadequate,
inferior and flawed filings from the Cal-ISO. FERC needs clear
authority and direction on RTOs to promote truly effective,
regional and independent transmission management.
<bullet> While California would be the 6th largest country in the world
based on GDP, it is not big enough to serve as a stand-alone
energy market. Markets are regional, and the transmission
system must be run in a manner that supports interstate
commerce.
<bullet> There are numerous transmission constraints in California that
have contributed to the rolling blackouts and locational market
power. While the Cal-ISO identifies these constraints, it has
no authority to take corrective action. Current transmission
constraints--like Path 15--must be eliminated. Ultimately, RTOs
should have clear authority and responsibility to plan and
expand the transmission grid. Federal transmission siting
authority is also needed.
<bullet> Creation of contrived markets--within the PX and ISO--don't
work and exacerbate market problems. While there is a need for
institutions to ensure independent grid management, these
institutions should have minimal market involvement.
<bullet> Markets do not work well when there are too few market
participants and scarcity of supply. FERC must establish clear
and effective rules to promote sustainable competitive markets
prior to granting authority for market-based rates.
<bullet> While there are conflicting accounts on whether generators
have exercised market power, manipulated supply and bids, taken
advantage of poorly designed market rules or simply profited
from scarcity, it is clear that there is little public
confidence in the current system. Reformatting FERC's role so
that it is an effective market monitor, with clear authority
and direction to detect and correct market manipulation or
abuse, is needed.
Congress and FERC have exclusive authority over interstate commerce
in the sale of electricity. The interstate market is not currently
working and will not sustain effective competition. It is critical that
the structure and mechanisms necessary for a competitive market be
established.
NCPA is a participant in the Electricity Stakeholders--a diverse
coalition supporting wholesale market reforms--and urges the Committee
to adopt legislation consistent with the Stakeholder principles.
CONCLUSION
NCPA remains committed in its belief that a competitive market is
beneficial to all consumers. However, such a market will not
miraculously appear simply by declaring markets deregulated. As the
California experience has demonstrated, deregulated markets that lack
the structure to support effective competition will simply cause
consumer and economic hardship.
California has begun to take steps that, if properly executed, can
help resolve the current crisis. But Congress cannot simply pass the
buck and watch the fall-out. Federal action must also occur. As a
first-step, FERC must re-impose regulatory discipline in the
uncompetitive western power markets. But we cannot stop there. Congress
must also provide FERC with necessary guidance and authority to promote
and monitor effective competition in the wholesale market.
NCPA looks forward to working with the Subcommittee in promoting
both of these objectives.
Mr. Barton. Thank you, Mr. Pope. We now want to hear from
Mr. William Hall, who is the Vice President for the Western
Region for Duke Energy North America, and he is headquartered
in Morro Bay, California. Your statement is in the record in
its entirety, and we recognize you for 8 minutes to elaborate
on it.
STATEMENT OF WILLIAM F. HALL
Mr. Hall. Thank you, Mr. Chair and members of the
subcommittee. My name is Bill Hall, and I represent the
California assets. I am based in California, and I have lived
there for 3 years. I represent a company who purchased those
facilities that is based in North Carolina, and I have a North
Carolinian accent. I have had the chance in the last few years
to travel up and down the State from San Diego to Sacramento,
participating in numerous public forums and hearings, and have
felt first-hand the frustrations, the anxiety and, at times,
the anger of Californians over the situation they are in. Duke
has continued to offer solutions and supply and risk-management
tools to the utilities and to the State to help mitigate this
issue as soon as possible. We have a long-term commitment to
the State.
I want to talk about some short-term actions we think need
to take place, as well as long-term, a few comments about who
we are in California, very quickly. We own four fossil
generating plants in the State, with a combined capacity of
about 3,300 megawatts, about 4 percent of the total capacity
available in the State. Those plants range in age from about 30
to 50 years.
Our plants produced in the year 2000 50 percent more
generation than they did in 1999, and we have in plants--and we
have actually permitted through Mr. Keese's agency, a project
at our Moss Landing Facility where by the Summer of 2002 we
will have 1,060 megawatt combined-cycle facility in service. So
we are investing in excess of $1.5 billion to bring new supply
on-line over the next few years to help the situation in
California. We also have plans to add within the West 6-7,000
megawatts of generation over the next three to 4 years.
Now, let me talk a minute about short-term actions. As you
have heard from the other panel members, we certainly have a
significant situation that we have already experienced
blackouts and we think certainly the Summer of 2001 and
potentially 1902 could be significant in terms of additional
blackouts, and we have some thoughts around what needs to be
done there.
First of all, Duke recommends a key Federal and State
agency should immediately form a Crisis Team made up of key
stakeholders capable of monitoring energy needs in the West,
and with the right people who can bring to bear the needed
actions to resolve problems as they arise this summer. We think
it is critical that Federal and State organizations work
together on this matter.
Next, we do have some units, some plants, that are
constrained due to emission limits. And we do applaud the
Governor and his Executive Orders to require the air and water
districts to work with us to see how those constraints could be
lifted. Mr. Lloyd and his organization have been very
cooperative, and we are making substantial progress. But at
times, we do have situations where Federal and State agencies
collide. U.S. EPA, for example, at one of our plants, they have
the overriding constraint on that plant, and we are going to
need the support of Region IX in that effort, and we ask the
subcommittee to help with Region IX in terms of the sensitivity
and need to rush forward with providing relief. And we are only
asking for relief in stage emergency events to help produce
more megawatt hours into the system.
We think it is going to be a real challenge to bring new
significant generation on-line this year. We appreciate Mr.
Keese's comments, but we also urgently ask that, again, Federal
and State agencies, in advance, identify where there are
conflicting issues, resolve those so once projects get into the
permitting process they don't buck up against those obstacles
in the process, they are resolved up-front and we can quickly
move through.
And, finally, the only real chance in California to
minimize blackouts this summer is through demand-side
management. The Governor has instituted many initiatives to
help out both the State agencies and consumers in California.
We ask the Federal Government, who has a significant presence
in California, to help with conservation, as well. The Governor
has a goal this summer of shaving 3,700 megawatts off the peak
during the summer months, and that is going to require
everybody's efforts.
Now let me talk about long-term actions--and long-term
means over the next 3 years because we think, fundamentally, we
have got to get between 15-20,000 megawatts of generation in
service by 2004 in California, and obviously other generation
in the West.
We think if a cohesive and successful program is to be
undertaken, the following issues must be addressed. We must
stabilize the existing business climate situation in
California. We must deal with the deficiencies in gas and
electrical transmission; deal with the robust wholesale markets
and retail markets; continue efforts to streamline permitting,
and look for a Regional Transmission Group which will help the
West. And I will talk about a couple of those very quickly.
As you know, the Governor is contemplating the acquisition
of the Utilities Transmission Grid as one means of helping them
with their debt situation. Duke takes a neutral position on who
owns the transmission grid, but we do ask FERC to work with
California to ensure that any transfer of utility transmission
assets will be conditioned to ensure open access, and that
California will integrate itself into a larger regional
transmission organization. You get consistent policy, you get
consistent pricing, and you get consumers who have more options
to go out and manage their portfolio of needs. So, we ask that
the transfer be conditioned such that no one can interfere with
interstate commerce or hamper the development of an effective
regional market.
Energy infrastructure issues: We have talked already quite
a bit about supply. Again, we encourage Federal and State
agencies to work together to streamline the process. A good
example is the Endangered Species Act, where the Federal
Government has certain species on their list, the State
doesn't, and we get caught in the middle trying to sometimes
deal with that and determine which agency prevails and what
sort of monitoring programs have to be put in place.
Also, the California ISO has identified most of the
significant bottlenecks on the electric transmission grid in
California, the most famous being the Path 15 constraint, and
we ask again that FERC and the State agencies work collectively
together to determine how we can make upgrades as quickly as
possible.
Let me also be candid here that while supply is difficult
to site anywhere in North America, certainly new transmission
projects are even more difficult. Nobody wants wires in their
backyard. So we also recommend that while we look at building
new transmission infrastructure, we look for other creative
ways as well, and that is to upgrade wires to strategically
place power plants on the grid near load centers, to get the
power into the needed areas of the State because building new
transmission projects will be difficult in California.
Intrastate gas transmission is of real concern. We have
already had rotating curtailments at our plants in Southern
California. There are simply not enough pipes and storage
capacity to supply the increased electrical generation from our
plants in Southern California, and the increasing core loads in
Southern California as well. So we think it should be a top
priority to build the infrastructure of gas system because, as
we build new power plants in the State--and they are natural
gas plants--we have got to be able to get the gas to the
plants, and that is a real concern. Again, FERC and the State
agencies, Public Utilities Commissions, it is important that
they work together in that manner. The FERC Order of March 14
begins the initial steps to create incentives and to reduce
obstacles to site both electric transmission and natural gas
upgrades. So we applaud FERC for their efforts.
Certain, a Utility Stabilization Plan, which Mr. Kline
talked about, is very critical. And the Governor and Sacramento
are working on that effort. We think it is very important that
we get loads--in this case, utilities--out of the spot markets
and into forward markets to mitigate their risk to wholesale
market volatility. In hindsight, certainly that was something
that was lacking. The laws or the regulations were designed
such that couldn't be done. And companies like Duke who do that
on the output side of our facilities, we manage our risk by
selling in the forward markets. Certainly, to protect consumers
in competitive markets, forward contracting should be one of
many products that they use to mitigate their risk to market
volatility.
So those are thoughts that we have. That concludes my
remarks. We look forward to working with both Federal and State
agencies to help solve the problems in California and the West.
We have a long-term commitment and we look forward to working
with you. Thank you.
[The prepared statement of William F. Hall follows:]
PREPARED STATEMENT OF WILLIAM F. HALL, VICE PRESIDENT, WESTERN REGION,
DUKE ENERGY NORTH AMERICA
Mr. Chairman and Members of the Subcommittee: Good morning. I am
Bill Hall, Vice President of Duke Energy's California operations. I
want to thank the members of this subcommittee for inviting Duke to
your hearing. As we collectively explore needed solutions for
California and the west, it is vitally important that all stakeholders
be heard in this process. I am a career employee with Duke Energy, and
am now based in California. So, I think I not only bring an industry
perspective to these discussions but a perspective that feels firsthand
the emotion and confusion over the events of the last 12 months. From
its initial entry into the California market in early 1998, Duke has
continued to offer solutions and ideas to the State's energy woes.
Today, I would like to offer Duke's thoughts on both near and long term
issues and our ideas for resolution.
Background on Duke's California Operations
Duke owns four fossil fired generating units in California, with a
combined capacity of 3,300 megawatts ranging in age from 30 to 50
years. In December 1998, long before the hint of an energy crisis, Duke
announced its intentions to develop an additional 1,500 megawatts of
combined cycle generation at an investment in excess of $1.5 billion.
In addition, Duke announced it would spend in excess of $100 million to
retrofit its existing assets with environmental control equipment and
perform upgrades to enhance reliability and flexibility. Our commitment
to California and the west is long term, we have plans to add an
additional 6,000 to 7,000 megawatts of generation in the west over the
next 3-4 years.
What Happened in California
The events of the last twelve months are well documented but I
think it's important to highlight a few key points. First, we should
remember that during the first 2 years of market operations, power
prices remained at or below initial expectations. In fact, on many
occasions power was sold during off peak hours at $0 per megawatt hour,
and during on peak at values typically in the $20-50 per megawatt hour
range. Why did this occur? The answer lies in market fundamentals,
there was an adequate balance between supply and demand. With adequate
supply to meet demand market prices remained at very attractive levels.
The state's utilities were able to pay down their stranded costs while
under a state mandated retail rate freeze by procuring their power
through the various available spot markets at prices well below the
rate freeze. However, this strategy failed miserably in 2000 when
wholesale prices exceeded the fixed retail tariff rates and utilities
had no hedging tools available to mitigate their exposure.
Over the last ten years California has enjoyed significant growth
in its economy. Since 1996 electricity demand in California has grown
by 25% while supply has grown about 6%. Up until the summer of 2000 its
economic growth and thirst for energy had been met through abundant
electricity imports, and weather patterns that produced abundant winter
rain and snowfalls and mild temperatures in the summer months. So
California's decision to rely heavily on cheap available hydroelectric
power from the northwest in the summer months and relatively cheap
fossil generation available from the southwest during the winter months
instead of building an adequate in state supply seemed prudent. This
combination of favorable weather patterns and abundant cheap power
lulled everyone in the west into a false sense of security.
Not only has California benefited from a robust economy, but in
fact most western states have seen their economies grow at similar or
even higher rates. Just last week census figures were released that
showed Nevada's population has grown at a faster rate that any other
state in the nation over the last ten years. In the summer of 2000, the
tremendous economic growth enjoyed by many western states coupled with
a very dry 1999/2000 winter and high seasonal temperatures produced
scarcity of a very valuable commodity . . . electricity. I have not
encountered anyone who has yet to profess his or her surprise at the
magnitude of the imbalance between supply and demand. The market is
reacting to the severe shortage of electricity supply and the resulting
fierce competition for this scarce commodity.
In addition to the scarcity of electricity, California is now
experiencing natural gas shortages due to the lack of available
intrastate gas transmission infrastructure. With the passage of clean
air laws in the early 1990's most California utilities switched to
burning 100% natural gas to meet compliance, as burning fuel oil
produced higher levels of emissions. With the increased demands on gas
fired generation the past twelve months, Duke's California plants
produced 50% more electricity in 2000 than in 1999, the gas
transmission system has been severely strained causing curtailments to
gas fired plants in southern California, and resulting price spikes of
natural gas that translate into higher electrical production costs.
California's energy infrastructure is severely challenged and must
be dealt with immediately and effectively. While efforts are being made
at the state level to improve the process, permitting and building new
power plants and gas transmission is a tedious and laborious effort and
will not be done overnight. As an example, at one of Duke's existing
sites where we are proposing to modernize the site with new gas fired
combined cycle technology it is anticipated to take 5 years to permit
and build the new plant due to NIMBY impacts. While there are numerous
opportunities to repair market policies and rules, this effort will be
to no avail if we collectively do not address the very basic of market
fundamentals, inadequate energy infrastructure.
Needed Solutions
The very nature of problem solving in this business requires
combinations of legislative, regulatory and investment schemes, all of
which involves multiple players including federal and state
governments, regulatory policy makers, suppliers and financial
institutions. Already the California legislature has introduced in
excess of 160 uncoordinated and conflicting bills, which send very
mixed messages to existing and potential suppliers. In order to resolve
these very complex issues California and the west, working
cooperatively with federal and state agencies, must commit itself to a
long term integrated energy policy that improves the investment climate
to stimulate supply buildup, puts the necessary legislation and
regulatory policy in place, and stabilizes energy prices for consumers.
If we are unsuccessful in our efforts we will see an immediate retrench
to a regulated environment. Even with the level of emotion and anger
all of you have seen coming from California in the last year, I must
say that those who ultimately desire to see competitive, unencumbered
markets in the west far outweigh those who seek a return to regulation.
However, as a resident of California for the last 3 years let me say
unequivocally that if we do not restore stability to the market in an
expeditious manner consumers will demand a return to regulation.
Remember, the events of last summer only exposed 10% of the state's
population directly to the volatility of the wholesale market. Already
we see a ``slowdown de-regulation'' ripple effect moving from the west
to the east.
In Duke's opinion the elements of a comprehensive energy policy
must include at least the following:
<bullet> Permit and build new supply quickly
<bullet> Institute appropriate retail tariff reforms that signal to
consumers the need to alter their consumption, while providing
them choices and tools
<bullet> Infrastructure improvements (electric and gas)
<bullet> Move towards a regional transmission framework with
appropriate market reforms
<bullet> Achieve these objectives while balancing the needs of the
environment
I will address Duke's thoughts on needed solutions in two
categories; the first being the very immediate and impending crisis
this summer, and second what needs to be done in the long term though
long term should not be viewed in the traditional sense of elapsed
time. Additionally, I will comment on those areas where the federal
government can assist California and the west in resolving its energy
problems in a timely manner.
Summer 2001 Outlook--Immediate Action
While there are varying opinions as to the potential severity of
this summer's pending crisis we should not make the mistake of pinning
our hopes on the cooperation of weather and new supply which has yet to
manifest itself. The signs of impending supply shortages are evident,
lack of rainfall and snow pack in the Pacific Northwest. The California
ISO has projected this summer's peak capacity will be about 10% shy of
peak demand. We must seek every way in which to responsibly free up
constrained megawatts, put new generation on the ground, and institute
aggressive conservation measures. Duke recommends the following actions
be taken immediately:
<bullet> Key federal and state agencies should immediately form a
crisis team capable of monitoring energy needs in the west and
when required bring to bear needed actions and decisions to
avert potential blackouts.
<bullet> In concert with the Governor of California's executive orders
to make available potential constrained megawatts at existing
facilities due to environmental regulations, the US EPA and
state agencies should seek resolution on existing emission
constraints that allow variances during periods of critical
short supply. Many existing facilities are mandated by federal
EPA Title V programs. Under normal hydro and weather years most
plants can operate within these limits, but the projected
increased demands on generating facilities in 2001 will result
in premature curtailments of generation. Appropriate and sound
methods should be developed that allow plants to operate in
critical periods while ensuring appropriate and reasonable
mitigation measures are employed to offset any increased
emissions.
<bullet> It is highly unlikely that any new significant generation can
be brought on line this year. While the Governor of California
has approved new legislation and issued executive orders to
streamline plant permitting the reality is there is little
hardware to bring into the State and the current regulatory
instability will deter suppliers from taking significant
financial risk. However, where new generation permitting is
feasible this year, then both federal and state agencies should
ensure adequate resources are made available to expedite permit
processing, both the federal and state government should make
this the highest of priorities.
<bullet> The only real chance California has this summer to avert
blackouts is through demand side management. Duke applauds the
Governor's initiatives over the last several months to incent
industry, small business and residential consumers to employ
energy efficiency programs and curb consumption during peak
demand periods. The Governor has a goal this summer of reducing
on peak demand by 3,700 megawatts. However, as long as
consumers are locked into fixed rates I'm afraid we will not
see an appropriate level of response to curb consumption. Let
me be clear that Duke is not advocating consumers be exposed to
wholesale price volatility with no protection. In conjunction
with the phase out of retail rate caps, utilities should be
given the ability to mitigate their price exposure and
consumers should have available tools to monitor and make wise
energy choices.
We should also be prepared to enact these same measures in 2002, as
no significant new supply in the west will come on line until 2003.
Starting the Process to a Long Term Comprehensive Energy Policy--The
Solution
There are many pieces to the energy puzzle, some must be identified
but all must eventually fit together into an integrated policy for the
west. California is not a market place unto its own. In fact,
California through its own decision in the 1980's is heavily dependent
on other west markets for its energy needs. While California should
take immediate and decisive steps to reduce its dependence on imports,
the very nature of energy supply in the west would not make it
practical or cost effective for California to become wholly self
sufficient. And as a practical matter it simply isn't technically or
politically possible. So, a west region energy policy needs to take
into account the overriding fundamental need for a region wide
marketplace. Duke offers the following comments on the needed elements
of a region wide energy policy:
<bullet> First and foremost California must restore stability to its
market, principally by restoring the utilities to financial
health as soon as possible. As you know California recently
passed legislation (AB1X-1) which provides for the State
Department of Water Resources to ``step in'' and cover the net
short position (difference between projected load and their
self provided generation) of the utilities, both for near term
power and long term power contracts. While this is major first
step, it is only a first step. The state is expending
approximately $50-70 million per day on power from the spot
markets, with no regulatory relief to collect these
expenditures from ratepayers. The California Public Utilities
Commission (CPUC) must act now to create sufficient revenues
from retail rates to cover the state's expenditures. Just this
past Friday the California State Senate Budget Committee
informed the Governor's office that it would suspend
appropriating additional funds from the state's budget until
the CPUC dealt with the recovery matter.
Next, the state must determine a method that will allow the
utilities to pay off their past debts. As you maybe aware the
State is contemplating the purchase of the utilities'
transmission assets to at least retire a portion of the
utilities' debt. Duke takes no position on the potential sale
of the transmission grid to the State, however it does expect
FERC approval of any transfer of this asset conditioned on
commitments of fair and open access. The transfer of this asset
cannot be permitted to become a means to interfere with
interstate commerce or hamper the development of an effective
regional market.
<bullet> Build more power plants as quickly as possible. Some new
capacity will be online in neighboring states for the Summer
2001, but these supplies will probably be absorbed to meet
local needs for 2001 and beyond. California's internal demand
growth is growing at a rate of at least 1,000 megawatts per
year. To provide for that growth and an adequate reserve
margin, public and private generators must construct
approximately 15,000 to 20,000 megawatts in California by 2004.
In addition, the US Department of Energy should hold
discussions with Canada and Mexico to determine if and how
available native generation supplies can be sold into the west.
The permitting process of new power generation projects needs to
be streamlined. Duke applauds the Governor for his actions to
provide legislation that expedites the process. However, there
are cases where federal and state environmental requirements
collide and slow down the process. One example is differences
between the federal Endangered Species Act (ESA) and the state
ESA. In the case of one species, it was given federal
``endangered'' status, the highest level under the federal ESA,
but it has no state protection status. Even though it has been
proposed for federal delisting, it remains on the list
requiring and required Duke to spend months of additional time
performing sampling studies. Federal and state agencies should
meet and determine where differences exist that impede new
plant permitting and then devise acceptable solutions.
<bullet> Eliminate energy infrastructure deficiencies. Building more
power plants will not help if the electrons cannot get to
loads. Transmission congestion has frequently occurred at the
seams between California and other western states, and between
each of the three utilities. The best example is the January
2001 rolling blackouts that occurred in northern California,
due in part because of the well-known ``Path 15'' constraints
which prevented generation in southern California and the
southwest from flowing north. The California ISO has identified
most of the bottlenecks. The challenge will be to address them
quickly. It is imperative that FERC, other states and
California work quickly to provide solutions to upgrading an
aging and weak grid. The US Department of Energy should direct
the Bonneville Power Administration and the Western Area Power
Administration to identify any action they could pursue to
address transmission bottlenecks. A major impediment to new
additions will be local community resistance, which is even
more pronounced than resistance to power plants. In conjunction
with new additions, the industry should look for other
alternative more friendly measures such as wire upgrades, and
effective placement of power plants on the grid.
Even more ominous for California are impending constraints on the
intrastate natural gas system that could impede the delivery of
fuel. In the winter of 2000/2001, the combination of high
electrical generating loads and high core loads strained the
gas infrastructure. San Diego Gas and Electric curtailed power
plants in its service area on numerous occasions. It is
expected that gas transmission infrastructure in San Diego this
summer will be inadequate as additional load is added from
Mexico generating plants. Adding new power plants to the
existing gas system in California requires careful gas supply
planning, including consideration of new gas pipeline capacity
to California, the intrastate gas pipeline system, and probably
significant expansion of gas storage capacity in Northern
California and San Diego.
Duke applauds the actions taken by FERC in its Order of March 14,
2001, to remove obstacles to permitting and constructing new
electric and gas transmission infrastructure.
<bullet> Need for regional price stability and transmission grid.
California must work with the western states to develop and
enhance a regional transmission grid that maximizes effective
resource utilization and minimizes costs to consumers.
California as a net importer of electricity stands to benefit
from a regional market. To facilitate regional transmission
planning that would insure power could reach its markets
without undue congestion, California transmission owners (state
agencies, utilities, municipalities) should be encouraged to
form a Regional Transmission Organization that could include
the Northwest, Intermountain, and Desert Southwest regions. Any
transfer of transmission assets should require the integration
of those assets into a larger transmission framework that
complies with FERC 2000. Regional transmission systems would
promote consistent and fair policy, tariffs, promotes open
access, and would prevent power leaving one area for higher
prices in another.
<bullet> Retail markets must be given the opportunity to respond to
energy price signals. As long as retail price caps exist, there
will be no demand response to elevated power prices. However,
as retail markets are de-regulated, consumers must be given
adequate assurances that their exposure to wholesale market
volatility is mitigated. This can occur through the use of
fixed term power supply contracts in conjunction with the
utilities self provision of still a large portfolio of
generation and an appropriate level of procurement from spot
markets. This will create a balanced portfolio of energy
products but at the same time allow electric service providers
to reenter the marketplace and compete with the default service
provider. In addition, with education and tools to make wise
choices consumers can then begin to respond and dictate the
terms under which they desire to procure electricity, this
called the elasticity of demand.
Conclusion
As I stated throughout my testimony today, Duke has a long-term
commitment to California and the west region. I can not emphasize
enough how crucial it is for California to integrate itself into a
larger electric wholesale market. Talk of commandeering instate supply
assets sends a chilling signal to new investment and spurs retaliatory
measures from other border states who have historically sold their
native generation to California. Already we see Nevada and Arizona
contemplating legislation to give their state's the right of first
refusal as a condition for any merchant generator to build power plants
in their states.
Finally let me say I'm pleased to see FERC's request for a
convening of west region political and regulatory leaders on April 6,
however this is much too late. If we are to solve these very complex
energy issues in a timely manner, then all federal and state entities
who can influence a successful outcome must make this the very top
priority within their administrations.
Let us all work together to solve this crisis just as this great
country has dealt so effectively with other challenges of the
past.Thank you.
Mr. Largent [presiding]. Thank you, Mr. Hall. We are going
to implement our own rolling blackout here in this subcommittee
hearing. Due to the unpredictable nature of Congress, we have
three additional votes that are about to occur. And so we are
going to issue our rolling blackout until 11:30, when we will
reconvene and hear the final two witnesses, and proceed with
the questions.
So, I apologize, but we will be back. Thank you.
[Brief recess.]
Mr. Barton. The subcommittee will please come to order. We
will now hear from our next witness, Dr. Larry Makovich, Senior
Director for the Cambridge Energy Research Associates. Dr.
Makovich, your written statement will be included in the record
in its entirety, and we recognize you for 8 minutes to
elaborate on it.
STATEMENT OF LAWRENCE J. MAKOVICH
Mr. Makovich. Thank you, Mr. Chairman and members of the
subcommittee.
The real lesson of the California power crisis is that
there is a right way and a wrong way to set up a power market.
California's power crisis is the result of poor market design,
which included some serious structural flaws in these markets
right from the start. And it is these flaws that created the
5,000 megawatt shortage in supply that exists in the State
today. Unfortunately, actions taken so far do not address the
underlying structural flaws of this market and, in some cases,
these actions are likely to make matters worse.
California should fix its market flaws instead of further
distorting the market by taking over the transmission sector
and entering into long-term energy contracts that defer the
cost of this crisis into the future.
The crisis in California arose because people believed that
electric markets were just like other commodity markets--when
demand and supply tightened up, prices would gradually rise,
stimulate investment and keep supply and demand in balance.
That notion was wrong. The power business is complex and has
unique characteristics. There has been research done over many
years that indicate if you are going to set a power market up,
there are a minimum set of structural elements that need to be
in place, and California simply didn't set its market up
properly.
So, it is no surprise that 5 years ago, when this
restructuring legislation was passed, when this flawed market
structure was put in place, the California economy has grown
over 32 percent, electricity consumption has gone up by 24
percent, generating capacity has actually declined.
Why wasn't generation added? When California set up its
market, it did many things, but not everything, to set it up
properly. Two major flaws prevented people from building power
plants. One was something that people have talked a lot about
here, which is the siting and permitting process was simply too
burdensome, and it is not clear today that that problem has
been solved. It looks like California, with all of its current
focus on this, and effort, may actually complete by this summer
versus last summer, enough capacity to just satisfy 1 year's
growth in demand, let alone make any closure on this shortage.
Now, besides being difficult to build power plants, one of
the key problems here was it was not profitable to build power
plants. Both Mr. Keese and Mr. Freeman have noted that power
prices were in the past too low in California, and that is the
result of one of the structural flaws in this market.
To set up a power market, you really need to set up markets
for two commodities, energy--the megawatt hours, and capacity--
the megawatts. California set up a market for energy, but it
did not pay for the capacity. There was no market for
megawatts.
The energy market they set up worked the way it ought to
work. What it did was, it kept the market in balance in the
short-run. Most of the time, electric demand is well above the
amount of capacity you have, so the problem in any hour is to
figure out which plants ought to be running to provide the most
efficient electric supply. So, an energy market that is
clearing on the basis of fuel and operating costs does the job
of efficiently supplying power at any point in time, but
because that market should and does clear on short-run cost, it
doesn't provide a price signal that is high enough to support
new plant development.
And so, as you look back through time over the 1995 to 1999
period, the price of power that cleared in this market was $14-
31 a megawatt hour. That is less than half of what you would
need to justify new power plant construction. I mean, the
amazing complacency about California was no one complained the
prices were too low when there was very clear evidence that
this market was tightening, and nobody had the incentive to
build power plants because it was neither profitable nor
possible to do so.
Now, this energy market was very competitive over the past.
It continued to clear at short-run cost when it was in surplus,
when it came into balance in about 1998, and even when it moved
into shortage in 1999, and it was only when in 2000, in the
summer, we had a severe shortage that, of course, the prices
exploded, and they went from being too low to being at
multiples of what is necessary to justify power plant
development.
Now, this has created a very acrimonious debate regarding
price gouging, but it is very, very clear--prior to the
shortage, the energy market was very competitive and produced
prices based on variable cost.
Now, when you get into a shortage and you are talking about
a commodity that customers regard as a necessity, if not a
basic human right, and for which there are very few
substitutes, you don't need market manipulation to have all of
this demand chase far too limited supply and drive the price
up.
So there are no features in the California market with
regard to supplier concentration or production agreements that
would lead us to believe that this was a problem of market
structure and collusion that led to gaming and higher prices.
This is simply a shortage, and that is the crux of the problem.
Now, what is just and reasonable? If a power market
produced prices that did allow you to cover the cost of new
supply, then it is very clear the prices we saw in 1995 through
1999 were unreasonably low. Now that we have created a
shortage, the prices are unreasonably high.
It would be a mistake to argue that because prices were low
in some periods and then too high in others that, on average
over some period, we have got reasonable prices. The problem
here is these wide swings in prices were both unreasonable,
they create an unfair cost recovery because customers and their
consumption patterns change through time, so we have had
subsidized consumption in the past and now we are burdening the
customers of today with paying for the prices that were too low
in the past.
A properly structured power market ought to pay for
capacity, and that requires that if you are going to buy
energy, you also have to buy capacity. That can be done through
a number of mechanisms including the right type of long-term
contract, but California has signed volume-based contracts
which are likely to create enormous take-or-pay obligations in
the future. If the State owns the transmission network, the
vital linkage between buyers and sellers in this marketplace,
it will further distort the market. Price caps are very
difficult to employ. The current FERC price caps based on
average incremental cost of the most expensive units are going
to create market distortions. At best, those most expensive
units are in different operation, most likely they are
beginning a perverse incentive to shut down when they feel
their prices are above monthly averages.
The recommendations here are clear. We need to set these
markets up with independent, expert governance structures. We
need to align wholesale and retail deregulation. You can't
deregulate wholesale without retail. You need energy and
capacity markets. You need to allow entry, set goals, and
enforce siting and permitting targets, and you need to give
people the right incentives, which means public ownership of
transmission price caps are going to be a problem. Thank you.
[The prepared statement of Lawrence J. Makovich follows:]
PREPARED STATEMENT OF LAWRENCE J. MAKOVICH, SENIOR DIRECTOR FOR NORTH
AMERICAN ELECTRIC POWER, CAMBRIDGE ENERGY RESEARCH ASSOCIATES
Lawrence J. Makovich is Senior Director for North American Electric
Power at Cambridge Energy Research Associates (CERA) and heads CERA's
Global Power Forum. His recent writings include: ``Beyond California's
Power Crisis: Impacts, Solutions, and Lessons,'' ``A Crisis by Design:
California's Electric Power Crunch'' and ``Regulation versus Market
Competition: Is Electricity Restructuring Changing Course?'' His recent
studies include, High Tension: The Future of Power Transmission in
North America and Electric Power Trends 2001.
When California passed its electric power restructuring law in
1996, it prided itself with being on the leading edge of deregulation
in the United States. At that time, the state took on the daunting task
of power deregulation for good reasons. The state's power prices were
among the highest in the country, and the industry was mired in a
complex regulatory system that promised to lead to still higher prices.
The hopes were that deregulation would deliver lower prices and that
California would be a model for other power markets to follow. That's
not what happened. The results, instead, are today's power crisis:
shortages, skyrocketing prices, rolling blackouts, financial distress
and political turmoil.
Today, one of the biggest problems in California is that no one can
agree on what went wrong. Customers, regulators, politicians and power
producers are all pointing a finger at each other to assign blame.
Although tempting, it would be incorrect to blame the problems in
California on deregulation itself. Indeed, there is a grave danger of
drawing the wrong lessons. If this crisis drives California back to the
heavy-handed regulation that launched deregulation in the first place
or to a expansive public power authority then the state is likely to
find its electric sector becoming increasingly inefficient and
expensive--and very much disadvantaged compared to regions with
properly structured power markets. California is now at a critical
juncture--the state can go backwards by reregulating--or even taking
outright ownership--or the state can fix the flaws in its power market.
The latter is the way to go.
Urgent action is needed not only to meet the current crisis but
swift and dramatic steps are needed to avert an ever more severe
shortage in the coming summer.
THE REAL LESSONS
The real lesson of the California power crisis is that there is a
right way and a wrong way to set up and run a power market.
California's electricity crisis is the result of three critical
failures:
1. California set up its power market with serious structural flaws
that made timely investment in new power supply neither
unprofitable. These flaws were part of the California market
design right from the start of deregulation. Consequently, the
current power crisis was both inevitable and yet could have
been prevented.
2. It has been enormously difficult to site and build new plants in the
state. California has perhaps the most daunting power plant
approval process in the nation. This process and the inability
to site have thwarted efforts by companies to build the new
power plant facilities that could have averted the supply
shortfall.
3. Although described as ``deregulation,'' the California system is
only a partial deregulation. Customers remain under controlled
prices (retail) that are well below the prices paid by
utilities to generators (wholesale). This is a fundamental
misalignment between the two parts of the market that creates a
liquidity problem for utilities and disconnects the demand side
from the market.
The crisis in California arose because people believed that
electric energy markets were just like other commodity markets--when
demand and supply tightened up then prices would gradually rise,
stimulate investment and keep supply and demand in balance. That
assumption, however, is wrong. Power markets are not like other
commodity markets. The power business is complex and has unique
characteristics. Research over several decades pointed out that power
markets are far more challenging to set up properly than most other
markets. The system that was set up in California could have taken
these realities into account--and come out with a good result. The
system that was set up did not take these realities into account--with
the results that we now see.
|
