SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 2800 words

COMMITTEE: SENATE Energy and Natural Resources

HEADLINE: TESTIMONY CALIFORNIA ENERGY CRISIS

TESTIMONY-BY: JUDI JOHANSEN , EXECUTIVE VICE PRESIDENT

AFFILIATION: REGULATION AND EXTERNAL AFFAIRS AT PACIFICORP

BODY:
JANUARY 31,2001 STATEMENT OF JUDI JOHANSEN, PACIFICORP SENATE COMMITTEE ON ENERGY AND NATURAL RESOURCES Mr. Chairman and members of the Committee, my name is Judi Johansen. I am Executive Vice President for Regulation and External Affairs at PacifiCorp. My company is an electric utility that provides retail service to nearly 1.5 million customers in six western states. We have about 8,000 megawatts of electric generating capacity in nine states, and approximately 15,000 miles of transmission lines across the west. PacifiCorp has not been a major player in California competitive markets since deregulation was implemented there in 1998. The California market presented few opportunities and increasing risk over time, so PacifiCorp has had small exposure in California. We do continue to provide service to about 45,000 retail customers in the far northern part of the state. Coupled with substantial growth in other parts of our own service territory, PacifiCorp has not had a substantial amount of electricity to sell to the California Independent System Operator since the forced-sale emergency orders were issued, beginning more than a month ago. That is not to say, however, that our company and customers are immune to the problems in California. The western region is a highly interconnected grid that has spawned a regionwide wholesale power market. California represents at least 30 percent of the western market. PacifiCorp is in the wholesale market even though our generation portfolio roughly meets our load requirements. Generally, the company needs to purchase power to meet peak needs, both seasonally and daily. Peak power is generally the most volatile market; the cost of this power can be several multiples of off- peak prices. As a result, we have filed applications to account for extraordinary power costs and, in some cases, to begin recovering those costs from customers. We believe the volatility in peak markets has largely been driven by a combination of decreasing generation reserves plus flaws in the California structure that drove so much of that state's procurement into the spot market. The company and our customers are also exposed to the California utilities' defaults on obligations to the California Power Exchange (PX). This is due to a convoluted, inequitable provision in the PX system that assigns the obligations of defaulted PX participants to entities still involved in the PX When Southern California Edison defaulted on its payment obligation to the PX two weeks ago, the PX sent other PX participants bills for shares of this obligation, based on their proportionate piece of the PX market. In PacifiCorp's case, this bill represented about $2 million or one percent of the defaulted obligation. The volatile, costly wholesale market and collapsing PX are two significant manifestations of the shock waves California has sent through the west. Now, California is in the midst of significantly changing its deregulation statute and policy makers here in Washington and in every western state capital are considering what needs to be done to bring demand and supply back into balance and otherwise stabilize the market. PacifiCorp is eager to engage in these discussions. In fact, the company gathered a series of regional stakeholders last October to discuss the problems that arose last summer and steps to alleviate future supply shortages. While nobody at that forum predicted the dire consequences that would befall the west less than two months later, I do believe we began an important dialogue. Whatever path federal and state leaders choose, the path must be one that works for electric consumers. Customers want prices to be stable and reasonable and they want service to be reliable. PacifiCorp aspires to remain a low-cost provider of electricity and to provide world-class customer service. Our new service standards and commitments will meet these aspirations. The fundamental requirement on all stakeholders is to take steps to balance supply and demand. In each case, it is vital to have a regulatory and investment climate conducive to meeting the following objectives: -tempering demand growth with price signals and other opportunities to encourage energy efficiency; -facilitating the reliable, economic delivery of electricity over the western transmission grid; -providing greater certainty over the terms and conditions under which generating facilities already in operation may run over the next 10-20 years; -creating an environment conducive to investments in new generation resources. PacifiCorp has been working with state regulators and customers to enhance energy efficiency and load reduction both immediately and in the long term. We urge the Congress to give serious consideration to tax policies that encourage investments in energy efficiency such as those embodied in S. 2718 from the 106' Congress. With respect to enhancing transmission, PacifiCorp has been leading the effort to form RTO West in response to FERC Order 2000. We believe the current situation makes establishment of RTO West even more valuable than ever. Creation of RTO West will make grid operations more efficient and facilitate construction of new generation. While the company has not taken a position on proposals to provide the FERC with eminent domain authority to site new transmission facilities, it is worth noting in the west that significant existing and future transmission corridors are located on federal lands. Federal agencies should work constructively to locate facilities expeditiously and permit their construction and operation in a cost-effective manner. Maintaining existing generation capacity is vital to upholding the first rule for getting out of a hole - stop digging. Most of PacifiCorp's existing generation fleet is comprised of mine-mouth coal plants in the Intermountain West and hydro generation in Washington, Oregon and Idaho. With respect to hydro, we have been actively engaged in relicensing various projects and find the process frustrating as most agency participants have no obligation to balance environmental and economic objectives. This Committee heard testimony from PacifiCorp last year on Senator Craig's legislation to make modest changes in the Federal Power Act's licensing procedures. We thank Senator Craig, Senator Gordon Smith, and others actively engaged in this legislation for their work and urge the Committee and its members to review the bill now pending before the Committee, S. 71, in light of current and future electric resource needs. Our coal plants are already among the cleanest in the nation for S02 emissions. We recognize, however, that a new generation of air emission standards is possible in the next few years. PacifiCorp has been working at the regional level for nearly a decade to fashion an approach to regional haze that achieves environmental objectives through a flexible framework. Under the leadership of Utah Governor Mike Leavitt and the Western Governors' Association, great progress has been made on this front. It is this type of constructive, cooperative approach to air quality issues that PacifiCorp hopes will mark the wave of emission control agreements. The company is prepared to engage in a multi-state, multi-pollutant strategy that, going forward, will achieve significant emissions reductions. This is a far better approach than the adversarial, litigious tactics that have pervaded emissions debates in other parts of the country. To stimulate construction of new generation, it is important that policies and regulations at the state and federal levels properly align risk and reward. Investing in new generation - which by virtually all accounts is necessary to solve the west's problems - requires huge amounts of capital. Sending unclear regulatory signals about the potential return on investment (or sending clear, discouraging signals to investors) will thwart investment in new plants. Conversations with investors and investment analysts confirm not only the potential for this investment gridlock, but the reality of it as well. Wall Street equates regulatory uncertainty with a bad investment climate. This makes the cost of financing new projects higher. These costs are ultimately borne by consumers. While this concern is primarily a matter for state policy makers and regulators, it is relevant to how the Congress addresses supply policy and how the FERC fulfills its responsibilities. PacifiCorp has taken the step of proposing a realignment of its corporate structure in order to make it easier for regulators to address resource acquisition strategies most appropriate to their respective states and customers. This realignment will also have the effect of sending clearer signals to developers about the potential for fair returns on investment in new generation. Ultimately, our realignment will require approval from the FERC and Securities and Exchange Commission. But the consent of state regulators is essential to putting PacifiCorp in a position in which we may constructively contribute to solving the regional power supply problem. On a related matter, PacifiCorp believes one of the more promising technologies available to increase generation is new wind energy. The Congress can help facilitate development of new wind generation by expeditiously extending the renewable energy production tax credit. And, federal agencies can help by approaching constructively the siting decisions essential for generation and associated transmission facilities. Certainly, other inducements to new generation investment through the tax code and other instruments should be examined as well. PacifiCorp is eager to work with this and other relevant Committees of the Congress to this end. Mr. Chairman, this concludes my prepared remarks. Thank you for the opportunity to testify. I would be happy to respond to any questions you or other Committee members may have.

LOAD-DATE: February 1, 2001, Thursday