TYPE: COMMITTEE HEARING

LENGTH: 52543 words

COMMITTEE: ENERGY AND AIR QUALITY SUBCOMMITTEE, HOUSE ENERGY AND COMMERCE

HEADLINE: U.S. REPRESENTATIVE JOE BARTON (R-TX) HOLDS HEARING ON CALIFORNIA ENERGY CRISIS

SPEAKER:
U.S. REPRESENTATIVE JOE BARTON (R-TX)

LOCATION: WASHINGTON, D.C.

WITNESSES:

LORETTA LYNCH, PRESIDENT CALIFORNIA PUBLIC UTILITIES COMMISSION
JOHN QUAIN PENNSYLVANIA PUBLIC UTILITY COMMISSION
ALAN SCHRIBER, CHAIRMAN OHIO PUBLIC UTILITIES COMMISSION
MICHAEL KENNY, EXECUTIVE OFFICER CALIFORNIA AIR RESOURCES BOARD
MIKE TRAVIESO MARYLAND PEOPLE'S COUNSEL
KEN RANDOLPH, SENIOR VICE PRESIDENT DYNEGY INC.
JOHN ROWE, CEO EXELON CORPORATION
ROBERT LEVIN, SENIOR VICE PRESIDENT NEW YORK MERCANTILE EXCHANGE
KIT KONOLIGE, MANAGING DIRECTOR MORGAN STANLEY, DEAN WITTER
ADRIAN MOORE, EXECUTIVE DIRECTOR REASON PUBLIC POLICY INSTITUTE

BODY:
HOUSE COMMERCE SUBCOMMITTEE ON ENERGY AND AIR QUALITY

HOLDS HEARING ON CALIFORNIA


FEBRUARY 15, 2001


SPEAKERS:

U.S. REPRESENTATIVE JOE BARTON (R-TX)

U.S. REPRESENTATIVE STEVE LARGENT (R-OK)

U.S. REPRESENTATIVE CHRISTOPHER COX (R-CA)

U.S. REPRESENTATIVE RICHARD BURR (R-NC)

U.S. REPRESENTATIVE ED WHITFIELD (R-KY)

U.S. REPRESENTATIVE GREG GANSKE (R-IA)

U.S. REPRESENTATIVE CHARLIE NORWOOD (R-GA)

U.S. REPRESENTATIVE JOHN SHIMKUS (R-IL)

U.S. REPRESENTATIVE HEATHER WILSON (R-NM)

U.S. REPRESENTATIVE CHARLES (CHIP) PICKERING JR (R-MS)

U.S. REPRESENTATIVE VITO FOSELLA (R-NY)

U.S. REPRESENTATIVE ROY BLUNT (R-MO)

U.S. REPRESENTATIVE ED BRYANT (R-TN)

U.S. REPRESENTATIVE GEORGE RADANOVICH

U.S. REPRESENTATIVE MARY BONO (R-CA)

U.S. REPRESENTATIVE GREG WALDEN (R-OR)

U.S. REPRESENTATIVE LEE TERRY (R-NE)

U.S. REPRESENTATIVE BILLY TAUZIN (R-LA)


U.S. REPRESENTATIVE RICK BOUCHER (D-VA), RANKING

U.S. REPRESENTATIVE RALPH M. HALL (D-TX),

U.S. REPRESENTATIVE THOMAS C. SAWYER (D-OH)

U.S. REPRESENTATIVE ALBERT WYNN (D-MD)

U.S. REPRESENTATIVE MARK DOYLE (D-PA)

U.S. REPRESENTATIVE CHRIS JOHN (D-LA)

U.S. REPRESENTATIVE HENRY WAXMAN (D-CA)

U.S. REPRESENTATIVE EDWARD MARKEY (D-MA)

U.S. REPRESENTATIVE BART GORDON (D-TN)

U.S. REPRESENTATIVE BOBBY L. RUSH (D-IL)

U.S. REPRESENTATIVE KAREN MCCARTHY (D-MO)

U.S. REPRESENTATIVE TED STRICKLAND (D-OH)

U.S. REPRESENTATIVE TOM BARRETT (D-WI)

U.S. REPRESENTATIVE BILL LUTHER (D-MN)

U.S. REPRESENTATIVE JOHN DINGELL (D-MI)

*

BARTON: The subcommittee will come to order. It's my practice, as subcommittee chairman, to do everything possible to start on time. And it is 10 o'clock. I'm gratified that we have a number of members here. I will not be calling any votes, since it's obvious I'd be outvoted if I were to do so.


(LAUGHTER)


We are delighted to welcome the Subcommittee of Energy and Air Quality members and our audience and our witnesses to our first hearing of the 107th Congress. I'm honored and privileged to be the chairman.


I would like to welcome, apparently in absentia, the new members of the subcommittee.


We have Congressman Chris Cox, Congressman Greg Ganske, Congressman Roy Blunt, Congressmen George Radanovich, Mary Bono, Greg Walden and Lee Terry on the Republican side that are new to the subcommittee.


On the Democrat side, we have Congressman Tom Barrett and Bill Luther, who've been on the full committee, but not on this subcommittee. We also have new both full committee and subcommittee members: Mark Doyle, Chris John.


Let the record show that Congressman Doyle is actually here in person. We do appreciate that.


To all members, I want to say that I look forward to working with you, as we work in this Congress to craft an energy policy that is good for the country, and also an environmental policy to the subject that is within our jurisdiction and that's good for the country.


We're going to be very busy. Energy policy's at the forefront of the minds of the American people. All we have to do is look at the various energy markets. Last summer, with oil prices very tight, prices for oil, gasoline and other petroleum products became unacceptably high. Supplies of home heating oil were low. Prices for home heating oil in the Northeast were very high.


In that part of the country, the supply of natural gas has not kept up with the demand for that product. Natural gas prices have been unacceptably high.


Our number of refineries in this country continues to dwindle, and their capacity has become even further constrained. Our transportation and distribution outlets for energy have not increased to meet the demands for this country.


And, of course, as we're going to learn more about today, in our state with the largest population, the great state of California, their demand for electricity has outstripped their supply of electricity in that market. We're going to hear more about what's been the consequences of that.

In this Congress, the subcommittee intends to focus on the balance of supply and demand in energy. We also want to take an inventory of our nation's energy capabilities and the obstacles that we will be facing in order to get a better supply-and-demand balance.


Our comprehensive review will be of each of the different fuel sources and of also the various differences between regions of our great nation.


We intend to work closely with other committees in the House and the Senate and with the new president and vice president and his Cabinet in the executive branch.


Today we're going to begin a series of hearings dealing with our electricity markets. We want to focus on the experiences of several states which have restructured their electricity markets in the last several years: on the West Coast, the great state of California, which passed its bill in 1996; on the East Coast, the great state of Pennsylvania, which also passed its bill in 1996; and finally, in the central part of the country, the great state of Ohio, which restructured in 1999.


In total, 25 states have passed restructuring legislation or implemented a regulatory restructuring effort in their electricity markets.


This subcommittee intends to find out what the differences are between each of the states' plans, and what are the similarities? What has a state done right? What has a state done wrong? What should other states know that haven't acted yet? What should federal legislatures know about our regional markets?


This subcommittee reported legislation during the last Congress dealing with both retail and wholesale markets and would do well to learn from the lessons that the states have learned as they have restructured their markets.


Later this year, the subcommittee will review specific parts of the electricity industry and the proper role of Congress and the federal government in improving supply, generation and capacity of operations of interstate transmission, and making states more successful, should they choose a retail restructuring opportunity.


So today, as we look at these three specific states, we hope that we'll learn lessons that we may be able to apply in the legislative arena later this year.


I want to thank our witnesses for attending today, and I look forward to hearing from your testimony.


I would now like to welcome my ranking member, the Honorable Rick Boucher, from the great state of Virginia. Rick and I have a close personal friendship and we intend, I think, on both sides of the aisle, to forge a great professional relationship for this subcommittee.


Mr. Boucher?


BOUCHER: Well, thank you very much, Mr. Chairman. As you have indicated, this subcommittee does have a long bipartisan tradition of addressing our nation's energy needs in a serious and a thoughtful manner.


Whether under the leadership of Phil Sharp or Dan Schaefer (ph), we have always tried to put the interests of our nation ahead of the allure of partisan advantage. And I want to commend you, Chairman Barton, for upholding that tradition during the 106th Congress.


I look forward to a continuation of that tradition as we embark on a bipartisan effort to examine and address the nation's energy and air quality policies during the course of this session of Congress.


Today's hearing is an excellent start to the work that we must undertake, as we continue to examine the potential need for federal legislation to restructure the electricity market.


It's incumbent upon the subcommittee to try to gain an understanding of what has happened in California, and how the state is trying to resolve its problems, and any lessons that we can learn, of a general nature, from that experience. To the extent that California's situation proves anomalous, other states that have adopted different retail competition plans may be reassured. States still considering retail competition can learn what to avoid.


In any event, with the economy the size of California's, and in light of the collateral damage which is being felt by ratepayers in neighboring states, such as Oregon and Washington, it behooves this subcommittee to hold educational hearings, such as the one we're initiating today.


I must, Mr. Chairman, express just a mild measure of concern regarding the short lead time that was provided for this hearing. I know that it's Chairman Barton's preference to work cooperatively with the minority and to give members time to understand the issues and delve deeply into substance.


That process is a lot easier when the hearings are undertaken with adequate time to develop the issues, to locate top-notch witnesses, and provide members with an opportunity to study the testimony in advance.


I hope that we can work toward that goal in planning future hearings of the subcommittee. And in accordance with the conversations that I had earlier this week with the chairman, I am assured that we will do so. And I thank the chairman for that commitment.


I also want to thank the chairman for his commitment to hold an additional hearing regarding the situation in California. Unfortunately, members of Congress for the region were not accommodated as witnesses during today's hearings, and several witnesses who we believe would be invaluable to this examination were not able to participate today for a variety of reasons.

As I noted before, the chairman and I spoke previously this week. And he has made a commitment to have another hearing concerning the situation in California. At that time, interested members of Congress will be invited to testify, as well as other witnesses whose experience might prove instructional to the subcommittee.


The California experience offers an interesting look into the process and potential pitfalls of restructuring the electricity market.


Since 1996, California has embarked steadily on a restructuring plan, and consumers in that state today should be enjoying the benefits of a fully competitive wholesale and retail market. Instead, consumers are faced with frequent power shortage alerts, increased rates and rolling blackouts. During this hearing and the next, we will examine the causes of these failed consumer expectations.



BOUCHER: In addition to examining the restructuring process that California undertook, I think it's important to examine whether the steps that California is currently taking to rectify its situation and whether the steps that the FERC has taken are sufficient to address the needs of both California's consumers and electricity suppliers, as well as the needs of consumers in the Western region of the nation who are also dependent on the same transmission grid, and who, in many cases, compete with California for the wholesale power that is available on the West Coast.


Looking at the lessons learned in California, as well as hearing from witnesses from Ohio and Pennsylvania, where other restructuring efforts are under way, will provide a useful exercise as we begin our examination of the flaws that still exist in the national competitive wholesale market and whether there is a federal role to play in fixing that problem.


There are many questions that must be answered. For example, does current law give the FERC the authority to enable a functional, national wholesale electricity market? Do the provisions of the Clean Air Act play a significant role in the problems in California? And if so, should we consider federal legislation to address any specific examples of such a correlation?


These are just a beginning to the questions that I think this subcommittee must consider. But today we make a positive beginning.


I look forward to the testimony of the witnesses today and at our future hearing. And let me again say how much I look forward to a continuation of the bipartisan work that Chairman Barton and I have undertaken on these matters, which are of fundamental importance to the nation's economy.


BARTON: I want to thank you, Congressman Boucher, and I want to repeat, for public consumption, so there's no question what I discussed with you privately.


Based on your suggestion, we will have another hearing specifically on California, if that's the wish of the minority. Also based on your comments and suggestions, if it is your decision and my decision collectively, we may do a hearing where we specifically have members-only testimony. Now we may do that in conjunction with the hearing; we may do it as a separate stand-alone. And if we do that, we'll do as many days as is necessary so that all members that wish to participate, in terms of putting testimony on the record, will do so.

In terms of the timing of future hearings, this first hearing we scheduled as soon as the committee was fully organized on both sides of the aisle. We were slow on our side; you were slower on your side. So both parties are almost equally guilty of slowness. But in the future, at the staff level and the member level, you and I will be a team in deciding, along with the leadership of Mr. Tauzin, the full committee chairman, and Mr. Dingell, the ranking member, the subject and the timing of the hearings.


When it's a 50-50 tie, my 50 percent is 1/10th of 1 percent more than your 50 percent simply because we have to have a way to break the tie. Hopefully there won't be too many cases where we have to go to the tiebreaker mechanism.


I want to reiterate that we have a lot of work to do, and fortunately energy is not a partisan issue; nor is the environment. So we're going to work together as a team, both at the top and the rank and file of this subcommittee if I have anything to do about it. And as subcommittee chairman I do have something to do about it.


BOUCHER: Will the gentleman yield?


BARTON: I'd be happy to yield.


BOUCHER: I want to thank the chairman for that commitment and again say that his work has been characterized over the years by an outreach to members on the other side and by bipartisan cooperation. And I want to commend you for that. And I look forward to the work of this Congress with you.


BARTON: With that, I want to welcome our new vice chairman of the subcommittee, the Honorable Steve Largent of Oklahoma, for an opening statement.


LARGENT: Thank you, Mr. Chairman.


I give a slightly different perspective. I guess some think we're moving too fast. I would say we're moving too slow. Thank you for the time in this hearing.


Unfortunately, this subcommittee had very little to do with what's happening in California. It's a crisis in the sixth largest economy in the world, and something that I think we have to at least begin educating ourselves on the why and wherefores of what's taking place in California.


So I thank you for holding this hearing, and, in fact, think we should have done it even sooner, if it had been possible.


Over the last several months, as a nation, we have been taught some valuable lessons. In Florida, we've learned some lessons on civics, election law, judicial process. And I think those are valuable lessons.


In California, we're learning some really valuable lessons on what a free market does or is. We're learning lessons about supply and demand. We're learning lessons about regulation and the effects that it has on markets.


And I think the question that is going to be before this subcommittee and before the full committee is, what is the best method to meet those market demands, the law of supply and demand? Is it best to continue to try to meet the demands of the market by continuing the last remaining monopolies in this country, the electric utility monopoly? Or is it, perhaps, better to move to a more transparent and free market where competition is alive and vibrant?


And I think that's really the issue. And, of course, over the course of the last couple of years, when we've taken off the table federal mandates to have a date certain when states move to electric retail competition, we're now really basically talking at the federal level about how do we clear up the wholesale markets in this country today where there's some really significant problems that exist.


And I would tell you that the focus of my effort on this committee in working with the chairman to resolve those issues can be summed up in three words, and that is transmission, transmission, transmission. And we will focus our attention like a laser beam on how we can resolve the transmission problems that exist today so that we can have that vibrant competition at the wholesale level, which does not currently exist, even though it desperately needs so.


So with that, Mr. Chairman, I'd like to ask for unanimous consent to submit my full testimony for the record and look forward to the testimony of our witnesses. Thank you.


BARTON: Without objection, so ordered.


We want to welcome back to the subcommittee the Honorable Henry Waxman of the great state of California.


WAXMAN: Thank you very much. But under the rules, we are called on in the order in which we appear, so I'm going to have Mr. Strickland and Mr. Doyle precede me.


BARTON: All right. I thought you all appeared about simultaneously. I've never -- If Henry Waxman wants to be a gentleman and yield, I'm going to let that happen. So who was the first?


DOYLE: We'll defer to our senior colleague.


(LAUGHTER)


BARTON: Who was the first? Was it Mr. Doyle or Mr. Strickland?


STRICKLAND: I was first, but I'm going to defer to Mr. Waxman.


WAXMAN: Well, I thank my colleagues for being so courteous.


BARTON: Well, let's watch this exercise in gentlemanliness here.


(LAUGHTER)


BARTON: Mr. Waxman of California, who has seniority and has been very active in the past on this subcommittee. We welcome him back.


WAXMAN: Thank you very much. And I think perhaps I'm being deferred to not only because of my age, but because I'm a Californian. And at the moment, I see myself as the only Californian present at this hearing.


BARTON: We have Mr. Radanovich on our side of the aisle.


WAXMAN: Oh, I didn't see him. I'm glad that we've got some reinforcement from California on the committee.


RADANOVICH: It's a big state.


WAXMAN: We're tackling an extremely important issue when we look at the California energy issue. Californians are angry and confused. Many people feel as if they are being held hostage by out-of-state energy generators. They believe that these companies are taking advantage of the energy shortage by charging astronomical prices.


Others blame our major electric utilities: PGE and Southern California Edison. They think these companies were the architects of California's deregulation plan, made billions off California consumers in the early years of deregulation, and are now seeking a state bailout caused by their own poor planning.


And others blame government. They're angry that California's former governor, Pete Wilson, and the California legislature could enact such a flawed deregulation bill.


They're dismayed that California's current governor, Gray Davis, and the California legislature have not yet solved this problem. And they feel abandoned by President Bush and the U.S. Department of Energy, who they believe hold the tools to provide immediate relief to California.


Sorting out these issues will be difficult but essential. If we fail to properly diagnose the cause of California's energy problems, we will surely fail in finding a cure. And we may find that other places around the country will continue to make the same mistakes.


I don't have the answers yet, which is why I welcome this hearing. But I do know that there is at least one red herring that's being promoted by special interests looking to exploit California's plight for their own gain.


I'm talking about the efforts of some in the energy industry and Washington that blame the Clean Air Act for California's energy problems.


The latest example happened just last Friday, when the president's spokesman told the press that Governor Davis had asked the administration to waive federal emissions standards for California so that more electricity could be produced.


This was hype designed to build support for environmental rollbacks. Governor Davis did not request that President Bush waive emission limits. All he had asked for was assistance in expediting the permitting process.


The fact is the Clean Air Act has not restricted energy production in California. Those plants that need the flexibility to operate additional hours are being given permission to do so. And nine new power plants have received approval to start construction since 1999.


In anticipation of this hearing, I wrote Mike Kenny, the head of the California Air Resources Board, about the impact that environmental regulations were having on California's energy problems.


Here is what Mr. Kenny responded, quote, "No essential electricity generation has been curtailed due to air emissions limitations. State law and local regulations provide several means to address permanent limitations without disruption of electrical generation or unmitigated damage to air quality," end quote.


And I'm going to ask unanimous consent to make Mr. Kenny's letter part of the record.


BARTON: Without objection.


WAXMAN: If air pollution laws were causing the energy crisis, Los Angeles should be having the worst problems in California, because L.A. has the toughest air quality regulations in the nation.


But the Los Angeles Department of Water and Power, which did not participate in the deregulation plan, is supplying Los Angeles with plenty of power. In fact, despite the tough air pollution laws and Los Angeles' tremendous economic growth, DWP is able to generate surplus electricity to be used by other parts of California.


Those who would blame the Clean Air Act and other environmental laws are doing a double disservice to my state. Their efforts to roll back environmental laws not only threaten the quality of our environment, but they also make it more difficult to solve California's energy problems.


Turning this issue into an environmental battle is a huge mistake. It will distract us from identifying and addressing the true causes of California's power crisis.


Times of difficulty and crisis usually bring out the best in Americans. I hope that this will be the case once again. We need to work together to find the right solution for California, not cynically use California's plight as a ruse for undermining the nation's environmental laws.


Mr. Chairman, I thank you for this opportunity to make this opening statement. I look forward to the hearing that you promised us a few minutes ago on the California issue, where you will invite not only members who wish to testify, but those interested parties who have something to contribute. It's unfortunate that many weren't able to testify today, but we'll look forward to hearing from them and getting their testimony on the record at the subsequent hearing that you've planned.

BARTON: Thank you, Congressman.


I want to just point out for the record, in terms of the witnesses from California, we invited every witness that the majority and the minority asked to be invited from California.


And because of -- and we had a number of distinguished Californians who initially agreed to testify and then for various reasons were not able to attend.


WAXMAN: Well, Mr. Chairman, I certainly didn't mean a criticism for which you should respond. Because I wasn't criticizing anything, except to say there are others who ought to be on the record, not just from California, but others who have some expertise on this subject.


I know that the head of our delegation, Congressman Sam Farr, wrote you a letter with a request for witnesses which were not accommodated. Witnesses can't always be accommodated every hearing and as long as we get the chance to hear from people who have something relevant to say in the future, that's all any of us can request.


BARTON: We're going to give every opportunity to make that happen.


I want to point out we're not going to hold people tightly today to our three-minute opening statement requirement if you're not chairman or ranking member. But our rules do allow for opening statements no longer than three minutes. And I would hope that we could at least make a cursory attempt to comply with that.


Mr. Shimkus of Illinois, who was the first member here, I would be happy to recognize for an opening statement.


SHIMKUS: First on our side.


BARTON: We're so nice today, that's great. We're going to be nice all year long.



(LAUGHTER)


SHIMKUS: The nice subcommittee.


It is great to be here dealing with energy dereg now. This will be starting my fifth year. There's a lot of lessons across the country on those who've been successful, those who have fallen short. This hearing is really important. And I agree with my colleague, Steve Largent: Transmission, transmission, transmission is the bottom line of how we need to address the competitive market in the future.


I'd like to submit into the record an article written by Harry Levins. Sometimes I question journalism and how they can write, because they are trained to be writers, not in the field that they're writing for. But this is the second time that I've read articles by Harry Levins from the St. Louis Post-Dispatch that's right on.


One was early in the energy dereg on stranded costs, and this one was just a couple days ago. And I think it would be a great credit for our colleagues to get a chance to read it. And if I could get permission I'd like to submit that for the record.


BARTON: Without objection, so ordered.


SHIMKUS: Also, on the second panel, I will have John Rowe of Exelon ComEd in Illinois present, and also Peter Esposito of Dynegy; Dynegy, obviously, of the great state of Texas, but also has a major presence now in Illinois.


What we've learned in Illinois is that you can't rely on one single source of a commodity product to power generating facilities. And when you do that, you fail. Illinois hasn't totally been successful. We did have really high price spikes of two years ago, based upon, you know, the summer.


But, as California will get through this, Illinois got through it also. But it does require the competitive market to be a competitive market, and for people to recover capital investments when you build a power plant and when you build transmission facilities.


So this is going to be a very interesting year. And I think many of us have been waiting for a couple years to get to this point. Sometimes it takes crises to raise issues of national level that -- an issue like California that helps us address common economic principles, supply and demand. And -- there'll be some people who shake their heads out here -- the aspect of physics that even though electricity is a commodity, it's not a stored commodity, and those electrons are just bebopping all over the place. And it creates some interesting different challenges than just a commodity, a product.


So I'm excited about it, Mr. Chairman. And with that I'll yield back my time.


BARTON: We're going to let you bebop a little bit this year too, Mr. Shimkus.


We're going to go now to Mr. Strickland of Ohio for an opening statement.


STRICKLAND: Thank you, Mr. Chairman. And Mr. Chairman, I'm going to be moving in and out of the committee today because I have divided responsibilities, as I think many of us do.


I'd like to begin my comments by welcoming an Ohioan, Dr. Schriber, who is the chairman of the Ohio PUCO. We have worked together on protecting the uranium enrichment plants in southern Ohio and other matters.


And I'm very proud, Alan, that you are here representing the Buckeye State. And I look forward to your testimony.


Mr. Chairman, this country needs a comprehensive energy policy. We need to utilize coal. We have, I am told, hundreds of years of coal reserves in this country. We need to increase refining capacity. We need to use more ethanol and other such energy sources. And we need to stress conservation.


And I am terribly concerned that the nuclear side of our energy needs is in serious jeopardy. Approximately 20 percent of our energy needs, electricity in this country is generated by nuclear power plants. And we have only two remaining enrichment facilities in this country. And one will be closed in June of this year. And I wonder how many members of this Congress understand what is facing us.


It is a looming crisis. And as we consider all aspects of our energy needs, I hope that this committee will, at some point in the future, focus on the critical needs of our nuclear energy.


And with that, I want to thank you for this committee and I look forward to learning a great deal today. Thank you.


BARTON: Thank you. And I would share many of the sentiments that you echoed in your opening statement. I think they're very well put.


We want to welcome a new member of the committee and the subcommittee to this hearing, Mr. Walden of Oregon.


WALDEN: Thank you very much, Mr. Chairman. And I am delighted to be on this subcommittee and on the full committee, and appreciate your expeditious efforts to have this hearing scheduled.


There is no greater issue affecting the Pacific Northwest than the energy crisis that's afflicting California. And to say that there isn't a collision between the environment and energy production is to ignore the basic problem we have in the Northwest. Because when we exceed the biological opinion on the river system to flow water through the turbines to produce power to prevent blackouts and brownouts in California, we are engaged in that debate between the environment and energy.


And that is happening now in the Pacific Northwest. It happened last summer when California faced brownouts. We exceeded the biological opinion to protect and preserve salmon and restore their runs in order to bail out California. Now we're in that same spot market with California competing for energy at a time when our peak loads are there.


And it is a huge problem that is affecting industry and community from farmers to production of aluminum in my district and throughout Oregon. And I am delighted that today we are going to begin to hear what happened in California, what is happening. And then take a look, as the committee progresses, on what can be done to work our way out of this situation.


Mr. Chairman, I think we need several things: a thorough analysis of all the power assets, especially in the Pacific Northwest hydro system, to determine what is fully in use, what is not and why, and what could be put into production. Seventy percent of our power in the Northwest comes from hydro.


We need a thorough analysis of licensing requirements and time lines, both from FERC, and as it relates to hydro relicensing, as well as other facilities. Do these time lines make sense in today's environment? And are there ways to streamline the time lines while continuing to ensure environmental quality and protection?


We need a thorough analysis of incentives for renewable energy and conservation, efforts that we're certainly promoting in the Northwest, because the cheapest production of power is that which is never used that results from conservation. And so in this time of great crisis, we need to be moving forward on conservation as well as production of energy, and looking at the alternatives and the renewables.


We also need a thorough analysis of the transmission system, both its capability, capacity and reliance. As I've been told by leaders in Northwest energy issues that we could go ahead and put plants on- line, perhaps using clean coal technology, further to the east in Wyoming and Montana, and yet lack the transmission capability and capacity to send that power to where it's needed most.


And I know that's also an issue in California between the southern part and the northern part. They may have a surplus in the south, but you got to route it up through the northwest to get it to the northern end of California. And we need to be looking at that.


And again, siting issues, construction issues, and how those federal laws interact are all critical elements of making sure we have both reliable and sufficient power supply.

So, Mr. Chairman, thank you for this hearing. I look forward to serving with you on this committee.


BARTON: Thank you. We look forward to working with you.


We also want to welcome a new member of the full committee and the subcommittee to his first subcommittee hearing, Mr. Doyle of Pennsylvania, who, at the appropriate time, will introduce the witness from Pennsylvania.


Mr. Doyle?


DOYLE: Thank you very much, Mr. Chairman. And thank you for convening this hearing to examine the electric supply and market problems in California, and to further determine the extent to which conclusions can be made about the distinct roles of federal and state regulations through a comparison of electricity choice plans enacted in Pennsylvania and Ohio.


Just as the California power crisis has sparked a national debate on deregulation, it has also heightened the need for a full and serious discussion about what constitutes a successful state regulation plan.


One thing that can be learned from a comparison of California and Pennsylvania is that regional factors should not be ignored, but should guide the formulation and implementation of a state's plan. And while population, climate and economic development trends all are important regional factors to consider, it is of the utmost importance that states also look at the factors of energy generation, transmission and distribution in much the same ways.


California has experienced an increase in population, severe weather and an economic growth in information technology which requires significant amounts of power. But California's plan seemingly did not incorporate complementary components into their design structure. California didn't address serious generation, transmission and distribution deficiencies adequately to reflect emerging market and consumer demands.


While Pennsylvania supplies all of its own energy, pays close attention to maintaining core capacity of its energy-producing infrastructure, and allows for energy consortiums, California has not built a single new power plant since before restructuring took place.


This, despite the fact that in four years, between 1996 and 2000, electricity consumption grew by approximately 9 percent. Between 1999 and 2000, electricity consumption in California grew by 15 percent. And keep in mind that even prior to these trends, California never produced 100 percent of the energy used, but relied upon imported energy from other states.


To compound this problem, generation capacity has been off-line for maintenance and their transmission system is constrained. As a result, prices being paid by consumers and businesses has skyrocketed. Not one facet of the plan appears to be interfacing well with the others.


In Pennsylvania, however, the plan is reflective of and takes into consideration regional factors, and has, in turn, accomplished its goals of creating more choice, maintaining a dependable energy supply and lowering cost.


As Chairman Quain will speak to later, when Pennsylvania began electricity competition in 1997, rates were, on the average, 15 percent higher than elsewhere in the United States. Today Pennsylvanians pay rates on average 4.4 percent lower than elsewhere in the country.


In order to gain greater insight from this comparative approach, we must also examine how the plans approach the issues of stranded cost, price caps, universal service, public benefits and a host of other important issues. We must also examine how these states approach the relationship between restructuring electricity generation and existing environmental regulations. These are the tougher matters that I believe we must effectively deal with in order to determine our appropriate role in energy deregulation.


I look forward to working with my fellow members on the subcommittee in fashioning a cohesive response to the complex and demanding set of issues before us today.


Thank you, Mr. Chairman.


BARTON: I want to thank the gentleman for that opening statement. And I've got to say, for a member who's never been on the committee or the subcommittee before, to give that kind of an opening statement, very impressive. Sounds to me like, if I didn't know better, Chairman Dingell wrote that statement for you.


(LAUGHTER)


I'm not going to go there.


(LAUGHTER)


Very impressive.


We'd now like to hear from another new subcommittee and full committee member from the great state of Nebraska, the big red machine, Congressman Lee Terry.


TERRY: Thank you, Mr. Chairman, for calling this. I'll submit my formal statement for the record today.


There's a couple of issues that have been brought up that I want to just casually mention to you, Mr. Chairman.


I was contacted by a contractor, a developer who's currently trying to build a power plant in California, expressing incredible frustration over the permitting and licensing procedures. They're going to meet with me next week to go over the details of that. But part of their frustration is in the process of building this, they thought at a time of crisis that it would be expedited, but it isn't. But we'll go over the details of that.


But, you know, we talk about so many levels of problems. And I wonder if part of the discussion in any of these hearings are going to be at the government or bureaucratic level. I don't know if it's bureaucratic indifference or incompetence, or if there are truly environmental reasons that don't allow them to expedite at time of emergencies like this.


But we would think that producing, building new power plants would be a priority in the state of California. Evidently, within the government, the message is it's not. So I hope that's an area that we'll hear about in one of our hearings amongst several other items of shortages and supply line.


Thank you for holding this hearing.


BARTON: Thank you.


Another new committee member and subcommittee member from the great state of Louisiana, Congressman John. I'm not sure this committee is ready for two Louisianans, but we welcome you to the subcommittee.


JOHN: One on each side of the aisle, too. That makes sense.


But thank you, Mr. Chairman and ranking member, for holding this committee.


And I'm looking forward to not only serving on the full committee, but also this committee, because I think that some of the issues that we're going to be addressing, and that this country must address, will come right through this committee.


And today's hearing about the problems out in California, I'm really looking forward to hearing from the panelists here. Because I believe our role in this committee is not to blame anyone for what has happened, cause there's enough blame going around. And whether it's the state, the federal government, or anywhere in between.



JOHN: And I think to take a look at this situation, find out all the facts that have contributed to where we are today, and to take that unfortunate circumstance and maybe overlay that onto how we can make a better situation.


You know, today it's California. This summer it could be Florida. It could be Louisiana. Because I think that, as we look into the future of generation and all of the different things that are happening out there, we are truly in a new time, a new economy, an e- economy with the demands on our electronics, whether it's our pagers, our cell phones.


I just got out of a hearing that opened my eyes on some of the things that are going to be -- that we're going to have to address in the future, as far as our demand on electricity.


So there are a lot of items that we're going to have to look at. And I look forward to listening and learning the lessons here. But not blaming any one individual or government, but just to learn from this and so we don't make these kinds of mistakes again.


Because we have to look into the future, because this is where it's happening with the price of natural gas, the oncoming of line -- of generations of plants that are fueled by natural gas, the cold winters. There are a lot of contributing factors that I'm interested in.


So thank you, Mr. Chairman. And I look forward to this hearing as we proceed.


BARTON: Has the gentleman completed his statement?


JOHN: Yes.


BARTON: I'm sorry. I was in consultation with the majority staff director.


On our side, we now go to Mr. Whitfield, of the great state of Kentucky, one of our veteran subcommittee members.


WHITFIELD: Mr. Chairman, thank you very much.


And I would just make the comment that, over the last eight years or so, there's been an effort in this country to reduce the use of coal, which is our most abundant resource; provides about 55 percent of the electricity produced in our country. And I know that we must take steps to encourage the use of coal while meeting environmental standards.


I would also touch on my friend from Ohio, Mr. Strickland's, comments about nuclear energy and say that I do think we must have a priority that we ensure that we always have the domestic capability to enrich uranium in the U.S. And with the closing of the plant in Portsmouth and the only other plant in Paducah, that that is something that we have to be concerned about.


And I yield back the balance of my time.


BARTON: Thank the gentleman from Kentucky. And we look forward to working with you.


We would now like to hear from another veteran of the subcommittee who did yeoman's work in the last Congress on these issues, Mr. Sawyer of Ohio.


SAWYER: Well, thank you, Mr. Chairman. Thank you for your leadership over the previous Congress and the one we're coming into.


I'd like to take just a moment to echo the remarks of my colleague from Ohio, Ted Strickland, on Dr. Alan Schriber, who has now been a mainstay of energy management and regulation in Ohio for now into his third decade. Not all of three decades, but components of three different decades. His leadership has been of enormous value to all of us.


Our hearing today is about a multidimensional problem. It touches on all of the topics that we've heard members refer to. But I'd like to focus my remarks today on the importance of transmission, with the grid being the literal backbone of the electrical system in the United States.


Unless we continue to improve and expand the transmission grid, the system simply will not sustain the growth in our economy. The linkages are just that direct. In the long run, we risk potentially catastrophic breakdowns if we don't both expand and maintain the grid to match changes in demand.


I'd like to refer to an article from the Los Angeles Times from January of this year: "Power Line Traffic Jams Add to Energy Woes." It warned that, "An antiquated and overworked system of electric transmission lines could leave much of California starved for power, even if the state can eventually generate and import enough electricity to serve its 34 million residents.


"The state's transmission system" -- the article continues -- "has long been neglected, a victim of poor planning, unexpected growth in electricity consumption, and regulations that make the lines a poor investment."


"Indeed" -- and I continue to quote -- "electricity use in the last decade has grown twice as fast as the new transmission capacity."


Many have focused on the lack of generation in California, but transmission is lagging even further behind. Quote, "The state is planning to boost generation capacity by 25 percent, but its current planning leads toward expanding the transmission capacity only by about 5 percent."


California is not the only part of the country experiencing this particular problem. It's much broader. Tuesday's Energy Daily had an article citing a study by the Mid-Continent Area Power Pool that, quote, "calls for upgrades to more than 2,700 miles of transmission lines in the MAPP system to boost reliability, but warns that existing transmission rates are not high enough to justify investment in new transmission projects."


We genuinely have a national problem, and its dimensions range from capital formation to siting decisions.


How do we close the gap between transmission capacity and demand? I believe it requires planning and thoughtful attention to long-term needs that promotes, rather than discourages, investment in the infrastructure needed to sustain competition. It requires design and maintenance standards and operating protocols appropriate to a high- speed electrical highway. And it requires timely locational decisions to meet the changing needs of the customer base.


Since I started talking about transmission investment, I've been gratified to see that the spread of concern with regard to that. We've moved from a simple repeal of PUCA and PURPA and putting a date certain for state action to the kind of discussion that we're having today.


But a funny thing happened on the way to the ISO. Electricity is becoming a riskier business than ever, with more need than ever to attract capital and to assure access and reliability.


In closing, just let me say that, according to Chairman Heber of the FERC, quote, "Transmission must become a stand-alone business and respond to the market. It must do so, however, within the framework of regulation, though in a new form."


That's what's happening. It will call on us to think through new roles for a federal framework in restructuring regional markets. That is to say, not more FERC, and maybe not less FERC, but perhaps a different FERC.


Thank you, Mr. Chairman. I appreciate your flexibility.


BARTON: Thank you, Congressman Sawyer.


We now want to welcome our full committee chairman, the distinguished Louisianan, Mr. Billy Tauzin -- Congressman, Chairman Billy Tauzin, who has -- not only have we put energy back in the name of Energy and Commerce, we have a chairman who's put energy back into the chairman's seat at Energy and Commerce.


TAUZIN: Thank you, Joe. Thank you very much, Joe. We're all getting used to new names. And while we're celebrating new names, the fact that we've named the Commerce Committee -- renamed it Energy and Commerce is not just for a light show. It is real. We have recognized that we are facing, incredibly, another energy crisis in this country and we need to move quickly.


It is no secret that we have not had an energy policy. If we had one, it may best be described as an anti-energy policy, for some time now. And defining a policy that is compatible to the needs of our country and its energy demands and is compatible to the requirements of our clean air policy and clean water policy and land-use policies in this country is going to be a demanding and awesome task.


And Joe, I want to thank you and the members of the committee on both sides of the aisle for the energy in which you have brought already to the organization of this hearing on California and the many hearings that we're going to have and discussions we're going to have with Vice President Cheney and the task force assembled at the executive level, and with Senator Murkowski and the senators who have pledged to work with us to define a new energy policy for America that fairly balances all of those mighty concerns.


If you're focusing today on California, tomorrow we'll be focusing on New York. We'll be focusing on Chicago, on Boston, on places we're told that the energy grids are too weak and blackouts, brownouts are likely this summer because of bottlenecks in those grids.


We'll be focusing later on fuel supply problems the likes of which we saw in Chicago and Milwaukee last year when fuel supplies were short and energy spikes hit consumers, and angry consumers wanted to know why and what was going wrong with our supply problems.


We know several things about this country, and one is that we have an insatiable demand for energy. And this new e-economy is a gas guzzler, and we have to somehow fit our energy supply with that huge demand. At the same time, we are going to necessarily balance those concerns against the environmental concerns of our country in maintaining some of the policies we put in place to clean up our air and our water and our land.


And that is why we put energy and air quality in the same committee. We know that relationship. We know, for example, in California that some plants are operating at 25 percent capacity because they've already bumped up against the NOx caps.


And at the same time, emergency generators are running full steam. And those emergency generators, using diesel, are polluting the air 300 times more than the power plants that are shut down. We need to put some common sense in these decisions.


And Mr. Chairman, I want to thank you for accompanying me to California. I think we're going later this month together to actually talk to energy executives and government officials in California to get a first-hand look at that problem.


California represents 12 percent of the nation's GDP. We can't have a crisis in California that is not a national crisis. We can't have a crisis in energy facing one community, one state in this country without it becoming a national concern.

There are six petro-chemical plants shut down in Louisiana because natural gas prices are so high. In an energy world where natural gas is now the premier desired fuel for electric generation, we've got a lot to talk about, a lot to do.


And Joe, I want to thank you, Mr. Chairman, for, again, the energy that your subcommittee is going to bring and you personally are going to bring to this awesome and demanding task.


Downstairs, Mr. Bilirakis has started the health care hearings and we're organizing, this afternoon, the O&I work of our committee. This committee is back. And we are going to do some remarkable things in this two-year cycle because of the talent on both sides of the aisle that is just itching to get to these problems and to find solutions for the American public.


This is going to be an exciting time for your subcommittee, Mr. Chairman. I thank you for allowing me to come in and interrupt like this. I promise, in the future, I won't do this to you.


But I wanted to come here on the first day and congratulate you for making this the first hearing. Because this California situation is something all of us have an interest in, and the entire nation has a stake in resolving. California, literally, is just the first sign of what could be problems all over America until and unless we make some good decisions.


Joe, thanks for entering this process, for helping us find those answers, and I look forward to working with you. You have the full support of the full committee and its staff in this grand effort. Thank you, sir.


BARTON: Well, this is going to be the energy bunny subcommittee of the Energy and Commerce full Committee. We're going to work, work, work, work, work, Mr. Chairman. And we hope produce, produce, produce, produce, also. We welcome your participation.


We want to welcome Mr. Markey for an opening statement. And I want the audience to look at your watches and let's see if Mr. Markey can hold his three-minute opening statement to under seven minutes.


(LAUGHTER)


BARTON: Let's pick a number.


Mr. Markey?


MARKEY: Thank you, Mr. Chairman, very much.


I begin here today my 25th year on the Energy Subcommittee. And I remember back in the late '70s, actually, when Senator "Scoop" Jackson used to hold hearings before the Senate Energy Committee. And we didn't have an energy committee in the House. We had an Interstate and Foreign Commerce Committee that had energy, health, telecommunications. You all serve on this committee right now.

And there was a big move to create a House Energy Committee and to strip the committee of its jurisdiction. I suggested to Mr. Dingell that we make a big move to help solve the problem that we didn't have an energy committee in the House, that we change the name of the committee to the Energy and Commerce Committee and that would solve the problem. Which it did. From 1980 until 1995, when, because the energy prices had, kind of, abated, the name was changed back to the Commerce Committee.


Beginning this year, we have changed it back again to the Energy and Commerce Committee, dealing with the reality that energy is now playing a much more pronounced role in public policy in our country. But also as an anticipatory, almost NMD shield against anyone coming after our jurisdiction in this particular area, because, Mr. Chairman, you are going to provide great leadership for us.


BARTON: I didn't realize it was your idea.


MARKEY: That was my idea. Coming up with a good line.


(LAUGHTER)


You know, my other always said to me, Mr. Chairman, try to learn as many lessons vicariously as you can. It's safer that way. Now we always don't do that, but we're here today trying to learn vicariously from the California electricity disaster.


Some of you recall the film "The Perfect Storm," in which three storm fronts converged off the New England coast to produce monster waves that crashed down and destroyed a small Massachusetts fishing vessel.


What we have seen today in California is an electricity perfect storm, in which converging fronts of a flawed state restructuring plan, high natural gas prices, increased demand, lower than expected rainfall, reduced imports of power from neighboring states, lack of new generating capacity, transmission constraints and market structure problems have all come together to produce a monster wave of rolling blackouts and higher prices.


For the citizens of California, it is a crisis that leaves consumers caught in a vortex of reliability problems and looming rate increases. For the rest of us, it is something that we only want to experience vicariously.


Now, we can learn the wrong lessons. President Bush, the secretary of energy, are arguing that we should drill in the pristine Arctic refuge to find more oil. Unfortunately, only 1 percent of electricity in California is generated from oil. And even if we did drill, we wouldn't find any oil and have a capacity to bring it to California for at least 10 years; not, I think, the time schedule that this committee wants to work on.


California is one of the main engines of the digital autonomy and digital bits are the currency of this information economy. What are they? Simply bundles of electrons. Every single one of the hundreds of millions of devices, PCs, routers, servers, transmitters, and so on, have exactly two kinds of connections: one for bits and one for kilowatt-hours. Just how much electricity does the Internet use? Some estimates are that up to 8 percent of the nation's electric supply is absorbed by the sprawling and deeply penetrating hardware of the Internet. And when the broader array of all the computers and related equipment are considered, the total probably has been estimated to reach 13 percent of all U.S. electricity consumption.


In fact, in just the past five years, our digital economy has driven U.S. economic growth so much, that the increased energy supply needed to meet this growth is equal to the total generating capacity of the country of Italy. Cyberspace, clearly, has an energy cost and energy still continues to be the engine for growth.


It is true that the increased sufficiencies brought about as the result of telecommunications and information technologies will help us to use energy more efficiently. But the heightened economic growth made possible by the digital era, also seems to be driving increased demand for electricity in California, in Massachusetts and elsewhere around the country.


Put simply, if oil was the fuel that powered economic growth in the 20th century, electricity is the fuel that powers economic growth in the 21st-century digital economy.


So how do we prevent the California catastrophe from becoming the California contagion? How do we create a functional electricity market that can efficiently and inexpensively meet the electricity needs, and do so in an environmentally responsible fashion?


One way to start is to assure that we have a fair and competitive market structure. Last year, when this committee was considering 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. My amendment would have given federal regulators the tools they need in order to address market power abuses in the emerging competitive market.


But there was widespread opposition to my amendment from the electric utility industry, and from many members on the other side of the aisle. "There is no market power problem," I was told. "We shouldn't be giving FERC any more authority in this area. We should leave it to the states."


Well, we ended up doing nothing, and 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 California's energy regime provided an opportunity for sellers inside and outside of the state to exercise market power when supply is tight.


Unfortunately, because FERC doesn't have the type of authority that it should have over market power abuses, it was unable to charge particular sellers with abuses of FERC rules.


And as we know, some of California's problems are beyond its own state boundaries, and so the state regulators can't reach those issues. Only if we have a national regime and a national wholesale market can we move to this new era, but we need national regulation as well to deal with the national market power abuses.


I know that there are many factors that combine to produce California's perfect storm. Some, like the amount of rainfall on 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 that we should act.


I look forward to the hearing today, and the expert witnesses that you've gathered, Mr. Chairman, and I look forward to working with you this year...


BARTON: Thank you.


MARKEY: ... toward the goal of producing national legislation.


BARTON: We appreciate your eight minute and 10 second three- minute opening statement.


MARKEY: Thank you, Mr. Chairman.


BARTON: We're going to give you style points, but I think Mr. Doyle has got substance points on you. You're going to have to...


MARKEY: That's because he agrees with you.


(LAUGHTER)


BARTON: Well, that doesn't hurt. Who does the judging does make a difference. That's true.


We now would like to hear from another of our Californians, Mr. Radanovich. We welcome you to the full committee and the subcommittee.


RADANOVICH: Thank you, Mr. Chairman.


And California rarely gets together on anything because we're such a big, and such a large and diverse state. But in my six years of being here, we did manage to come together on one thing. And that's when the state delegation, both Republican and Democrat, came back to Washington, together with the California delegation here in Congress, to lobby the fed to keep them out of the current deregulation debate back here at the time, because California had such a great plan and the fed would only screw it up if they got involved. That's how our plan started. And, of course, this turned out to be not such a terrific plan. It hasn't worked out very well.


And as the only member here, I think, whose district has gone through a rolling blackout, I would really want to stress one thing. And that is that in two and a half years, things are going to get very critical, and if there's not both federal and state participation to get us through these two and a half years, I fear that there will be loss of life.


I am a supporter of temporary cost-plus caps that could be had through the FERC. But I don't support those things until the state really does a couple of things. One is to begin to relax some of the clean air standards, because it's my belief, and I hope that we hear more about that from some of the testimony today, that California can produce 10 percent more of its own energy if that alternative is investigated.


Secondly, I think the environmental community in California needs to stop using environmental policy to stop growth, because growth is and has occurred, and until the state collectively pulls its head out of the sand, and begins to prepare for its future, rather than ignoring the fact that infrastructure needs to be expanded, both electricity and water, then I think that the fed ought to wait.

California needs to do a few things, but we can't get through these two and a half years without federal help. And I really think that temporary assistance, both from the federal level and the relaxation of some of these standards, or the assertion of a temporary cap, is no more dangerous than temporarily relaxing some of the state's clean air standards.


It doesn't mean eviscerating the law. It doesn't mean that at all. It means temporary assistance to a state that's found itself in very dire straits. And it's going to need attention from both the federal and state governments. Thank you.


BARTON: We thank you, Congressman, and we really look forward to your input because it is very, very beneficial to have a congressman whose district is having some of the problems that we're trying to address. And while it's no fun for you and your district, I understand that, the knowledge that you have as a result of it's going to be very beneficial.


RADANOVICH: Thank you. And this summer, Mr. Chairman, it will be statewide. Southern California will be getting it this summer.


BARTON: We appreciate your participation on the subcommittee.


WAXMAN: Mr. Chairman?


BARTON: Gentleman from California, Mr. Waxman?


WAXMAN: Just so we have the record straight, Chairman Tauzin made a statement and we can have views, and I respect other people's views. But statements of fact ought to be evaluated. And Chairman Tauzin said that plants are running at 25 percent of capacity because of NOx limits. That's contrary to what we heard from the California Air Resources Board. I wonder if we could get for the record the information that Chairman...


BARTON: Well, let's get to the opening statements before we start into a debate on other member's opening statements.


WAXMAN: He probably has data that I don't know about, and I want to be sure.


BARTON: We're going to be fact-based, but we will -- obviously, whatever data is there from EIA or the California Air Quality Board, the FERC, we will put into the records. No question about that.


We now would like to hear from another veteran of the subcommittee and the full committee, Mr. Bart Gordon. We came to Congress at the same time, and our hair was dark, and our bellies were flat. His belly is still flat. Mine's not, nor is my hair dark. Mr. Gordon?


GORDON: Thank you, Mr. Chairman. And thanks for your leadership here. We've had some interesting opening statements, but I think it's time to hear from the panel.


BARTON: Well, thank you. You give us back a little bit of time.


We'd like to go to a new member of the subcommittee, not spoken, Mr. Ganske of Iowa, for an opening statement.


GANSKE: I thank you, Mr. Chairman.


To Mr. Markey who speaks about the confluence of factors that created a perfect storm, I say let us gladiators lay down our swords, traffic in good will to work together, have a piece of chocolate with Erin Brokovich, and try and figure out this energy policy.


And Mr. Chairman, several of us are juggling at simultaneous hearings on energy and prescription drugs. And we actually have people on fixed incomes in this country who are trying to decide which bill to pay: their medicine bill or their power bill. And so, for this hearing, I think it's important to focus on two separate questions.


First, what role should the federal government play in assisting California and overcoming its energy problems? Second, we should examine California as a case study in restructuring and determine what went wrong, because clearly, something has gone wrong.


Mr. Chairman, as our committee resumes work on energy issues, I want to reiterate the principles that I think we should keep in mind as we deal with energy, this energy crisis. All retail customers must benefit and be protected in a competitive market. Those companies that have invested in power facilities must be treated with responsibility.


We need to ensure that competitors enter the market on an equal footing. We need to clarify any jurisdictional ambiguity that could frustrate a competitive market. We must maintain a safe and reliable electricity system, and we need to protect the environment.


As I see it, there are many contributing factors to the current state of the energy situation in California. One of the factors is a failure of power generation and transmission to keep up with growing power needs in the state. Current regulations, under the Public Utility Holding Company Act, clearly deterred the establishment of greater power generating capacity in the state.


It also seems that the 1996 California restructuring changes have violated some basic rules of economics. By locking in consumer power rates, and allowing the rates the utilities had to pay for power, it was only a matter of time until the price at which power could be purchased exceeded the amount that could be collected from the customer. My question is this: Where was the market incentive for conservation of energy?


By also preventing long-term contracting for power, another stabilizing factor in the price was removed.


And finally, I would also say that I think we're making a mistake if we focus only on what California did wrong. We should look at what other states may have done right.

Mr. Chairman, I hope that the lessons we learn today will help us in our efforts on the federal level to help create a reliable energy policy, and I yield back.


BARTON: Thank you, Congressman Ganske. We appreciate that opening statement.


We'd like to hear from Congressman Barrett of Wisconsin for an opening statement.


BARRETT: Thank you, Mr. Chairman. I agree with Bart that we should get on with the hearing, so I yield back my time.


BARTON: Thank you.


Then we would go to Mr. Bryant of the great state of Tennessee for an opening statement.


BRYANT: Thank you, Mr. Chairman. Let me, too, apologize as another one of those members that's doing double duty today with the Health Care Subcommittee also meeting at the same time upstairs on the very important issue of prescription drugs for senior citizens.



BRYANT: I will be quick. Like my colleague, Bart Gordon from Tennessee, I think just about everything's already been said. Let me associate myself with a couple of people's remarks, though. With Mr. Doyle because my chairman said it was such a good statement. But I do agree with Mr. Doyle's statements that we have to, as others have said, learn not only from the mistakes of California, but also from a job well done, it appears, from states like Pennsylvania.


And finally, let me associate myself with remarks by our chairman of the full committee, Mr. Tauzin. What I heard him say, among other things, was we need to focus, as a subcommittee and as a full committee, as a Congress, on a national energy policy in this country that covers the range, not only of this issue, but natural gas and a complete energy policy. And I hope that we can, in this Congress, join in with the administration in looking at this, and not only looking at it, but coming up with a comprehensive energy policy.


And with that, I will yield back the balance of my time.


BARTON: We thank the gentleman from Tennessee.


I see no members on the Democrat side that haven't been given an opportunity for an opening statement, so we'll go to Mr. Pickering and to Mississippi for an opening statement.


PICKERING: Thank you, Mr. Chairman. And let me just say, from the committee's perspective, I think that we have done the right thing in the last two Congresses by waiting to see the experiments in the states. And now we have a greater body of evidence and examples, both good and bad, what works and what does not work.


But let me say now is the time for us to develop the comprehensive energy policy that our country so desperately needs. And it will have to contain every component, from the reliability of our system, to the transmission, to the generation, to regulatory reform, exploration and production, alternative energy sources and new technology.


Now is the time to act. We do see from our states what works and does not work, and we ought to take those lessons to heart as we begin working with the new administration, and as Republicans and Democrats do the right thing for the country.


Thank you, Mr. Chairman.


BARTON: Thank you, Mr. Pickering.

Seeing no other members present who has not been given an opportunity to give an opening statement, the chair would ask unanimous consent that all members not present be given such an opportunity to put an opening statement in the record. Is there objection? Hearing none, so ordered.


We now want to welcome our first panel. We have a distinguished panel. We have the commissioner from the California Public Utilities Commission, the chairman of the Ohio Public Utilities Commission, the chairman of the Pennsylvania Public Utilities Commission, and a national leader in the consumer movement, Mr. Travieso from Maryland.


We're going to start, obviously, since there's been quite a bit of focus on California, with the commissioner of the California Public Utilities Commission, Mr. Carl Wood.


Welcome to the subcommittee, Commissioner Wood. We're going to put your entire statement in the opening record. We're going to start you with seven minutes, and see how close you come. If you need additional time, obviously we're going to give you additional time. Welcome to the subcommittee.


WOOD: Thank you very much.


Good morning, Chairman Barton, and members of the subcommittee. I very much appreciate the opportunity to testify before you today on behalf of the California Public Utilities Commission, or PUC, the state of California and our 35 million residents.


Your invitation asked that I focus my remarks on the cause or causes of the electricity disruptions that Californians have been experiencing since June of last year, and those elements particular to the electricity deregulation plan implemented by California's previous administration, which I view as responsible for those disruptions.


As I appear before you today, California marks its 31st day of a continuous Stage 3 energy alert. The three major investor-owned utilities in California are experiencing severe financial difficulties, with vendors and independent generators expressing concerns about whether they will be paid for services rendered. As the governor and legislature move aggressively to address these challenges, with plans to increase generation and conservation and stabilize the financial health of the utilities, I think we can learn much from our painful experience with deregulation.


Fundamentally, I believe the premise that provision of electricity as an essential service could be effectively traded on the day-ahead and hour-ahead spot markets absent a full range of generation procurement options, was at the root of the failure of California's deregulation scheme. The flaws in the system adopted reflect this belief: the pool structure that was established, the accompanying reliance on wholesale trading in lieu of native generation, California's retreat from integrated resource planning, and the unmet promise of customer choice.


A balanced reliance on the mix of generation procurement options available has historically been necessary to maintain reliable, reasonably priced electricity, and it remains so today.


Historically, California participated in the Western Systems Coordinating Council, or WSCC. The WSCC was a loose pool that permitted coordination and trading of loads and resources in the Western states. During the two decades before deregulation, California's utilities relied on trades and purchases from within the WSCC to fill out their resource needs, in combination with native generation and short- and long-term purchases from qualifying facilities.


For example, San Diego Gas & Electric Company successfully reduced its average electric rates from a high of $0.123 per kilowatt- hour in 1985 to about $0.09 per kilowatt-hour in 1991. This was accomplished largely by meeting its energy requirements with a mix of native generation, and trades and purchases. SDG&E met approximately 30 percent of its energy requirements through contracts in 1992.


In contrast, the Federal Energy Regulatory Commission, or FERC, authorized efforts to regionalize the Western Interconnect and markets have failed to protect consumers. Beggar-thy-neighbor withholding of generation and sales has replaced the regional cooperation that worked for years. California is now moving to restore a mutually beneficial and cooperative approach.


A central mistake of California's deregulation experiment was the divestiture of a large portion of the cost of service utility generation plant in our state. Over a two-and-a-half-year time frame, California's investor-owned utilities sold 18,393 megawatts worth of fossil and renewable generating facilities. These facilities were subject to cost-of-service rate making. They now generate power that is sold into the current market at considerably higher prices. I would say spectacularly higher prices. That market is dysfunctional. Wholesale prices no longer bear any relation to the cost of production, demand or time of use.


The very power the utilities once owned and controlled is now sold on the wholesale market to meet virtually the same demand. Spot market wholesale trading should be used to meet electricity demand on the margin only as part of a mix of resources relied upon to meet requirements. But nothing in California's deregulation experiment limited reliance on the spot market to meet any demand, even including base load. California is now moving to permanently reduce its reliance and exposure to wholesale markets.


I believe policy-makers at the time should have taken a more measured approach to authorizing the divestiture of native generation. It may have been appropriate to authorize divestiture of some amount of utility generating facilities to improve the development of a workably competitive wholesale market and the Power Exchange.


However, losing the benefit of regulatory control over this portion of California's energy requirements in such a short time period significantly diminished California's ability to minimize price volatility during the uncertain transition period. California's PUC, our legislature and Governor Davis are all in agreement that no further divestitures should be authorized given the current dysfunctional market.


Throughout the 1980s and 1990s, the California Energy Commission and the PUC conducted a joint integrated resource planning process. Future resource needs were forecasted and a mix of demand-side management, generation and purchases were identified to meet those needs. In 1992, this process resulted in a finding by the PUC that 1,300 megawatts of additional generation should be procured from qualifying facilities through an auction.


After receiving bids to provide power it regarded as being too high priced, Southern California Edison Company appealed to the FERC. Ultimately, FERC found that the commission's auction process was flawed and the utilities settled outstanding claim, but the auction outcome and the building of the new generation facilities was blocked. No additional power was procured through that process, and the PUC determined not to incorporate a state resource planning component into its adopted deregulation experiment.


This retreat from integrated resource planning in California aggravated the problems that stemmed from market uncertainty. The state ignored its energy efficiency building standards during the building boom of the mid-1990s and discouraged the construction of cost-of-service power plants, all in the hope that unregulated investors would build sufficient new generation capacity for predicted future needs. No warning signals were built into the deregulation experiment to provide policy-makers with adequate warning that the market was not delivering sufficient new capacity.


The deregulation experiment also held out the promise that all customers would be able to choose their energy provider. But in reality, this promise was a false choice. Direct-access sellers, or energy service providers, set up shop in California and solicited customers, but were not assigned a duty to serve customers comparable to the obligation borne by traditional utilities. These providers never penetrated the market to any significant extent, and at the first sign of trouble in the market, they closed their doors and returned customers to the regulated utilities. The prospect of choosing your energy provider turned out, in practice, to be little more than a rationale for the unbundling of the distribution utility.


As I said before, I regard provision of electricity as an essential service. Policy-makers concerned about economic stability should assure a reliable, reasonably priced supply of this essential service.


The state and the Federal Energy Regulatory Commission have the responsibility and jurisdiction to take corrective actions when, as today, reliability or reasonable prices are compromised. We are taking those actions in California. Unfortunately, FERC has not exercised its authority and responsibility under the Federal Power Act to protect consumers from unreasonable rates.


FERC recognized last year that the market was dysfunctional, and that the wholesale rates being charged were unreasonable, but nonetheless has failed to act effectively. In spite of FERC's inaction, California's policy-makers are working together to restore reliability and price stability to the market.


Again, thank you, Mr. Chairman, for the opportunity to come before you this morning.


BARTON: Thank you. Thank you for that statement.


Mr. Doyle would like to introduce our next witness.


DOYLE: I want to thank Chairman Barton for extending the courtesy to introduce a fellow resident of Pennsylvania, John Quain, chairman of the Pennsylvania Public Utility Commission. I'm pleased not only that Chairman Barton included Pennsylvania as part of our discussion about electricity deregulation, but that the expertise of Chairman Quain was sought out. I'm sure we will all learn a lot from his contribution to today's proceedings.


Chairman Quain was named chairman of PUC Pennsylvania in 1995. Prior to his appointment to the commission, he was a managing partner in the law firm of Tucker Aaronsburg (ph).


At the request of Governor Ridge, Chairman Quain facilitated the development of consensus legislation in the electric and gas industries that led to the introduction of customer choice and utility competition in Pennsylvania. He is well-known for his role in the development and implementation of Pennsylvania's Electric Generation Customer Choice in Competition Act.


Chairman Quain currently serves on both the National Advisory Counsel to the Gas Research Institute and the National Advisory Committee to the Gas Industry Standards Boards.


Welcome, Chairman Quain.


QUAIN: Thank you, Congressman.


BARTON: We'll put your statement in the record in its entirety. We're going to recognize you for eight minutes. Commissioner Wood took a little over eight, so we'll at least give you eight minutes.


QUAIN: Well, I will not take eight minutes, Mr. Chairman. I will not read my statement. It's not my custom to do that. You have it, and I know you've read it. We've talked ahead of time.


Congressman Doyle, thank you for those kind remarks.


We entered into this journey of deregulation back in late 1995. And the commission at that time held a hearing to determine whether electric generation, as distinguished from transmission and distribution, ought to be deregulated. At the conclusion of our investigation, I had the privilege of sitting down with Governor Ridge in July of 1996 with the conclusion: Pennsylvania's rates were about 15 percent above the national average. That was making us non- competitive for jobs in the national economy. It's non-competitive for manufacturing in the national economy.


But we also had, at that time, an industry in the electricity market that was safe and reliable. So our challenge was to bring down rates without sacrificing either safety or reliability.


As Congressman Doyle indicated that governor asked me to convene a stakeholder group. We decided, with the good will of our General Assembly, not to follow the normal legislative process. But because we were dealing with a fundamental human needs commodity, we had to get the details right. This is a complex area, as everyone has recognized. There are a lot of moving parts, all going at the same time.



QUAIN: So we put together a consensus group, a stakeholder group, consisting of 50 different interests, sitting around the table. Not 50 people, 50 different interests. And we actually negotiated every single phrase in the entire dereg bill.


At the conclusion of many hours over a three-month period of time, we had a consensus piece of legislation, where every stakeholder, save one, the environmental community, who we disagreed with because they wanted portfolio requirements and our goal was to bring prices down -- the entire stakeholder group either did not oppose or supported the deregulation bill.


Now, at that table, were low-income advocates, consumer advocates, large industrial customers, independent power producers, senators, representatives, members from the governor's office, electric utilities and the like. We all move to the General Assembly in one night, without amendment, our bill passed.


But that was only the beginning of the challenge. We then had to implement it, and what our bill provides is for the Public Utility Commission in Pennsylvania actually to implement it. And when we went through the stranded investment issues, as you can expect, that's about $18 billion at issue, we had significant disagreements. And as we issued eight separate orders, we followed the same process. All orders were appealed, so we brought back all participants, all litigants, and actually sat down and settled eight in a row.


So today in Pennsylvania, there's not a single issue on appeal, either on the legislation or with regard to the eight separate implementation orders for stranded investment recaps and the like.


And as Congressman Doyle said, our goal was to bring our rates from 15 percent above the national average, and today they're 4.4 percent below. But the news doesn't stop there. We've had, over the first three years, about $3 billion in savings to all classes of customers, not simply large industrial customers.


In 1999, the Philadelphia school district alone saved $3.1 million -- $3.6 million. This year, the Commonwealth of Pennsylvania saved $3.1 million. Residential consumers sold somewhere between 10 and 15 percent on a regular basis.


And the good news continues. We've seen a growth and projected job growth of about 36,000 jobs by the year 2004, just as a result of deregulation. And we set a marketplace in action which actually encourages new generation to be built within our grid, the PJM interchange. Today, about 15,000 megawatts, or about 25 percent increase in generation, is being proposed to be built in the grid over the next five years.


We cannot escape the laws of supply and demand. They are necessary to the economy, and are necessary for a competitive market to work.


But my message to this committee today, Mr. Chairman and members of the committee, is competition can work. It is good, because I don't care what kind of regulator you are, either soft or the most strident, there is simply no substitute for good old-fashioned American competition if you get the fundamentals right.


And our challenge now is to continue that effort. We work on deregulation, literally, every day. We have over the last four years, and we will continue for the foreseeable future, because we are managing this transition from monopoly to competition. It cannot happen overnight, but it can and does provide benefits.


Thank you, Mr. Chairman. I look forward to the questions.


BARTON: Thank you, Chairman.


We'd now like to yield to Congressman Sawyer to introduce our next witness.


SAWYER: Thank you very much, Mr. Chairman. Ted Strickland and I tossed a coin, and I won.


It's a pleasure to welcome Alan Schriber to this panel. He has served as chairman of the Public Utilities Commission of Ohio since 1999, when he was appointed by Governor Bob Taft. It has been an extraordinary time in the very long history of that institutional asset in the state of Ohio. He also served as a commissioner from 1983 to 1989 under Governor (inaudible). He brings a number of assets to his work, but they include a BS in economics from the University of Wisconsin at Madison in 1967, an MS in economics at Miami University in 1972, and his doctorate in economics by Indiana University, Bloomington, in 1976.


I would mention, just as an aside, that Chairman Schriber also serves as the chairman of the Ohio Power Siting Board. It is a critical component in the process that Ohio is taking to site new power generation and, I might add, transmission, to prevent the situation that occurred in California from occurring in Ohio, and to do it in a way that is compatible with environmental and public needs concerns.


I'm happy to welcome him to our panel today.


BARTON: Chairman, your statement is in the record in its entirety. We will give you eight minutes also. If you need a little more or a little less, that's fine.


SCHRIBER: Thank you very much.


BARTON: And put the microphones really close to you. They don't pick up well if you don't speak directly into them.


SCHRIBER: Chairman Barton, thank you very much. Members of the committee, thank you, and the kind words of Congressman Strickland and Congressman Sawyer. That's all I needed is a little bit more pressure to perform. But I do appreciate it very much.


I'm going to take a little bit of a different tack here today, because I think what we wanted to pursue, at least what I would like to pursue for the benefit of the committee, is what we have learned from the experience of California. It's not my mission today to go into a post-mortem of what went wrong. I think we're all pretty much aware of many of the circumstances that led that state to where it is. Of course, I'd be happy to answer questions about that later.


I think, above all else, those of us in states that have undergone restructuring -- and ours is very recent; we're six weeks into it -- bear a very heavy responsibility. We've talked about what one state may have done wrong, and what another state and other states may have done right. I'm not absolutely convinced, and I don't think any of us can be convinced, of what we have done in Ohio, just because it's significantly different from what was done in California, is right. But we hope it is.


I think that brings us to a virtually sacred obligation to be vigilant. Among other things, as time goes on, we have to be very careful. We have to look for early warning signs. We have to be aware of what the market is doing. We have to have capabilities of monitoring the market. Yes, we all get phone calls of crises that have gone this way and that way, and we get lots of consumer complaints. And we're alerted to the fact, and we know quite well, that natural gas prices are high, and electricity marketers may be offering different rates at different times.


But equally important, and probably more difficult, is to monitor the supply side of the market. There are, of course, two sides to this market.


And when we look at the supply side of the market, again, we're looking for early warning signals of what might go wrong. And without going into a great amount of detail, for example, the relationship between retail prices and wholesale prices. Good signal. Can we monitor loop flows across grids? Can we determine where there's congestion? Can we determine reliability? Can we determine whether or not our ancillary services that accompany the generation of electricity and the flow of electricity? Can we keep on top of that?


Any combination of these activities could lead us to be very, very concerned where we're going. And if that concern does come to fruition, what do we do? I think that each commission, and I think we have the support -- I'm happy to say that I believe we have the support of the legislature and the governor's office to really step in when we need to.


We need the ability, and we have the ability in our code. We've got lots of laws. The bill that's set up, and gave the commission the ability to implement our restructuring law, gave the commission the right, the obligation to step in if need be, and take dramatic action where need be. We need not hesitate to do that if we get the wrong signals from the markets, because we really do believe that we need to cut anything off at the pass that could be deleterious to our state.


I would also note that the supply of electrify is obviously paramount in everyone's mind. Ohio does have a power siting board, which I chair. In our power siting board, I can't say that every state does, I know a lot of states do not have power siting boards. We have a power siting board with a lot of authority. Not only do we just site the facilities for quote, unquote, "public utilities," as defined in the law. But we also site merchant generators who would otherwise not be considered public utilities, interstate transmission lines we site, natural gas pipelines, and the like.


I'm happy to say that in the last three years, since 1998, we've approved 6,000 megawatts to date. Between last year, the year 2000 and this year, 2001, we will have 2,560 brand new megawatts of electricity on board. We have before the siting board another 8,000 megawatts pending. These are applications pending before us.


Now, clearly much of that is natural gas. I am prepared to tell you that we would love nothing more than to entertain some good base load, coal-burning power plants in Ohio. We believe that there is the clean coal technology at hand. We believe that Ohio, of course, does have the natural resource. And we believe that the base load coal plants are a necessity, because we know that natural gas is going to be used everywhere in every manner. And that will do nothing to enhance the price of natural gas.


Finally, I need to point out that in my prior iteration as a commissioner, demand-side management seemed to have been a catch word that really didn't catch on at the time. It seems to have gotten away from us. I think it's something that desperately needs to be revisited.


We do need to look at the demand side. We need to look at conservation. Conservation is accomplished, not just through the incentives that are provoked through high prices, but I think we, as a government, have an obligation to incent and to push very hard for demand side considerations.


With that, I will conclude mine, and look forward, also, to further questions.


BARTON: Thank you, Mr. Chairman.


We now want to hear from Mike Travieso. He is the people's counsel for the state of Maryland. He's also the secretary for the National Association of State Utility Consumer Advocates, on whose behalf he's testifying today.


And Congressman Wynn of your state was very helpful in allowing and helping us communicate with you to get your attendance. We welcome you.


TRAVIESO: Thank you very much, Chairman Barton, Congressman Boucher, Congressman Wynn, members of the committee. I am Mike Travieso and I am...


BARTON: Mr. Wynn, would you like to further introduce Mr. Travieso?


WYNN: Thank you, Mr. Chairman. I am anxious to hear his testimony, and I want to thank him for coming, and only make the comment and share with the committee that Maryland has had a very thoughtful and very successful experience with deregulation. I think he will add greatly to our storehouse of knowledge. So with that, thank you for coming.


TRAVIESO: Thank you very much. I am Mike Travieso, and I am here on behalf of NASUCA. I'm not from the great state of Pennsylvania, but I'm from the great state of Maryland. And we've had a similar experience as Pennsylvania in the way that we deregulated.


But first I'd like to take us back a little bit in time to the '94, '95 era in California to listen to the promises that were made then to the customers of utilities as to the benefits of retail competition and the wisdom of the market structure that they had set up.


One thing that's important to remember is that this structure was designed by the participants. The utilities were involved in the design, the suppliers, the generators were involved in the design. But there was very little involvement on behalf of small consumers and residential customers.


Now, I represent them. My job is to represent all the small consumers and the residential customers in the state of Maryland. NASUCA, as an organization, is made up of 42 agencies like mine, whose job it is to represent small customers and residential customers. So our perspective, I think, is a little different than the perspectives that you may have heard or you may hear from the next panel.


Back in '94, '95, there were promises made to all consumers, including residential customers, that their rates would go down as a result of competition. And these promises have actually been made in virtually every state that has deregulated. And the theory is that competition will squeeze out inefficiencies, and will produce lower prices; that a competitive market is better than a regulated one in terms of providing these kinds of benefits.


The two agencies that are members of NASUCA in California, TURN (ph) which is our agency in northern California, and UCAN, which is our agency in southern California, were opponents of the deregulation bill in 1995. And they pointed out that there were some serious problems with the way the market was designed back then.



TREVIESO: So I guess one message I would have to the members of the committee is, in your deliberations, please pay attention and give some weight to what the consumer advocates are saying, and what they're saying in connection with policy issues and economic issues, because we have a tremendous amount of experience. We have consultants, and we've done a lot of work. And of course, we've been the victims of a flawed plan in California.


A little bit on the point of electricity as an essential quantity, or essential item, that is necessary for all residential customers, in fact, all businesses. Electricity is a little different than a lot of other commodities, and it has to be looked at a little differently when you're considering deregulation, because it can't be stored, because it's an essential quantity, it's an essential item, economists will say that demand is inelastic. And so, when there are problems with the supply and demand issues with respect to electricity, the consequences are far more severe because there are fewer opportunities available to consumers.


We would hope that this committee, and Congress in general, would focus on the wholesale markets. Many of the states have already set in place, retail deregulation plans, as has Maryland. And I think we would agree that the laboratory for those plans, and the experience should be gained at the state level. But we would certainly urge that Congress consider the best way to deal with the wholesale market, and use some of the experiences from California to formulate your policies.


We think there are a number of flaws in the design of the California market. And I think Carl Wood has pointed out a number of them. I would only point to the fact that there were some mistakes made in the estimates of supply that would be available to serve the market, looking toward the future, and would refer again to the plants that were canceled, that were not built. Not because of any constraint, any problem with permitting, or anything else, they were just canceled.


I would point out as well that there was a large overestimation of the amount of energy that would be saved through demand-side management programs. The planners relied on utilities to put these programs in place. They were counted as reducing the demand. But when push came to shove, the utilities discontinued these programs, and therefore, energy was not conserved. And that obviously increased the demand.


So there needs to be consideration given to what the actual supply will be, and what the demands will be. And the planners need to take a very clear look at energy growth and at things like light conservation.


A major flaw affecting California, also, was the prevention of the utilities, for example, to enter into long-term power contracts, which would allow them to meet their retail obligations.


Now, Maryland has price caps. Pennsylvania has price caps. Virtually every state, I think, that has deregulated, has retail price caps. And the reason for that is that advocates have asked for them. We don't really see, necessarily, that small customers are going to gain a benefit through electric deregulation. And therefore, most advocates have urged that prices be stabilized during the transition period, and also be reduced. And this has happened in many states.


I don't think the flaw in California is that there were price caps. I think the flaw is that there wasn't a wholesale market that didn't operate properly. And the concept of price signals really would be inapplicable under those circumstances, because sending a retail customer a $0.22 per kilowatt hour price signal is not valid, since $0.22 does not represent a valid price.


So I certainly wouldn't agree with the concept that retail rates can't be capped. And the reason for that is that, for example, in Maryland, we permitted our utilities to retain their assets and to enter into long-term contracts, and they've done so. So they can hedge. They can have four-year contracts at a price that will allow them to meet their retail obligations, and we've done that in Maryland. That's one of the good things that we've done.


I would urge the Congress to empower the FERC to do a number of things that they don't currently do. And the reason for that is that I think, as I've said before, wholesale energy markets are a far different animal than lots of other markets, and they lend themselves to market power abuse. And I think there is a substantial amount of evidence that indicates that there was market power abuse in California.


You have hourly markets, and you have the suppliers with enough information to withhold energy, withhold their production until the prices go way up. And they can make more money doing that than they can selling at the lower prices.


So it's a serious problem. I think there's evidence of that in California. And we would urge Congress to allow FERC not to diminish their responsibilities, but to -- I think we agree with Chairman Markey; to give them the authority to deal with market power abuses, to protect the small consumers against price volatility in the wholesale market, to take the public interest into account.


I think markets take private interests into account, because that's what they're supposed to. They have stockholders and their obligations are to maximize their profits. But in the electricity business, at least from the retail consumer's standpoint, there are things that markets don't necessarily respond to. And one of them is conservation, the demand-side management, renewables, low-income issues. There are a lot of things that are extraneous to markets. And markets don't necessarily work with respect to those kinds of issues.


So our message is to pay attention to the wholesale market, to give FERC the market monitoring authority that they need, and to give them authority to require the formation of RTOs, ISOs that own the transmission lines independently, to establish the boards of these organizations without the interested parties controlling them. And to make sure that there is some benefit, somehow, for small customers, and that we don't end up paying for mistakes like we're doing in California and some parts of New York, and we may well do in other places.


Thank you, Mr. Chairman.


BARTON: Thank you.


We're now going to go to the question period. I have consulted with Congressman Boucher. We're going to have one round of questioning for this panel, but we're going to have a little extra time; instead of five-minute round per member, let's set the clock at seven minutes. And we'll be liberal in the use of the seven-minute rule, but we have another panel and a number of members present. So we're going to try to do one round, and give each member seven minutes.


And the chair would recognize himself for the first question.


This is not a hearing to just jump on California. I mean, that's why we have Pennsylvania and Ohio, and some consumer representatives. But we do need to compare. And the first thing that I would like to get in the record from California, Pennsylvania and Ohio is what your base load supply equation is, and what your base load demand equation is, and also, your peak supply, peak demand for each of the states.


Could we start with you, Commissioner Wood? Can you tell us what the base load supply, generation capacity is in California, and what the base load demand is?


WOOD: I'm afraid I don't have those numbers off the top of my head. The generation resources in California, from what I can tell, tend to be structured a little differently from some other states. And many of the resources don't conveniently sort themselves out into base load, load following and peaking units.


BARTON: Well, let me hit it another way. Again, we simply have to get some sort of a fact basis in the record. Correct me if I'm wrong on California, but your general generation capacity on a daily basis is about 38,000 megawatts; is that right?


WOOD: That's a pretty typical figure, although there are extreme seasonal swings as well as time of day...


BARTON: But your demand is 45,000 megawatts?


WOOD: That's what the peak looks like. That's the outside of high demand, 45,000, maybe as high as 48,000.


BARTON: OK.


Chairman Quain, can you give us what situation...


QUAIN: You saw me checking the numbers myself. I don't generally look at them on a state basis. We generally look at them on a grid basis. But I have both.


Pennsylvania is a net exporter, generally. We have, in Pennsylvania, about 30,000 megawatts. The peak is just a little under that, on a stand-alone basis. But we look at both on a grid basis. And the numbers there, Mr. Chairman, are about 57,000 megawatts on the PJM grid basis, with a peak of about 54,000 or 55,000. We have about 6,000 in the ground being built.


BARTON: But your supply situation is larger than your demand situation.


QUAIN: Absolutely. But there is also an ability to bring in on long-term and short-term contracts, to balance any particular supply or demand, in the event a generating unit is down for unscheduled maintenance, for example.


BARTON: Chairman Schriber?


SCHRIBER: Yes, Mr. Chairman, I would probably speak more accurately in terms of reserve margins. Ohio if you take into consideration peaking power, base load, what have you, we're talking roughly 35,000 megawatts. During peak periods normally in the summer in Ohio, we have reserve margins now that are down from up in the 20 percent range to somewhere between 6 and 10 percent reserve margin, which may sound fairly comfortable, but it's not as comfortable as you might think if you have an extraordinarily hot summer.


BARTON: But your supply availability is larger than your demand.


SCHRIBER: Exceeds our demand, yes.


BARTON: Now, this is a general statement, and if you disagree, the panelists, I want you to -- but is it fair to say that one of the differences between California and Pennsylvania and Ohio, is that in Pennsylvania and Ohio your supply margin is greater than what your expected peak demand is, and in California it is not? Is that a fair statement?


SCHRIBER: That is one of the major differences.


BARTON: Would you agree with that, Commissioner Wood?


WOOD: At the present time, as contrasted to when the deregulation legislation was passed, yes it certainly is true.


BARTON: OK, now...


TRAVIESO: Mr. Chairman, as far as Maryland is concerned, we are members of PJM, as the same as Pennsylvania. That's the Pennsylvania, New Jersey, Maryland Interexchange, and our peak is included in the PJM peak, and our supply is included in the PJM supply. At the moment, there are 4,000 or 5,000 megawatts of excess capacity in the ground.


BARTON: Well, one of the lessons that I think we need to learn from the different states is that if you're going to restructure or deregulate, you should make sure there's a mechanism to, to the largest extent possible, guarantee that the supply availability is larger than the expected demand request. Is that a lesson that we should think about?


TRAVIESO: I would say so, Mr. Chairman.


BARTON: Now, I want to go...


QUAIN: Can I tell you? I just want to qualify, that doesn't necessarily mean the generation has to physically exist in your state.


BARTON: I understand that. But you have to have -- I would think you would agree if it's not in your state, you have to have contracts to get it in your state, and the transmission capability to transmit it to your state.


QUAIN: Absolutely.


BARTON: All right.


Now Commissioner Schriber, in your testimony, you went to some detail about the siting process in Ohio.


SCHRIBER: Yes.


BARTON: California has a siting process also, and when you look at the history of the time it takes to site a plant in California, it can take as long as three years or longer. And in Ohio, it takes six months to a year to make a decision. I would like Commissioner Wood and you to elaborate on your siting procedures in your states to the extent that you can fairly briefly.


SCHRIBER: I can't speak precisely to how California sites, obviously. In Ohio, briefly, we have the authority to usurp, to a great extent, home rule, which often gets in the way when you have a state without a siting board. We work in concert with the Ohio EPA, who also will grant a certificate.


Our whole thing is need and convenience and the public interest. And if an application before us is deemed worthy of an application, it is, because there's a need for that power and it is convenient. And again, it is something that we have the capability of implementing without a lot of local interference.


BARTON: In Ohio, what is the maximum time before a decision is rendered on whether a plant shall be sited or not? If every intervention step is taken, how long would it be before a decision is rendered, yes or no, in your state?

SCHRIBER: On a gas peaking plant, I would say the turnaround time could be six months to a year, at the most.


BARTON: At the most?


SCHRIBER: At the most.


BARTON: At the outside?


SCHRIBER: At the outside.


BARTON: Now, Commissioner Wood, in California, where the people have required a more interventionist system, could you answer the same question? What's the maximum amount of time that, not necessarily a yes decision, but some decision is rendered on whether to allow a plant to be built?


WOOD: It's hard to answer that directly for the reason that it's a very dynamic situation right now.



WOOD: It was recognized some time ago, early in the Gray Davis administration, that we had slow processes which were not appropriate to a market-driven situation. They were appropriate to a regulated situation.


In the last number of months, especially since the summer, many of these processes have been expedited, particularly for peaking units. So that the time necessary has been compressed very considerably.


BARTON: All right, let me ask it this way.


WOOD: Yes.


BARTON: In your memory bank, what's the shortest time period in which the decision has been rendered on a yes or -- not necessarily a yes, but just a decision on a request to build a plant in the state of California, the shortest that you've actually got a decision rendered?


WOOD: I believe that for peaking plants, for smaller peaking units, those are now being done in the range of about six months.


BARTON: So you've actually -- you know of a case that a decision was made within six months?


WOOD: I cannot say that, and the reason for it is that the body that does the siting in our state is the California Energy Commission, not the Public Utilities Commission. So I don't deal with those day to day.


BARTON: What about the longest? What's -- do you know -- I mean I hear anecdotal stories, three years is...


WOOD: Yes, certainly before the recent changes, there were plants that took multiple years for the entire siting process to be completed. But as I say, it's dynamic so it's hard to say.


BARTON: Thank you. I understand that remedies -- or what are purported to be remedies are being instigated in California.


My time has expired. I want to, before I yield to Mr. Boucher, bring to the members' attention a report that has just been released this week by the CERA Energy Group, the Cambridge Energy Research Associates. It's entitled, "Beyond California's Power Crisis: Impact Solutions and Lessons." This is a proprietary report, but I have spoken with the founder of the research association, Daniel Yergin. He's going to give every member a copy of this report so that we can study it.


It is fact-based. It is non-judgmental in a political sense. It goes into a great amount of detail about the history in California, the current situation and some proposed solutions. And I would call this to the members' attention as we get into this problem in more detail.


I would now yield to Mr. Boucher for seven minutes for questions.


BOUCHER: Well, thank you very much, Mr. Chairman.


Mr. Travieso, I would like to call your attention to some comments that were made recently by Dr. Mark Cooper, who is with the Consumer Federation of America. You may know him.


He cautioned that problems that are similar to those that have been experienced in California could also be experienced in other states that have adopted retail competition plans. And specifically, he said the following: "Without vigorous federal policies to open the transmission network and prevent the abuse of tight markets, consumers will pay billions more in unjustified overcharges."


Do you share those concerns from your perspective as the public advocate of Maryland?


TRAVIESO: Yes, I do. Mark Cooper and I have actually met with our Public Service Commission chairperson, not about this subject, but I'm very familiar with Dr. Cooper and read a number of his papers and been on panels with him.


The issue, I think, is the phrase "tight market" is to me the key. And let me give you an example of one of the issues that's now facing PJM.


PJM has a much better functioning market than California does. And as Chairman Barton was pointing out, there is more capacity than demand, and plants are being built.


But here's one of the things that's happening at PJM. There's a capacity market at PJM. There's also a requirement that suppliers have a 19 percent reserve; that is, that they actually have 119 percent of the capacity they need to meet the demand. Well, those two things intersect, because actually in PJM there is just about an additional 19 percent above what is needed typically.


So what that means is that there's a very tight market in the capacity market for suppliers who have to buy capacity to meet the requirement and the sellers who know that the suppliers have to buy the capacity to meet the market. So the prices in the capacity market currently do not actually reflect competitive prices. They reflect market power prices because of the tight market.


And that's an example of an issue that PJM is currently working on. So these kinds of issues exist in any wholesale market that deals with a commodity like electricity.

BOUCHER: I heard you suggest in your testimony that the tight market circumstance certainly is reflected in the decision by power suppliers, in some instances, to withhold power in order to maximize price. But does that situation also pertain with regard to transmission?


I've heard suggestions that, perhaps, the wholesale transmission market is not working particularly effectively, and that some transmission owners may actually be operating in such a manner as to favor their own economic interest and withhold transmission at a time when the market is tight and when transmission should be made available to other suppliers.


TRAVIESO: Well, transmission is a bottleneck in economic terms. And if someone has control over that bottleneck and also has an interest in generation, then there's an opportunity to favor one's own generation. One of the benefits of PJM marketplace is that the transmission owners have assigned a control and management of their transmission facilities to an independent operator, PJM. So I think we've dealt effectively with that problem in the PJM region.


BOUCHER: What about on a national basis, however? Do we have a problem with an inefficient transmission market with respect to wholesale transactions? And if you think that we do, is this a concern that Congress should address, or does FERC, at the present time, have adequate authority to address the problem administratively?


TRAVIESO: Well, I'm not really an expert on the transmission problems in other areas. I do think that there are some states where each owner of the transmission system can charge a rate, and it's like a pancake rate. So it inhibits the free flow of electricity because a generator has to pay, instead of a postage stamp rate, has to pay a rate per mile. And that has a significant cost. So there are issues there.


BOUCHER: Dr. Schriber, let me ask you to comment on this question, if you would.


SCHRIBER: Thank you, Congressman. I'd like to.


I think probably the greatest impediment we have to the development of a good retail market in any state is the lack of a substantial vibrant, if you will, wholesale market, which includes transmission. Electricity simply does not move as it should move between regions.


It's interesting to find when you go to conferences, read lots of papers, everybody is willing to tell you what's wrong with regional transmission organizations. At the present time, it's very difficult to find anybody or any group of people who are willing to come together and say, "Here's the problem. Here's how we solve it."


It's an economic problem. It's a physical problem. But the economics are confounding a lot of people.


The other part of the question, where does FERC belong in this equation? For a number of years, FERC has been short-handed. It's a five-member commission that hasn't had five members. They couldn't get votes, and quite frankly, it's my opinion that they have not stepped forward at times when they should have. In Ohio, where we actually have three regional transmission organizations operating, it makes no sense.


What we would advocate, and we would ask the states around us to advocate for, is a regional RTO, if you will. And if FERC is not willing or able to step forward and do so, we're more than happy to.


BOUCHER: Does FERC have the authority to do that, in your opinion?


SCHRIBER: Yes, FERC does have the authority.


BOUCHER: So we do not need to empower FERC any further in that regard?


SCHRIBER: In my opinion, no.


BOUCHER: But perhaps encourage it to simply take some steps that would address the problem.


SCHRIBER: Yes, sir.


BOUCHER: Let me ask you another question. I was somewhat intrigued by your testimony concerning the need for demand-side management, a sentiment with which I entirely agree. And I wonder if you could take just a moment to describe to us what the Ohio PUC has done to encourage demand-side management, and what kind of response you gotten to that encouragement from the investor-owned utilities in the state.


SCHRIBER: Congressman Boucher, we have not done much in the way of demand-side management in the last number of years. This was, again, a product of the '80s. It was like gasoline; we all have very short memories. And I think our memories are beginning to come back. And I do believe fervently that it's time that we do step forward.


It's difficult to incent utilities to move forward with demand- side management.


On the other hand, a simple, to me, real-time metering is something that I cannot comprehend is not in each of our homes. I can't imagine why they cannot put a meter in our homes that tells us what we're using, how much, at what time of day, so we can see what the price is at this hour, next hour. It's inconceivable, with the technology that we have today, that we don't have those in our homes.


That, to me, would be an outstanding start, because if we know what we're buying -- just like when we go to the supermarket, if we know what we're buying and how much we're buying of it, we know what it's going to cost us.


BOUCHER: Thank you very much.


Mr. Chairman, my time has expired.


BARTON: Thank you.


We'd now like to recognize Congressman Largent for seven minutes for questions.


LARGENT: Thank you, Mr. Chairman.


Mr. Wood, what was the rationale for not allowing utilities to enter into long-term contracts in California?


WOOD: The creation of the Power Exchange and the funneling of all of the utility transactions through the Power Exchange was really a fundamental underpinning of California's deregulation experiment.


As I understand it -- I wasn't a policy-maker at the time -- the major concern was that the utilities, if they retained control over either the supply side of the equation, which would be ownership or control of the generation, or the demand side, which meant purchasing as the major purchaser on behalf of their customers, they would be able to exercise market power. And that might be detrimental. In the case of what was addressed by the Power Exchange, it would be detrimental to the interest of competition among generators and marketers.


Therefore, the Power Exchange was established as a transparent market in which it would not be possible for the utilities to exercise any market power. They were made, essentially, passive participants in that market.


This concept was, in effect, endorsed by FERC, which recognized it as a centerpiece or an underpinning of California's deregulation structure. And although it wasn't embedded in the legislation itself, the legislation, AB 1890, was passed after the final decision by the commission that established the PX. And so it was implicitly endorsed by the legislation. That was, as I understand it, the rationale.


BOUCHER: Was it also endorsed by the utilities?


WOOD: The entire project was endorsed by the utilities as part of a compromise, essentially, between the utilities and large customers with eventual sign-on by other parties. Later on, several years into the experiment, at least one of the utilities, Southern California Edison, began to ask for some changes in that regime.


BOUCHER: So essentially, it was just a bad call by everybody.


WOOD: Certainly, in retrospect, it looks that way.


Up until May 22 of last year, it looked like a great idea. Prices were stable, they were low, they were below regulated prices. And then the wheels came off after that date.


BARTON: Will the gentleman yield very quickly?


BOUCHER: Yes.

BARTON: It is true now that, because of what's happened, long- term contracts are allowed in California.


WOOD: Yes. Long-term contracts have been permitted since August 3 of last year. There's a condition attached to them that unless there is a sign-off by the PUC staff on the reasonableness ahead of time, or that it falls within a certain safe harbor, then the utilities may be subject to reasonableness review afterwards. And if their actions are found to be unreasonable, then they could face some sort of disallowance.


But in the face of that, nevertheless, the utilities, at least Southern California Edison and PG&E, have engaged in long-term contracts since that time.


BOUCHER: Mr. Travieso, I have a question for you. You said something that was of interest to me about empowering FERC to address market power abuses like those that took place, or are taking place, in California. Can you define market power abuse, and maybe give us an example of the type of abuse you're talking about that took place in California?


TRAVIESO: Yes. I don't have personal knowledge of this, but I guess I would direct the committee to an article that I think does a pretty good job of discussing this issue. It's published in Public Utility Fortnightly, January 1 of this year, by Robert McCullough, called "Price Spike Tsunami." And he's done a very good analysis, I think, of which plants ran and when they didn't, and how the price curves changed.



TRAVIESO: And the famous May 22 date is the date that he uses to start with.


One example would be if you're a generator, and you own two different kinds of plants, one of which is a base load or a plant that runs fairly often, and the other which is a plant that comes on at the peak or near the peak, you could choose, for example, to have an unplanned outage in your plant that runs at a lower bid price. And there actually have been -- the number of outages have gone up, from 5 to 10 percent, up to about 50 percent in California in recent months. You could choose to have an unplanned outage on the unit that runs at a lower bid price. That would then force the demand price to go up, because the supply would go down.


And if you thought that you could run the other plant, the peaking plant, long enough and at a high enough price for it to be profitable, you would do that. And there is some evidence that that occurred.


BARTON: Would the gentleman yield?


BOUCHER: Well, in just a second, I'd be glad to yield. Are you saying that there's some evidence that there was a conspiracy of sorts to shut down a lower profitable plant, a base load plant, and go to a peaking plant that you had more profit? Are you saying that that was deliberately done?


TRAVIESO: I don't know if it's a conspiracy. And the investigation that FERC had, the staff reached some conclusions along those lines, but the FERC never adopted them.


But it doesn't even have to be a conspiracy. I mean individual owners of plants, with enough information -- and one of the flaws of the California system was they got a tremendous amount of information about what the demand was going to look like the next day -- could make that rational decision without it even necessarily being any kind of illegal act. They could make that decision just based on a rational business decision. But the effect would be to raise the price substantially, to raise the retail price.


BOUCHER: Gentleman?


BARTON: I just want to try to set the record, or put into the record, it's my understanding, until they abolished the Power Exchange in California, that everybody that supplied power had to put it in through the Power Exchange. And there was a market-clearing price established that the highest price anybody bid that day was the price that everybody received. It's also my understanding that the distributor utilities had to purchase from the Power Exchange and sell at a fixed rate that was set by the law unless they had an existing long-term contract that they were allowed to continue.


So the example that is in your article that you referenced doesn't make sense from the standpoint that anybody supplying power, unless they had a long-term contract before the Power Exchange went into place, would get the identical price regardless of which plant they were utilizing.


TRAVIESO: Well, they're hourly markets. And the market at the end of the day for the last 300 or 400 megawatts to meet the demand that you can't shed, has produced prices that were $3,000 a megawatt. That's why somebody in the situation I described could choose to try to create that situation. And the bid prices for power during non- peak hours for base load plants had traditionally been $30 an hour. So there is an incentive based on the structure of the market to do that.


BOUCHER: I just had one other question, Mr. Chairman, if I could.


BARTON: Sure. I took some of your time.


BOUCHER: Mr. Quain, I would just like to ask, I was listening to you and the response by Mr. Travieso about capacity at 119 percent. And, you know, either Mr. Quain or Mr. Travieso, if you know the answer to this question, I'm just wondering how much new generation is currently under construction or in the process of being brought on line within the PJM power market grid.


QUAIN: I do know that, Congressman, and only because I was asked a similar question yesterday by the Pennsylvania state senate.


PJM has queues, and I think they go A, B, C, D, E and F, and the higher up in the queue you are, the more likelihood of completion. In queues A and B, which have a 75 percent likelihood of completion, there's currently 15,000 megawatts. Of that, 6,000, either in upgrades for existing units or new construction, are currently being built now. The remainder expects to be built over the next five years. Going to queue C, D and E, I think it goes down to, there's an additional 31,000 megawatts.


Now clearly, the further you get down to the queue, you've got to question the likelihood of financing being available, whether the market conditions will exist that will allow those investors to believe that there investment is indeed prudent and continue to construct those. So that's the long answer to your question.


BOUCHER: So the tight market that you mentioned, Mr. Travieso, is becoming -- will become significantly less tight as this new generation is brought on-line?


WOOD: We would hope so. There is 2,500 megawatts that actually is currently under construction.

There is an issue, though, with respect to what gets built in the future, and that's because the way the PJM system works is they review these projects, and they determine the effect that the new plant will have on the transmission system. And they assess the cost of that to the developer.


So developer one will have a certain effect on the transmission system, and that will increase the load on the line. And as you get further along, you get two or three power plants along, the third plant will have an enormous effect. It could have a multiplier effect on the transmission system, which means that the cost of that project could be substantially more for the same plant than the cost of the first project in line. And I haven't seen any studies or analysis which attempts to take that into account in terms of the likelihood that these projects will get built.


But the short answer is, I think we're going to have significant increases in capacity. But when the risk changes and the reward changes, based on costs of the project, I haven't seen any analysis of that, but at some point, it could.


LARGENT: Thank you.


Thank you, Mr. Chairman.


BARTON: Thank you, Congressman Largent.


Recognize Mr. Waxman for seven minutes for questions.


WAXMAN: Thank you, Mr. Chairman.


Mr. Wood, I want to thank you very much for your testimony. Perhaps we should be paying particular attention to your testimony, since you predicted several years ago the problems we're seeing in California today.


As you're no doubt aware, there are sometimes advocates who will exploit a problem to advance an unrelated agenda. And I'm concerned about this in the case of California, because the president, some members of Congress and even a few generators have blamed our states' environmental laws as being responsible for California's energy problems. They've also blamed the federal Clean Air Act, the Endangered Species Act, the forest roadless policy, the ban on drilling in the Arctic National Wildlife Refuge, or it seems almost any other law they never liked in the first place.


Mr. Wood, you mentioned several causes for California's problems in your testimony, but you don't mention environmental laws. I'd like to have it clear in the record. Are environmental laws responsible for California's electricity problems?


WOOD: No, not in my opinion.


WAXMAN: Have clean air laws or other environmental laws prevented the generation of electricity?


WOOD: No, they have not prevented it.


WAXMAN: Have environmental laws prevented the construction of adequate electricity generation facilities?


WOOD: No, that has not been the cause.


WAXMAN: If I understand your view, the root cause of California's problems is the creation of a dysfunctional market, not environmental regulations; is that correct?


WOOD: That's right. It's reliance solely upon market mechanisms to provide adequate generation in a timely manner. And that has not occurred.


As you pointed out, I testified before this subcommittee three and a half years ago and pointed out the problems of relying on the market in a business cycle context, where a new generation would come on-line in response to price signals, but perhaps not in a timely manner.


WAXMAN: Well, under this current system, it's remarkably easy for suppliers to gain the systems to drive up prices, isn't that correct?


WOOD: Yes, it certainly is. And that's been partly discussed already, but if you're interested, I could maybe explain some of the mechanisms.


WAXMAN: If you could briefly, go ahead. I had some questions, but I think it's important to get this on the record.


WOOD: Yes. In the California market, several of the players of the generators each control 14 percent or more of the total generation that's available. Those include AES, Duke, Dynergy, Reliant and Southern Company.


As I pointed out in my testimony, for the last month, we have every day been in a Stage 3 emergency. That means that reserves are less than 1.5 percent. In that environment, any generator can withhold a relatively small portion of their total generation in order to drive prices up. And the net effect would be -- if, for example, the actual cost of generation, the marginal cost for a particular producer, is let's say, $70 a megawatt hour, given current high gas prices. But if withholding, say, one quarter of the available generation by that particular market participant would result in prices that were, say, $280, or four times the price, they would be a net beneficiary even though they weren't running part of their own generation.


This explanation does not require collusion, and therefore, it doesn't require market power abuse. It merely involves the exercise of market power. And as I have been told, I'm not an economist, but I've been told by economists that when market power exists, it is exercised. It's really a definition of market power, that it will be exercised. So this constitutes an exercise of market power.

I'd also point out that while FERC has not seen it necessary, and, in fact, apparently has denied that it's possible under their existing authority, to intervene in this situation to require refunds or any restitution of that sort, I saw an item recently that in England, which is considered by many a model for successful deregulation, the generation regulator in that country last summer called Southern California Edison's English affiliate -- generating affiliate on the carpet for withholding generation in order to drive up prices. So in that example of a deregulated country, they still have a market referee, which looks over these kinds of abuses.


WAXMAN: In California, we had no market referee, so we had an incentive, in essence, through this market-based system to take advantage of the consumers by charging these extraordinary high prices by manipulating supply.


WOOD: That's right. So far, it's been taking advantage of the utilities. Except for a period of time in San Diego, the results of these abusive market behaviors...


WAXMAN: That's because the caps on retail sales.


WOOD: That's right. The frozen prices, yes.


WAXMAN: I know the legislature, the governor, the Public Utilities Commission in California is working around the clock to resolve this problem. And in doing so, the state has sought the help of the federal government, specifically the Federal Energy Regulatory Commission. In fact, many of the Western states have also sought for assistance in temporarily taming these wholesale prices.


Recently, eight Western governors -- five Republicans and three Democrats -- have called on FERC to implement a temporary cost-plus pricing requirement on wholesale electricity. But FERC has rejected these calls for assistance. Do you believe FERC has a role or responsibility to act?


WOOD: A plain reading of the Federal Power Act seems to indicate they have an obligation to act. The Federal Power Act, as I recall, requires that wholesale prices be just and reasonable, and says that if they're not, then they're unlawful.


Again, I'm neither an economist nor a lawyer, but my understanding is that when there is an unlawful act or an unlawful situation, implicitly if not explicitly, there is some sort of remedy. The FERC is the agency of government set up under the Federal Power Act to enforce that law, and I think, clearly, they have that obligation.


WAXMAN: Well, when California deregulated, it handed over its authority over generators to FERC. And the assumption was that FERC wouldn't allow the exercise of market power, particularly in the way we've seen it.


Yet FERC has failed to conduct a comprehensive and detailed investigation. It's failed to take any action to temporarily control these unjust and unreasonable rates.


Some have argued that if the PUC would simply raise rates, if PG&E and Southern California Edison could regain financial stability, if they just allowed for the increase in rates. And FERC has identified that the dysfunctional market in California can result in unjust and unreasonable prices. And some market participants can exercise market power. Does simply raising rates make sense with this kind of market in place?


WOOD: If you raise rates, it simply transfers the burden of this dysfunctional market to another group of parties, which would be the customers of all classes. And presently, the utilities have been a buffer. They've suffered immensely as a result of it, and unfairly, I believe.


But it doesn't solve the problem. It simply means that the consumers, rather than the utilities, then have to pay these unjust and unreasonable prices.


WAXMAN: Well, the secretary of energy, Mr. Abraham, has expressed concern that if we didn't allow prices to be increased, it would discourage new generation. In your view, is this true? And is there a way to provide much needed emergency relief to California without discouraging new investment?


WOOD: At this point, I can't imagine what would discourage new investment in California. The owners of the plants that were divested have probably paid off their entire initial investment over the last eight months or so. It's a gold rush there.



WOOD: But even in a well-regulated market that allows for reasonable return on investments, which is what I think all of us in California are asking for, there's ample opportunity to invest profitably in California.


We have a wonderful economy, as you know, in our state. It's the most diverse economy in the United States. It's a strong economy, which is heavily based in a powerful agricultural sector, a very advanced technological sector, and the prospects, I think, for investment there are outstanding, including in the energy area.


WAXMAN: Mr. Chairman, my time's expired, but let me just, for the record, if I might, point out that the Government Reform Committee held a hearing in September, and they indicated the applications for electric turbine permits moved through the process in a time frame that averages 12 to 18 months. States would take the first steps in this process. EPA frequently does not become involved except to concur in what the state is requiring for pollution reductions. This isn't an unreasonable time frame for a big industrial facility that will be in operation for the next 30, 40 or 50 years, but I thought the committee ought to have the benefit of the record.


LARGENT: Thank the gentleman.


Recognize -- go ahead.


BARTON: Well, before we recognize Mr. Shimkus, we would like, Commissioner Wood, for the record, since Mr. Waxman has alluded to it, the records of the various regulatory authorities in the state of California on permits that have been requested and the length of time to either make a decision yea or nay on those for, say, the last 10 years. Is that possible?


WOOD: I believe so. And as I pointed out earlier, this process is controlled by the California Energy Commission, and I will take that...


BARTON: I understand that they're different regulatory...


WOOD: ... request and arrange to get that information for you, yes.


BARTON: Thank you, sir.


WAXMAN: I think we ought to have the Energy Department in California come in and testify so we can get it put on the record.

BARTON: You know, I just bet we can allow that to happen.


LARGENT: The gentleman from Illinois is recognized for seven minutes.


SHIMKUS: Thank you, Mr. Chairman.


I'm going to refer back to a question that Mr. Largent asked and also this article from Harry Levins from the Post-Dispatch. The question that Congressman Largent asked was why did California not go to long-term contracts? And I want to make sure, Congressman Waxman -- I want to make sure you don't leave, because this is a California thing, and I'm just throwing this out, because it relates to Congressman Largent's question.


Harry Levins says this in this article, which we submitted for the record, so you all should be able to get it: "The planners looked back to the late '70s and early '80s when California utilities got locked into widely overpriced, long-term deals to buy bits and pieces of power generated by solar and wind power. The planners told themselves, 'We will not make that mistake again'." Based upon your position, is that a plausible answer why California didn't lock themselves into long-term contracts?


WOOD: That's part of it. We had a very aggressive implementation of PURPA, which resulted for years in billions of dollars of over-market electricity prices, although we ended up with a very diverse resource as the result of it. But by the early 1990s, there was an overhang of over 20 percent excess capacity in the Western market, and the utilities were very reluctant to see any new generation built outside of rate base.


And therefore when the Public Utilities Commission, in the early '90s, would not let Southern California Edison at least build new generation in rate base, which they wanted to do, but required that it be built outside of rate base, because even then the commission was looking forward to the days of an unregulated, non-rate-based market and generation, then Edison aggressively opposed that, went before FERC and got the project blocked based on a technicality. So that was a large part of it, yes.


SHIMKUS: And this is why hearings are important to research. I mean we're going to have a crisis in California right now, a crisis based upon decisions that were made in the '70 and '80s. And what seems to be correct is part of those decisions were made based upon the PURPA requirement in federal law, which we discussed here numerous times in energy dereg. And for my new colleagues on the committee, this is an important statement to understand.


But also as a big, renewable supporter from commodity-growing states of corn and soybeans, I always find a way to talk about ethanol and biodiesel anytime I get a chance. We're not saying it's bad, it's just you need to understand the full picture that the PURPA requirement did cause some decisions to be made. And in this case, it may not have been the best decisions.

WOOD: Congressman Shimkus, if I could just note, there's a remarkable parallel between the implementation of PURPA in California and some of the things that we did in our deregulation project, particularly the Power Exchange. Under PURPA, in California, the utilities were essentially made passive, not price-takers, but acceptors of generation at a fixed contract price that didn't really correspond to actual costs. And that resulted in what was called the QF gold rush in the mid-1980s and with subsequent problems.


The Power Exchange similarly resulted in making the utilities passive price-takers in the market and preventing them from acting effectively or having a truly dynamic market involving equal interaction between buyer and seller and with consequent disastrous results.


SHIMKUS: And I appreciate your testimony, because it speaks to the argument of the basic economic equation of supply and demand, and that consumer's paying prices for the good that they want to receive. And we want to make sure that, obviously, as policy-makers, that the market works so that we have the folks represented by Mr. Travieso, and in my perspective, Marty Cohen, from the Citizens Utility Board in Illinois, that the competition that the market equation works, and we have more choices and lower cost, and it does. But we interspersed the equation with demand and control through the regulatory scheme.


Illinois is going through high natural gas prices. One of the reasons is because of our focus on power generating and peaker plants to meet above-load demand, we have drawn down stocks of natural gas that have been built up to be used as the heating fuel of choice in much of the Midwest -- double the price.


This is all interrelated. That's why the chairman is correct in doing a couple things: pushing for a national energy audit. What are we producing? What fuels are we using, so we can understand the context by this whole debate? What fuels are we consuming? And my position is we need to explore a lot of the alternatives of basic fuel.


A question for Mr. Quain: Of the plants in the PGM market, what are the basic fuel components of the plants that are on the drawing board?


QUAIN: What's on the drawing board is almost all natural gas.


SHIMKUS: And that should be a scary signal to anybody whose home is heated by natural gas, which prices have doubled.


QUAIN: I agree with that statement. I would note that currently we've got 57 percent coal, about 36 percent nuclear. And I think as we look forward, we've got to look at fuel diversity as we build these new plants. I couldn't agree more.


SHIMKUS: And I think part of a national energy policy and strategy will be looking at our fuels, making sure we put the money into research and development to make sure they meet our environmental standards.

But we have to have a diversified portfolio, and in my opening statement I submitted for the record, Illinois does have a very diversified portfolio of coal-based generating, nuclear generating. We're also -- peaker plants are sprouting up all over the place. But as much as you hear problems about the electricity price in California, we're hearing it on natural gas, and it's because of the whole national energy equation.


My time's expired, and I'm not going to go over. I appreciate the time. I yield back.


LARGENT: Thank the gentleman.


And now the gentleman from Pennsylvania is recognized for seven minutes.


DOYLE: Thank you, Mr. Chairman.


I have two questions, and I'll give them to you both at once, and then if you each take 105 seconds to answer, my seven minutes will be up.


I know it's not an easy question, but what specific oversight do you think should rest at the federal level and what should rest at the state level to maximize the potential benefits of deregulation?


And then secondly, in a more general sense, generally, what do you think is the best way to encourage states to consider retail competition? And you can each just take a stab of it down the line.


WOOD: Well, the first question was, what, sort of, oversight should rest at the federal level? First of all, I think that existing oversight of interstate transactions is appropriate. I don't think it's appropriate for the FERC to overreach that. There are many transactions which, in fact, are intrastate, and they should remain that. And in general, retail transactions should remain within state jurisdiction. But the federal government plays a necessary role in overseeing interstate wholesale transactions.


What we have found in California, certainly, is that there is a need for somebody to ensure that the market, to the extent that it exists, is workably competitive, and to ensure that. All other markets that I can think of in the United States are effectively regulated in some way, not to determine prices but just to make sure that they remain workably competitive. We do not have an effective system for doing that right now with electricity, certainly in the western United States.


Your second question, I'm sorry, I didn't get it written down.


DOYLE: Just generally, what do you think is the best way to encourage retail competition? Reciprocity requirements? Relieving states of the requirements of PUCA and PURPA? Just, you know, what are your thoughts on how we can encourage retail competition?


WOOD: I think that's really, respectfully, the wrong question. The question that I would say more properly should be, how can you permit and allow to develop as appropriate retail competition? Because there are and there will be states which, for their own reasons and very legitimate reasons, see that it's not beneficial to enter into retail competition. And I won't list states, but some of them are very well known.


In California, we are seriously rethinking the dimensions of our experiment. It remains the governor's belief and hope that deregulation can work, but we are moving towards putting a lot of things on hold. That has happened in a number of other Western states as well.


So, anyway, having said that, I think that again the most effective thing that can be done is to assure that there will be fair and policed, if you don't like the word "regulated" markets, so that it will embolden states to launch into ventures like this. I think everybody in the country is terrified now because of what happened in California.


If there had been some kind of market enforcement, then we'd have problems, but they wouldn't be nearly of the dimensions that we're facing right now, and it would enable other states to move forward or in whatever direction they want to go with more confidence.


QUAIN: Did you take my 110 seconds?


DOYLE: Hundred and five.


QUAIN: Hundred and five.


I'll give a very broad answer, Congressman, because obviously the devil is always in those details. I think the one thing that Congress can do is define a visionary, long-term, as well as short-term, national energy policy. We need to know where we're taking this nation given the growth in energy demands on it, and we need to have a long-term energy policy to do that.


I think encouraging transmission investment, encouraging generation investment can be part of that. Encouraging production and encouraging demand-side management and research and development also can be part of that; making sure that we take care of the less fortunate amongst us to make sure that this human needs commodity gets to ever household as well to every large industry. All that has to be part of it.


Having said all that, I think it's appropriate for Congress to put parameters for states to work within. What's happening in California is not just only a California problem; it's affecting our state. Not nearly to the extent it is the residents and businesses of California, but it's affecting the nation, and we need to have certain parameters by which we all agree to play.



QUAIN: But with that in mind, each state, I think, needs to have the flexibility to design the program for their own demographics, economy, whatever, geography, climate. But nobody works best without a deadline, and I think Congress would do -- if you believe in electric restructuring, as I do, if it's functioning properly and put together properly, it works. I think putting a deadline by which states should act would help the process a great deal.


DOYLE: Thank you.


SCHRIBER: Congressman Doyle, let me answer your second question first, how could we encourage states?


I think the most important thing that we could do at this time is to enhance the wholesale side of the market. Not only does that bring electricity to the doorsteps of the state that wishes to restructure, but, and I think what has evaded a lot of questioning here, is the fact that electricity will move out of state, too. And that could have some serious consequences. But the larger the market, the more electricity's going to flow, and you're going to have a better market. And that will encourage more, I believe, states to become involved at the retail level.


As far as oversight goes, I firmly believe, as I said in my opening remarks, that what we have learned as commissions, as commissioners, is that we have to be very, very vigilant, and we have to look for the early warning signs, and we have to swallow hard and step on some toes and stop the process if it's going in the wrong direction.


DOYLE: Thank you.


TRAVIESO: Congressman, I think at the federal level we certainly should be concerned about reliability. I thing we should be concerned about market power and mitigation of market power and the wholesale markets, fair access and control of the transmission system through ISOs or other similar organizations such as that, and maybe helping create a market for load management. There really isn't such a market in PGM, as I understand it at the moment. That would be a market where large users of electricity can bid in to the market, discontinuing using a certain amount of their load and get paid for it and make an economic decision as to whether they want to do that or not.


At the state level, I think, certainly, the retail market should be within the states' control, things like distributed generation, the rates of distribution, demand-side management at the retail level. And things like renewables, I'm not sure where they belong. There certainly could be a federal policy, and there could be a state policy to encourage the development and use of renewables.


With respect to encouraging states to consider deregulation, I think the best thing you could do is nothing for the time being. We have 25 states that have adopted deregulation statutes. The market is infantile at the moment, and even in California, we don't have a very long experience.


I think it would make sense to see what happens in these various states, see how it progresses with different plans in place, see whether competition develops, see whether they have market power issues. I don't know, for one, what's going to happen in Maryland when our price caps are lifted in four years. I have no idea. So I think that would be useful data for you to have before you made a decision about whether you should require that on a national basis.


DOYLE: Thank you, gentlemen.


BARTON: Gentleman's time has expired.


Before we recognize Mr. Walden, let me make an announcement, just, kind of, for the good of the order. We're not going to take a lunch break, but with the members still present if each of them take their full seven minutes and extend it a little bit, it's probably going to be 2:30, 2:45 before we're through with this panel.


So if you're in the audience or you're on the second panel and you want to stretch your legs or just go out and get a sandwich, feel free to do so, just do it discretely so that we don't bother too much our witness panel. And if you're on the first panel and you need a personal convenience break, you've got my permission to just, kind of, head out and come back, and we'll continue on without you.


Mr. Walden's recognized for seven minutes.


WALDEN: Thank you, Mr. Chairman. Hope I don't lose the whole audience.


Mr. Wood, I guess I was listening to your comments earlier today about how the California consumers shouldn't bear the price for this debacle of restructuring -- I think I'm capturing what you said -- in terms of price caps. You made some comment about it shouldn't be shifted to them; they're, kind of, the innocent bystanders in this. Is that accurate?


WOOD: What I meant to say, whether it came across clearly or not, is that the consumer should not have to pay for the unjust and unreasonably high wholesale prices.


WALDEN: Right. Now, do you believe that there is any relationship between price and consumption in the energy markets?


WOOD: Depending on class of customer, there is some. There is not as much as one might think.

WALDEN: But there is some.


WOOD: There is some.


WALDEN: So you don't think conservation is driven by price. If my bill goes up to $600 a month, you don't think I'm going to turn my lights off or turn my thermostat down much or reduce my...


WOOD: We have some empirical data on that. In San Diego, during the summer of last year, people were exposed to price signals representing 300 percent increases in their bills. We saw consumption go down by no more than 10 percent across all classes of consumers.


WALDEN: Over what period of time?


WOOD: That was just in the summer, and...


WALDEN: How many months?


WOOD: That was a period of about three months.


WALDEN: Because I would think there would be probably a one- month lag or two before they saw the price.


WOOD: Yes.


WALDEN: Till you get your bill, you don't know you've been stung.


WOOD: Right. People were aware of what was -- this is towards the end of that period. The information that I have, talking to experts about it, is that in the long run there's quite a bit of elasticity of demand that can be triggered by price signals. In the short run, there's very little. It requires cultural changes for small customers; it involves technical changes for large customers.


WALDEN: So the longer you put off that elasticity, the longer it's going to take to get to conservation for that price.


WOOD: Conservation coming from price signals, yes.


WALDEN: Right. I guess the question I have is, you know, the Northwest is still in the spot market, because we're short about 3,000 megawatts.


WOOD: That's right.


WALDEN: So the extent to which Californians don't suffer a price increase and therefore don't conserve, results in higher prices in that spot market, because you're out competing for more energy than you otherwise would be, right?


WOOD: That's true.


WALDEN: So therefore, those of us in the Northwest who are seeing our bills go up 40, 50 percent are paying the price for the price caps in -- because California isn't taking those off. I mean that's hitting us at home right now, in my district, in my state, because we're out there competing with you at your peak period at a time which would not normally be our peak period, because we don't have price caps.


WOOD: I think that your question assumes that a price responsiveness by all consumers would result in the reduction of prices to the people that you represent.


WALDEN: It would -- no. It might, but it also reduces the amount your utilities are in the market for in the spot market, right?


WOOD: Yes.


WALDEN: If demand goes down, they're not out competing at this point, right?


WOOD: That's true. They...


WALDEN: And so, therefore, the price of the spot market ought to be less.


WOOD: Well, it ought to be, but the experience has been that there is not much of a correlation between supply-and-demand relationships and price in the spot market in the West since the beginning of last summer. And if you'd like, I don't know that I have...


WALDEN: I'd love to see that. I didn't take a lot of economics in college, but I...


BARTON: Well, you still have retail price caps in place in California.


WOOD: Yes.


BARTON: They were suspended in San Diego briefly. And then because of the uproar the wholesale price passed through, they were reimposed in August. That's my understanding. So there really wasn't much of a history to determine whether there was a price response.


WOOD: What we know is that, during certain hours of the day when demand is low and supply is adequate, that there was not a significantly large drop in prices during those hours. And from that, we extrapolate that -- and also during the days of the week and of the month and so forth, when similar conditions take place, we saw a price plateau; we didn't see peak and valleys.


BARTON: I think Commissioner Schriber's point in his testimony that we really don't have demand meters -- I don't know the exact buzz word -- but where a person knows what they're paying at 4 o'clock in the afternoon. They know that on a monthly basis they get a bill, and it gives an average kilowatt per hour price, but they don't know that at 4 o'clock on August 10 that they should have been charged $20 a kilowatt hour.

So we've really not given the price signal to the market at a time when it would mean something, in my opinion. That's just an opinion.


WALDEN: I share your opinion. Because I don't think some of our industries are looking at a hourly basis; they're looking over the next six months. They're seeing projected rate increases for Bonneville to be out in the spot market at 60 percent or 300 percent or something like that and trying to figure out if they should plant their crops, because it's going to cost two or three times as much to pump the water later this year.


So I do -- I mean I believe there is a relationship there between demand and supply as it relates to price. And it may not be something that's quick and direct on a daily or hourly basis felt by the consumers, but people are sure planning that way as we go down the road.


Let me touch on two other questions. One is, when the federal government mandates that suppliers with surplus send power to utilities that may be bankrupt, who ultimately should be responsible for that cost if those utilities can't pay it?


WOOD: If the prices that are being charged in the wholesale market are not just and reasonable, then the just and reasonable portion should be the responsibility of the ultimate users, of the retail rate-payers. But the remaining amount should be disallowed and should be refunded by the generators or marketers who are charging the unjust and unreasonable prices.


WALDEN: OK. We can argue about that part of it. But the specific question is, when the Clinton administration, and followed by the Bush administration for a few weeks, continued the order mandating that some suppliers send power to companies they might not otherwise have thought were creditworthy, are my rate-payers going to get stuck with that bill if those utilities in California can't pay for it?


See, I look at that as kind of a takings. I'm telling you, "You've got to send your credit card to my chairman here, and he may use it and not be able to pay you back. Tough luck. And it's your family that's going to pay the bill."


And that concerns me that in the federal law that allows for that to occur in an emergency situation, maybe the rate-payers in a completely unaffected state, in terms of deregulation in California, they get stuck paying the bill while your rate-payers have a rate cap.


WOOD: All I can say is that there are many unjust distortions that start occurring once we start facing the consequences of this dysfunctional market. I don't want to get argumentative, and I wouldn't argue, really, with your conclusions.


WALDEN: Let me just conclude with one other comment, because in your colloquy with my colleague from California, you seemed to be saying that the environmental restrictions, laws on the books had no impact on power supply or price. Is that -- I mean that's what I thought I heard.


BARTON: And this will have to be your last question. We've let you go about a minute and a half over. So let gentleman answer the question, and we'll go to Mr. Strickland.


WOOD: Yes, that's my conclusion. We have sited and seen constructed over the last couple of years quite a number of power plants in California. The process may take somewhat longer than in some other states, but I don't view this as an obstruction. It may change the planning...


WALDEN: To either price or supply.


WOOD: That's right.


WALDEN: Can I just have a slight follow-up since I yielded to you in the...


BARTON: Oh, already. All right. Very slight.


WALDEN: From the perspective of the hydro system, clearly the Endangered Species Act plays a role in price and supply in water years. And I'm not arguing you blow that out, but I just don't get it how you can say those laws don't have an impact. Would you care to respond?


WOOD: Between 1990 and 2000, the state of California added 2,670 megawatts of new capacity. The surrounding states also added new generation. The state of Washington added over 1,300; the state of Oregon, 890. The planning horizon for these things is a longer time than for many other products.


I don't really quibble with your conclusions. It's a very dysfunctional, distressing situation. I'm concerned about the hydro issues in the Northwest, as well.


WALDEN: Thank you, Mr. Chairman.


BARTON: We'll now go to the gentleman from Ohio, Mr. Strickland, for seven minutes.


STRICKLAND: Thank you, Mr. Chairman, and I'll try not to use my seven minutes.


But I note that approximately, I think, 52 percent of the electricity generated in this country is generated through coal. Another approximate 20 percent or so is generated through nuclear power. I note that California and the West is heavily reliant upon hydro power, and because of rainfall and the snow pack and so on, they may be experiencing difficulties in the future.


And the question that I'd like to address to the four of you is this: Do you think that we should have federal policies that encourage diversity of fuel in order to make sure that no one region or the country, certainly, does not become overly dependent upon a single source of electricity?


WOOD: Yes.


QUAIN: Yes.


SCHRIBER: Yes, however, I think that the market, in and of itself, is going to dictate a lot. We've heard and heard and heard about the woes of natural gas, and I think that, in and of itself, will cause a lot of people to move away from natural gas. So perhaps the national policy might be to direct industries and direct us to adhere more to the messages that the market's sending us.


TRAVIESO: I would be concerned about that kind of a policy, because whenever we've done that in the past we've made a mistake. And it seems to me that if you picked one fuel, let's say you picked coal, we really don't know what's going to happen with the price of coal or the use of coal, nor do we know whether the market would want to build a base load plant. I mean that's really what the -- if it's happening the marketplace, the reason these plants are natural gas plants is because they are the most efficient plants that the developers want to build. So the market has caused them to use this particular kind of fuel.


I do think that, where there is a problem with competition and market entry, like with renewables, and where we want to -- if had a national policy that favored the use of renewable energy, then maybe the Congress should do something about that.


STRICKLAND: OK. And there are four states represented here. Would you share with me what percentage of the electricity in your individual states is the result of nuclear power, roughly?


WOOD: In California, the proportion is about 7 percent of the annual average load.


STRICKLAND: Pennsylvania?


QUAIN: Pennsylvania is 36 percent.


STRICKLAND: Ohio?


SCHRIBER: Congressman Strickland, I'm trying to calculate real quick here. With our nuclear plants that I can think of, we're probably looking at less than 10 percent.


TRAVIESO: I don't have the exact number. I know it's 40 percent of Baltimore Gas and Electric, which represents a significant percentage of the total generation. So it's probably about 20 to 25 percent.


STRICKLAND: The reason I ask you is I'm particularly concerned about nuclear power. And I don't want to be a Johnny-one-note here, but the fact is that I believe we are entering into a period in this country where Russia has their finger on our national light switch. And the fact is that we are importing a huge percentage of the fuel necessary for our nuclear power plants from Russia, and attempts are under way to import even more of that fuel, while at the same time our domestic capacity to create this fuel is in danger of being obliterated, I believe.


There is a report that was done by the Nuclear Regulatory Commission last fall, a report that I have been trying to get a redacted copy of, Mr. Chairman, so that all members of this committee and members of this Congress can know what it says. And thus far, the NRC has refused to provide that information. But we cannot afford to allow ourselves to enter a situation where some 20 percent of our electricity output is controlled by a foreign country.


And I just thank this panel. I think you've helped us all become more knowledgeable about a whole complex of difficult issues. And with that, I'll return my time.


BARTON: Thank you, Congressman.


Recognize the congressman from Nebraska, Mr. Terry, for seven minutes.


TERRY: Thank you.


Commissioner Wood, you were appointed by the governor. Are commissioners -- I'm unfamiliar with your...


WOOD: In California, the governor appoints commissioners who are then confirmed by the state senate.


TERRY: OK. And you were appointed when?


WOOD: I took office in June of 1999.


TERRY: So you're a Davis appointee.


WOOD: I'm a Davis appointee, yes.


TERRY: Have you heard of the Regional Clean Air Incentives Market, RECLAIM?


WOOD: Yes.


TERRY: In layman's terms for us, could you explain what RECLAIM is?


WOOD: Probably not real well. But there are emissions quotas or permits that were granted to various industrial facilities. And as those facilities reduce their usage or go out of business or whatever, then those quotas can be traded, and they are useful in allowing...

BARTON: Would the gentleman yield?


If I were to characterize the RECLAIM program as a state program to reduce NOx emissions by 80 percent from current levels over a five- year period and it creates an emission trading credit system if a plant wants to continue to operate above its certificated emissions, that it can purchase on the open market a NOx trading credit for so much a ton, would you say that was a fair assessment of the program?


WOOD: I would so stipulate, yes.


BARTON: Thank you.


WOOD: Thank you, Mr. Chairman.


TERRY: It's just another way of saying it. Thank you, Mr. Chairman.


BARTON: Just to expedite the process here.


TERRY: We'll get into that aspect as well.


Now, as I understand the vast majority of power plants in California are 30 years old, 40 years old. They probably have a great deal of NOx emissions. So the payments of these tax credits, when they exceed the emissions is -- it's an inherent part of the process. Are you aware of, during the last year this crisis has evolved, what has happened to the price of those trading credits?


WOOD: This is another one of those spot market issues. On the spot market, the prices went up considerably, although most of the generators, to my understanding, don't rely upon spot market purchases of those credits.


TERRY: Well, do you know the fluctuation of the price of the credit from, let's say, year '99 to December of 2000?


WOOD: I heard testimony back in September at hearings that we held in San Diego, and what sticks in the back of my mind is we saw fluctuations on the order of 10-fold or more. But I'm not sure that's true.


TERRY: Or more. Generally, the price of the credit is about a dollar per pound...


BARTON: Per ton.


TERRY: Right, per ton. OK.


BARTON: Per pound would pretty expensive stuff.


TERRY: It would. And then as...


BARTON: Oh, is it per pound? Oh, I'm wrong then.


TERRY: Yes. That's what it says here -- a dollar per pound. And then fluctuated to as high as $50. And the average in December of '99 was $45. So 45 times an average.


Now, that, certainly, as I understand the system, and maybe you can set me straight, but when the generator has to pay, in essence, a penalty for exceeding the NOx, what the state allows for nitrogen oxide to be placed into the air, $45 increase, this is passed on to the cost of production, and then through the pipeline to the consumer. At least someone has to absorb that cost. Would you agree with that scenario?


WOOD: I believe there are two processes working here. One is the permits for a certain amount of emissions, and the other is penalties that are paid when those are exceeded. And this is not my area of expertise, but in any case, the state, specifically the governor, intervened in this situation last year and has, through a negotiated process, created accommodations for generators that, because they had to run in order to maintain reliability of this system, exceeded their emissions quotas.


TERRY: Understand. It's not labeled as a penalty, by the way. You purchase this credit to exceed.


So I'm just -- this is all getting down into the issue of whether any environmental laws from the state of California in any way affect price. Are you saying, then, that the generator having to pay $1 one month and then up to $45 to $50 per pound for this credit isn't impacting price?


WOOD: It affects price on the margin if, in fact -- but the problem is that even with this particular issue included with the high gas prices, we're not seeing any correspondence between underlying costs and prices in the wholesale market. If we were, then your conclusion, I think, would be true, that if...


TERRY: Because a study showed that just in December of 2000 that the necessity of paying the additional cost for these credits added anywhere from $500 million to $2 billion to the cost of power. You would refute that study, that conclusion?


WOOD: It certainly didn't add that much to the actual total cost of generation. If you have a marginal pricing structure, then by raising the marginal cost of the least efficient producer, then you could produce a result like that in the market, I suppose.


TERRY: Thank you.


I yield back.


BARTON: Thank you. Thank you, Congressman.


Congressman John, you're recognized for seven minutes.


JOHN: Thank you, Mr. Chairman.


I have two brief questions, one of which may seem as a follow-up to my colleague from Ohio, Mr. Strickland, and it deals with diversity of where your power is generated.

And I guess if we look at -- we talked about California, and Mr. Strickland talked about nuclear, but I'd like to take it one step further. And do you have the numbers or the figures in front of you that show the percentage of the kinds -- of the generators that supply all of California? And I want to ask California and I want to ask Pennsylvania to see if there are any lessons that we might could learn in this area of diversity.


WOOD: As I happens, I do have those figures.


JOHN: Good. I figured you might.


WOOD: Yes. Well, I didn't do it in preparation for this, as a matter of fact, but I have a slide that shows this.


These are average proportions based on the experience over an entire year. It changes quite a bit from season to season.


But about half, 49 percent, is oil and gas, which is almost all natural gas. Renewables constitute 6 percent; coal, about 1 percent; geothermal, 5 percent; hydroelectric, 24 percent; nuclear, 7 percent, and then imports, 8 percent. Again, at times, imports are much higher than that. At other times, imports are almost non-existent. The imports include various hydro as well as coal.


JOHN: OK.


Mr. Quain?


QUAIN: If memory serves me, it's 57 percent coal, 36 percent nuclear, last 7 percent's a combination predominantly of oil, natural gas and a little bit of hydro, some renewables.


JOHN: OK. So it seems like -- is there any conclusions maybe? I mean in looking at those percentages, they look fairly similar, where gas is a predominant generator in really both of your states, somewhat; coal being more in Pennsylvania and hydro being a player in California. Is there any conclusions that we can draw to that as we -- or lessons that we can learn maybe that we should maybe not diversity as much if we have a reliable source or maybe we should diversity a little more? Is there any conclusions that you could see just...


QUAIN: Yes. I think -- which is why I answered the earlier question in one word, yes.


I mean fuel diversity, to me, is a hallmark, just like financial diversity is a hallmark for personal finances. You want to be able to put on and shut down facilities at points in time when, as compared to other fuels that are out there, other generators that are out there, they're high. So at a point in time when natural gas is high and coal is low, you burn less natural gas for generating purposes and increase your coal. Same thing with nuclear. But if you don't have a diversity, you can't take advantage of the cycles of the marketplace as the economy drives one particular fuel over another.


JOHN: How easy is it...


BARTON: Would the gentleman yield just for a...


JOHN: Sure.


BARTON: I want to ask the chairman of the PUC in Pennsylvania, you mentioned a little bit of supply of renewable in your supply equation, but my understanding is on the consumer side that a fair number of Pennsylvania consumers have opted for the green consumer option. Do you know offhand what percentage of your switchers have switched to the so-called green option?


QUAIN: I know the exact number, Mr. Chairman, and I'd be happy to give that to you off-line, because I think it might be proprietary. But in the -- I mean we have virtually no green power in Pennsylvania before electric deregulation. Now we're seeing -- I mean some of the highest energy in the country was produced in the Philadelphia area. We have a lot of consumers who are paying even higher than those rates just to say that they're using green power.


BARTON: But that's a proprietary number.


QUAIN: The number of customers I believe is, but I'd be happy to give it to you.


BARTON: We don't want to get proprietary information, but any generic about the...


QUAIN: It's been one of the real thrills. I mean when we did this, we knew there were going to be consequences we couldn't foresee. I never dreamed for a PECO customer who's paying some of the highest rates in the country, that there'd be a lot of people willing to pay more just to say, "I'm burning environmentally compatible energy." But there's a lot of them.



BARTON: Some of those rich Republicans in the Philadelphia suburbs that want to be green is what it sounds to me like.


Gentleman from Louisiana?


TAUZIN: How complex and flexible can you turn off and on, as you mentioned earlier, that the market supplies when the gas prices are up, you might -- I mean can you turn that off and on?


QUAIN: Well, certain facilities you can. You have, what you call, base load facilities, and you have peaking facilities. And that's why a grid like PGM is a very efficient, very effective way, not only for reliability but for pricing purposes.


So when you look at low curves, in the morning when we're all asleep, the low is very low, and you're burning the cheapest power to meet that demand. And as people get up and start to turn on their ovens and start to ride the trains to work, and manufacturing facilities are starting to tune up, you can see that low grow. So as that low grows, you continually put on, incrementally, the more expensive generation to meet that demand.


And that's why we got into the conversation over here about time- of-day rates. So, yes, that's exactly what happens. By the time you hit your peak, you're stressing the system to the extent that all generators that are up and running properly are being used. If you can bring down that demand to a reasonable level and flatten it out, then the result is you're burning less, more expensive fuel and still meeting the demand that you need with less expensive fuel.


TAUZIN: OK. I want to get to my next question here. There's a story in the Los Angeles Times today. The headlines are: "Impatience with State's Approach to Crisis Grows." And it's talking about the legislature and the governor. And I guess one of the scenarios that's a possibility of the actual state of California taking over the grid and paying billions of dollars to the utilities to help them refinance all of their debts.


I'd like your comment on that. I mean I don't know -- I just want your comment to see is that a good thing, is it a bad thing or is it just a Band-Aid, a quick fix to maybe -- I mean can the state actually handle the grid and the operation of it by owning it? And I'm just concerned about where this is going. And maybe just a brief comment from you. Is that a viable solution?


WOOD: Of course, I have personal opinions about it, but I would like to ask if I could take a pass on that, specifically because the issue is before the legislature and the governor right now. I'm not an elected official in the state, and I think it would be appropriate for me to stay out of that debate until I'm called upon by our state elected officials.


TAUZIN: OK.


That's all I have, Mr. Chairman.


BARTON: Thank you.


The gentleman from Kentucky, Mr. Whitfield, for seven minutes?


WHITFIELD: Thank you very much.


Mr. Wood, you had indicated that in California that 1 percent of the electricity produced is produced by the use of coal, is that correct?


WOOD: That's the in-state proportion, that's right. We do get quite a bit of coal-fired power from outside of the state.


WHITFIELD: And about 20 percent of your demand is met by outside-produced power, is that correct?


WOOD: The imports are about 8 percent, on average.


WHITFIELD: Eight?


WOOD: Yes, on average. As I said, at times it's quite a bit more than that.


WHITFIELD: Because I read some article a while ago that said that you were importing about 20 percent of your total demand, but I guess...


WOOD: Well, the numbers that I'm providing are historical data, and it very well may be that certain things have changed. And I'm sorry, I don't have, really, an exhibit to offer here. I could get it for you if you'd like.


WHITFIELD: That's OK.


In Pennsylvania, 57 percent is produced by coal?


QUAIN: That's right, Congressman, and frankly I'd like to see more if we can make it compatible with the clean air quality standards.


WHITFIELD: And what about in Ohio?


SCHRIBER: Much more than 57 percent. I can't tell you the exact number.


WHITFIELD: OK.


And Maryland?


TRAVIESO: Similar to Pennsylvania. I don't have the exact number, but...


WHITFIELD: OK.


TRAVIESO: ... the majority of our electricity is coal-produced.


WHITFIELD: Mr. Wood, when this bill was passed in California, many people referred to it as restructuring rather than really deregulation, because a lot of the goals of deregulation were never met. But the utilities were required to divest themselves of 50 percent of their generating capacity; is that correct?


WOOD: Of their fossil-generating capacity, yes.


WHITFIELD: OK. And the other 50 percent was required to be sold to the Power Exchange; is that correct?


WOOD: All of their retained generation, which it turned out they actually divested 100 percent of their fossil generation, but they retained hydro, nuclear as well as some long-term contracts and out- of-state-produced power that was utility controlled. That was required to be sold into the Power Exchange, yes.


WHITFIELD: OK. And then they were required to buy back from the Power Exchange.


WOOD: That's right, all of their needs, to serve their domestic load.


WHITFIELD: And any demand that you could not meet from power generated within the state, you obviously had to go out of the state to buy.


WOOD: That's right.


WHITFIELD: And it is your position that part of the problem is that these wholesale rates were unjust and unreasonable; that the prices that you were paying were unjust and unreasonable.


WOOD: And I'd say not just we were paying; the prices that existed throughout the Western Interconnect in the wholesale market.


WHITFIELD: Now, did you -- it's my understanding that the Power Exchange also was buying power from municipally owned or government- owned utilities in California.


WOOD: That's right.


BARTON: Would the gentleman yield?


WHITFIELD: Yes.


BARTON: And I know you're just one commissioner, and you're not the government of California, but if, in fact, it was the political wisdom of the powers that be in California that these wholesale rates were unjust and unreasonable, why did they not immediately let people go outside the Power Exchange and enter into bilateral contracts, enter into long-term contracts and even, heaven forbid, go to the New York Mercantile and begin to hedge against these prices if, in fact, you really believed that the prices were just and unreasonable? Why did that not happen until, effectively, the FERC came in, I believe in December, and, basically, threatened to abolish the Power Exchange if California government didn't do it?


WOOD: The first indications of market dysfunction started to show up on May 22, but that was just a series of peaks. We didn't actually see sustained high prices until the first week in June. We started to recognize that we had a problem by late in June, and by August 3, we had considerably expanded the ability of the utilities to enter into long-term contracts. So that is a remarkably fast turnaround for regulators in our state, and I think for public officials almost anywhere, frankly.


BARTON: But by definition, if you really have a market, a willing buyer and a willing seller, by definition that price is just and reasonable or the buyer wouldn't buy and the seller wouldn't sell.


WOOD: In this case the buyer -- I'm sorry, I interrupted you.


BARTON: Well, I'm just saying that this is pure economics 101, this whole concept of just and reasonable, when you look at the facts -- and there have been several studies by the FERC staff and our understanding even in California by some of the regulatory authorities, they don't come to the conclusion that the -- obviously, the prices were high, but the prices were high because there was a huge demand, and the price signal didn't get through to the consumer so the demand increased. You had an unregulated wholesale market but a regulated retail market, which I would stipulate might be unjust and unreasonable state legislation.


But, anyway, back to the gentleman from Kentucky.


WHITFIELD: I agree with you, Mr. Chairman.


(LAUGHTER)


I was reading -- what I was trying to get at, though, I was reading an article in the National Journal, and it was talking about that many people in California are talking about more power should be generated by government-owned utilities, about municipally owned utilities and that public power is the way to go.


And yet when you do the analysis, and someone's testimony that I had read for this hearing pointed it out, that these state agencies and local water authorities in California have been selling excess power to the Power Exchange and that the state water project, they said, for example, made $23 million, $24 million in profit from selling power to the Power Exchange. Los Angeles Municipal Authority made close to over $200 million in profits by selling power to the Power Exchange. Even the city of Redding earned over $8 million and then the local municipalities, using the preference power, were buying power from Bonneville Power Administration and selling that at five to 10 times what they bought it for, and that Bonneville Power itself in the year 2000 earned $207 million in profits, 116 percent increase over what they had made the previous year. So, I mean, it looks like to me that even the public powers are making money on your situation as well.


And the thing that particularly seems unfair about this, that, unlike the state's private utilities, the munis were not required to sell off the generation plants, were not forbidden to enter long-term contracts to hedge against price increases, and they had the option of buying from and selling into the Power Exchange, not being required to do so.


So this argument that public power is the way to go seems to me that there's really not any rational reason that we should believe that, when the advantages that they have under this deregulation of California. Would you agree with that or not?


WOOD: The behavior of the municipal and government-owned utilities in the California market was they behaved similarly to private companies for profit maximization.


What creates the attractiveness of entities like Los Angeles Department of Water and Power, which is the country's largest municipal, is that they did not, in fact, deregulate in the sense that the other utilities did. They didn't divest their generation capacity. They kept adequate generation. The retained regulated retail rates. And as a result of that, rates in that service territory remained stable and reasonable. And the utility itself was not put in financial jeopardy.


Whether that's an argument for municipal power or just a general argument against the way that we went about deregulation for the investor-owned utilities, people can draw their own conclusions.


WHITFIELD: But you're saying the investor-owned utilities were not required to divest, but they chose to divest.


WOOD: They were required to divest a large part of their generation, but they considerably exceeded what they were required to do.


WHITFIELD: And the munis were not required to divest.


WOOD: They were not. There was an internal debate. There was a very close call. Originally, the mayor of Los Angeles wanted to divest their generation, but the city council informally eventually prevailed, and they held on to all of their generation.


WHITFIELD: Now, it is true that Governor Davis is...


BARTON: This will have to be your last question.


WHITFIELD: OK. You took my time, but that's OK.


BARTON: I took about a minute and a half of your time.

WHITFIELD: But the governor has issued some abatement orders, and he is doing executive orders that does not require bringing these utilities on-line to meet all the existing environmental and regulatory requirements; is that correct?


WOOD: I'm not sure which utilities you're referring to. Are you referring to new power plants?


WHITFIELD: Yes, new power plants.


WOOD: I believe that, in a general way, that all of the requirements remain. However, the permitting processes have been dramatically speeded up. He's put together what's called a green team, which helps to expedite these processes and cut through government red tape.


WHITFIELD: Thank you.


BARTON: The gentleman from Massachusetts, Mr. Markey?


MARKEY: Thank you, Mr. Chairman.


BARTON: Seven minutes.


MARKEY: Thank you, Mr. Chairman.


Last fall, the FERC conducted an investigation into the California situation. That investigation found the California electricity market was, quote, "seriously flawed and caused unjust and unreasonable rates for short-term energy." The FERC also found that California's energy regime provided, quote, again, "an opportunity for sellers to exercise market power when supply is tight."


What actions do you think that FERC and this committee should take when a state or regional electricity market becomes dysfunctional, as California has?


And should we give FERC stronger market power authority including, one, authority to mandate participation in regional transmission organizations and to assure RTOs are fairly structured; two, enhance merger review authority, including the power to review mergers of utility holding companies, generating companies or power marketers; three, authority to assure there is open and non- discriminatory transmission access and an ability to interconnect to transmission systems; and four, enhance authority to take action against bad actors, who gain the system, manipulate the prices, or cross-subsidize unregulated businesses using monopoly transmission or distribution assets?



MARKEY: Dr. Schriber?


SCHRIBER: Thank you, Congressman. First of all, I believe it was with respect to the RTOs, the regional transmission organizations. That should clearly have been a FERC endeavor, including open transmission access, because that, after all, deals with the regional interstate, if you will, transmission of electricity.


MARKEY: Well, let me ask you, do you agree with that...


SCHRIBER: Yes, that's NASUCA's position.


MARKEY: OK. Do you agree with that, Mr. Quain?


QUAIN: Yes, I do.


MARKEY: Do you agree with that, Mr. Wood?


WOOD: No.


MARKEY: You don't? OK, fine.


Let's go to the next one, Dr. Schriber.


SCHRIBER: OK. Merger review. I believe firmly that the states should maintain merger review. In general, if market power is of great concern within a state, because of the outcome of a merger, that would be something that I think...


MARKEY: You don't think the FERC should have merger review?


SCHRIBER: I do not.


MARKEY: You do not.


Mr. Travieso?


TRAVIESO: We disagree with that. We think mergers -- this is a regional market, these are regional companies, if not national companies. We're very concerned about market power, and particularly the relationship of gas and electric companies. We would support merger review.


MARKEY: Thank you, Mr. Travieso.


Mr. Quain?

QUAIN: I think FERC has some merger review authority. I don't know to what extent, but I agree...


MARKEY: Do they need to enhance merger authority?


QUAIN: No, I don't think so. I agree with Dr. Schriber. I think that's primarily a state action, and we do look exactly at that and have held hearings and made conclusions with regard to market power.


MARKEY: Mr. Wood?


WOOD: I believe that FERC should have enhanced merger review authority, but that this should not preempt the states to also make decisions.


MARKEY: Very helpful.


Next, Dr. Schriber.


SCHRIBER: I'm not sure what the next was, sir?


MARKEY: The next one would be to assure open and non- discriminatory transmission access...


SCHRIBER: That, too...


MARKEY: ... and interconnection.


SCHRIBER: Interconnection would be intimately related to the regional transmission organization issue, and therefore would be a FERC endeavor, I would believe.


MARKEY: Do you agree with that?


SCHRIBER: NASUCA supports that.


MARKEY: OK.


Mr. Quain?


QUAIN: I agree, but again, I think they already have the adequate authority on that. I'm not sure they need more.


BARTON: Would the gentleman yield on that?


MARKEY: Go ahead, sir.


BARTON: Are the two chairmen of the state PUCs saying you don't think your state should have any authority on transmission issues and siting issues of transmission lines? I'm going to give that...


SCHRIBER: Absolutely siting.


QUAIN: Siting, sir; we do, as well have some...


SCHRIBER: Correct, we do.


QUAIN: But we don't currently have jurisdiction over transmission. We look at it and work with the FERC on it, but we do that through a collaborative process, and it works.


SCHRIBER: The siting is one issue, the economics is another.


MARKEY: Mr. Wood?


WOOD: At least with respect to the Western states, there should be considerable federal deference to voluntary cooperative efforts among the states.


MARKEY: What if there's no voluntary cooperation?


WOOD: I think that there should be some minimal federal standards for open transmission access. Although, I believe that we already have workable processes for our regional transmission organization.


MARKEY: Sometimes states don't want to cooperate with other states, though.


WOOD: Correct.


MARKEY: Have you noticed that, Mr. Wood?


WOOD: Yes, but we have a history prior to our deregulation of close cooperation among the Western states.


MARKEY: But we're not talking about before deregulation. We're talking about after deregulation. How is it working since then? A little bit more paternal tension?


WOOD: As I indicated in my testimony, we're working towards improving cooperation for obvious reasons.


MARKEY: We won't call it a dysfunctional panel. We'll just say you're going through a difficult time with other family members in the region. But...


QUAIN: Congressman, let me add...


MARKEY: And sometimes, you need someone to move in. We're just going to run out of time on...


BARTON: It is so delightful to see Congressman Markey trying to stay on time.


MARKEY: I am trying to stay on time, and I appreciate that, sir.


QUAIN: Very well.


BARTON: I really do appreciate it.


MARKEY: I have an understanding for the time limit that I have.

QUAIN: I understand.


MARKEY: And finally, on the enhanced authority to deal with the bad actors, the gaming of the system, manipulation of prices, the cross subsidy, should the FERC have enhanced power to be able to deal with those issues since they, by definition, in many instances, go across state lines?


Mr. Travieso?


TRAVIESO: Yes, we agree. We don't think they have adequate powers now, and we think they should be enhanced.


MARKEY: OK.


Dr. Schriber?


SCHRIBER: I think within the state, we have plenty of authority. We should exercise that authority.


MARKEY: How about across state lines when they're gaming, so that you can reach the bad actors?


SCHRIBER: Gaming is something that is created by a market. I'm not sure gaming is irrational behavior.


MARKEY: Can you reach all of the cross-subsidization of unregulated business issues within your own state, or do you need any outside, you know, long-arm reach?


SCHRIBER: Within our own state, we have rules of conduct of all players in the electricity market, even those that are unregulated.


MARKEY: Mr. Quain?


QUAIN: I agree with Dr. Schriber. Again, we have adequate authority in the state. I think that's where it belongs. And if there is criminal activity, there is laws on the books that exist already with regard to anti-trust, et cetera.


MARKEY: Mr. Wood, enhanced FERC authority?


WOOD: In the wake of divestiture, we do not have that authority in the state any more. And I think FERC has considerable authority, which they've so far chosen not to exercise. But I would strongly support additional authority as well as direction from Congress.


MARKEY: Dr. Schriber, Mr. Quain says there's already adequate authority at the state level. You say you don't have adequate authority at the state level, and you think it's at the federal level, and they don't think that there should be authority at the federal level, because it doesn't have to be at the federal level. And you're saying it should be enhanced at the federal level because you don't have it at the state level, which leads to a rather disconcerting, you know...


BARTON: That's why we hold these hearings.


MARKEY: I know, I know. But...


WOOD: Congressman, just briefly.


MARKEY: Yes.


WOOD: I prefaced my comment saying that, "in the wake of our divestiture." Had we not seen a divestiture of these plants, we would have retained considerable state authority. And that may be the case in other states.


MARKEY: Thank you, Mr. Chairman. I appreciate your giving me this time, and I tried to reciprocate by staying within your very wise...


BARTON: All joking aside, it's obvious that Congressman Markey knows the issues. He's been on this committee a long time, and those were excellent questions. And those are some of the, kind of, key questions we'll address as we move towards structuring a restructuring bill.


MARKEY: Praise from Caesar. Thank you. I appreciate it.


(LAUGHTER)


BARTON: The acknowledgment of the ability of the gentleman from Massachusetts.


Another very distinguished and able member of this subcommittee, Mr. Cox of California, for the last round of questions for this panel?


COX: Thank you, Mr. Chairman.


I have to say, despite all of the horror stories coming out of my state in California, it is a pleasure to hear the stories from other states. And it is good to know that it doesn't have to work the way it works in California.


I'm particularly pleased to hear what's going on in Pennsylvania, where customers have been given meaningful choices between electricity providers. New companies have been encouraged to enter the market, something that hadn't happened in California. Prices have gone down. People, according to consumer surveys, are happier with their service than anyplace else in the country.


So I think we would do well today to spend a little bit of time eliciting from Mr. Quain as much as we can about how not to make even worse the problems we've got in California.


Let me start by trying to clear the air of something that seems unwilling to go away, and that is this notion that what happened in California was deregulation. It is so vastly different than what's happened in these other states, where we have had competition, we have had consumer satisfaction, we have had prices go down, we have had supplies increased, that I just want to put it straight to the representatives from other states.


In 1996, the California legislature mandated a 10 percent reduction in retail prices, and it imposed that price cap effectively until 2002. By law, it created a government-run monopoly power exchange that prohibited any utilities from buying power on the open market. It outlawed market contracts for electricity beyond the spot market. It specifically outlawed forward contracts. It outlawed any market transactions between utilities and power generators. It forced utilities to sell significant portions of their power generation.


It did a lot of other dumb things, too, to prevent people from coming in or at least, to discourage them from coming in, such as saying that you have to buy a new meter to put on your house at the expense of hundreds of dollars, if you're interested in switching.


And for all of those reasons, we shouldn't be surprised, not only at what's going on in California, but also that only 2 percent of retail customers ever experienced anything like changing.


So let me put the question, based on that premise, is that, in your view, deregulation, or is that just restructuring the way things work? I'll put it to each member of the panel.


TRAVIESO: Well, in Maryland, we did number one and then we didn't do any in the other ones. There is a statutory rate reduction. We did negotiate 6.5 percent rate reductions. We do have price caps, which last between four and eight years. And we all thought that was important. Our legislature, our governor thought that was important because...


COX: Well, I appreciate that, and all I'm asking -- I think it should go without saying that if you have price controls in place, that you have regulation. That can be good. That can be bad. We can talk about that. But we shouldn't be mistaken about what it is. It is a regulation.


TRAVIESO: It's a regulated rate.


COX: Exactly.


TRAVIESO: And we wanted them.


COX: Right. Now, would you consider what California did to deregulation or its opposite?


TRAVIESO: It's a mix. It's a mix.


COX: Specifically, the things that I outlined, are those regulations?


TRAVIESO: Those are regulations, yes, sir.


COX: They certainly seem to me to be precisely that.


Dr. Schriber?

SCHRIBER: At the risk of sounding somewhat absurd, I'd say it's regulated competition. It's purely regulated. And to some degree, competitive, but mostly regulated.


COX: You're describing now California?


SCHRIBER: California.


COX: And I think that -- well, I'll give you a moment to explain.


SCHRIBER: Well, I think that...


COX: What I'm trying to understand is whether it's deregulation.


SCHRIBER: It is absolutely not deregulation. It is, in my mind, a restructuring, an attempt to impose a competitive market given constraints that are regulated.


COX: Right. All right.


Mr. Quain?


QUAIN: It is definitely not deregulation. I'm not sure how I would characterize it.


But let me add, none of us are purely in a deregulated market at this point. I mean when you strain it, investment recovery is not deregulation either. Either are price caps. What I think the challenge is, is how you move from a monopoly environment to a purely deregulated environment. And that's a period of transition, and states have handled that differently.


COX: And how would you compare your state with California on the spectrum of progress from a purely regulated monopoly utility system to market competition that's not much regulated?


QUAIN: We are encouraged by the benefits we've seen over the last three years, but we recognized, as I think has been said here from my friends from Ohio, that we need to be vigilant. We need to watch this thing and manage it for not just the next couple of months, but for years going forward, until we get out of the whole strain of investment recovery, we get out of rate caps, we get out of the upset between supply and demand, and as the wholesale market settles down and we truly do have an open competitive market. We have made tremendous progress, but we continue to have to work at it.


COX: Mr. Wood, you got appointed in 1999. You're previously on the record opposing what was done in 1996. So your fingerprints aren't on this. How do you characterize it: regulation or deregulation?


WOOD: I think Chairman Quain's description was a good one, but one thing I would point out is that you could say similar things about virtually any of the states' restructuring efforts. Virtually every state that I'm aware of, has some, sort of, residual benchmark or default, kind of, regulated rate for a transitional period, which California had as well. We screwed up a lot of other pieces of it, which some other states, hopefully, haven't done yet.


COX: Let me now talk about the future, because the future's coming very, very fast. In today's papers, there's more evidence that the state of California, the state government, is moving towards acquiring transmission. I wonder if I could hear from -- Dr. Schriber, you seem interested in commenting. We'll start with you.


SCHRIBER: Congressman, I think that the first thing California, in my opinion, needs to clean up, is its financial situation. We're talking about billions and billions of dollars. And I can't imagine anyone wanting to transmit power. I can't imagine anyone wanting to provide power with the specter of not being repaid.


So if the government of California is to participate, I would say it would be, first of all, to guarantee, to the extent that they can, a certain level of debt, by which the companies, in and of themselves, can begin to operate. I don't think that in any shape, in any manner, the states should take over any of the facilities involved with the conveying of electricity.


COX: Mr. Quain, do you have a view on that?


QUAIN: I have yet to see a government run much of anything that private industry can't run better if the rules are set properly. And they're clearly not in California, and it would make me very nervous to be part of advising any state official in that environment to take over that process. I think you've got to fix the underlying problems, and get the market to help work with you, not against you.


COX: If the state of California ends up owning the transmission lines, and if they are then leasing them to the utilities, it's pretty clear that the state of California is in the business. About 20 percent of California's electricity is now provided from other states. But the state of California, which is supposed to be the regulator, is also going to be the regulated entity.



COX: We saw in spades how this didn't work in the Soviet Union. The worst environmental protection in the world existed in the Warsaw Pact countries; horrible problems that we may never clean up in our lifetimes, because there was not an arm's-length relationship between the regulated entity and the government that's supposed to be the regulator.


How does California, as it gets into this business, avoid that conflict of interest? Maybe I should start with our consumer advocate who's here.


BARTON: This will have to be our last question.


COX: Yes.


TRAVIESO: Well, I think there's a model that exists already. It's the municipal utility model, which has been very, very successful and has produced some of the lowest rates in the country.


COX: But they're related by a different level of government.


TRAVIESO: Well, they are regulated by a public service commission, but the model is they actually own the transmission system, they own the delivery system, and they own some generation, and they buy the rest through long-term contracts, and that system has actually worked.


COX: But you've got to have an arm's-length regulator, yes?


TRAVIESO: Well, they are owners of both generation and distribution. So there is -- they're like an old-fashioned, vertically integrated utility.


COX: You don't need an arm's-length regulator?


TRAVIESO: We don't regulate municipal utilities. They're subject to their recall votes and they're just like elected officials who run the municipal utilities. They can be voted out of office if they don't do the right thing.


COX: Well, they didn't do the right thing in California. I mean the utilities, as we just heard from Mr. Wood, that were owned by the government, ended up profiteering. As a matter of fact, municipals get preference on federal power, and they bought federal power at very cheap rates, and the resold it at a markup of 500 percent to a 1,000 percent, and profiteered from the situation. I mean is that not evidence that we need an arm's-length regulator?


TRAVIESO: I guess from the consumer perspective, I'd much rather have been a customer of the Los Angeles municipal utility than I would be in the situation that...


COX: No, because they didn't have -- they were exempted from the '96 law. They didn't have to sell off their capacity.


TRAVIESO: Exactly. They performed the function just like a regulated utility would. In other words, they actually are proof in California that the regulated model works better than the deregulated model.


COX: Well, Mr. Chairman, I think...


BARTON: Well, not quite. What that proves is people that actually plan on a supply reserve sufficient to meet expected demand work well. And we give Municipal Power Authority of the city of Los Angeles great credit for having the foresight to have enough supply to meet within.


TRAVIESO: That's what long-range planning is. That's what the utilities were required to do under vertical integration. That's what the regulators required them to do.


QUAIN: Mr. Chairman, can I just add one thing...


BARTON: Sure.


QUAIN: ...because I'm nervous as to what my colleague is saying over here?


My understanding of how regulation, how independent boards started in the first place, is because these kinds of decisions did not lend themselves to the legislative process. They're difficult, you have to raise rates, they're unpopular, they're hard, they're economically driven, they're not politically driven. And if we all agree that even putting them in separate agencies, as I believe, is not the best answer, we've got to move you from that to something more competitive. Going back the opposite way has to be an absolute wrong solution.


COX: Mr. Chairman, I'll just wrap up and observe it's been said here by this panel that California needs to get its fiscal house in order rather than take on these new liabilities.


I think that we're kidding ourselves if we think we're protecting consumers by capping these rates in our state, in California, at the same time that the state government is spending $1 billion each month to go buy power in the spot market and then prepares to issue these power purchase bonds, which all these taxpayers are going to have pay for. That $1 billion a month works out to about $50 per taxpayer in the state of California each month that's getting passed on directly to taxpayers. And you can pay it as a citizen taxpayer or you can pay it as a rate-payer for electricity, but you're still paying for it.

And what we're doing, I think, is trying to mask what's actually going on and causing an even further distortion into the market. So I'm very, very concerned, and I'm very pleased that we have some good examples before us today that we can follow, and I look forward to the next panel.


BARTON: Thank you.


We want to release from purgatory this panel. I want to ask, for the record, though, before I release you, my opening question asked for a supply/demand information in terms of capacity generation, both base load and peak load, and I'd like each of my chairmen and my commissioner to get that for your respective states. And if it's possible for you to get it for the state of Maryland, you're not an elected official but or an appointed official, we'd like to have it for Maryland, also.


TRAVIESO: Yes. I could get that for you, Mr. Chairman.


BARTON: And I'd also like to ask unanimous consent that we submit into the record a December the 21st document from the California Energy Commission, entitled, Docket 000 Site 2. It's a request for information of the California Energy Commission on some of these siting issues. I would also ask unanimous consent to put it in the record a congressional research document entitled, "Air Quality Issues with Specific Emphasis on the RECLAIM program in the state of California." Is there objection? Hearing none, so ordered.


Gentlemen, thank you. We'll probably have additional written questions for you, for the record, and we'd ask that you reply in a timely fashion. But we appreciate your attendance and your testimony.


As they're leaving, we're going to have a 10-minute break. It is 1:45, so at 1:55, we reconvene and would like our second panel to be at the table, at 1:45 p.m. So we're in recess for 10 minutes.


(RECESS)


BARTON: I think our second panel is available, so we're -- oh, I said 1:55. We'll start a little bit early, and, hopefully, we will have other members in attendance.



BARTON: I want to welcome our second panel. Our first panel was the public sector. Our second panel is the private sector. These are the people that have either done business or attempted to do business in some of the states that we've looked at today, and we, in addition, have an academic expert who is from California who has looked at some of these issues and lived some of these issues, so to speak.


We're going to start with Mr. Peter Esposito, who is the vice president of regulatory affairs for Dynegy. We welcome you to the subcommittee.


Mr. Esposito, your testimony is in the record in its entirety, and we will welcome you for eight minutes to elaborate on that.


ESPOSITO: Hopefully, I can use less, Mr. Chairman.


BARTON: Hopefully.


ESPOSITO: Mr. Chairman and members of the subcommittee, I appreciate this opportunity to appear before you today.


Dynegy owns or controls approximately 14,000 megawatts of generating capacity in the United States, of which 2,750 is in California. That's about 5 percent of the California market. Despite our relatively small presence in California, we've spent thousands of hours and hundreds of millions of dollars to provide California consumers and businesses with power.


As a recent FERC staff investigation revealed, which I would like to enter into the record with your permission, we have been running the generating plants we bought from the California utilities in 1998 and 1999 more heavily in the last year than in the last three years and perhaps ever. The intermediate and peaking plants are 30 to 40 years old and inefficient. Because California's current needs are resulting in delayed maintenance, we are forced to run them until they break, often at great additional expense, and despite growing financial risks, we've committed to produce power.


Dynegy is presently negotiating with the California Department of Water Resources on a long-term sale at prices substantially below current spot prices. Dynegy takes its mission to serve our customers very seriously. It's good public and corporate policy to recognize that no one benefits if power is not reliable and consumers are shocked with staggering price increases.


What went wrong in California? I think we've pretty much covered the base. I'm going to, sort of, summarize my remarks here.


Essentially, California has added no generation in the last 10 years, and that number is 600 megawatts. Meanwhile, the peak has increased 15 percent, 33 percent in Silicon Valley. Notably, California is dependent for imports for about 25 percent of its peak load. Last year, it lost about 5,500 megawatts of import capabilities because of a dry hydro year. That's a big chunk of its load.


Also, we had a significant increase in natural gas prices. Spot prices increased five- to 10-fold in December and January and have doubled for long-term contracts for the natural gas that fuels 50 percent of California's generation.


Congressman Markey referred to this as the perfect storm. I use the same term, and many others do.


California over-relied on spot and real-time markets. No one waits around until the last minute to buy airline tickets at the highest price, yet this is exactly what the California power market was operating at until January 1. Because of other aspects of California's legislation, San Diego customers, who never had a realistic chance to enter into long-term fixed-price contracts, also paid those highest last-minute prices last summer.


As we spoke about just now, California did not deregulate the market. They deregulated only the wholesale side, maintaining price caps on the retail side. This kept competition out. Competition would have provided customers with the opportunity to enter into fixed-price contracts on their own, which they were essentially unable to do because of the structure of the California market.


It isolated customers from real price signals that could have caused them to reduce consumption. In fact, a retail rate increase of 10 to 30 percent in the context of a portfolio of long-term and short- term forward contracts would likely solve California's current financial crisis. When I explained this to one in San Diego of modest income, he responded, "This is about the price of a Snickers a day to fix the problem."


Other states have not and will not make the same mistakes as California. Unlike California, Texas started down the path toward deregulation in an environment where generation was being added, some 8,652 megawatts in the last five years, with 12,745 megawatts under construction for operation in 2002.


Texas is upgrading its transmission facilities and has an expansive gas pipeline infrastructure. In implementing retail competition, Texas has a price-to-beat structure similar to Pennsylvania's shopping credit structure, both of which encourage retail competition. Both have mandated price cuts, but in neither case is the utility required to buy in real time from the spot market. In Texas, there's also an adjustment for fuel increases, so customers will see price increases resulting from fuel.


Illinois' retail choice program incorporates transition power purchase arrangements where utilities who have divested their generation entered into long-term buy-back contracts rather than, again, depending solely on the spot market.


The basic message I'd like to leave you with today is not to over-react to the California power crisis. The market is already self-correcting for natural gas price increases which drove a lot of the increase in the price of power this fall and winter, and producers are drilling at a frantic pace.


FERC is taking action to address wholesale power market issues, and California, albeit long after it could have obtained more favorable prices, is addressing long-term contracting issues. Congress need not micro-manage these issues. Rather, it should develop a well thought out national energy strategy and address the need for open access to power transmission lines, as we've spoken about earlier.


This policy should include addressing the need to increase supplies of natural gas and power through access to public lands for drilling and efficient siting of both power and gas transmission lines. Remember, gas fuels 90 percent-plus of new generation in America. Increasing supplies of gas is the number one thing that will reduce the cost of power in this country in the short term.


Encourage fuel diversity -- clean coal, renewables, perhaps even nuclear -- promoting demand side responses, for example, incentives for conservation and efficiency, research and development, tax credits for conservation and the like.


Repealing the Public Utilities Holding Company Act so that excessive cost can be removed from transmission and distribution -- assets and economies of scale realized. Affirm FERC's authority to require participation in regional transmission organizations and otherwise encourage FERC to exercise all its authority to assure that new generation is interconnected as quickly and cost effectively as possible.


We spent a lot of time this morning talking about the need for transmission. Unless you can interconnect to generation, that transmission's not going to be of a whole lot of use.


And, finally, give FERC eminent domain authority when necessary to resolve interstate transmission siting problems.


In the short term, there's no silver bullet that's going to fix all of California's ills. California must do its part by finalizing long-term contracts currently being negotiated with Dynegy and other suppliers and by developing a mechanism to pay the outstanding balances owed to power suppliers so that order can be restored to the market.


Finally, one fact that policy-makers in state and federal governments should be aware of is that Dynegy's plants in San Diego are facing a 60 percent reduction in emissions limits this year, which equates to about 750 megawatts of capacity being taken off-line at some point. This will further tax hydroelectric and other assets all over the West.

We have heard that others face the prospect of similar cutbacks in other areas of California, and we recognize that the California agencies are addressing these issues, but there is uncertainty over when and if these issues will be resolved, and this can't last a whole lot longer.


I appreciate the invitation to join you today, and I am pleased to answer questions. Thank you.


BARTON: Thank you, Mr. Esposito.


We now want to hear from Mr. John Rowe, who is the CEO of Exelon Corporation, which I guess is the old Revlon Corporation who has moved out of the cosmetics business, but we'll let him...


(LAUGHTER)


... answer that question in his testimony. Mr. Rowe is also either the current or at least a past president of EEI, I believe.


ROWE: That's correct, Mr. Chairman.


BARTON: So we are delighted to have you, and your statement is in the record in its entirety, and we recognize you for eight minutes to elaborate on it.


ROWE: Thank you, Mr. Chairman. I shall try to be brief. I appreciate the members of the committee who have been patient enough to wait for us, particularly Congressman Shimkus from my own state of Illinois.


I lack the capability to be effective in the cosmetics market, so it's fortunate that Exelon is a power producer and deliverer. It is the combination of what used to be Commonwealth Edison in northern Illinois and Philadelphia Electric in Pennsylvania. We are the largest suppliers of electricity in Illinois and Pennsylvania, two states where we believe that utility restructuring is working, but we have much work to do to keep it working.


Simply put, the question I hear is, "Should we continue to work on electricity markets, or should we go back?" Well, what I am here to say is there is no back to go to. We got the competition precisely because earlier models failed, and there is no sensible alternative except to make competitive markets work for our consumers.


If you all remember, in the '70s and early '80s, utilities, whether privately owned or publicly owned, lost the public confidence, the political legitimacy or the economic legitimacy to monopolize the development of generation.


This was replaced in the mid-'80s and early '90s with something called integrated resource management or integrated resource planning. That proved to have all the merits of central planning in Chicago tort litigation. It drove the prices up rather than down, made supply more brittle, and politicized what should be economic acts.

I believe that Illinois experience and Pennsylvania experience strongly suggests that we can make competitive markets work, but we have to do it prudently, carefully and with a willingness to change our mind when we're wrong.


In my judgment, California failed, as you've heard from many others, because it built too little capacity. It relied too extensively on natural gas and imports, something that can be a national problem. It relied far too extensively on spot markets and did not allow utilities to engage in forward contracts or own enough capacity of their own. It expected utilities to be providers of last resort for all customers under all conditions, without allowing them the resources to do that. And it shaded customers from the price impacts of their own decisions.


Illinois and Pennsylvania are presently working, largely because capacity is being built, nearly all gas, largely because we have a diverse existing base of coal and nuclear power in both states, because the utilities have been allowed to be effective suppliers and have been given the resources to meet their obligations, and because utilities in these states are working on effective regional transmission organizations such as PECO's participation in the PJM pool.


We have not, however, solved all the problems or skinned all the cats in our states. Gas is the only easy kind of generation to build, and even gas-fired plants are subject to NIMBY pressures. Transmission can be built, but it's not easy, and, as several folks have said, expanding the transmission system is vital to an effective wholesale market.



ROWE: In addition, we have not, in either state, resolved ultimately the tension between expecting utilities to be a supplier or a provider of last resort to all consumers and the desire at the same time to have a competitive wholesale and resale market. Simply put, you can't have every customer entitled to move and utilities required to buy to provide them at the same time. It just doesn't add, and we have still to solve these problems in my state.


What can Congress do at the present time? I believe it dreadfully important that Congress reaffirm the national goal of effective wholesale electricity markets. I believe Congress can and should encourage the development of both additional supply and additional energy conservation. I would strongly urge any actions that will help encourage gas drilling and the addition of additional gas pipeline capacity. I would also strongly urge things which protect our existing coal and nuclear fleets, such as passage of the nuclear waste bill, which Congress did pass last year, but was vetoed.


I would urge the Congress to do what it can to eliminate obstacles to a working transmission market and to a working wholesale market, particularly repealing the Public Utility Holding Company Act, the Public Utility Regulatory Policies Act, and the taxes which now exist if we try to transfer our transmission to regional transmission authorities as we ought to do. I would urge Congress to support FERC's efforts to develop regional transmission organizations. I believe that FERC has the authority it needs to do this right now, but it has not been exercised in a consistent and firm way, and congressional endorsement in this respect might be helpful.


In sum, I believe we can make effective wholesale and retail markets work, but in order to do that, we have to have evolving supplies of electricity generation which meet the needs of our consumers.


Thank you.


BARTON: Thank you, Mr. Rowe. We appreciate that testimony.


We now want to hear from Mr. Robert Levin, who's the senior vice president for planning and development at the New York Mercantile Exchange.


Your testimony is in the record, and we welcome you to elaborate on it for up to eight minutes.


LEVIN: Thank you very much, Mr. Chairman. On behalf of the New York Mercantile Exchange and myself, I thank you for inviting us and me back here before you again.


I'm not going to focus this afternoon on some of the problems that have already been gone over here, in particular, insufficient generation, unforeseen increases in demand in California, the uncapped wholesale combined with the capped consumer market, or even, more recently, the financial vacuum that has been inflicted in California with everything going on. Rather, I am going to focus on market structure, a market structure that NYMEX found to be corrupt, one that reflected, in our view, that the California government felt that it was wiser than the marketplace, in terms of the institutions that were necessary to support deregulation, in terms of the commercial standards, in terms of conditions and practices that were necessary to support deregulation, and all the way down to how prices should be formed under deregulation.


This market was severely hamstrung from the start with the inevitable result, unfortunately, of delivering policies. Gross commercial inefficiency was not a consideration that California took into mind when it came up with its program. It was severely criticized by a number of parties, especially by the New York Mercantile Exchange, usually in the form of me.


From 1994 all the way through 1997, we appeared there with formal appearances and written testimony more than a dozen times, some of it rightly even predicted less competition, higher prices, lower consumer value. We believe that it's important you have an appreciation of the debate that took place then, because that debate is not over.


It's my goal to get you to take sides. Of course, I'd like you to be on my side, but, frankly, if you're on either side, that would be better, and at least acknowledge that there are sides, because that was some of the problem as all this was unfolding.


Some of the parties decided that both sides were arguing for the same thing, and it was very hard to get heard when you said, "Well, no, we're not." So I'll try to lay it out for you.


One side believed you can mimic a competitive market through government interference. Buyers and sellers need not directly interact. You can create an artificial middleman to buy from all the sellers, to sell to all the buyers, for transactions. You can make that middleman exclusively spot, because it doesn't matter. And, besides, spot, according to this program, is more efficient.


You can force much of the participation into this market by mandating it, in particular, the utilities. You can create a series of other biases -- which I'll be glad to lay out for you, but I'm not going to right now -- that practically forces almost everything else into that market.


And just to reflect how devoted to this notion of being in the spot market this program was, it insisted that the system operator -- this is the one that's responsible for keeping the lights on, the one that in times of perhaps panic has to rush to the market and buy really at the last second -- that the system operator, too, participate solely through the spot market. This was an issue, obviously, that didn't involve NYMEX directly, but even here we debated and suggested, "Why don't you allow them to use the tools that are available in all other free competitive markets, in particular, something called a call option, so they can, ahead of time, lock in as an insurance policy prices they may need to buy for?" This was not part of that program.


On the other side was the belief to allow markets to develop their own institutions, their own commercial terms and conditions and standards, to aggressively promote the competition of sellers for buyers, to aggressively promote the development of commercial rivalry. This is very fundamental, on the one hand, but I almost feel as if I have to go into some examples so people will understand why rivalry matters.


It occurs to me that perhaps sometimes even in this building, somehow, somewhere, somebody might be influenced or maybe even inspired by rivalry. They may find themselves wanting to best the other side. They may work harder, longer, stay up late into the night. They may think up many ideas and experiment with them.


Some of those ideas may turn out not to be very practical. Some of them may be practical, but the other side turned out to beat you to it. And then, once in a while, inspired by that rivalry, you beat them.


Now, this may seem fundamental. It may seem odd that I would waste your time -- and I hope I'm not -- talking about it. But this type of experimenting, taking risks at one's own expense, and innovating to meet the customized needs of others -- and I'll give you a couple of examples in a moment -- for electricity was not allowed to happen as a practical matter in California. In fact, from NYMEX's perspective, what is deregulation without that?


We don't understand what it is. We don't think they ever had deregulation. We don't think a single price auction -- that formerly competitive rivals who had very strong rivalries in the natural gas business to get customers to line up with each other, but now they go to one market for all their sales, we don't understand how that could be the same thing. That doesn't sound like competition.


What kind of examples are there? Let me give you a few. Let's suppose you have a company such as an apartment house, or maybe like an industrial plant, a school system, maybe some sort of shopping mall that is a big purchaser of electricity. They go to a market.


Now, if they can go and have sellers come up to them and compete for their business, we might find that they're willing to buy at a set price. We might find in the course of that negotiation that, if they can identify an unvarying amount of their load, that price will come down, because that's valuable for the seller, the supplier; to have dependable, unvarying load reduces the cost to the supplier.


They might negotiate further, and the supplier might say that, "Under certain circumstances, can I interrupt my sale to you?" And that buyer might say, "I have the ability to lower how much I use." Maybe it's a grocery chain that can put the shades down, lower the refrigeration -- excuse me, increase the refrigeration, lower the air conditioning temperatures, and lower their price more. And perhaps as their own backup, they may have their own generation or their own supply. This did not take place in California.


But it does take place in the electricity market. As a matter of fact, it takes place in Pennsylvania, among other places. Commercial flexibility really matters. I think...


BARTON: You've got about 20 seconds.


LEVIN: OK. Let me just conclude by saying that if you would allow this market to develop, you will get immediate benefits that they sorely need in California. They need to reduce the load, because right now the state is buying on behalf of everybody.


At some point -- I don't know what the future role of the utilities is there. I'm not sure anybody does. The utilities may have to go back and buy on behalf of their consumers. Anything that would reduce the load that they have to carry will take them out of their current market circumstances, certainly take them out of the spot market. All of this would be immediately beneficial.


So we come before you today once again to promote true competitive free markets, to point out, I think as already has been pointed out, that California has not experienced that, and if it had been allowed to, we think that today, this discussion -- well, maybe this hearing might not have even had to take place.


Thank you.


BARTON: Thank you, Mr. Levin.


We now want to hear from Mr. Adrian Moore, who is the executive director of the Reason Public Policy Institute in Los Angeles, California.


Your statement's in the record, and we recognize you for eight minutes.


MOORE: Thank you, Mr. Chairman and members of the subcommittee.


It's household knowledge that the deregulation experiment or the restructuring in California has proven to be a disaster across the nation. Under pressure to deregulate and lower electricity rates, state legislators acted hastily without really understanding all the issues at hand, and we are now reaping the consequences of their actions.


We've got something that's neither fish nor fowl. This came up in the first panel. We're not really the old regulated monopoly structure. Neither are we a truly deregulated competitive market, something more like what Pennsylvania has. We are in this strange world of our own, unlike any other state that has attempted to deregulate its electricity market.


Now, state leaders are again acting in haste and with only a partial understanding of all of the consequences of their proposals, and we're moving very rapidly towards a state-dominated if not state- owned-and-operated electricity system, the likes of which you don't see outside of Eastern Europe.


Meanwhile, summer of 2001 projections are looking particularly grim. The most optimistic projections coming out of the California Energy Commission show us having a couple of megawatts more supply than demand, under the most optimistic assumptions. We know those assumptions are not worth the paper they're written on. Blackouts are inevitable this summer under any realistic view of the future.


In the end, California residents have been denied the benefits of competition and choice in electricity the residents in other states have enjoyed. We heard in the first panel from several of those states; there are a number of others as well, so it's particularly a shame for California residents in that regard.


So what went wrong in California? I'm going to avoid the academic impulse to really drill down into things and just try to hit some highlights, many of which have already been covered.


The first and most important, though, is California did not deregulate. They restructured, and what that means in a fundamental and easy to understand way is the day-to-day operational decisions and the long-term planning decisions of the electric utilities, after restructuring, were more controlled by the rules imposed by government than before.


You could argue that it wasn't even a restructuring. It was just a switching around of deregulation to free up controls on the generation part of the market and impose far more controls on the rest of the electricity market.


With a nod to some comments Mr. Doyle made earlier, another common failing in analysis of what happened in California is a tendency to over-simplify. The causes of price increases in California, if you just look at that slice of the problem, are enormously complex.


I include in my testimony a diagram which is simply a flow chart -- it's at the end -- of all of the factors that you could argue fed into price increases. It fills the entire page with a sea of little bubbles and arrows of forces at work here. That's the diagram.


BARTON: I would commend all my committee to actually study this. It took me 30 minutes last night, but I did study it, and it is very useful.


MOORE: The lesson of that diagram is simple policy solutions are only going to carve out a little slice of that diagram and not really affect overall outcomes.



MOORE: Some specific pathologies with California's deregulation have already been discussed. The power exchange in the pool model differed dramatically from the pool as a theoretical concept and as implemented in other states primarily by being mandated and being a monopoly, and I'll draw some parallels to that with other policy choices in a few minutes.


Price control is another problem that has already been well discussed. But, put simply, prices are the mechanism that tells consumers when it makes sense to consume more or less of a good and tells suppliers when to invest in more or less production.


OK, that's a great tautology, but this is not a simple market. A good chunk of the increase in wholesale prices in the California market is not simply a function of rules in those wholesale markets; it's not simply a function of supply and demand.


And, again, this goes back to my diagram. There's four quadrants in that diagram. There's forces acting on the supply side, forces acting on the demand side, market rules and institutions created by California law, and then those extra-market forces, things going on in the natural gas markets, things going on in the market for emission controls, et cetera, et cetera, that impinge upon electricity markets.


All of those things interact, so price decisions within the California market and price controls are necessarily abstracting away from all of that reality and, therefore, are bound to bring about distortions.


Discouraging entry in new power supplies -- the gentleman from Pennsylvania made some excellent points in that regard about the difference -- you know, the last numbers I saw, California (sic) had 130 companies offering to sell power to customers in that state. That's a remarkable difference from California, where there's virtually none besides the original utilities at this point, and even at the beginning, there weren't a whole lot in the way that was anticipated.


Partly, that's a function of the power exchange I just mentioned. By creating a monopoly, centralized exchange like that, the theory was that would encourage small suppliers to come into the market. But the fact is lots of other restrictions, including the price controls and so forth, discouraged that entry, so you didn't wind up with the effect that was intended.


I also wanted to give a nod to Mr. Waxman and emphasize that I don't believe that air quality regulations, as such, are a significant part of the problem. Within the framework of the standards that exist, there is room to deal with this crisis without fundamentally revamping those standards.


Now, I have lots of issues with the national air quality standards, but out of academic honesty, I have to say that this particular crisis isn't a very good lever for revising those standards in any fundamental way. The problem really is how do we work within those standards, and there's lots of room to work within those standards that are not being fully captured.


RECLAIM came up earlier, and under RECLAIM, which is a market mechanism for achieving compliance with air quality standards, there are constraints imposed by that market on electricity generation, as such. But at least it's a market mechanism, and we don't want to explode that mechanism in an attempt to solve the electricity crisis. We should work within that mechanism, and there is room to do so.


Now, I'm not going to talk about the contrast with other states, though that was one of the questions the committee asked, because the first panel addressed that. But I do want to point out something that tends to get overlooked.


There's an organization called the Center for the Advancement of Energy Markets, which has a very nice rating and benchmarking system for assessing state electrical deregulation schemes. And in June of 2000, they ranked California 16th in the nation in moving toward a system that actually offered -- their real bottom-line benchmark is a system that offers consumers real meaningful choice and competition in the market.


Now, that's 16th in the nation at a time when only a little over 20 states had even done anything towards deregulation. So California has not been, for some time, a model of deregulation by any stretch.


The really interesting thing about Pennsylvania which did not come out in the last panel, is if you compare the actual reforms that were made in -- the institutional changes made in Pennsylvania and California, they're remarkably similar. The one overriding difference is no mandates.


Pennsylvania used lots of the same institutions California did; they just made them voluntary, like a real market. California made them mandatory monopolies, controlled.


They worked great as long as market conditions were exactly the same as they were at the time the legislation was passed. As soon as the world changed, those institutions had no built-in mechanisms for change. They were not able to change -- very fragile -- and the whole thing started collapsing, and we're living through the collapse right now in California.


BARTON: You're going to have to collapse the rest of your statement.


MOORE: Yes. I'll go right down to recommendations here. In my testimony, I talk a lot about what the state ought to be doing, but I won't belabor you with that.


At the federal level, the first recommendation I make is to recognize that the federal role has to be limited. State law created California's problems. The bulk of any resolution lies with state law, as well.


In spite of some criticisms that have been heard so far today, FERC has done a very good job of trying to set California up for success, trying to create a competitive wholesale market in which a competitive retail market created by the state could function. The fact that the state has failed to work within that wholesale market the way many other states have, as we heard this morning, does not indict FERC's management of the wholesale market.


Another thing the federal government and Congress could worry about is ensuring, to the extent that it remains important, a functioning wholesale market. The fact that FERC has done well so far doesn't mean we can just forget about the wholesale market.


Transmission issues have come up. I second a lot of the recommendations that have been made, that if we don't start thinking seriously about transmission, we're not going to be able to ship electricity back and forth across state lines the way we need to, and we're going to continue to run into these bottlenecks.


Something that hasn't come up at all that's fully under federal purview is federal hydropower. Bonneville Power Administration and other federal power entities' role in the California market has highlighted how absurd and distortionary federal hydropower sales policies are.


Bonneville Power Administration made huge profits selling into the California market. Municipal utilities in California made huge profits buying that power at cost, owned by me, a taxpayer. But because I don't live in a municipal utility district, it was sold to my neighbors at that cost and sold to me at a 500 to 1,000 markup. So we equally owned that electricity in an abstract sense, and this has really screwed up the market in a lot of ways.


And I recognize this is a political buzz saw. You know, Congress has visited the issue of federal hydropower sales many times. It's a very regionally divisive issue, but I think the problems in California have brought a whole new light on just how distortionary they are.


Federal agencies need to do their part. There are a number of examples of where unrelated policies have impinged upon electricity markets. And what's come up are environmental rules, but there are a number of other issues as well.


I know of an example of a plan to use wind power to pump water uphill during the night, when people aren't using the wind power, and run it downhill during the day.


BARTON: You really do need to conclude.


MOORE: OK.

BARTON: We'll talk anecdotal evidence after the hearing, so get to your bottom line right now.


MOORE: Yes, Mr. Chairman. Federal agencies need to be encouraged and incentivized to help make power come on-line in a lot of different ways.


And, finally, formulating federal restructuring policy at whatever level it occurs needs to recognize there are many paths to success. The first panel highlighted that. There's no one sure way to restructure a market, and so a one-size-fits-all solution is clearly contraindicated in this particular industry.


BARTON: Thank you.


Last, but not least, we have Mr. John Fielder, who is the senior vice president of regulatory policy and affairs for the Southern California Edison Company, a company that has not only felt the pain, but has actually lived the pain and is living it today.


We welcome you. Your statement is in the record, and you're recognized for up to eight minutes to elaborate on it.


FIELDER: Thank you, Chairman Barton, Congressmen. I wish I could say it was a pleasure to be here, but right now, it's not a pleasure to be anywhere. I mentioned earlier maybe it's even better to be here than in Sacramento these days, because it's a circus in Sacramento.


This is a mess. I'm not going to spend a lot of time reviewing how we got here. I think the prior panel and the prior speakers have, kind of, touched on most of the issues.


I'd like to spend the time I have talking about where we think we ought to go to get out of this mess. I think everybody agrees that we made serious mistakes.


I say we in a collective -- there is a bit of a misperception that the utilities were, kind of, behind deregulation in California. I don't want to go back and do finger-pointing too much, but the Public Utilities Commission started the deregulation process over the objections of the utilities in 1994, and we wrangled for about two and a half years before we ever got to the legislature with AB 1890.


The utilities were happy being vertically integrated, noncompetitive utilities. We'd been monopolies for 100 years. We thought it worked fine.


The compromise that came about in the legislature was only in reaction to the PUC's action, and I think a lot of the problems of 1890 and a lot of the problems with the way we implemented was the fact that it was a compromise. And, as somebody mentioned, we had all the parties at the table, and you know what that looks like when you get done with a several-month process; that turns out to be a compromise.

Most of the problems need to be resolved at the state level, and I think there are one or two things that can be resolved or helped at the federal level looking forward. I mean, this is such a mess that some of the options that we might have had open to us going forward are gone.


The first thing that the state needs to do is to make the utilities financially viable. Now, in the rhetoric of California, what this implies is rate increases, and it does mean raising the retail rates for customers that have used the power that we have delivered to them.


We have run up debts of about $5 billion -- $5.5 billion if you...


BARTON: "We," is just your company.


FIELDER: Our company. I'm sorry. I'm talking about Southern California Edison now. PG&E has got its own problems. They've actually run up a little more than we have. And that's happened in eight months.


Eight months ago, we were a financially healthy company. We were a single A-plus rated company. We had good bond ratings, and we were profitable.


Today, our shareholders have lost two-thirds of their value. We've had to suspend the dividend for the first time in the company's 100-year history. We've had to lay off over 2,000 employees, cut back on service, minimize investments in the distribution system. It's just torn this company asunder.


On a going-forward basis, we have to raise rates to amortize some of this $5 billion that we've paid out and borrowed on customers' behalf to deliver energy. Now, a lot of people think that's going to be a big rate increase. Let me tell you that with the plan that we have proposed, to amortize it over 10 years, and using some bonds that would be issued by the state, it's less than a penny a kilowatt hour to amortize that past debt.


That would get the credit that will enable us to pay the bills that we haven't been paying. We have over $700 million in bills. We haven't paid generators, we haven't paid qualifying facilities, because we are out of cash. Our credit lines are borrowed to the max, and we don't have any money. It's kind of like when you've used all your credit cards, and now it's time to pay the bill, there's no money there to pay, and we can't borrow any more.


So we need to raise the rates to amortize the past undercollection. That will get us our credit lines back. We can then borrow money, as we have for years, and try to procure power and keep the utility in balance with the demands that the customers are placing on us.


One of the things that's happened in the last two weeks is the state has passed a law now that says that they are going to procure the power for customers that is over and above what the utilities can provide through their own generation and their own contracts.


So the state is in the power business. The state water resources board is acquiring power today. They are trying to do it under long- term contract. They have not got very much of the supply under long- term contract. They're spending, as somebody mentioned, about $1 billion a month. I think that's low. And, you know, even with a $10 billion surplus in the state, they'll run through that, without some other market reforms, in just a few weeks or a few months.


The second thing we need to do is we need to get off the spot market, as people have said. We need to get into long-term contracting.


The state has taken that over. We had proposed that the utilities should do that. It's a little bit of a revisionist history -- some of the stuff that was said in the earlier panel.


We saw, as early as 1998, the risks that you could have with a spot market. In the summer of '98, we had spot prices run up to prices that we had never seen. Now, they only stayed there for a few hours or a few days, and then came back.


But in March of 1999, we actually applied to the Public Utilities Commission to get authority to do bilateral contracts and get off of the spot market, even though this was inconsistent with what the PUC's policy was. That application was opposed by virtually everybody in the state: generators, marketers, energy service providers, big customers, small customers, because it was, kind of, the mantra that, "We're trying to get the utility out of this business. And if you tie up long-term contracts to supply and get lower prices than what they think the competitive market will yield, we won't have a competitive market. We don't have direct access."


So that mentality was there early, and in spite of our -- over the last two years, we've tried seven times to get authority to do bilateral contracts, and not until last summer, when the horse was out of the barn by then, were we given the authority, and, even then, it was with a lot of strings attached.



FIELDER: What bilateral contracts we were able to enter into, we've had canceled because we are not credit worthy anymore, so the state basically is in the power procurement business. For how long, we don't know.


The third and fourth things that the state needs to do -- and they're finally getting around to this -- is we do need to change the permitting processes and put some more incentives in place to get new generation built in the state. When we started this deregulation process, everybody thought the common wisdom and all the forecasts were that we had 30 percent surpluses.


So when we started this thing in 1994, '95, there was a surplus of generation, and I think that gave people confidence that we wouldn't run into the problems that we have. We misjudged it. Demand grew more than what anybody thought, and we're now short.


And we need a crash program, and the legislature is about ready to and has done a lot to provide incentives for generators, to streamline the permit process, to put some better bureaucracy behind the environmental permitting process, and, hopefully, get some generation on-line in the near future.


Right now, we don't expect to get more than about 1,000 megawatts before the end of 2001. Most of that comes after the summertime. The forecasts are -- and the CERA report that you mentioned, Mr. Chairman, is forecasting -- and I think probably conservatively -- 20 hours of rolling blackout sometime this summer, and it's just a fact of the physics.


The other thing that we need to do is we need to move on the demand side and really increase the awareness and the conservation ethic in the state. We have spent hundreds of millions of dollars, billions of dollars, over the last 10 years on energy efficiency.


Commissioner Wood mentioned that -- or somebody mentioned that the utilities didn't do a good job of energy conservation since this market became deregulated or restructured or screwed up, whatever you want to call it. But the fact of the matter is that another policy of the Public Utilities Commission was to get the utilities out of the energy conservation business, out of the energy efficiency business. They wanted to turn it over to the private industry so that the utilities were basically cut back in their role of delivering energy efficiency.


We think the utilities are the best place to deliver energy efficiency. We've done it for 10 years or more, and when you disperse that role to the marketplace that is disorganized and has its own provincial financial interests at stake, you don't get the energy efficiency that you're paying for.


Lastly, let me just say with respect to the FERC, and I know this is not popular, but we need some type of respite to work ourselves out of this from the high, volatile spot prices that we're seeing. There's no new supply that's going to be in the market in the next few months. We can't keep paying $250, $300, $400 a megawatt hour for power; there's just not enough money in the state to keep paying those kinds of prices.


We need to work out some kind of policy with FERC and the generators that gives us a temporary respite, whether it's a cost-plus type cap, as Mr. Radanovich suggested, or some other mechanism that gives us some breathing room, because we're not going to be able to get out of the mire we're in if we have to keep paying those high spot prices.


I'll stop there and we'll answer questions.


BARTON: Thank you, Mr. Fielder. The chair recognizes himself for seven minutes.


Right now, the state of California, are they directly purchasing power, Mr. Fielder?


FIELDER: Yes, sir.


BARTON: Are they purchasing it on the spot market or the long- term market or how are they purchasing it?


FIELDER: I believe they are purchasing most of it on the spot market. They are trying to enter into and negotiate long-term contracts with suppliers, but I believe most of it...


BARTON: Now, the power exchange as it existed is gone; is that not correct?


FIELDER: That's true.


BARTON: So what spot market are they looking for power in?


FIELDER: Well, they'll go to a generator and ask for supply to be delivered tomorrow or...


BARTON: So they can go to anybody in the country, and anybody in the country can come to them.


FIELDER: Yes, sir.


BARTON: OK. So it's an open market now, but it's a single buyer, and it's the state of California.


FIELDER: Let me clarify. Whatever the Department of Water Resources is not able to acquire for the day's load, the ISO will continue to go out and do purchases like they have been doing to keep the lights on. So it's between the CDWR, the California Department of Water Resources...


BARTON: So, conceivably, if there's no transmission constraints -- and there are transmission constraints, both regionally and nationally. But if we had a perfect transmission system, then very conceivably, an open market, like the state of California is engaged in, you could very quickly see these wholesale prices come down if you had a larger national supply sufficient enough that the demand didn't exceed it in California. Is that...


FIELDER: I think I would limit it to a regional supply. It's not very practical to ship power from...


BARTON: Because of the transmission constraints.


FIELDER: Well, not because of the transmission constraints, but because of the physics. By the time you generate power in Virginia and ship it to California, the losses eat up all the power...


BARTON: What would happen is Virginia would wheel it to Tennessee, and Tennessee would wheel it to Arkansas, and Arkansas would wheel it to Oklahoma, and we'd just be doing tumble wheels until it all of a sudden got out there.


FIELDER: When you get on the west side of the Rockies, if you didn't have any transmission constraints, then you could deliver power from anywhere in the Western grid to California customers and...


BARTON: Which is the ultimate goal of the national restructuring debate, which, admittedly, we don't have that now.


FIELDER: Right.


BARTON: I want to go to Mr. Esposito. There was a lot of discussion by the first panel and some of our questioners about market manipulation and just and reasonable pricing, gaming the system. Would you like to comment on that, since Dynegy is one of the companies that might have engaged in such behavior had such behavior actually occurred?


ESPOSITO: Thank you, Mr. Chairman. I sure would. I'm the designated bleeder here.


We are an extremely competitive company. We're in there to make some money, and we're not going to apologize for that. On the other hand, when we hear that we've been out gouging or manipulating markets, we take great umbrage at that.


I think if you look at the FERC report that was issued the first of February, a staff report by people who had no dog in the hunt, by people who audited 60 percent of the outages -- now, you don't usually audit anywhere near 60 percent of anything when you go do an audit -- that audit shows that we and the other so-called out-of-state generators ran our plants much harder than they had been run in prior years. There's absolutely no evidence of withholding.

In fact, we went out of the way to keep the plants running. We had a pump go down at one point and went to South America to find a pump. If we wanted to withhold, we could have just sent the pump out to get rebuilt and waited three months. So the real evidence is absolutely contrary to that.


As far as the market itself...


BARTON: This FERC report, is that a public document?


ESPOSITO: I've got it right here, Mr. Chairman.


BARTON: The fact that you have it doesn't necessarily mean it's a public document, not in this -- we have learned otherwise over the years.


ESPOSITO: This was a report that was issued at the Western Governors Association meeting in Portland. It's on their web site and...


BARTON: Then if that is a public document, I would ask unanimous consent that we put it in the record so that members of the subcommittee that wish to could take a look at the FERC report. Is there objection to that?


ESPOSITO: Thank you. As far as the market structure goes, there is a problem when you set a market up where everybody pays the highest price at the last minute. We and others in the industry have been at FERC advocating that that market be changed for a long time.


You know, if you look at that market -- we, I know, in December when gas prices ran up, were incurring costs north of $600 a megawatt hour. When you have $40 and $50 gas, $40 emission credits, you can easily get over $600. So everybody was getting that same $600 in that market.


John Fielder was buying power from Hoover Dam at about $0.99 a megawatt hour and selling it for the same amount, absent some rules that keep him from doing that today, but...


BARTON: In your opinion, had the state of California created the power exchange like they did, but instead of having a one-price market clearing auction system to protect and encourage small producers, what would have happened if they would have had a different auction system similar to the New York Stock Exchange, where it's an ask-bid, and if you bid it, and they say yes, you sell it at that price instead of waiting to see what the clearing price is for the incremental marginal clearing cost? Would that have worked at all?


ESPOSITO: We've been advocating that for years now, and, obviously, we advocate it because we believe it will work. There's academics who will differ.


We encourage the bilateral market, where, as Mr. Levin was talking about earlier, we each have different needs and different capabilities, and if we can get together and match those needs and capabilities across the table from each other, we can resolve the problems and come to prices that are reasonable for both sides.


BARTON: Mr. Rowe, you said in your testimony that natural gas- fired generation is the one that most utilities have decided to build because it's the only easy kind of generation to build. What do you mean by easy to build?


ROWE: You can build the plants much faster, much cheaper, and you have much less difficult times with siting regulation, with not- in-my-backyard opposition, and, in general, with environmental rules. It's simpler and cheaper to build natural gas.


BARTON: There's less hassle, and, at least until recently, the supply equation, the economics of it, was a little bit better?


ROWE: Exactly, sir. For the last 15 years, gas has clearly been the economic option of choice for nearly all new generation, and we're now at a time when we have to question the continued validity of that assumption.


BARTON: Anybody here who's actually been in a decision-making capacity, or at least in an advisory capacity to building a power plant in California, what's the average time it takes to site a plant?


And, Mr. Esposito, has your company tried to site a plant, and, if so, how long did it take to get a decision on that?


ESPOSITO: Well, our choice was to buy an existing plant so we didn't have to go through that process. The averages we hear in the industry are about three years.


Now, having said that...


BARTON: About three years.


ESPOSITO: About three years.


BARTON: Compare that to the national average, if there is one.


ESPOSITO: If I can compare it to siting a plant in Mr. Rowe's territory, we went from a gleam in somebody's eyes to production in nine months.


BARTON: In nine months.


ESPOSITO: Nine months.


BARTON: That's got to be the exception to do it that quickly from the gleam in somebody's eye to production.


ESPOSITO: Well, you know, we saw a price signal in the Midwest. We were willing to spend extra money to get it on the ground so it would be operating the next summer. So it's doable with the right set of circumstances. We had a willing utility who wanted to see us in their backyard.


BARTON: This is my last question. I'm going to give Mr. Fielder the first crack at it, but anybody can answer it if you want to.


Given that the state of California is apparently seriously contemplating becoming the power purchaser and power generator of a large portion of its state's base load, what's the natural competitive advantage that any state government or, specifically, California's state government, has as compared to the private sector?


FIELDER: Mr. Chairman, that's a loaded question. I think the only...


BARTON: I intended it to be loaded.


FIELDER: I think the only competitive advantage, from my viewpoint, is financing and the fact that they can borrow money at lower rates because it's not taxable. Tax-exempt financing is the only advantage.


BARTON: And they have the taxpayers backing up the full faith and credit of their contracts.


FIELDER: The taxpayers are backing up the full faith and...


BARTON: But in terms of management intelligence, futuristic planning, experience, technology, knowledge, does any state government or California's state government have a natural competitive advantage to people like you that are greedy capitalists that, you know, probably studied in business school or learned it in the marketplace the hard way?


FIELDER: In my opinion, no.


BARTON: Does anybody disagree with that?


MOORE: I don't disagree, but I would refine it. It's not actually a cost savings. The fact is that if the state gets into the transmission business, they can finance -- they can use tax-exempt debt more easily to finance new transmission.


BARTON: They have a credit -- their natural advantage is a credit advantage. There's no question.


MOORE: Right, but that just means it's lost tax revenue to the federal government. So, as a citizen of the United States, it doesn't gain me anything. Ultimately, it's not in my -- it doesn't affect my net loss.


BARTON: But if we had advocates of state control -- and let's assume that they do have a competitive advantage -- who regulates the regulator if the state is running the system?


MOORE: Well, nobody does in that case. I mean, it would even be questionable what role FERC would have, you know, with a state-run transmission system like that.


And, you know, if you look at -- going back, you've mentioned data driven a number of times. If you look at costs again, they have lower debt costs, but, traditionally, municipal utilities, publicly owned entities, enjoy the same advantages. They don't pay taxes, they don't make profits, and there are some other smaller subsidies. Their rates are slightly, very slightly lower in some cases than private utilities which do pay taxes and which do make profits. That difference in rates is nothing like the lesser amount -- their lower debt cost, their lower prices.


So the argument I'm making is that on a net basis, if transmission goes under state ownership, costs will go up in the long run.


BARTON: My time has expired. The gentleman from Virginia is recognized for seven minutes.


BOUCHER: Thank you very much, Mr. Chairman.


Mr. Levin, as the representative of the Mercantile Exchange, I know you have an interest in the reliability and predictability of markets for commodities.



BOUCHER: And I wonder if you would give us your opinion about whether the market for wholesale power transactions has the level of predictability and reliability that you deem desirable, and if it doesn't, why it doesn't. Are there particularly any problems with regard to the predictability of transmission availability? Is that a concern?


LEVIN: I'd like to answer that in a couple of different ways. I didn't mention it before, but before California actually embarked on this program, NYMEX had two modestly but growing and healthy electricity futures contracts based in the West. We still do. In fact, I understand that Palo Verde one, even today, had some bids and offers, but it's few and far between.


We were trading -- these contracts were roughly 800 megawatt hours each. We were trading 1,000 to 1,500 of these a day. We had somewhere on the order of, I think, about 15,000 contracts open interest. It was actually a vibrant market that existed out West.


When California decided to dramatically tilt everything into its spot market, it changed things -- well, it really eliminated the need for that, or even the ability to use those sorts of instruments and the purposes of them, and it affected the entire West. It's a little bit more like a -- maybe even a black hole.


But, I mean, Mr. Fielder's company and PG&E were big customers in that forward market beforehand, and when they were eliminated from being in it, that market disintegrated in many ways. It's still there, but very small, and that had an impact.


Now, transmission wise, which you also talked to, on transmission, you need to keep in mind not only the physics, but, commercially, what benefit you can provide, and there are some issues out there right now. In fact, our only criticism of, really, the PJM system is that we think it's adapted a congestion management program that really makes it more confusing for commercial participants, and it is confusing. Unless you ask, I won't go into the details of how and why.


But what it does is it introduces to parties that they don't generally know, can't have full confidence what the cost of transmission will be ahead of time. That's what you need for people to have confidence. They need to be able to perform delivery.


It's common sense, once again. "What will be the cost? Is it a reasonable cost, and can I even depend on that?" And there's too much uncertainty in their pricing.


BOUCHER: Mr. Levin, is there anything that we ought to be examining at the federal level, either in Congress or at the FERC, that would provide better predictability with regard to pricing for wholesale power transactions for the transmission component?


LEVIN: For the transmission component, I think that I would state that the goal should be to be supportive of commercial efficiency -- I mean, I think that actually needs to be there. I wish it was in FERC's mandate, because it isn't.


And I think then I would add something specific. There's a physical rights model for congestion pricing, which we endorse, and other participants with experience in competitive markets have been big endorsers of. And certainly getting firm transmission in place in a program that's usable by market participants at a bare minimum.


BOUCHER: Mr. Esposito, you have some comments in your testimony directed to this general subject. Would you care to comment on the extent to which, as a power generator, you have difficulties, or perhaps don't have difficulties, in getting the transmission that you need in order to deliver your product?


ESPOSITO: We have a lot of issues with getting transmission, and, Congressman, I know we're trying to get you down to our trading floor so you'll see some of that in person, I hope, soon.


There are issues all over the country. There's California issues. A lot of the problem is that people are measuring their capabilities differently from one area to the next. For instance, if PJM versus Virginia Power uses different wind speed assumptions, which dramatically increase or decrease the amount of capability you might have in a line, that can be used to commercial advantage. So you have those issues out there.


We've been endorsing the RTO model for FERC; get the transmission out from under those who own generation. Make that a business in and of itself that has a desire to serve customers and move more power and to expand when necessary to do so.


BOUCHER: Do you believe that FERC has current authority to require participation in RTOs, or would FERC's authority have to be augmented before it could do that?


ESPOSITO: I think that's a real gray issue, Congressman. I think it could use some clarification or affirmation from you all.


BOUCHER: Finally, Mr. Moore, let me commend you for the acknowledgement that you made in your testimony that the federal clean air standards are not the problem in California, that there is flexibility within the federal clean air standards to accommodate the California problem, and that, therefore, the example of the California problem should not be used as a reason for amending the federal clean air law. I appreciate very much your candor in making that point.


Mr. Chairman, that's all that I have. I yield back.

BARTON: We thank the gentleman from Virginia and welcome the gentleman from Oklahoma to question for seven minutes.


LARGENT: Thank you, Mr. Chairman. I wanted to get a reaction from the other members of this panel on Mr. Fielder's suggestion that California be granted some sort of temporary respite and just find out what your reaction is to that.


ESPOSITO: I'll take that on first, if I may, Congressman. The California market has had 37 amendments in less than 36 months so far, trying to fix it and create what are probably little respites along the way. I don't think any of them have been successful.


The one that's out there right now that's got the most attraction, if you will, is a cost-plus paradigm, which smacks, to me, of traditional rate making, which I think got us here in the first place. What happens after we have this temporary respite, during which you've cut my price and my ability to bring back my capital costs, and all of a sudden the market goes down, and all of a sudden, "So long, you're on your own"? We're going to be back there saying we want stranded costs.


We've thrown around a lot of big numbers here. One of the numbers we haven't thrown around is $16.8 billion in stranded cost collections from the last time we had cost-plus rates. So if I haven't made myself clear, I don't think a respite is the answer.


ROWE: Congressman, with great reluctance and speaking only for my own company and not for EEI, I think something of the respite nature must be done. FERC has found that this wholesale marketplace is broken, and the costs which are streaming into California are so overwhelming that they almost fracture any workable system.


Price caps are, of course, inconsistent with the long-run functioning of a competitive market. You know it. Your colleagues know it. I know it equally well.


But it seems to me that we don't have a fully competitive market in California at the moment, and for some short period, you probably have to have caps as an element of a solution. But if those are to be adopted, they should be well in excess of the replacement costs of new capacity, so that they do not intimidate the construction of new facilities or unfairly penalize people like my colleagues from Dynegy who place wagers on this market.


In addition, they have to be accompanied by state mechanisms, such as suggested by SCE, to recover the existing expenditures that have been made, and also by some mechanisms to pass through on a current basis some of the going-forward costs of power. In other words, you can't fix this by just sticking a price cap in. It takes a lot of other pieces at the same time which are more forward looking. But we have price caps at a very high level, $1,000 a megawatt hour in the PJM pool, and that has not deterred new construction there.


LEVIN: There are two elements of a respite that -- and I'll speak for me here, not necessarily -- the Mercantile Exchange has no formal view, as somebody that works in all these energy markets. So, for me, I have problems with two aspects.


One is there's potentially more than just an element of coercion there, and that doesn't seem to be the solution for their problems to now mandate behavior against the will of others in the marketplace. That's very troubling, and a respite is too open-ended.


But the other aspect is what is California doing to solve this problem? I mean, even if a respite comes into play, as Mr. Rowe suggested at the end of what he just said that, "Well, it needs to be in combination with other things."


What are they doing? And it's not clear that they're doing anything right now that's constructive, and that needs to be the first step. They need to start doing some constructive things, and they need to start going to the entities that they're seeking this respite, really, from, you know, like Mr. Esposito's company.


And if they had a track record of having done that -- material things to get this problem solved, not threatening to take over the grid or even to be buying and selling -- and, by the way, Mr. Chairman, I think it's a lot worse if the state's doing it. I'm throwing that in, and it's worse, far worse.


But this is what they've done so far. They have not addressed in any meaningful way how to solve this, and to the best of our knowledge, they have not really tried to go to the sellers and say, "Let's sit down, let's solve this problem." At that point, I'm not sure how I'd feel. But we're not there, and those are necessary first steps.


BOUCHER: Mr. Moore?


MOORE: I would say that the kind of respite that's suggested is essentially equivalent to imposing blackouts. If you impose any kind of wholesale price controls, cost-based or otherwise, you're going to reduce the supply in the market at a time when supply is already below demand, when there's nothing being put in place to constrain demand, and that means absolutely unequivocally more blackouts. So that's the first big and biggest problem.


They haven't worked in the past. There's been several attempts to do different kinds of tweaks. The ISO, the independent system operator in California, tried to do wholesale price caps. They didn't work. They had to lift them because they reduced supply.


And, for six months, as this crisis was developing, up until the beginning of this year, the California state government leaders clove to the policy of trying to get the federal government to cap wholesale prices in some way and took no other action whatsoever during that time, because that was the peg they hung their hat on. And it's my belief that if we were to come in at the federal level and impose some kind of temporary controls like that, the pressure on the California legislature to do anything would immediately come off, and they wouldn't do anything, because they don't like any of the solutions they're facing, and we'd be back to the same problem again in the summer and next fall, what have you. So in no way, shape, or form is that a solution.


But if you're going to throw that out, you do have to bring up alternative ways to address the utilities' financial problems, which are the fundamental reason for doing that in the first place.


BOUCHER: My time has expired. If I could ask a yes-no question from four of the panelists, from Mr. Rowe to my right and your left, Mr. Esposito said something about granting FERC power of eminent domain. Good idea? Bad idea?


ROWE: Good idea, but won't solve the problem.


LEVIN: I'm going to pass on this one.


MOORE: Bad idea.


FIELDER: Bad idea.


BOUCHER: Thank you, Mr. Chairman.


BARTON: Thank you, Congressman.


Mr. Strickland is recognized for seven -- let me say something on price caps, since there's been quite a bit -- the chair has no intention of marking up either a stand-alone bill or a bill with price caps in it. Now, I want that on the record. If we have folks that are hanging their hats that this subcommittee is going to pass a price cap relief bill, that's the wrong peg to hang it on, because that is not going to happen.


Mr. Strickland?


STRICKLAND: Thank you, Mr. Chairman.


Mr. Esposito, my understanding is that Dynegy is constructing a facility in my district in southern Ohio, and I just would like to say to you that I hope you find that a wonderful place to do business.


ESPOSITO: Thank you.


STRICKLAND: As I said in my opening statement, I'm concerned about the ability of this country to maintain a reliable and economic supply of nuclear fuel. And to that end, Mr. Rowe, I would like to address a few question to you, if I could.


How many nuclear reactors does your company operate at this time?


ROWE: We operate 17.


STRICKLAND: And is that a majority of your company's source of generation?


ROWE: Indeed it is. It's more than half of our capacity and substantially more than that in terms of energy production.


STRICKLAND: I'm going to ask you a question that may have a self-evident answer, but is having a long-term, stable source of domestic uranium enrichment services important to ensuring that your nuclear powered generating business will remain viable into the future?



ROWE: It's very important, sir.


STRICKLAND: OK. As I'm sure you know, over half of the fuel sold by the United States Enrichment Corporation is imported from blended down nuclear warheads from Russia. Under this important nonproliferation agreement, USEC is now making an effort to import and broker commercially produced uranium enrichment services from Russia as well. I could be off a little bit when I say half or roughly half or slightly more than half, but a huge portion.


Mr. Rowe, in your opinion, as the CEO of Exelon, is the trend toward USEC's reliance upon Russia for the majority of U.S. supplies of enrichment services good for our nuclear power industry?


ROWE: It is my opinion that having diverse sources, including some that are domestic, is what our industry needs. I think the ability to import from abroad is important, but, like you, I would question the wisdom of having that be the only source.


STRICKLAND: Are you, or, to your knowledge, do others of your colleagues in the various corporations that you are aware of which rely upon nuclear fuel -- is there a concern that we may not be paying adequate attention to the stability, reliability of an economical domestic supply of nuclear fuel in this country?


ROWE: Yes, sir.


STRICKLAND: Would you say that again?


ROWE: Yes, sir.


STRICKLAND: I just...


ROWE: I could say it very loudly and explain, but I think your question says it exactly right, sir.


STRICKLAND: The reason I wanted you to say it twice is that I reiterate what I have said before.


Mr. Chairman, over 20 percent of all of the electricity generated in the United States of America comes from nuclear power plants, and we have an industry that needs our attention.


Mr. Rowe, thank you, and thank all of you. You've been very patient with all of us today, and all of us, I think, appreciate the fact that you've been patient with us, and you've given us good information.


Thank you, Mr. Chairman.


BARTON: Thank you, Congressman.


The gentleman from Illinois, Mr. Shimkus, is recognized for seven minutes.


SHIMKUS: Thank you, Mr. Chairman. The more we listen, I think the more questions we continue to scribble down, and I've got notes all over the place. I'm going to try to keep this organized in my mind somewhat.


First, Mr. Moore, I have to ask you a question. Do you have any expertise on the Clean Air Act?


MOORE: Some.


SHIMKUS: Do you have...


MOORE: I actually have staff that are experts. I have staff who are on advisory panels with international bodies.


SHIMKUS: And why I asked that -- I have your bio. You have a master's in history and a master's in economics.


MOORE: And a Ph.D. in economics.


SHIMKUS: And a Ph.D. in economics. So I wanted to see what scientific background that you might have to make a claim on the impact of the Clean Air Act on power generation today.


MOORE: I don't have any expertise to comment on the scientific aspects. However, the impacts I commented on were the market impacts, the economic impacts, which fall under my expertise.


SHIMKUS: OK. But you have no expertise on the scientific aspects.


MOORE: No, I do not.


SHIMKUS: OK. Thank you very much.


BARTON: The chair would point out it's not a requirement that people have to back their opinions up with an educational or even an experimental background.


SHIMKUS: And I would say we're a perfect example.


(LAUGHTER)


But why I have to get that on the record is, historically, with the advent of the Clean Air Act, our utility generating industry has changed, and it's been, kind of, a ripple effect.


I went back for -- you all had to stay here. I went back after my first round of questioning to get some lunch and check some e-mail, and on my e-mail, I've got an article from the Breeze Courier -- it's a paper in Taylorville, Illinois -- and the headline is "High Gas Prices an Issue in Edinburg" -- a small community -- "Edinburg -- With the gas expenses exceeding the income by about $44,600, the Edinburg Village Board decided to borrow $20,000 from the general account to pay for the gas bill."


Now, this is happening all over the Midwest. The reason is because of the Clean Air Act, and the ease of siting of natural gas generation, has created a higher demand for that fuel, because we're not using other fuels, even for base loading to some extent. And that supply-and-demand equation is filtering down again now in the -- and I think the utilities are going to be questioning their market assumptions, based upon the current high cost of natural gas, with siting new natural gas generating facilities, and that's the way the market works.


But to say that the Clean Air Act has had no impact, for those of us who are from southern Illinois, who have seen coal mines close yearly because of the impact of the Clean Air Act, obviously, we can't leave that unchallenged.


Can I ask a question to those who are in production of new generating facilities? There are two types -- in the natural gas- generating facilities, we throw out the term, peaker plants, which are supposed to be prepared for exceeding the base load, and you fire them up, and then you turn them off. Is that true anymore, or are these peaker plants running daily?


ROWE: Congressman Shimkus, if I can at least try, it is our experience that they're running more often than would originally have been anticipated, but they are still running a fairly small percentage of the hours of the year, and I would be happy to get you some real data on that if I can. There are, in fact, two kinds, the gas- combined cycle plant, which is the cleanest and most efficient and is designed to run a great many hours of the year, and the peaking single-cycle turbine, which is what you and I have seen built in Illinois.


On an economic basis, it is the peaking capacity that is most needed in Illinois at the present time. And while I am keenly sensitive to the point you just made about rising natural gas prices, here I would say that the peaks we've seen in Illinois in the last year, unpleasant though they are for my company as well as others, are almost a necessary antidote to the fact that the prices were too low for many years to encourage new drilling and pipelines.


So I went out on a limb once today, but I'm generally not a very big fan of price caps and wouldn't like to see us get trigger happy with them.


SHIMKUS: Let me follow-up -- Mr. Esposito, you used the terminology that there were market signals demonstrated that caused you to reinvest in generating facilities in Illinois. I understand what that means. But for the record, what do you mean?

ESPOSITO: Well, we were seeing prices well north of $1,000 a megawatt in -- I think it was the summer of 1998. And to answer your previous question, we came in and laid a plant down, ran it hard in 1999. It only ran 200 hours in 2000. So these plants can run hard, they can run not much.


Our plants in California are running now, when most of the units should be down for maintenance, and they've been running since October in that sort of situation. So it really varies on the location and...


SHIMKUS: Well, let me -- I've got limited time. So if we have caps, how are there any market signals? Are there any market signals if you cap?


ESPOSITO: Well, if you cap high enough, there could still be market signals below that cap, I suppose.


SHIMKUS: Is it in the interest of California utilities to have a cap in place to help them get out of their financial mess, but not too high to inspire reinvestment in the California market?


ESPOSITO: Internally, we've talked about, "Does it make sense to have the $1,000 cap that we have in the East in the West?" It hasn't been a disaster in the East yet. It may be. But then we look at some of our costs for production, and we're looking at that maybe going to $1,000 in some cases with gas and emissions prices.


SHIMKUS: And, Mr. Chairman, since I talked to Mr. Fielder, can I -- since I referred...


BARTON: Yes.


SHIMKUS: Before you answer that question, how can you not -- explain why you're not supportive of FERC having eminent domain to site transmission power when California is experiencing such a disaster? I mean, I would think that's an easy thing to say, "We need to be able to import more power."


FIELDER: Because in California, the existing transmission owners already have the power of eminent domain. So the transmission line is needed.


SHIMKUS: But you don't have it in the state of Nevada.


FIELDER: We don't have it in the state of Nevada.


SHIMKUS: That's the whole point of that debate. How can we get across state lines? Yes, you can do it with -- if you have limited generation ability right now, you siting more transmission lines may not...


BARTON: I don't think the problem is an interstate transmission line problem. I think the problem is an intrastate transmission line. Am I right or wrong on that?


FIELDER: In California, Mr. Chairman, we have a lot of intrastate problems.


BARTON: Intrastate.


FIELDER: Intrastate problems.


BARTON: Within the state.


FIELDER: Within the state.


BARTON: It's not necessarily getting it across the state boundary.


SHIMKUS: But it could be.


BARTON: Well, it could be, but the point in fact it hadn't -- they haven't gotten out of the state yet in California. We'll worry about interstate once we solve the intrastate problem.


SHIMKUS: But we are concerned about interstate.


BARTON: That's our federal responsibility. You're absolutely right.


SHIMKUS: I will stop while I'm ahead and yield back my time.


MOORE: Mr. Chairman, may I respond to Congressman Shimkus?


BARTON: Very quickly.


MOORE: I think my comments were maybe misunderstood. What I'm arguing is that we can solve the shortage crisis for electricity within California without changing the national air quality standards.


Right now, projections are, with plants being built, by 2003, we'll have more electricity supply than demand, under the current air quality standards.


I agree that it has tremendous price effects, and I wasn't commenting on the price effects. Air quality standards drive up the price of electricity, hands down, and that is an issue that -- there's many ways in which you need to address. But in order to satisfy California's shortage, we don't necessarily need to change the air quality standards. That was my only argument.


SHIMKUS: Now you're speaking as an economist, not a scientist, and I appreciate that.


BARTON: Before I recognize Mr. Waxman, Mr. Esposito, is it not true that last year, within the California power pool, there was a limited time frame in which they put wholesale price caps into effect?


ESPOSITO: There were wholesale price caps on and off now for probably three years in the California market at varying levels with varying different triggers.


BARTON: Is there any evidence that those price caps had anything other than a short-term effect in minimizing costs?


ESPOSITO: There's some line of reasoning, in fact, that they increased the costs.


BARTON: That they increased. But within that very specific market, when price caps were tried at the state level, they did not work; is that a fair statement?


ESPOSITO: That's a fair statement.


BARTON: Mr. Waxman, for seven minutes.


WAXMAN: Thank you very much, Mr. Chairman. First of all, I want to apologize to all of you -- we've got so many things going on at the same time -- that I wasn't hear to listen to your testimony, but I had a chance to review some of it, and I'll look at the record more carefully.


Mr. Esposito, in your testimony, you state that California's clean air rules are going to require a 60 percent reduction in emissions from your plants in San Diego. You imply that this will require you to take 750 megawatts off-line.


We had hoped to have environmental regulators from California here today so that we could better understand these kinds of claims. Unfortunately, they did not receive sufficient notice to be able to attend.


The Air Resources Board has stated that, quote, "no essential electricity generation has been curtailed due to air emissions limitations." Additionally, the South Coast Air Quality Management District has issued several executive orders in order to ensure that generators can continue to operate in times of need.


And I'd like to enter three Rule 118 executive orders into the record so that the record will reflect the accommodations made by the South Coast Air Quality Management District.


BARTON: We would ask that the staffs be given a chance to look at it, but I have no objection once we've looked at the documents.


WAXMAN: The Air Quality District has also announced that they will finalize changes to the NOx trading program in April or May of this year to help stabilize credit prices and reduce the cost of compliance.


Reliant Energy is one of your competitors, and they've been quoted in the press as saying that the implication that environmental regulations have limited electricity generation is absolutely false. "We're making every megawatt available on request. We factor the air quality regulations into our daily operating bases, and they're not causing us to withhold power." That's the end of their quote.


So given these facts, I want your claims to be clear on the record so that we can follow up with state regulators.



WAXMAN: I'd also like to send you additional questions so that we can better understand your claims later.


But for now, have clean air rules caused you to shut down your power plants or significantly limit your generation in California?


ESPOSITO: Congressman, we've got generation both in the South Coast District and in San Diego. In San Diego, which is what I refer to in my testimony, we have suffered a reduction in emissions from 1,100 tons to 419, in terms of allowances, between 2000 and 2001.


So far this year, we've used up in January alone 106 tons of that. Now, we have a request for relief in to the San Diego board. We are hopeful that we'll get it. But in the meantime, we would, as wise stewards of our assets, so to speak -- we would have shut the plants down a week ago, except we got a court order telling us to keep them open.


So, you know, while this stuff may not actually be happening -- now, I am aware that ADS (ph) shut down perhaps November and December -- I don't know the exact dates -- and that was a 2,400 megawatt plant that was shut down last year because of lack of emissions allowances.


WAXMAN: Is that one of your plants?


ESPOSITO: No, it wasn't.


WAXMAN: But as far as your plants are concerned, you haven't had to shut anything down or significantly limit your generation...


ESPOSITO: But what I'm getting at, Congressman, is that, you know, we've got a level of uncertainty here that's growing. And if we go at our present pace in San Diego and do not get relief -- and it's not certain that we're going to get relief -- we're done in May, and we're looking at a summer that's going to be real tough.


WAXMAN: Are you currently being told by state officials that clean air rules will limit your generation of electricity in the future during times of need?


ESPOSITO: The message we're getting in, sort of, sub rosa confidence is, "Go ahead and run, and we'll worry about what it costs later," and that's not the way we want to do business. We're not about to break the law, because somebody says, "Go do it." So we're just in a tough position, and we're looking for some relief.

I'm not here advocating that we have to change the Clean Air Act. I'm just trying to alert you all to a situation that needs some attention.


WAXMAN: Would it be possible to achieve the 60 percent reduction in emissions you mentioned through the installation of pollution control devices?


ESPOSITO: In fact, we have installed some pollution control devices on that facility. But you can't take them down to do it. It's a six- to nine-month process. These are all very old units. The parts just don't come off a shelf. You have to go and order them and get them and get the time to shut the plant down to do it.


We've got $20 million that I'm aware of that's budgeted for cleaning up our plants. But, again, if the ISO says run, we're running.


WAXMAN: Today I was told that your company agreed to additional reductions in emissions voluntarily in order to receive a variance for additional time to put pollution controls on; is that true?


ESPOSITO: I'm not aware of that one way or the other, Congressman.


WAXMAN: Well, I think it's helpful to get these statements on the record. We'll evaluate it, and we want to understand the situation.


ESPOSITO: I'd be glad to follow up. We're looking to solve the problem.


BARTON: We are also going to do a specific hearing just on California, which we can go into some of these and...


WAXMAN: Well, that would be helpful, Mr. Chairman. We should go into these issues, and we should sort through a lot of the claims that are made to find out what's accurate and what's not, what can be addressed in what way.


Some things can be addressed administratively. Some things can be addressed by California. Some may require our action. And I still maintain that a lot of what we need is an active involvement by the Federal Energy Regulatory Commission, because they have, I think, a clear responsibility, as I see it, to deal with this problem.


But I appreciate you answering these questions.


And, Mr. Chairman, I yield back the balance of my time.


BARTON: We thank the gentleman from California, and we look forward to his continued presence. I think it's going to be very important, Congressman Waxman, that you be involved on this subcommittee this year, because these are issues you know a lot about, and it's also in your state where some of the problems are that we're facing immediately.

WAXMAN: I look forward to working with you, Mr. Chairman.


BARTON: Last but not least, the gentleman from Nebraska, Mr. Terry, for the last seven minutes of questioning.


TERRY: I feel the anticipation in the room.


Mr. Esposito, let me ask you very quickly just, kind of, a friendly wrap-up question in regard to the issue that we were just having the colloquy on. My understanding is that, in order to ease the pain right now that California, in regard to environmental regulations and requirements, or their RECLAIM program, or flexibility on backup generators, you know, these are all in flux right now.


Do you know what you face in terms of these types of environmental regulations and requirements this summer? I mean, how can you plan? What do you expect?


ESPOSITO: Well, planning, obviously, is extremely difficult. Congressman Waxman, a moment ago, was talking about the South Coast Air Quality Management District proposal. And as I understand that proposal, it basically says we can't go out in the market and buy our credits anymore as of January 11, and so we stopped doing that, because we can't do it, and if we get them and can't use them, then we've paid for something we can't use.


And there's a process that's going to take months in that district to figure out whether that's actually going to be adopted. And my understanding -- and perhaps Mr. Waxman knows better than I do -- is then it has to go to the EPA because it's part of a state implementation plan. So you've got all this uncertainty revolving around just that marketplace to get the credits to be able to know you're going to run.


You know, we're trying to enter into forward contracts with the state of California and with other parties, and if you don't know the cost of running, it's very difficult to negotiate those contracts. Environmental is just one of a plethora of regulatory uncertainty problems that I think are plaguing the industry in California and across the nation right now.


TERRY: Well, one of the things that you need is certainty. Do you have any feelings or a clear understanding that there'll be certainty in that area of environmental regulations this summer?


ESPOSITO: The last thing you're going to do is get a lawyer to say "Yes, I have a clear understanding."


TERRY: Good point. Thank you.


One wrap-up question for Mr. Fielder and Mr. Levin. You had brought up the point of the call option, and that triggered a thought in my mind. We've talked about how you were dumped into the spot market and weren't able to do long-term contracting. Were there other hedging opportunities or options out there that were available to you? None?

FIELDER: Well, Mr. Terry, let me answer it this way. The products that were available in the PX forward market were all firm energy, and we have been trying to get bilateral authority to do the kind of products that Mr. Levin talked about, capacity products, call options, because you can't run an electric system with low variability with all firm products. And in California, there hasn't been any kind of standard capacity products available for us to do.


TERRY: So there's just absolutely no hedging options available to you. I can't imagine...


FIELDER: Whatever options were available we took advantage of. We did so some...


TERRY: What was available to you?


FIELDER: In the block forward market of the power exchange, we could buy out about through the end of 2001, and we could six by 16, meaning six days a week, 16 hours a day firm power to help shape the load, and we did buy that up to the limits that the Public Utilities Commission had placed on us. And so we did buy through the summer, and they were worth about -- almost $1 billion, so that's about...


TERRY: I've got to imagine that's still a small percentage.


FIELDER: Small percentage.


TERRY: Thank you.


Mr. Levin, do you...


LEVIN: I wanted just to add something. Last summer, at the beginning of the summer, I believe, the CPUC voted -- I don't know if it was unanimous -- to allow the utilities, the jurisdiction of utilities there, to participate in other -- and it's called qualified exchanges. That was in the legislation. I don't know if it was ever really identified or defined what those were.


And that got over to the legislature. We don't exactly know why, but in the consideration of that, they made a determination to study that for a year. So they put that off for a year before anybody would have been allowed to do it, and we know what ensued -- in fact, it might have even been in the spring when this happened, and it was remarkable timing, and this is really like rearranging the deck chairs on the Titanic, and they prevented them from going out to anybody else.


And the last thing is, John, I do have to tell you that a couple of years ago when you guys did seek that approval -- I haven't agreed with everything you've said today when you said everybody was in agreement with this or that. But you said nobody supported you.


Actually, we did try to support you. We even called your lawyers. I think, because of our record of always being against the state there, that they said, "Why don't you keep a low profile?" But we did...

(LAUGHTER)


FIELDER: I'll stand corrected.


TERRY: Mr. Levin, let me leave you with the last word. Has the California crisis in any way affected the overall markets, Wall Street?


LEVIN: Well, it's affected it, yes.


TERRY: In your opinion?


LEVIN: I mean, we've talked to some of the bankers. The bankers are very concerned about what's going on. They're wondering about what kind of interference we're going to see with other utilities. There could be some reverberation there.


And I'll also say that it's -- which is a very serious impact, and currently, obviously, that's operational in California. You've also -- you know, people say -- and Peter said, "Well, the natural gas price rose, and that helped raise electricity prices."


We should not lose sight of the fact, going back to this structure in California forcing everything into spot, the next-day price in natural gas has reportedly reached as high as $60 per million Btu in California, what they call the California border, that meaning inside California. This is for gas that's costing maybe $10 or so on the other side of that pipeline, certainly nowhere near $60. It was $40 a couple of days ago is what somebody in the industry told me.


This is the direct result of the panic bind, because they're all now in this spot market. This isn't high gas prices leading electricity now. This is actually a panicked electricity market leading -- and it's next-day natural gas, and I want to differ between that and say that in NYMEX, where the price has been around in, you know, Gulf Coast, Louisiana, $6 per million Btu.


So $40 next day inside the border in California in response. So it's had -- this impact is spreading. I mean, this is very unfortunate, and this is why, once again, commercial efficiency really matters.


TERRY: Thank you, Mr. Chairman. I yield back if there is any time.


BARTON: I think you used two seconds too long. That's not a bad record.


TERRY: That's still quick for today.


BARTON: The chair wants to accept unanimous consent on the request from the gentleman from California on the South Coast Air Quality Management District documents, and the chair would ask unanimous consent that an editorial from the New York Times dated February 7, 2001, by Richard Wheatley (ph), who's the director of corporate communications for Reliant Energy, also be allowed in the record at this point in time.


Is there objection? Hearing none, so ordered.


We want to thank this panel for your attendance today. I think we are learning. I have learned, as chairman, that one size doesn't fit all in the restructuring debate, in the restructuring markets.


We saw two states -- three states today where restructuring appears to be meeting the goal of lower prices and more competition. We've seen one state where, with the best of intentions, that goal has not been met.


We will do a specific hearing on California. We will also probably do another hearing or two or three or four on restructuring in general in the electricity markets. But it is obvious that decisions that could have been made several years ago that weren't made to address some of these problems are now coming home to roost.


We thank you for your attendance. There will be additional written questions from both sides of the aisle for the record, and we would hope that you would respond expeditiously.


This hearing is adjourned.


END


NOTES:
???? - Indicates Speaker Unkown
      - Could not make out what was being said. 
off mike - Indicates Could not make out what was being said.

PERSON:  JOE L BARTON (94%); STEVE LARGENT (72%); CHRISTOPHER COX (57%); RICHARD M BURR (57%); GREG GANSKE (56%); HEATHER WILSON (55%); JOHN SHIMKUS (55%); MARK DOYLE (55%); ROY BLUNT (54%); GEORGE P RADANOVICH (53%); MARY BONO (53%); W J (BILLY) TAUZIN (52%); RICK BOUCHER (52%); LEE TERRY (52%); THOMAS C SAWYER (51%); ALBERT R WYNN (51%); RALPH M HALL (51%); CHRIS JOHN (50%); 

LOAD-DATE: February 23, 2001