SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 2925 words

COMMITTEE: HOUSE ENERGY AND COMMERCE

SUBCOMMITTEE: ENERGY AND AIR QUALITY

HEADLINE: NATIONAL ELECTRICITY POLICY

TESTIMONY-BY: FRANCIS BLAKE, DEPUTY SECRETARY

AFFILIATION: U.S. DEPARTMENT OF ENERGY

BODY:
Prepared Witness Testimony The Committee on Energy and Commerce W.J. "Billy" Tauzin, Chairman

National Electricity Policy: Federal Government Perspectives

Subcommittee on Energy and Air Quality

September 20, 2001

Francis Blake Deputy Secretary U.S. Department of Energy

Mr. Chairman and Members of the Subcommittee, I welcome the opportunity to testify before you today on national electricity legislation.

Last Week's Terrorist Attack

Before I address the subject of this hearing, I would like to briefly address the energy issues arising out of the vicious and cowardly attack on our country last week.

The terrorist attack on our country had a significant impact on the energy infrastructure in lower Manhattan. The fire and building collapses destroyed two substations located under the World Trade Center as well as power transformers, circuit breakers, underground cable and other distribution equipment. Multiple transmission lines were damaged, resulting in the outage of a third substation. Con Edison is restoring limited temporary service by deploying mobile generators and reconfiguring portions of the effected distribution system. New power lines are being installed above ground to replace damaged underground cable. Normal electricity service in areas where there is limited physical damage is being restored, but restoration to areas where there is significant damage will take much longer. There also has been a disruption to natural gas service in lower Manhattan. The attack on the Pentagon had no impact on the energy infrastructure in the Washington, D.C. area. Last week's attack raises issues relating to the security of our energy infrastructure. Outside of lower Manhattan, our energy infrastructure was not affected, and there were no specific threats to oil refineries, oil and gas pipelines, electric transmission lines, and generation facilities, including nuclear power plants.

Notwithstanding, the security of our energy infrastructure was upgraded in the wake of the attack. Commercial nuclear power plants were placed on their highest alert status, the North American Electric Reliability Council, an industry organization responsible for maintaining bulk power system reliability, recommended that transmission operators implement heightened security measures, pipeline owners were put on high alert after the attacks, and security at oil refineries was upgraded.

As you know, there were isolated reports of gasoline price gouging in the wake of the attack last week. In response, the Secretary of Energy determined there was no supply disruption to justify reported prices and issued a public statement that these high prices were unjustified. The Federal Trade Commission also threatened to take enforcement action. Gasoline price spikes receded in wake of these actions.

The Department is conducting an assessment of the security of our energy infrastructure. When this assessment is complete, the Department will recommend appropriate action.

Need for Federal Electricity Legislation

I commend you for holding this hearing. Earlier in the year, many believed there was little likelihood Congress would consider electricity legislation. The view was that the California electricity crisis would discourage both the Administration and Congress from dealing with electricity legislation. Your hearing disproves this common wisdom.

The Administration believes the opposite is true - the electricity crisis in California and the West demonstrates the need for Congress to act. This experience shows there is a need to make wholesale electricity markets more competitive, to strengthen the transmission grid, to increase electricity supply, to protect consumers, and to improve reliability. The California electricity crisis is a dramatic demonstration of problems that exist under the status quo - problems that Congress should address.

The Administration recognizes the need for Congress to pass comprehensive electricity legislation. The National Energy Policy included a recommendation that the "Secretary of Energy propose comprehensive electricity legislation that promotes competition, protects consumers, enhances reliability, promotes renewable energy, improves efficiency, repeals the Public Utility Holding Company Act of 1935, and reforms the Public Utility Regulatory Policies Act of 1978."

Since 1995, Congress has been grappling with electricity legislation. Initial efforts sought to require States to open their retail electricity market by a date certain. Subsequent legislation focused on promoting competition in electricity markets and complementing - not commanding -- State retail competition programs.

We clearly need to revise Federal electricity laws to recognize changes in electricity markets. The principal Federal electricity law - the Federal Power Act - was written in 1935. At the time, there was virtually no interstate commerce in electricity, there was no interstate transmission grid, electricity markets were local, power plants were built right next to consumers, and electricity generation was perceived to be a natural monopoly.

The Federal Power Act was enacted to fill a regulatory gap, out of recognition that States cannot regulate interstate commerce. Initially, the Federal role was modest, since there was very little interstate commerce in electricity. As interstate commerce in electricity expanded, it was only natural that the Federal role would also expand.

Today, the transmission grid is both interstate and international, electricity markets encompass entire regions, almost all wholesale electricity sales are in interstate commerce, and the natural monopoly in generation has long since been disproved.

The Administration believes the time has come to make changes to Federal electricity law to reflect changes that have occurred over the past 66 years, and the sweeping changes that are underway in the industry. The Administration believes there is a need to modernize our electricity laws.

The Administration believes it is essential that Congress pass comprehensive electricity legislation. Electricity legislation can make wholesale electricity markets more competitive, lower prices, strengthen the transmission grid, increase electricity supplies, protect consumers, and improve reliability.

I want to make it very clear that the Administration respects the State role in electricity regulation. For example, the Administration does not support proposals to require that States open their retail electricity markets by a date certain. It believes that it is a State responsibility to determine whether and when to open retail electricity markets to competition. At the same time, the Administration recognizes that since 1935 the Federal government has been charged with responsibility over wholesale electricity markets and the transmission of electricity in interstate commerce.

The Administration believes that electricity legislation should focus on core Federal issues that are beyond State authority.

Regulation of Interstate Commerce

Electricity markets are increasingly regional in nature. Under the Constitution, States have no authority to regulate interstate commerce and regulation of interstate commerce is a Federal responsibility. The California experience shows that actions taken by one State can have regional consequences.

Transmission

Assuring that our transmission system can deliver reliable electricity supplies is a core Federal issue. As the National Energy Policy noted, investment in new transmission capacity has failed to keep pace with growth in demand and with changes in the industry's structure. Since 1989, electricity sales have increased by 2.1 percent per year, yet transmission capacity has increased by only 0.8 percent per year. There is widespread recognition that there is a need to expand the transmission system, remove bottlenecks, and provide for open access. Since the transmission system is both interstate and international, regulation of the grid is a Federal responsibility.

There are various reasons why transmission constraints exist. In some cases, the problem is a lack o f economic incentive. The national energy policy proposes a solution to that problem: encouraging the Federal Energy Regulatory Commission (FERC) to develop incentive rates to promote transmission expansion. FERC has great flexibility under current law to set transmission rates at a level to attract investment. Recently, FERC has shown flexibility in considering nontraditional transmission rates. For those reasons, it does not appear legislation is needed to address transmission pricing.

In other cases, the problem is the siting process itself. Under current law, transmission siting is an exclusively State function. That law was written 66 years ago, at a time when power plants were located right next to customers, and decades before transmission lines interconnected States and regions. Congress did not provide for transmission siting by the Federal government because it did not foresee the transmission system would develop into not only an interstate but also an international grid.

Much has changed since 1935. The transmission grid is the interstate highway system for electricity. It should not be a system of local toll roads.

Electricity legislation can remove transmission bottlenecks by providing for siting by the Federal government of transmission facilities used for interstate transmission. The Administration believes legislation should preserve State transmission siting authority, but should provide for Federal siting of transmission facilities that are in the national interest, based on effects on reliability, interstate commerce in electricity, and on competition in wholesale electricity markets. We believe Federal siting decisions should rely in large part on recommendations made by regional siting boards.

We also believe that Federal electricity legislation should grant FERC authority to require State and municipal utilities and rural electric cooperatives to provide open access to their transmission systems, in the same manner as jurisdictional transmitting utilities. This is a step towards establishing one set of rules to govern the transmission grid.

Reliability

Ensuring the reliability of the interstate transmission system is also a Federal responsibility. Since the 1960s, the reliability of our transmission system has been based on voluntary compliance with unenforceable reliability standards. That is no longer tenable, and Federal legislation is needed to provide for enforceable standards developed by a self-regulating organization subject to FERC oversight.

Market Power

The Administration believes that FERC needs to be able to mitigate market power. However, the debate about market power often starts with a misunderstanding about FERC authority under current law. Under the Federal Power Act, FERC is responsible for ensuring that rates charged by public utilities are just and reasonable. As a general matter, the ability to set rates is the ability to prevent the exercise of market power. An exercise of market power generally entails charging rates that are higher than those produced in a truly competitive market. For that reason, FERC can prevent the exercise of market power through its authority over wholesale rates and by ordering refunds of unjust and unreasonable rates.

In our view, a discussion of market power issues must start with an understanding of FERC authority under existing law and a determination of whether existing FERC authority to address market power is inadequate.

Legislation can strengthen FERC authority to address market power. For example, the Administration believes legislation should amend the refund provisions of the Federal Power Act and provide that refunds are effective on the date of complaint, not 60 days later. The Administration believes there is a need to increase the penalties for criminal violations of the Federal Power Act and expand the scope of the civil penalty provisions to include any violation of the Federal Power Act, not just the provisions added by the Energy Policy Act of 1992.

The Administration believes that FERC should retain its authority to approve mergers and asset dispositions, given its expertise on the electricity industry. We also believe it is appropriate to clarify FERC authority to approve holding company mergers and mergers and asset dispositions involving generation facilities.

Electricity Supply

The lack of uniform interconnection standards appears to have contributed to the difficulty in developing independent power plants in some regions of the country. Federal legislation can help assure adequate electricity supplies, by providing for uniform interconnection standards and reforming FERC authority to issue interconnection orders.

Consumer Protection

Electricity markets are regional in nature, and are no longer confined neatly within individual States. For that reason, there is a need for electricity legislation that protects consumers against "slamming" and "cramming," strengthens the bargaining power of consumers through aggregation, protects consumer privacy, and ensures that consumers have the information to make informed decisions to meet their needs.

Federal Electric Utilities

Another core Federal issue is defining the role of Federal electric utilities like the Tennessee Valley Authority (TVA) and Bonneville Power Administration in competitive electricity markets. Obviously, States have no authority over Federal electric utilities. Legislation is needed to provide open access to transmission systems operated by the Federal electric utilities and ensure that one set of rules governs the entire interstate transmission system. There is a need for other specific TVA and Bonneville reforms. I assure the Subcommittee that the Administration intends to work closely with the Congressional delegations from these regions on these reforms.

Reform of Federal Electricity Laws

There is a need to reform Federal electricity laws, such as the Public Utility Holding Company Act of 1935 (PUHCA) and the Public Utility Regulatory Policies Act of 1978 (PURPA). With respect to PUHCA, each of the past four presidents has supported PUHCA repeal. PUHCA repeal is an idea whose time came a long time ago. There is also a need to repeal the PURPA mandatory purchase obligation prospectively.

Jurisdiction

Federal legislation should also clarify Federal and State jurisdiction. One jurisdictional issue is State authority to charge public purpose fees. The Administration believes that States are in the best position to develop public purpose programs to suit their needs. Some States may prefer to develop strong low-income assistance, while others focus on rural assistance, while still others concentrate on conservation. States have different needs, and need the flexibility to craft programs to suit those needs. These programs can be funded through the distribution charges - an area where States have exclusive jurisdiction - or charges on retail sales of electricity.

Electricity legislation can clarify the authority of States to impose fees to fund public purpose programs that meet their needs and avoid bypass of State fees. We believe this is a better approach than imposing a Federal tax to fund a Public Benefits Fund. One concern relating to a Public Benefits Fund that has not received much attention is equities in allocating funds. There is no assurance that fees raised in one State to finance a Public Benefits Fund will not be spent in other States.

Energy Efficiency and Renewable Energy

A stable power supply should consist of a clean and diverse portfolio of domestic energy supplies - including renewable and alternative supplies - that are available right here in the United States. The National Energy Policy includes several recommendations on ways that new and emerging technologies can help us provide for increased generation of electricity while protecting the environment, as well as on ways to increase use of renewable and alternative energy supplies. These recommendations should be considered as electricity legislation is developed.

By no means is this intended to be an exclusive list and there are other issues that may be appropriate to address in Federal electricity legislation.

Conclusion

We have a rare opportunity to learn a lesson from the California experience and act to prevent a future electricity crisis. Congress normally passes energy legislation in the wake of a crisis, and it is rare for Congress to act to prevent an energy crisis.

Mr. Chairman, Congress has been slowly reforming Federal electricity laws for over twenty years. This process began with the Public Utility Regulatory Policies Act of 1978, which the encouraged the development of independent power producers. This process continued with enactment of the Energy Policy Act of 1992, which provided greater access to the transmission system and further encouraged the development of independent power producers. The time has come for Congress to take another step, a bigger step, one that can make electricity markets more competitive and result in lower electricity prices, and ample and reliable electricity suppliers.

The Administration looks forward to working closely with the Committee to develop comprehensive electricity legislation.

I appreciate the opportunity to testify before you today.



LOAD-DATE: September 21, 2001