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Federal Document Clearing House
Congressional Testimony
December 12, 2001, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 3068 words
COMMITTEE:
HOUSE ENERGY AND COMMERCE
SUBCOMMITTEE: ENERGY AND AIR QUALITY
HEADLINE: ELECTRICITY TRANSMISSION
TESTIMONY-BY: WILLIAM L. MASSEY, COMMISSIONER
AFFILIATION: FEDERAL ENERGY REGULATORY COMMISSION
BODY: The Honorable William L. Massey Commissioner
Federal Energy Regulatory Commission
TESTIMONY
Mr. Chairman and
Members of the Subcommittee on Energy and Air Quality:
Thank you for the
opportunity to testify on the important electricity legislation now pending
before the House and recent Commission activity promoting efficient and reliable
electricity markets.
I. H.R. 3406 - The Electric Supply and Transmission
Act
A. Interconnection
I am generally supportive of the
provisions of Title I. Section 101 addresses interconnection standards. The
Commission has made a firm decision to move forward on developing standard
procedures and agreements regarding interconnection and will likely do so in a
way that is consistent with section 101.
B. Demand response
Section 103 provides for implementation of price responsive demand
programs. As I have testified previously, markets need demand responsiveness to
price. This is a standard means of moderating prices in well-functioning
markets, but it is generally absent from electricity markets. When prices for
other commodities get high, consumers can usually respond by buying less,
thereby acting as a brake on price run-ups. If the price, say, for a head of
cabbage spikes to $
50, consumers simply do not purchase it.
Without the ability of end use consumers to respond to price, there is virtually
no limit on the price suppliers can fetch in shortage conditions. Consumers see
the exorbitant bill only after the fact. This does not make for a well
functioning market. Instilling demand responsiveness into electricity markets
requires two conditions: first, significant numbers of customers must be able to
see prices before they consume, and second, they must have reasonable means to
adjust consumption in response to those prices. Accomplishing both of these on a
widespread scale will require technical innovation. A modest demand response,
however, can make a significant difference in moderating price where the supply
curve is steep.
Once there is a significant degree of demand
responsiveness in a market, demand should be allowed to bid demand reductions,
or so called "negawatts," into organized markets along with the megawatts of the
traditional suppliers. This direct bidding would be the most efficient way to
include the demand side in the market. But however it is accomplished, the
important point is that market design simply cannot ignore the demand half of
the market without suffering painful consequences, especially during shortage
periods. There was virtually no demand responsiveness in the California market.
Customers had no effective means to reduce demand when prices soared.
It
is important for Congress to send a message that instilling a significant
measure of demand responsiveness into electricity markets is in the public
interest. This legislation does just that, and I endorse it.
C. PUHCA
and
PURPA Subtitle B of Title I repeals PUHCA. I am
pleased that the bill appears to include important provisions regarding state
and federal access to the books and records of holding companies and their
subsidiaries.
Subtitle C of Title I repeals
PURPA on a
going forward basis. I would support such repeal of
PURPA if
there were a mechanism to promote the development of renewable resources, such
as a reasonable portfolio standard.
D. Review of Mergers
Section
141 repeals the Commission's authority to review mergers. I do not support this
provision. As we strive to move toward competitive markets and light-handed
regulation, the Commission's ability to remedy market power is increasingly
important. Market power is likely to exist in the electric industry for a while.
It is unreasonable to expect an industry that has operated under a heavily
regulated monopoly structure for 100 years suddenly to shed all pockets of
market power. An agency such as FERC with a broad interstate view must have
adequate authority to ensure that market power does not squelch the very
competition we are attempting to facilitate.
The Commission's authority
over mergers is important. We are seeing unprecedented industry consolidation
now. While mergers can produce efficiencies, they can also increase both
horizontal and vertical market power. The Commission is particularly well suited
to evaluate proposed mergers involving electric utilities. The Commission's
detailed experience with electricity markets and its unique technical expertise
can provide critical insights into a merger's competitive effects. In addition,
the Commission's duty to protect the public interest is broader than the focus
of the antitrust agencies and thus allows us to better protect consumers from
other possible effects of a merger, such as unreasonable costs. As the architect
of Order No. 888 and the RTO Rule, Order No. 2000, the Commission must retain
the authority to condition a merger to ensure consistency with broader policy
goals. And unlike the antitrust agencies, the Commission's merger procedures
allow public intervention and participation in proceedings critical to the
restructuring of this vital national industry.
For these reasons, I
would not support any weakening of the Commission's merger authority. Indeed, to
ensure that mergers do not undercut our competitive goals, the Commission's
authority over electricity mergers must be strengthened in a number of ways. The
Commission should be given direct authority to review mergers that involve
generation facilities. The Commission has interpreted the Federal Power Act as
excluding generation facilities per se from our direct authority, although that
interpretation is currently before the courts. It is important that all
significant consolidations in electricity markets be subject to Commission
review. For the same reason, the Commission should be given direct authority to
review consolidations involving holding companies.
I am also concerned
that significant vertical mergers can be outside of our merger review authority.
Under section 203 of the FPA, our merger jurisdiction is triggered if there is a
change in control of jurisdictional assets, such as transmission facilities.
Consequently, consolidations can lie outside of the Commission's jurisdiction
depending on the way they are structured. For example, a merger of a large fuel
supplier and a public utility would not be subject to Commission review if the
utility acquires the fuel supplier because there would be no change in control
of the jurisdictional assets of the utility. If the merger transaction were
structured the other way, i.e., the fuel supplier acquiring the utility, it
would be subject to Commission review. Such vertical consolidations can have
significant anticompetitive effects on electricity markets. Those potential
adverse effects do not depend on how merger transactions are structured, and
thus our jurisdiction should not depend on how transactions are structured.
Therefore, I recommend that the Commission be given authority to review all
consolidations involving electricity market participants, however structured.
E. Open Transmission Access
Section 201 allows the Commission to
require all transmitting utilities as well as public utilities to offer open
access transmission service. I am generally supportive of placing all
transmission owners under the same set of rules. I have concerns, however, with
codifying the manner in which the Commission should calculate stranded costs.
Such calculation should be left to the Commission's discretion and judgment.
F. Regional Transmission Organizations
Section 202 sets out a
number of provisions regarding RTOs and RTO formation. I am particularly pleased
that this legislation sends a clear message that RTOs are in the public
interest. Nevertheless, I am concerned with the proposals to codify matters such
as RTO standards, hearing requirements, and when the Commission may or may not
make modifications to existing RTOs. It would be far more useful to give the
Commission express authority to require RTO formation under standards determined
to be appropriate by the Commission. This would allow standards to evolve along
with the requirements of competitive markets.
G. Reliability
Section 301 provides for Commission certification of an organization to
develop and enforce reliability standards. The industry needs mandatory
reliability standards. Vibrant markets must be based upon a reliable trading
platform. Yet, under existing law there are no legally enforceable reliability
standards. Compliance with the reliability rules of the North American Electric
Reliability Council (NERC) is voluntary. A voluntary system is likely to break
down in a competitive electricity industry.
I support legislation that
would lead to the promulgation of mandatory reliability standards. A private
standards organization with an independent board of directors could promulgate
mandatory reliability standards applicable to all market participants. These
rules would be reviewed by the Commission to ensure that they are fair and not
unduly discriminatory. The mandatory rules would then be applied by RTOs, the
entities that will be responsible for maintaining short-term reliability in the
marketplace. Mandatory reliability rules are critical to evolving competitive
markets, and I urge Congress to enact legislation to accomplish this objective.
Section 301 seems reasonable and I support its adoption.
H.
Transmission Infrastructure
Section 401 directs the Commission to adopt
policies that facilitate construction of transmission facilities needed for
competitive electricity markets, and to report to the Congress on transmission
adequacy. I support these goals. I am particularly supportive of the
legislation's specific goals such as promoting economically efficient
enlargement of transmission networks, including the provision of proper price
signals so that new generation and transmission is built where it provides the
lowest overall cost to consumers.
I. Transmission Siting
Section
402 enacts backstop transmission siting authority for the Commission. In
previous testimony, I have recommended that Congress transfer to the Commission
the authority to site new interstate electric transmission facilities. The
transmission grid is the critical superhighway for electricity commerce, but it
is becoming congested because of the new uses for which it was not designed.
Transmission expansion has not kept pace with changes in the interstate
electricity marketplace.
Although the Commission is responsible for well
functioning electricity markets, it has no authority to site the electric
transmission facilities that are necessary for such markets to thrive and
produce consumer benefits. Existing law leaves siting to state authorities. This
contrasts sharply with section 7 of the Natural Gas Act, which authorizes the
Commission to site and grant eminent domain for the construction of interstate
gas pipeline facilities. Exercising that authority, the Commission balances
local concerns with the need for new pipeline capacity to support evolving
markets. We have certificated well over 15,000 miles of new pipeline capacity
during the last six years. No comparable expansion of the electric grid has
occurred.
I continue to recommend legislation that would transfer siting
authority to the Commission. Such authority would make it more likely that
transmission facilities necessary to reliably support emerging regional
interstate markets would be sited and constructed. A strong argument can be made
that the certification of facilities necessary for interstate commerce to thrive
should be carried out by a federal agency.
Adequate grid facilities are
essential to robust wholesale power markets. I am confident that transmission
will be built in sufficient quantities if siting authority is rationalized, rate
jurisdiction is clarified, and adequate cost recovery mechanisms and risk-based
rates of return are allowed.
Proposed section 402 provides the
Commission with backstop siting authority to ensure that the necessary
transmission facilities are built. This provision appears to provide appropriate
respect for the siting prerogatives of the states and has my support.
J.
Federal Utilities
I have long advocated placing all transmission
providers under the same set of rules. Placing TVA, BPA and the Federal Power
Marketing Administration under Commission authority has my full support.
Section 523 permits BPA to transfer operational control of its
transmission facilities to an RTO. Although I strongly support allowing BPA to
participate in an RTO, I would not limit its participation in an RTO of a
specific scope as this section does. In addition, I would recommend that
Congress specifically authorize TVA and the PMAs to participate in RTOs
determined to be appropriate by the Commission.
K. Penalties
Section 703 expands the scope of civil penalties to include all of Part
II of the Federal Power Act. This provision moves toward giving the Commission
much needed tools to police the markets and I support it.
II. Recent
FERC Action on RTO Formation and Markets
A. RTO Formation
The
Commission has received a number of proposals to form RTOs, and has acted on
most such proposals. In general, the Commission has strongly encouraged RTOs to
grow larger and has provided guidance on independence and RTO governance. In
July, the Commission issued an order expressing its preference for no more than
four large RTOs in the nation, but has recently indicated that greater
flexibility will be allowed in RTO formation.
During October 15-19, 2001
the Commission held five days of public hearings on a wide range of issues
related to RTO formation and market design. In an order issued November 7, the
Commission indicated a desire to receive additional comment from state
commissions with regard to RTO formation, and indicated that additional cost
benefit analyses on RTOs would be conducted. Also, the Commission stated its
intention to standardize market design rules as appropriate. The November 7
order stated that since it is not possible for all RTOs to be in operation by
our December 15, 2001 deadline, the Commission will set out in future orders a
time line for continuing RTO progress in each region. I expect the Commission to
act on such orders in the near future.
B. Market-based Rates
In
two orders the Commission issued November 7, 2001, we began to correct severe
weaknesses in our market based pricing policy. My longstanding concerns had been
sharpened by the failure of the California market and the economic consequences
that spun from it. We've learned that we must accurately assess market
conditions when depending on markets to discipline prices. And we must provide
adequate refund protection to customers when poorly functioning markets do not
protect them from unreasonable prices.
In AEP Power Marketing, et al.,
the Commission took three important steps in our market based pricing policy.
First, we concluded that our traditional market power analysis no longer
adequately protects customers against generation market power.
Second,
we announced a new interim analytic screen to protect customers until we develop
the tools we need for the longer term. That interim tool is the Supply Margin
Assessment, or SMA, and will be applied to all sales except those into an ISO or
RTO with approved monitoring and mitigation. This is a major step in the right
direction. The SMA improves on the old analysis by taking into account
transmission capability and by looking to the critical notion of a "pivotal
supplier" in a market. When supplies are tight, prices in electricity markets
can run up quickly, especially when there is a pivotal supplier whose capacity
is needed to satisfy demand. The SMA addresses that problem and does not allow
pivotal suppliers to charge market based prices. The SMA is a major improvement.
Like most new policy tools, it is not perfect, but we are moving in the right
direction. As with any analytic method, it is only a snapshot of current market
conditions. But if market conditions change, parties are free to file a
complaint showing that the new conditions result in a seller failing the SMA
screen.
Third, the Commission applied the SMA to three sellers in the
context of their triennial updated analysis, found that they fail, and put in
place innovative mitigation measures requiring the applicants to offer all
uncommitted generation capacity into the spot market. Sales will be priced at
the traditional split savings adder. As the order points out, maintaining an
accurately priced spot market is the single most important element for
disciplining longer term transactions. Thus, with the spot market mitigation in
place, an applicant may freely negotiate longer term transactions but must post
on its web site a portfolio of long term products and prices that are available.
In another order issued November 20 in EL01-118, the Commission took two
additional important steps. First, we announced the start of a generic
proceeding to develop new analytic methods for evaluating markets and market
power on a long term basis. I fully support launching this important initiative.
Second, the order initiated a section 206 proceeding to place a refund condition
in the tariffs of sellers with market based pricing. That condition would
prohibit anticompetitive behavior and the exercise of market power. This is an
improvement providing customers with some added protection, and to that extent I
support the order.
But we should do more for customers. The order fails
to provide any refund protection to customers when market structure and market
rules are flawed and unjust and unreasonable rates result. The Federal Power Act
states that such rates are unlawful. This is precisely the situation in which
the Commission found itself in the California proceeding. We did not make any
findings of bad behavior on the part of any sellers. We found only a market that
was badly broken. The risk of a broken market should not be placed solely on
customers. Our tariff condition should provide for refunds whenever the
Commission finds that unjust and unreasonable rates are charged.
III.
Conclusion
I stand ready to answer questions and to assist the
Subcommittee in any way. Thank you for this opportunity to testify.
LOAD-DATE: December 13, 2001