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Congressional Testimony
July 26, 2001, Thursday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2389 words
COMMITTEE:
SENATE ENERGY AND NATURAL RESOURCES
HEADLINE: NATIONAL ENERGY POLICY
TESTIMONY-BY: WILLIAM L. MASSEY, COMMISSIONER
AFFILIATION: FEDERAL ENERGY REGULATORY COMMISSION
BODY: July 26, 2001
TESTIMONY OF
COMMISSIONER WILLIAM L. MASSEY FEDERAL ENERGY REGULATORY COMMISSION
BEFORE THE COMMITTEE ON ENERGY AND NATURAL RESOURCES
UNITED
STATES SENATE
Mr. Chairman and Members of the Committee on Energy and
Natural Resources:
Thank you for the opportunity to testify on
comprehensive electricity restructuring legislation. Let me state at the outset
that I have reviewed Chairman Bingaman's excellent White Paper and agree with
all of its recommendations, save one: I would recommend that Congress transfer
jurisdiction over the siting of interstate transmission to the Commission, an
agency with explicit interstate responsibilities.
With notable
exceptions such as
PURPA and EPACT, the legal framework that
governs the electricity industry is now more than sixty five years old and
assumed an old fashioned cost of service regime. Simply stated, the Commission
does not have all of the tools it needs both to promote large regional markets
and to protect the public interest. I would like to underscore a number of
legislative changes that are critical to achieving the goal of well functioning
competitive markets that yield substantial consumer benefits. Transmission
Jurisdiction A.One Set of Rules
Congress should place all interstate
transmission under one set of open access rules. That means subjecting the
transmission facilities of municipal electric agencies, rural cooperatives, the
Tennessee Valley Authority, and the Power Marketing Administrations to the
Commission's open access rules. These entities control 30% of the nation's
electricity transmission grid. Their current non jurisdictional status has
resulted in a patchwork of rules that hinder seamless electricity markets.
Markets require an open non-discriminatory transmission network in order to
flourish.
In addition, all transmission, whether it underlies an
unbundled wholesale, unbundled retail, or bundled retail transaction, should be
subject to one set of fair and non-discriminatory interstate rules administered
by the Commission. This will give market participants confidence in the
integrity and fairness of the delivery system, and will facilitate robust trade
by eliminating the current balkanized state-by-state rules on essential
interstate facilities.
B.Regional Transmission Organizations
While the Commission has made substantial progress in forming the
Regional Transmission Organizations that are critical to the competitive market
place, our hand would be strengthened by a clear declaration by the Congress
that these institutions are in the public interest and should be formed. One
appropriate action would be to give the Commission clear authority to order the
formation of such institutions in compliance with Commission standards. I firmly
believe that large RTOs consistent with FERC's vision in Order No. 2000 are
absolutely essential for the smooth functioning of electricity markets. RTOs
will eliminate the conflicting incentives vertically integrated firms still have
in providing access. RTOs will streamline interconnection standards and help get
new generation into the market. RTOs will improve transmission pricing, regional
planning, congestion management, and produce consistent market rules. We know
for a fact that resources will trade into the market that is most favorable to
them. Trade should be based on true economics, not the idiosyncracies of
differing market rules across the region. A clear message from Congress would
certainly speed the formation of these critical institutions.
C.Generation Interconnection
I would recommend that Congress
direct the Commission to adopt uniform nationwide standards that streamline the
process of interconnecting generators to the grid. The Commission has taken some
steps in this direction by encouraging utilities to file their interconnection
rules, but more must be done. Generation siting decisions should not depend on
how easy it is to hook up in a particular region or with a certain transmission
provider. Standardized and uniform rules promulgated by the Commission are
necessary.
Reliability
We need mandatory reliability standards.
Vibrant markets must be based upon a reliable trading platform. Yet, under
existing law there are no legally enforceable reliability standards. The North
American Electric Reliability Council (NERC) does an excellent job preserving
reliability, but compliance with its rules is voluntary. A voluntary system is
likely to break down in a competitive electricity industry.
I strongly
recommend federal legislation that would lead to the promulgation of mandatory
reliability standards. A private standards organization (perhaps a restructured
NERC) with an independent board of directors 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.
Rates and Market Power
A. Refunds
I believe the
Commission needs additional authority to properly address the issue of refunds
for unjust and unreasonable wholesale electricity prices. Section 206 of the
Federal Power Act limits a refund effective date to not earlier than 60 days
after a complaint is filed or an investigation is started. Whether the
Commission can order refunds retroactively from the refund effective date is an
issue that is still before the Commission. I note, however, that in an order
issued November 1, 2000, the Commission observed that the Federal Power Act and
the weight of court precedent strongly suggest that retroactive refunds are
impermissible. I recommend clear statutory language that would allow the
Commission to order refunds for past periods if the rates charged are determined
to be unjust and unreasonable. Limitations on how far back in time the
Commission can order refunds may be appropriate.
B.Civil Penalties
I recommend that the Commission be given authority to assess civil
penalties against participants that engage in prohibited behavior in electricity
markets, such as anticompetitive acts and violations of tariff terms and
conditions. If the Commission is to be the "cop on the beat" of competitive
markets, we must have the tools needed to ensure good behavior. Refunds alone
are not a sufficient deterrent against bad behavior. Simply giving the money
back if you are caught is not enough. The consequences of engaging in prohibited
behavior must be severe enough to act as a deterrent.
C.Mergers and
Consolidations
To ensure that mergers do not undercut our competitive
goals, the Commission's authority over mergers involving participants in
electricity markets must be strengthened in a number of ways. Consolidations of
market participants can have adverse consequences to the functioning of
electricity markets. The Commission's detailed experience with electricity
markets and its unique technical expertise can provide critical insights into a
merger's competitive effects. The Commission's authority to review mergers
should be strengthened to ensure that all significant mergers involving
electricity market participants are reviewed.
I recommend that the
Commission be given direct authority to review mergers that involve generation
facilities. The Commission has interpreted the FPA 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 the current 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 over those transactions should not depend on how they are
structured. Therefore, I recommend that the Commission be given authority to
review all consolidations involving electricity market participants.
D.Market Power Mitigation
Market power still exists in the
electricity industry. The FERC, with its broad interstate view, must have
adequate authority to ensure that market power does not squelch the very
competition we are attempting to facilitate. However, the Commission now has
only indirect conditioning authority to remedy market power. This is clearly
inadequate. Therefore, I recommend legislation that would give the Commission
the direct authority to remedy market power in wholesale markets, and also in
retail markets if asked by a state commission that lacks adequate authority. For
example, such authority would allow the Commission to order structural remedies
directly, such as divestiture, needed to mitigate market power.
E.Demand
Responsiveness
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 would be helpful for Congress to
send a message that instilling a significant measure of demand responsiveness
into electricity markets is in the public interest. I would recommend that
legislation strongly encourage FERC and state commissions to cooperate in
designing markets that include demand responsiveness. This would help to ensure
just and reasonable wholesale prices and would be an effective market power
mitigation measure.
Transmission Siting
I would recommend 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 due to the
increased demands of a strong economy and to new uses for which it was not
designed. Transmission expansion has not kept pace with these changes in the
interstate electricity marketplace.
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 product 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 12,000 miles of new pipeline
capacity during the last six years. No comparable expansion of the electric grid
has occurred.
I recommend legislation that would transfer siting
authority to the Commission. Such authority would make it more likely that
transmission facilities necessary to reliably support emerging regional
interstate markets would be sited and constructed. A strong argument can be made
that the certification of facilities necessary for interstate commerce to thrive
should be carried out by a federal agency.
Market Transparency Rules
I agree with the White Paper's recommendations in this area.
Miscellaneous Provisions
I agree with the remainder of the White Paper's
recommendations with respect to the repeal of PUHCA and
PURPA,
and with respect to renewable resources, information to customers, a Public
Benefits Fund, and the repeal of tax provisions that inhibit structural changes
in the market.
Conclusion
I stand ready to answer questions and
to assist the Committee in any way. Thank you for this opportunity to testify.
LOAD-DATE: July 31, 2001