[Senate Hearing 107-49]
[From the U.S. Government Publishing Office]
S. Hrg. 107-49
ELECTRICITY RATES
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HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
on
S. 26 S. 287
S. 80 Amdt. to S. 287
__________
MARCH 15, 2001
Printed for the use of the
Committee on Energy and Natural Resources
----------
U.S. GOVERNMENT PRINTING OFFICE
72-886 WASHINGTON : 2001
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON ENERGY AND NATURAL RESOURCES
FRANK H. MURKOWSKI, Alaska, Chairman
PETE V. DOMENICI, New Mexico JEFF BINGAMAN, New Mexico
DON NICKLES, Oklahoma DANIEL K. AKAKA, Hawaii
LARRY E. CRAIG, Idaho BYRON L. DORGAN, North Dakota
BEN NIGHTHORSE CAMPBELL, Colorado BOB GRAHAM, Florida
CRAIG THOMAS, Wyoming RON WYDEN, Oregon
RICHARD C. SHELBY, Alabama TIM JOHNSON, South Dakota
CONRAD BURNS, Montana MARY L. LANDRIEU, Louisiana
JON KYL, Arizona EVAN BAYH, Indiana
CHUCK HAGEL, Nebraska DIANNE FEINSTEIN, California
GORDON SMITH, Oregon CHARLES E. SCHUMER, New York
MARIA CANTWELL, Washington
Brian P. Malnak, Staff Director
David G. Dye, Chief Counsel
James P. Beirne, Deputy Chief Counsel
Robert M. Simon, Democratic Staff Director
Sam E. Fowler, Democratic Chief Counsel
Howard Useem, Senior Professional Staff Member
C O N T E N T S
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STATEMENTS
Page
Abraham, Hon. Spencer, Secretary, Department of Energy........... 15
Baum, Stephen L., Chairman, President and CEO, Sempra Energy, San
Diego, CA...................................................... 66
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 5
Bryson, John E., Chairman, President and CEO, Edison
International, Rosemead, CA.................................... 62
Burns, Hon. Conrad, U.S. Senator from Montana.................... 14
Campbell, Hon. Ben Nighthorse, U.S. Senator from Colorado........ 6
Cantwell, Hon. Maria, U.S. Senator from Washington............... 13
Craig, Hon. Larry E., U.S. Senator from Idaho.................... 7
Feinstein, Hon. Dianne, U.S. Senator from California............. 8
Fetter, Steven M., Managing Director, Global Power Group, Fitch,
Inc., New York, NY............................................. 78
Hagel, Hon. Chuck, U.S. Senator from Nebraska.................... 12
Hebert, Curt L., Jr., Chairman, Federal Energy Regulatory
Commission..................................................... 48
Hecht, William F., Chairman, President and CEO, PPL Corporation,
Allentown, PA.................................................. 73
Landrieu, Hon. Mary L., U.S. Senator from Louisiana.............. 13
Locke, Hon. Gary, Governor, State of Washington.................. 41
Martz, Hon. Judy, Governor, State of Montana..................... 45
Murkowski, Hon. Frank H., U.S. Senator from Alaska............... 1
Smith, Hon. Gordon, U.S. Senator from Oregon..................... 11
Thomas, Hon. Craig, U.S. Senator from Wyoming.................... 15
Worthington, Bruce, Senior Vice President and General Counsel,
PG&E Corporation, San Francisco, CA............................ 70
APPENDIXES
Appendix I
Responses to additional questions................................ 91
Appendix II
Additional material submitted for the record..................... 99
ELECTRICITY RATES
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THURSDAY, MARCH 15, 2001
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:10 a.m., in
room SH-216, Hart Senate Office Building, Hon. Frank H.
Murkowski, chairman, presiding.
OPENING STATEMENT OF HON. FRANK H. MURKOWSKI,
U.S. SENATOR FROM ALASKA
The Chairman. Good morning, ladies and gentlemen. The
Committee on Energy and Natural Resources will convene.
Today we have a very interesting panel led by the Honorable
Spence Abraham, one of our own, as Secretary of the U.S.
Department of Energy. We were chatting in the back room, and it
occurred to me that the responsibilities of the Department of
Energy were kind of what we thought the world looked like
before Columbus proved it was round: seemingly flat; it has no
end. As a consequence, I am not suggesting you are here to end
it by any means, Mr. Secretary, but the dimension is beyond
comprehension.
On panel 2, we will have the Honorable Curt Hebert,
Chairman of the Federal Energy Regulatory Commission, which is
expected to solve many of these problems that we are going to
hear about today.
We have panel 3: the Honorable Gary Locke, Governor of the
State of Washington, and the Honorable Judy Martz, Governor of
the State of Montana.
Panel 4: Bruce Worthington, senior vice president and
general counsel of PG&E, San Francisco; John Bryson, chairman,
CEO, and president of Edison International of Rosemead,
California; Steve Baum, chairman, CEO, and president of Sempra
Energy, San Diego, California; William Hecht, chairman, CEO,
and president of PPL Corporation, Allentown, Pennsylvania; and
Steve Fetter, managing director of the Global Power Group at
Fitch, New York.
Senator Bingaman and I are going to chair this hearing this
morning. About 9:25 I am going to have to go downtown for a few
minutes on another matter that was previously scheduled, but I
will be rejoining the hearing.
We are having fast-breaking news. I understand that there
was a press conference and perhaps some concurrence between two
of our members, and they can tell us about that.
I cannot help but note the Wall Street Journal this morning
makes a rather startling statement that this energy shortage is
not unique to California by any means. The Wall Street Journal
suggests this morning that the New York independent system
operators said that 8,600 megawatts of new power capacity, a 25
percent increase from what currently exists, must be
constructed by 2006 or shortages will become so pronounced that
they will push up prices and raise the specter of blackouts.
Whether we want to adhere to that projection, I think we
ought to at least recognize that we have heard these
projections at previous times and, unfortunately, we have not
taken action. As a consequence, we find ourselves in a rather
embarrassing position today, and it appears to be getting
worse.
In any event, let me make a brief statement here. Then I
will call on Senator Bingaman and then we will go around with
the members.
What we have today, at least currently, are three bills by
Senator Feinstein and Senator Boxer that attempt to address the
California electric supply problem, and the methodology is
price controls on wholesale power sold, as I understand it, in
all Western States.
Before we proceed, I think we must decide what are we
really trying to fix. Are we trying to fix power shortages and
price spikes as the fix-all? Or are these symptoms of perhaps
deeper problems: inadequate generation, inadequate
transmission? Unfortunately, in my opinion, these three bills
do not fix the supply problem in California, and I emphasize
``supply.''
I would note that in the 1970's we did impose price
controls on oil and natural gas. We have had some experience
with it. At that time it did not work. Those who forget
history--we have heard this before--are condemned to repeat it.
Simply put, price controls in my opinion will not solve
California's supply problem.
Let me point out a couple relevant facts.
First, California is dead last--dead last--in the Nation in
terms of electric generation per person. Yet, I believe it
ranks sixth in the world economy in comparison.
Second, California has very low monthly electric bills in
comparison to other areas. Consumers in 37 other States have
higher bills. For example, consumers in Oregon paid about
$61.40 per month in 1999, which are the latest available
figures from the Secretary's office, as compared with $58.70
per month in California. The nationwide average residential
bill is about $70.88.
The staff has prepared a detailed summary of the bills but
briefly, as I understand it, S. 287, the Feinstein/Boxer bill,
requires FERC to impose cost-of-service price controls on
wholesale electricity sold in the West. Cost-of-service price
control is the price set on a generator-by-generator basis,
calculated by adding the actual cost of generating power plus a
rate of return on invested capital.
S. 80, the Boxer/Feinstein bill, requires FERC to impose a
price cap on wholesale electricity. Now, the wholesale price
cap is a single maximum price which may not be exceeded
regardless of the cost of production. I think we have to ask
ourselves if that, in fact, stimulates generating capacity
coming into California. I think we know what the answer is.
S. 26, the Feinstein/Boxer bill, requires the Secretary of
Energy to impose either a price cap or a cost-of-service price
control on wholesale electricity. Now, that basically takes the
authority from an independent regulatory agency, FERC, which we
assume is an objective agency, and gives it to a political
appointee. No offense, Mr. Secretary, but the Secretary of
Energy is given that authority. I think that is contrary to the
object of initially establishing FERC because it sets it in a
political arena.
In addition, amendment no. 12 by Senator Smith, as I
understand it, would require the States to allow the pass-
through of costs to consumers if they are to receive wholesale
price controls. I think there is some justification for this,
certainly, in ensuring that we have some relief by increasing
power generating capacity because unless there is the assurance
of a pass-through, I doubt very much if it is going to be
economically viable to attract those that want to put in
facilities. In my opinion, this would address the problem of
California denying the utilities the pass-through of their
costs, which I understand is about $13 billion to date.
I am of the opinion that if you receive the power, you are
entitled to pay for it. Clearly the California consumers got
consideration. They got power. Whether the price was reasonable
or unreasonable I think is an obligation of FERC, but the
utilities are certainly entitled to payment. The question is,
who is going to pay for it? Is it going to be the taxpayer of
California or is it going to be the ratepayer of California?
The three price control bills I think raise some policy
concerns for the committee.
First, imposing price controls on wholesale power, as I
indicated, in my opinion will discourage construction of new
generation. Why will investors build powerplants in California
subject to price controls if they can build them elsewhere and
not be subject to price controls?
Second, it appears that the bills are intended to exempt
municipally owned utilities from price controls. If that is
true, with only part of the wholesale power market subject to
price regulation, loopholes and market distortions certainly
could be created. I would note that California ordered its
investor-owned utilities to divest their fossil fuel fired
generation and to purchase power exclusively from the spot
market but, in doing so, exempted or they opted out
California's municipally owned utilities from doing the same
thing. It is my understanding they were given a choice. The
independent utilities could not have that choice.
I think it is interesting to wonder and speculate that the
Los Angeles Department of Water, which is owned by the city of
Los Angeles, has made hundreds of millions of dollars of profit
from selling electricity to the power-short investors and the
investor-owned utilities during this crisis. I think there
should be some accountability there.
Third, imposing price controls on existing contracts may
result in their abrogation. It is my understanding that the
Governors of California, Washington, and Oregon support the
legislation in general; yet, the Governors of eight other
Western States are opposed to price controls. We will hear from
some of those Governors today.
So, what is the solution? Well, first and foremost,
California itself must act responsibly. We must assist
California in every possible way.
But on the supply side, California must get over its
aversion to new powerplants and transmission lines. California
has not allowed a new major powerplant to be built in almost a
decade. California's extremely limited transmission capacity,
the so-called Path 15 problem, directly contributes to the
shortage problem in California.
On the demand side, California must get over its
unwillingness to pass through wholesale costs. As a result,
California utilities owe banks some $13 billion, which
continues to grow daily. California's legislature has also
authorized the issuance of $10 billion in bonds to purchase
power, and it has already spent $3 billion before they have
even been issued. So, California's taxpayers are certainly at
risk.
California is driving independently owned utilities to the
brink of bankruptcy. There is a lot of finger-pointing going
on, which is understandable. Everybody wants to duck when the
flack is flying. They are having the State buy power, take over
transmission lines, seize utility assets. I do not think this
necessarily resolves the problem of supply and demand. The
demand is there; the supply is not. It only prolongs the agony.
It reminds me of busily rearranging the deck chairs.
The recent survey, according to I believe the Washington
Post--so we can all question the accuracy----
[Laughter.]
The Chairman [continuing]. Allegedly found that two out of
three people in California would rather have the lights go out
than have any price increase. I will leave it up to the
witnesses to comment on that. But in any event, if they
continue to oppose powerplants and transmission lines, they
might get their wish.
There is no question that California faces serious
problems, but we must work together to find a meaningful
solution. We do not want a band aid patch that just creates
different problems that are going to have to be addressed by
different people sitting in this same chair in a different
month or a different year.
Last week FERC took action to rein in wholesale prices in
California by declaring high prices unjust and unreasonable and
ordering millions of dollars in refunds. It may not solve the
problem, but it is certainly going to get the attention of
those that sold power at extremely high rates.
Likewise, California has taken some tentative steps, I
think in the right direction, by trying to expedite powerplant
permit approval. But the first real test is the start-up of an
existing 450 megawatt gas powerplant for this summer, and I
understand it is already encountering several areas of local
opposition. If that powerplant is prevented from going on line,
I wonder what can save California.
Again, I would encourage that we be sympathetic to
recognize that we are all somewhat in this together in the
sense that we are intertied, but nevertheless, I think we have
to recognize patterns here that suggest that we are not really
addressing adequately the issue of supply.
One other thing that occurs to me. We were looking at some
matters the other day relative to where is the energy going to
come from. If we look at the moratoriums that exist on the east
coast, roughly from Maine to Florida, look at the moratoriums
that exist on the west coast, roughly from Canada down to the
start of Mexico, and the withdrawal of the overthrust belt and
the roadless areas in the forests where some 23 trillion cubic
feet of commercial gas have been put off limits, I think it is
time we came to grips with just where the energy is going to
come from.
I look forward to hearing from the witnesses on whether
they think this legislation is going to solve California's
problems and ensure an adequate and reasonable supply and price
of electricity over the long term. I think that is the real
question before the committee.
I want to commend my friends from California and Oregon and
the other States that have been most affected initially by
this, but as the Wall Street Journal points out, it is going to
move right across the country and do not think New York and the
east coast corridor is not going to be exposed to this because
it is a reality. It is coming and we better take action.
Senator Bingaman.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
Senator Bingaman. Thank you very much, Mr. Chairman.
At the last hearing we had on this subject, we learned that
there is a variety of suggestions for what has caused the
problem in California: structural flaws in the restructuring
plan in California, high natural gas prices, hot summers, cold
winters, insufficient rainfall, too few powerplants, too few
transmission lines, too many environmental laws, and price
gouging. Those were all suggested as causes.
But whatever the cause is, the result has been runaway
wholesale power rates that have brought the California system
to the point of collapse and have driven its largest utilities
into debt and is rapidly draining California's State treasury
to the tune of some $45 million a day, as I understand it.
The California electricity crisis is, as the Federal
Reserve Board Chairman testified 2 months ago, a national
concern. Obviously, California represents a very large part of
our economy and its problems are the Nation's problems.
The Federal Energy Regulatory Commission and the Bush
administration's response to this crisis have been largely to
let the market resolve the problem. The senior Senator from
California has argued forcefully that the market forces are not
solving the problem and that we at the Federal level have an
obligation to step in and to fix the problem.
California's wholesale rates first started spiking about 10
months ago in May. The Federal Energy Regulatory Commission,
which is the agency charged with regulating those rates, found
them to be unjust and unreasonable in November. That was 5
months ago.
The law is quite clear, as I read it, on what the
commission is required to do when it finds a wholesale rate to
be unjust and unreasonable. The Federal Power Act says the
commission must set a just and a reasonable rate. The
commission has yet to do so. It has, instead, taken a number of
half-hearted actions to try to bring down California's
wholesale rates. It is clear that these actions have yet to
bring those rates down to a just and reasonable level, as the
law requires.
Both the commission and the Bush administration have
offered various explanations and excuses for why a rate cap or
a cost-of-service rate would not work. They indicate that it
would send the wrong signals to generators and consumers. It
would discourage generators from building more powerplants and
more transmission lines. It would discourage consumers from
saving energy. The commission has said that the cost-of-service
rates will take too much time and be too difficult to
calculate. The commission and the administration embrace an
economic theory, the theory that an unregulated, competitive
market will cause supply to increase, will cause demand to fall
until those two are in balance, and this will necessarily lead
to reasonable prices.
But the Federal Power Act does not, obviously, enact an
economic theory. It does not provide an exception for
administrative difficulty. It simply says if wholesale rates
are unjust and unreasonable, the commission is required to make
them just and reasonable. This has not been done. To the
contrary, by its action last Friday, the commission appears to
have given its approval to many millions of dollars of
manifestly unjust and unreasonable charges.
Perhaps a cost-of-service rate mandate is not the ideal
solution to the problem and perhaps the bills that have been
introduced and referred to by Senator Murkowski are not
perfectly drawn, but they are a proposed solution. If the
administration objects to carrying out its obligations under
the Federal Power Act, then I believe it must come forward with
a credible alternative solution if it is not anxious to embrace
these.
Why do we not go ahead and have short statements from any
of the committee members who want to make them, and then we
will go to our witnesses. I am advised that according to the
order that people arrived here, Senator Campbell is next.
Senator Campbell. Mr. Chairman, I will just introduce a
statement for the record. Thank you.
Senator Bingaman [presiding]. Very good.
[The prepared statement of Senator Campbell follows:]
PREPARED STATEMENT OF HON. BEN NIGHTHORSE CAMPBELL, U.S. SENATOR
FROM COLORADO
Thank you, Mr. Chairman. I would like to thank you for holding this
hearing and all of the witnesses here to testify, especially my friend,
Secretary Abraham. This hearing will delve into the ongoing problems in
California and some of the bills that are attempting to fix portions of
the problem. This should be an interesting discussion on how we are
going to proceed on the electricity crisis in California, especially
since it is affecting the entire West.
As you all know, many Western states are joined together in one
enormous power grid. We are so interdependent that the breakdown of a
generator in one part of the grid will affect power in another part.
The entire Western grid's electric system is under severe stress. High
prices and insufficient supplies of energy are likely to burden many
Western states for months to come. But, the long-term problem is the
supply of electricity which is smaller than the demand in the region.
Also, California has not built a new power generation facility in years
which would help alleviate the increasing demand for electricity.
The Western power grid is already overworked because of the energy
needs created by booming economies and population growth, but not just
in California. My home state of Colorado, along with other Western
states, has increased demand for electricity as well.
Also, with the soaring price of electricity and the environmental
concerns surrounding coal-fired generation plants, natural gas will
play a key role in supplying our nation with sufficient power. But, we
have certain problems with natural gas as well. In California, they
have been experiencing particularly high natural gas prices--more than
twice as high as recent national averages.
There are some proposals being offered to help address this power
crisis like S. 26, S. 80 and S. 287 which my friends from California
have introduced. But, concerns have already been voiced regarding these
bills. Regardless of the controversy, whichever way we decide to go, we
have to consider all proposals so that the problem can be solved, even
if that means consideration of an electricity ballot initiative in
California.
I am approaching the California crisis debate very carefully so
that the best interests of my home state are not compromised and hurt.
I have some questions for the witnesses that I would like them to
address so that we can further explore this issue during the time for
questions.
Thank you Mr. Chairman.
Senator Bingaman. Senator Craig.
STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR
FROM IDAHO
Senator Craig. Mr. Chairman, thank you very much.
Ladies and gentlemen, witness this marvelous act of
bipartisanship that the U.S. Senate is now working in. We think
it can work. It is working and you are seeing it firsthand this
morning, Mr. Chairman.
[Laughter.]
Senator Craig. And I appreciate that.
Senator Bingaman. I will ask for another 45 minutes I
expect.
[Laughter.]
Senator Craig. But I do want to thank Chairman Murkowski
for holding these hearings. I think they are tremendously
important to address the current energy crisis that the West is
experiencing.
But first, Mr. Chairman, I want to commend Senator
Feinstein for her diligence and I believe honest effort to both
define and resolve the difficult energy-related problems that
are crippling the economies of California and the West. Senator
Feinstein I think has been tireless in her search for answers.
I will also say she has been bold against considerable
political odds as it relates to rate caps on retail sales to
consumers. She has publicly acknowledged the critical need for
California to expedite permitting of new powerplants that need
to be sited in her State. That goes against some of the
political mainstream in her State, but again, when you are in a
crisis, it is time to lead.
As she has candidly stated in recent Investor Daily
articles, without expedited permitting for new powerplants and
true market pricing, there is no incentive to conserve. And we
are finding in polls coming out of California today that the
average California consumer does not recognize that they are in
an energy crisis.
Mr. Chairman, these are not easy decisions for a California
Senator to make or to acknowledge and the actions she has taken
and legislation introduced and these hearings today are
important for all of us.
Mr. Chairman, I am sure that it is largely because of her
willingness to be honest and openly address these issues that
these hearings have been scheduled and that we will move
forward as we work on this very difficult problem. I am
committed to giving this legislation attention.
However, I hasten to add, Mr. Chairman, that I am
fundamentally skeptical of the ability to price cap in any way
and to call that a solution to an energy problem in the West.
Price caps have not had much economic success in years past.
They have always proven to be very difficult to remove once in
place. Moreover, they have often proved to be a distraction
that creates short-term chaos in balancing load and resources.
Mr. Chairman, I am grateful that our Energy Secretary is
here, the Chairman of FERC is here. Clearly, this issue has
their attention, as it should. I think we all look forward to
their insights in it.
I must say I am also grateful to the Governors who are here
today to speak. We in the West are experiencing the California
crisis in rather dramatic ways. In fact, rates are going up
much faster outside California than inside California. That is
true in the State of Oregon. It is true in the State of
Washington. It is true in the State of Idaho. It is true in the
State of Montana because, as you said, Mr. Chairman, we are all
linked together and that grid and wholesale rates and
California's inability to get itself under control is driving
us into a very real crisis.
Mr. Chairman, let me ask unanimous consent that a letter
from my Governor, Governor Dirk Kempthorne of Idaho, become a
part of the record, as well as a letter of February 6 from the
Governors of Arizona, Colorado, Idaho, Montana, Nevada, New
Mexico, Utah, and Wyoming, very clearly expressing that price
capping is not the issue to solve the problem. It only creates
a greater problem. Siting, regulation, getting on with the
business of building production capability is the issue. They
obviously express concern about California and the decision it
is making, but they also recognize the importance of actions
taken. This is a letter to Secretary Spence Abraham as a result
of his trip out there and his expressions of cooperation of
help, but at the same time, a recognition to stand true to the
market and let the market forces work. And I ask that those
become a part of the record.
Senator Bingaman. Those will be included in the record.
Senator Feinstein.
STATEMENT OF HON. DIANNE FEINSTEIN, U.S. SENATOR
FROM CALIFORNIA
Senator Feinstein. Thank you very much, Mr. Chairman. Let
me thank you and the chairman for holding this hearing. I would
also like to thank my colleague from Idaho for his remarks. I
appreciate them very much.
Earlier Senator Gordon Smith of Oregon and I held a press
availability, and what we announced was essentially agreement
on a piece of legislation which would, in essence, say that
once the Federal Energy Regulatory Commission finds that rates
are unjust and unreasonable, that that commission would be
bound to either set a temporary regional wholesale price cap,
one, or two, set cost-based rates, provided that the State
would then respond and pass on those rates to the consumer.
Now, the State would have the option of setting the timing
and the manner in which those rates would be passed on. That
could be tiered pricing, real-time pricing. It would include a
baseline for those on the lowest part of the economic ladder.
It would give the State flexibility in that regard. But it
would seek to correct what in California today is a broken
market.
That brokenness really came from a bill passed in 1996
which deregulated the wholesale end and yet kept regulated the
retail end, which forced California to buy electricity on the
day-ahead market, 95 percent of it, and required the utilities
to divest themselves of their generating facilities. In
hindsight, all of this came together in a catastrophic scenario
so that today California buys power at what are, if you look at
rates 5 years ago, astronomic prices.
We believe that FERC should act, but we believe that FERC
should act in a way that it can be sure that the market also
will have a chance of responding correctly.
Let me just quickly take a look at electricity prices in
California. In 1998 and 1999, the average energy price for a
megawatt of electricity consistently averaged about $30. The
green bar is 1999 and the purple bar is 1998. The red bar is
the year 2000. You clearly see what happened. The price of
electricity jumped to $150 a megawatt hour in the summer, and
then in December it increased to over $350 per megawatt hour.
The late fall/early winter season is normally the time of the
year when demand is low, and California has such an ample
supply of electricity, that it usually exports its surplus.
This season, however, there were serious shortages of power.
Chart number 2 compares the hourly prices of electricity
for two July days in 1999 and 2000. The line graph and the
number on the right indicate the available power supply for
that day. As you can see, the demand is the same for these two
days. However, the purple bar represents the hourly prices for
the day in 1999, and the red bar represents the price for 2000.
Again, you can look at those price differences.
The discrepancy in price exists in the early morning and it
exists late at night. So, even though the supply is the same
and we know that there should be ample supply to meet demand
late at night, prices for energy still skyrocketed. The only
way to explain the differences in price is to conclude that
someone is gaming the market and the market is broken.
Now, I am not going to spend a lot of time on natural gas
prices. The ranking member and I had the privilege of meeting
with El Paso, and I think both of us saw one of the problems
and I want to quickly state what it is. The real cost of
transporting natural gas is less than $1. Based on cost, when
natural gas is selling for $5 in San Juan, New Mexico, directly
adjacent to the California border, it should not be selling for
anything more than $6 in southern California.
But as you can clearly see from the second spike on the
graph, at the end of last year when natural gas was averaging
$5 to $7 nationally, it was as much as $37 in southern
California. That is additional evidence that the market was not
working.
Now, the Federal Power Act gives the exclusive authority to
regulate the interstate transmission of power, and I think the
statute is pretty clear. Let me quote from it. ``Whenever the
Commission, after a hearing had upon its own motion or own
complaint, shall find that any rate, charge, or classification
demanded, observed, charged, or collected by any public utility
for any transmission or sale subject to jurisdiction of the
Commission, or that any rule, regulation, practice, or contract
affected such rate, charge, or classification is unjust,
unreasonable, unduly discriminatory, or preferential, the
Commission shall determine the just and reasonable rate,
charge, classification, rule, regulation, practice, or contract
to be thereafter observed and in force, and shall fix the same
by order.''
Now, I agree California has to fix the brokenness of its
market on its own. It has to build additional generation. It is
moving in that direction and anticipates at the end of 2002
there should be greatly increased power generation within the
State.
So, what is the appropriate Federal role? The appropriate
Federal role in my view is, at a time of crisis, to provide a
period of reliability and stability in the marketplace. This in
my view FERC has refused to do. So, this unusual price market
has continued.
The State has spent nearly $4 billion of its surplus to
date buying power. It spends about $45 million a day. About $30
million of that is lost forever. That is an extraordinarily
difficult situation to sustain into time, and I would suspect
that by the end of this year, the State will probably spend
close to $10 million buying power. That is gone. It does not
buy a school. It does not repair a road. It does not build the
water system many of us believe the State needs. As a matter of
fact, some of that money has also gone to buy power.
This is one of the reasons that I feel so strongly that any
legislation that comes out of this body must also fix the
brokenness of that market. Thanks to Senator Smith of Oregon,
we have come together I believe now with a bill that says,
FERC, do your job but, California, you also must do your job
and fix your market. So, we hope that this bill will have
favorable consideration by this committee and that we will be
able to move it forward. I think long term it is the right
thing to do.
There is a program of conservation now asking for 10
percent conservation in the State. But what is the greatest
incentive to conservation is if the retail market functions so
that when supply is limited, people have incentive to control
their use. They can use smart meters. They can buy new
refrigerators which save a lot. The computer industry has
indicated that if people just take their computers and instead
of putting them on sleep, put them on off, that saves totally
about 7 percent of the State's supply. That was amazing to me
to find out. But people have to respond and the marketplace is
one of the ways in which people can respond.
I want to thank Senator Smith. I believe we now have a
piece of legislation that can fix the brokenness of the market
and also demand, in effect, that FERC provide this period on a
temporary basis, a period of reliability and stability in
prices which can be a big help.
I would like to take this opportunity just to welcome those
people from California who have come a long way, Mr. Chairman,
to testify this morning.
Senator Bingaman. Thank you very much.
Let me just alert Senators here. We have six more Senators
who are here and ready to make statements. I would urge that
people keep the statements short so we can get to our witnesses
as quickly as possible.
Senator Smith.
STATEMENT OF HON. GORDON SMITH, U.S. SENATOR
FROM OREGON
Senator Smith. Thank you, Mr. Chairman.
Mr. Secretary, welcome. Thank you for being here.
I believe in free markets, but truly we have never had a
free market in electricity, not one that is truly free. What we
now have is a broken market and a duty to do something.
When this crisis erupted, many rushed to re-regulate. I
have withheld any impulse to do that, believing that until
California fixed the fundamental flaw in its law, a re-
regulation would amount to little more than putting a band aid
on cancer.
Senator Feinstein and I have reached a conceptual
agreement. We are going to advance it as legislation. We
believe the administration should respond and favorably and
help us to do this because truly what you have now is
converging a perfect storm, both environmentally and
economically, for the States in the Western United States.
I think it is important that everyone understand the
fundamentals of the agreement that we are going to pursue.
The legislation should direct the Federal Energy Regulatory
Commission, FERC, to impose a just and reasonable wholesale cap
that could be load-differentiated or cost-of-service based
rates in the Western energy market. That market is comprised of
the States in the Western Systems Coordinating Council:
Arizona, California, Colorado, Idaho, Montana, Nevada, New
Mexico, Oregon, Utah, Washington, and Wyoming.
The wholesale price cap or cost-of-service based rate will
not apply to wholesale sales for delivery in a State that
imposes a price limit on the sale of electric energy at retail
that precludes a regulatory utility from recovering costs under
the price cap or on a cost-of-service based rate or precludes a
regulatory utility from paying its bills.
The ratemaking body of a State can determine, however,
would be allowed to determine how and when the wholesale rates
will be passed on to ratepayers, including the setting of a
tiered pricing, real-time pricing, and baseline rates. With
respect to the Bonneville Power Administration, BPA will be
encouraged to seek to reduce rate spikes to economically
distressed communities, while ensuring costs are recovered by
the end of the next contract period in 2006.
Three, the wholesale rate cap or cost-of-service based
rates shall remain in effect until such time as the market for
electric energy in the western energy market reflects just and
reasonable rates, as determined by the Commission, or until
March 1, 2003, whichever is earlier.
In addition, as to natural gas transmission costs, the
legislation would reimpose FERC tariffs for natural gas
transportation into California and require natural gas sellers
to declare separately the transportation and commodity
components of the bundled rate for gray market transactions.
Additionally, after the date of the enactment of this
legislation, utilities should not be ordered to sell
electricity or natural gas into a State without a determination
by FERC that the seller will be paid.
Finally, in the event that a State in the Western energy
market does not meet the criteria described in this agreement,
State public utilities commissions in the western energy market
should be able to ensure that regulated utilities within their
jurisdiction meet demand for electric energy in the utility's
service area before making sales into any such State.
Mr. Chairman, I believe that this approach, while
temporary, will help us to avert an economic and environmental
catastrophe. I hope that we can pass this on a bipartisan basis
and I hope the administration will be a party to it because we
would be unwise servants if we just sat while Rome got ready to
burn.
Thank you.
Senator Bingaman. Thank you very much.
Senator Hagel, did you wish to make a statement?
STATEMENT OF HON. CHUCK HAGEL, U.S. SENATOR
FROM NEBRASKA
Senator Hagel. Very briefly, Mr. Chairman. Thank you.
This issue of energy is the most pressing issue America
faces, bar none. This is an issue that crosses all boundaries,
all walks of life, all socioeconomic dynamics of our country.
It affects our national security. It affects our productivity,
our economic growth. It affects agriculture. It affects the
environment.
I find it a bit ironic, Mr. Chairman, that there are some
who are shrieking around America this morning who are concerned
that this President has decided not to cap carbon dioxide
emissions for utility plants when we are here today about a
most urgent issue and that urgent issue is about energy supply.
It is not complicated. It is a very clear case of energy demand
outstripping energy supply.
As Chairman Murkowski said before Chairman Bingaman took
the gavel, we are all in this together. This is a national
problem. It is not going to get better. It is only going to get
worse. We are here today because of that problem.
We need a national energy policy. We need a short-term and
a long-term policy. We need energy supply. We need a broad,
deep portfolio of energy supply. That is connected to the
environment. It is connected to every part of our lives.
We can talk about amendments to energy legislation and we
can talk about quick fixes for particular States, and that is
of great importance and great urgency and we understand that.
But we must also understand we have an obligation here to take
a bigger view and a national responsibility because if we do
not, the consequences of this will be catastrophic. We think we
have market problems today. It will be nothing compared to the
economic downturn that will essentially spread to all of the
globe if we do not fix this and we do not have a market that
believes we are going to fix it both for the short term and the
long term.
So, I am obviously like all of us on this committee, Mr.
Chairman, appreciative of the leadership that you are giving
and Chairman Murkowski, obviously our colleagues, Senator
Feinstein and Senator Smith and others who are grappling with
the immediacy of this. It is difficult and we understand that.
But my only point is this is a big issue that is going to
require big-time, long-term solutions and we should not tinker
around or just edge around the bush on this with the American
public. We need to tell them straight out we are in trouble.
Thank you.
Senator Bingaman. Thank you very much.
Senator Landrieu.
STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR
FROM LOUISIANA
Senator Landrieu. Thank you. I waive my right to an opening
statement because I am anxious to hear the testimony and
actually have another hearing in a few minutes. Let me just
state this in three questions really.
I commend my colleagues for working together in a
bipartisan way to try to address this difficult situation in
the West.
My first question would be, what would be the potential
effects on prices in other regions of the Nation as a result of
this bill?
Second, will we address the authority of FERC to site new
powerplants, require the expansion of powerplants and to
require transmission lines, possibly even over local
opposition, which has been a real stumbling block to any
solution to this problem?
Third, would the legislation allow those States that are
aggressively pursuing new supplies of energy such as oil and
gas and coal, to be compensated for our good efforts in trying
to increase the Nation's supply? States such as Louisiana and
Texas should be recognized for their efforts.
So, I throw those three questions out for right now and I
will have others as we debate this legislation. Thank you.
Senator Bingaman. Thank you very much.
Senator Cantwell.
STATEMENT OF HON. MARIA CANTWELL, U.S. SENATOR
FROM WASHINGTON
Senator Cantwell. Thank you, Mr. Chairman, and I would like
to thank Chairman Murkowski for holding this hearing.
As stated by my colleague from Idaho, this is truly a
bipartisan effort, in the sense of this hearing and the
committee working together, the legislation being offered by my
colleagues from California and Oregon, and in the testimony
that we are going to hear from two Governors from the West.
We in Washington want to make sure that the point is not
lost today that we are seeing both economic impacts to
industries and to consumers. The Northwest continues to suffer
the harsh consequences of this market instability, obviously
exacerbated by our below-average rainfall and snowpack. This is
the worst drought in our State since 1977, and it is only
March. So, there is much to do to address this issue.
BPA is predicting more than a 45 percent water flow
shortfall this summer and predicts rate increases of over 200
percent this fall. Rates are already up 43 percent with
residential users and 75 percent for some industrial customers
in Tacoma, and up 28 percent in Seattle.
Northwest officials and we in the Northwest congressional
delegation continue to look for mid- and long-term answers to
this problem. I congratulate FERC on their press release
yesterday in which they went through a variety of issues that I
believe are mid-term and long-term answers to increasing energy
supply by expediting processes and procedures.
But I think it is very important that we look at not just
the mid-term and long-term solutions to this issue, but the
immediate consequences to the economy of the Northwest. We need
to stop the bleeding first before we look for a cure for this
disease. That is why I join in support of my colleagues from
California and Oregon in S. 287, which will try to address
these issues.
I cannot emphasize enough--and I am very proud that our
Governor, Gary Locke, is here today to talk about these
economic consequences to our region. The effect of these energy
prices could mean 23,000 fewer jobs in Washington State over
the next few years, and that is on top of a 20,000-job loss in
water and energy-intensive businesses such as aluminum
smelting. This was referred to in a Wall Street Journal article
that I would like to submit to the record.
I would also like to submit to the record an article that
appeared in the Seattle Post Intelligentser about the fact that
this is not just about California bashing. While there have
been problems created by distorted spot market pricing, this is
a larger issue that we need to address if we are to help the
Northwest economy survive these high prices.
I appreciate the attention of the committee to this issue.
I appreciate the fact that our Governor has flown across the
country, I think on a red-eye, to be here today to give
testimony on this. And I appreciate the Secretary's immediate
attention to these Northwest issues.
Senator Bingaman. Thank you very much.
Senator Burns, did you have a statement?
STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR
FROM MONTANA
Senator Burns. May I just say to the Senator from
California that the last time we sat in these chairs, I said
that we have to address this nationally. California's economy
is so large--and I think they are still a member of this
Union--that it affects all of us. We want to be a part of the
solution, not a part of the problem.
I want to congratulate her and Senator Smith for working
out this arrangement. It is not a knee-jerk approach to this.
It has been given great forethought.
Rather than standing and shouting and worrying--I worried
ever since I was in Las Vegas and picked up that newspaper. The
Los Angeles Times on the front page about a month ago, Senator
Feinstein, said 54 percent of the people in California do not
believe there is a power shortage. Now, that told me we have
got some credibility gaps here. So, we have to address those.
Senator Hagel is right. This is a national problem. It is
just not local. But we are situated such in relevancy to the
Northwest that it impacts our State of Montana.
I want to congratulate our Governor for being here. And do
not worry about Governors taking red-eyes. They are no better
than we are. They can take them just like everybody else.
[Laughter.]
Senator Burns. So, I am not going to feel sorry for
Governor Locke because my Governor did the same thing. She is
here today and will offer her points.
I want to thank the chairman for calling this hearing. I
plan to be part of the solution rather than part of the
problem. I congratulate them for it. Thank you.
Senator Bingaman. Thank you very much.
Senator Thomas, you are the cleanup hitter here. Do you
have a statement?
STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR
FROM WYOMING
Senator Thomas. Yes, sir, very briefly.
Mr. Secretary, glad to see you. I thought I was going to
miss you, but I see you are still here. You have not had a
chance yet.
[Laughter.]
Senator Thomas. What we really need to focus on is our
energy policy, and this local thing is a little different. I
think we need to deal with it. I am ready to deal with it.
But I have to tell you I want to see from California some
decisions made out there, some changes made out there. There
were market messages coming out for a number of years. You
cannot accept the notion that your use is going up and your
production is going down and not know it. So, I am anxious to
hear of some of the decisions with regard to caps on retail and
so on that have been made out there.
Then we need to move and our emphasis needs to be on the
broader emphasis in my view. The national problems are quite
different than the California problem. We tend to put them
together, but I think there is quite a difference and we need
to deal with it that way. So, I am anxious to hear.
Thank you, sir.
Senator Bingaman. Thank you very much.
Secretary Abraham, we are glad to have you before the
committee today and we look forward to hearing from you.
STATEMENT OF HON. SPENCER ABRAHAM, SECRETARY,
DEPARTMENT OF ENERGY
Secretary Abraham. Mr. Chairman, thank you. I could not
help but reflect upon my first months in the Senate when, as
the most junior member, 100th in seniority, I used to wait at
committee hearings to get a chance to make my opening
statement, and I see that things have not changed much since I
moved from the Senate to the administration.
[Laughter.]
Secretary Abraham. Mr. Chairman and members of the
committee, I just want to thank you all for having me here
today. I look forward to this testimony and to continuing to
work with all of you on the challenges that we face in the
energy arena.
I would just say at the outset I agree strongly with the
points that have been made that this is not an isolated
situation or a short-term challenge. The approach we intend to
take as an administration is to look at this in a broad,
national, and long-term sense.
However, over the past year, as we know, California has
experienced three major blackouts that affected hundreds of
thousands of Californians in progressively larger numbers. The
problem will get worse and blackouts this summer appear
inevitable when peak demand is expected to be about 61,000
megawatts while supplies are anticipated to be only about
56,000 megawatts. Consequently, some analysts project that
California may experience up to 20 hours of rolling blackouts
this summer, while others project 200 or more hours of
blackouts.
The clear cause of this electricity crisis, as has been
stated here today, is an imbalance between supply and demand.
Over the past 5 years, electricity demand in California grew by
6,300 megawatts while generating capacity has, as a result of
regulatory and other impediments, decreased by 1,200 megawatts
due to plant retirements and no new sources of power
generation.
I believe Governor Davis has acknowledged that California
has principal responsibility to address this crisis, and thus,
he has taken a variety of actions designed to increase supply
and reduce demand. If these measures prove successful, the
situation this summer will be improved. In a variety of ways,
this administration has been trying to help California in those
efforts, as I will later discuss in my testimony.
Unfortunately, the national focus and the focus of this
hearing has been diverted away from the challenge of inadequate
supply to price controls. Yes, it is true that California is
paying high prices for energy, but California is not alone. The
rest of the West, as we have heard today, as well as other
regions of the country, have also experienced significantly
higher energy costs, particularly this winter.
Although other areas of the country are confronting energy
supply and pricing challenges, the problems in California are
unique because of the aforementioned lack of new generation and
the electricity purchasing constraints the State itself applied
to its own utilities. By refusing to permit its utilities to
buy power except on the spot market, can set into motion the
process which drove its costs through the roof.
For example, last summer Duke Energy offered to meet the
supply needs of San Diego Electric and Gas Company for 5 years
at a price of $55 per megawatt-hour. This is just a fraction of
the average price of $376 per hour paid on the spot market in
December and $314 paid in January. If the State had approved
new generation in a timely manner or had allowed utilities to
enter into long-term contracts, such as the one offered by
Duke, we would not be here today discussing price caps.
This administration is absolutely and certainly concerned
about high energy prices, whether they are in California or
anywhere else in the United States. We believe that energy
prices should be just and reasonable and we support the recent
action by the Federal Energy Regulatory Commission to order
refunds to Californians charged unjust and unreasonable rates
instead of market rates. And this administration will continue
working closely with California and the West to develop
measures to help reduce its projected energy shortages.
But let me make one point clear. Any action we take must
either help increase supply or reduce demand because that is
real challenge. If a proposal does not increase supply or
reduce demand, it is not a real solution. If it decreases
supply or increases demand, it will only make the current
crisis worse, especially as we go into the peak summer season.
And it is within that framework that the administration
opposes the imposition of price controls. Price caps will not
increase supply or reduce demand. In fact, in our view they
will seriously aggravate the supply crisis since they will
discourage investment in new generation while eliminating
incentives to reduce demand.
Now, this is not a theory. It is the product of experience.
Price caps have already been tried and have already failed.
California has long had a ceiling price for electricity sales
into the State. That price was steadily lowered throughout last
year from $750 to $500 to $250 to finally $150 per megawatt-
hour. Proponents of price caps then made the same arguments the
proponents make today, that price caps will control high prices
without diminishing electricity supply.
They were wrong. Price caps failed because some power
suppliers were subject to the price cap while others were
exempt. The result was market distortion. Price caps gave in-
State generators every incentive to sell power out-of-State and
power exports from California rose 85 percent. As a
consequence, 3,000 megawatts of power were exported.
And what happened to prices? The lower the price cap was
set, the higher average electricity prices rose.
Notwithstanding that failure, we are here today discussing
price caps for the entire West. However, these proposals I
think suffer from the same flaws contained in previous ones.
Regional cost-based price caps will discourage investment
in new generation at exactly the time it is needed the most.
Furthermore, imposition of cost-based price caps will also
split the electricity market in the West into two markets, one
that is subject to price controls and the other which is
exempt, much as has been the case in California. This will
occur for a very simple reason. FERC only has jurisdiction over
47 percent of the electricity generation in the Western Systems
Coordinating Council. The other 53 percent, municipals,
cooperatives, and so on, fall outside of the Federal
Government's power to regulate.
Now, a cost-based price cap that applies to only half the
region has four fundamental flaws.
First, the California experience with price caps, where
part of the market was subject to the cap and part was exempt,
will be repeated. We believe the result will be the same:
distortion of electricity markets, reduction in electricity
supply, shifts in electricity supply from capped markets to
uncapped markets, and most importantly, failure to control
prices.
Second, because of this separation or division, we believe
that electricity exports to the United States from Canada and
Mexico will almost certainly decrease, since these producers
could get a higher price selling electricity within their own
countries. And we cannot control the price that it is sold
extraterritorially.
Third, a split electricity market would create winners and
losers. Winners would be large municipal utilities in the West
that have significant surplus generation, since they would be
exempt from the price caps, and the losers, of course, would be
buyers that cannot purchase electricity from an entity subject
to the price caps.
Fourth, a creation of two electricity markets will likely
induce cheating and circumvention like that which occurred in
the days of oil price controls. That will occur because as the
prices in the two markets diverge sharply, prices in the
unregulated market will be increasing and rising higher than
existing levels, whereas prices in the regulated market will
not. Electricity is like oil: it is a fungible commodity. Some
unscrupulous parties could easily take advantage of the split
markets and sell capped electricity at market-based prices. In
fact, that is exactly what Marc Rich's company is accused of
doing under oil price controls.
The only way to apply price controls to all generation in
the West would be to amend Federal law and grant FERC authority
to set rates for wholesale power sales by State and municipal
utilities and rural electric cooperatives. However, if we did
that, it would be inconsistent with 70 years of Federal
electricity legislation, and I would just make it clear that
the administration would not support such a proposal.
Finally, I would just like to note that one popular
variation on the cost-based price cap idea, which has been
espoused by several Governors and a recent FERC chairman, would
actually reduce electricity supplies in the most immediate
sense. This approach would actually not even guarantee cost
recovery because basically it would set a rate at variable cost
plus 10 percent or $25 per megawatt-hour, whichever is less.
Since powerplants would fix costs in excess of $25 per
megawatt-hour, presumably not elect to operate at a lost, the
region's electricity supply in those cases would be immediately
reduced if we adopted this approach.
Last month, 8 of the 11 Western Governors sent me a letter
expressing opposition to price caps. In that letter they
stated: ``Caps will serve as a severe disincentive to those
entities considering the construction of new electric
generation at precisely the time all of us, and particularly
California, are in need of added plant construction.'' We share
this view and we believe that our responsibility is to help
minimize electricity shortages and the blackouts and the
resultant economic and security dislocations such shortages
produce. So, for those reasons, we do not favor price controls.
Regrettably, I think our opposition to price caps has been
claimed by some to suggest that the administration either does
not care about California and the West or is doing nothing to
help. That is simply untrue.
One day after being sworn into office, President Bush asked
me to call Governor Davis to see how we could help address
California's power shortages.
Three days after taking office at Governor Davis' request,
we extended the emergency electricity and gas orders to give
California time to enact reform legislation aimed at
maintaining electricity supplies.
Last month, President Bush issued an executive order
directing Federal agencies to expedite permits relating to
construction of new powerplants in California. The U.S.
Environmental Protection Agency has issued air permits for
three powerplants in the past 3 weeks.
President Bush and I have engaged in extensive discussions
with the Government of Mexico about increasing electricity
imports from Mexico to California.
Last week, at the behest of Governor Davis, we sent a
letter to FERC asking that the agency act on his request for an
extension of the waiver for qualifying facilities from certain
fuel requirements. Yesterday that waiver was granted.
Also last week, FERC determined that some suppliers had
charged unjust and unreasonable rates and then compelled them
to refund those overcharges to California buyers. And new FERC
orders, intended I think to again address these issues, were
just announced yesterday.
Moreover, today we will be responding favorably to Governor
Davis' request that we review his plan for ensuring the
financial health of the California utilities.
Mr. Chairman, we are committed to working with California
and the West to develop effective solutions to this crisis and
we will continue to do so. Moreover, the administration, under
the leadership of Vice President Cheney, has embarked on a
multi-departmental task force project, much as was recommended
by members of this committee to me during my confirmation
hearing, to try to look at our energy challenges on a broad,
interdepartmental, national, long-term and short-term basis.
And as results from that task force effort are completed, we
will be taking additional action.
The only action the administration will not take is the
implementation of price caps.
In that each of the legislative proposals before this
committee today basically are premised on the types of price
controls I have just addressed and for the reason which I have
just outlined, we do not support them. There are, however,
additional concerns which we have with each proposal and I will
address those concerns as part of the fuller written testimony
which we submit today.
Mr. Chairman, that concludes my testimony. I look forward
to answering any questions you or the other members of the
committee might have and look forward to working with people as
we address these various energy challenges on a very broad-
based approach in the future. Thank you very much for having me
here today.
[The prepared statement of Secretary Abraham follows:]
PREPARED STATEMENT OF HON. SPENCER ABRAHAM, SECRETARY,
DEPARTMENT OF ENERGY
Mr. Chairman and Members of the Committee, I welcome the
opportunity to testify before you today on various electricity measures
pending before the Committee, namely S. 26, S. 80, S. 287, and the
Smith amendment to S. 287.
All of these legislative proposals address the electricity crisis
in California and the West. Before I get into the Department's specific
comments on these bills, it may be useful to step back and offer our
views on how this crisis developed, the real nature of the problem, and
an analysis of proposed solutions.
electricity crisis in california and the west
As everyone knows, California is in the middle of a serious
electricity crisis. Over the past year, the State has experienced three
major blackouts that have affected hundreds of thousands of
Californians in progressively larger numbers. The problem will get
worse, and blackouts this summer appear inevitable when peak demand is
expected to be 61,125 megawatts, while supplies are anticipated to be
only 56,159 megawatts. Consequently, some analysts project California
may experience up to 20 hours of rolling blackouts this summer, while
others project 200 or more hours of blackouts.
The clear cause of this electricity crisis is an imbalance between
supply and demand. Over the past five years, electricity demand in
California grew by 6,300 megawatts while generating capacity decreased
1,200 megawatts due to plant retirements. The State siting process
constituted a barrier to entry for power producers that sought to build
new generation. Over the last four years, independent power producers
tried to build new generation, filing applications to build 14,000
megawatts of new generating capacity. None of this new generation is
operating yet. Moreover, anticipated political resistance undoubtedly
discouraged serious consideration of other new generation options.
Governor Davis understands the nature of the problem and recognizes
the State of California has principal responsibility to address this
crisis. As the Governor stated in January: ``The problem is primarily
of California's making, and we will solve the mistakes we made in
1995.''
To that end, Governor Davis has taken a variety of actions designed
to increase supply and reduce demand. The Governor proposed a series of
executive orders intended to increase supply by 5,000 megawatts and
reduce demand by 10 percent this summer. If these measures prove
successful and the weather is mild the situation this summer will be
improved.
We are helping the State in its efforts, and the Administration has
taken a number of actions to support the State in recent weeks. I will
discuss the actions taken by the Administration later in my testimony.
Mr. Chairman, the national focus, and the focus of this hearing,
has unfortunately been diverted from the challenge of inadequate supply
to price controls. It is true that California is paying high prices for
energy, although, because of retail rate caps, consumers have been
largely protected from these price increases. But California is not
alone.
The rest of the West and other regions of the country have also
experienced higher energy costs, particularly this winter. Unlike in
California, where retail rates are frozen, higher wholesale electricity
prices have impacted consumers in other Western States. Heating oil
prices are at near-record levels, which affect consumers in the
Northeast. Regions that rely heavily on natural gas for home heating
have also experienced sharp price increases. In every instance, these
problems arise from an imbalance between supply and demand triggered by
an inadequate development of new generation, unique climate factors
and/or higher natural gas prices that have resulted from recent,
significant increases in demand for natural gas as a preferred energy
source.
Yet, although other areas of the country are confronting energy
supply and pricing challenges, the problems in California are unique
because of the electricity purchasing constraints the State itself
applied to its own utilities. By refusing to permit its utilities to
buy power except on the spot market, California set in motion the
process that drove its costs through the roof.
For example, last summer, Duke Energy offered to meet the supply
needs of San Diego Electric and Gas Company for five years at a price
of $55 per megawatt-hour. This is a fraction of the average price of
$376 paid on the spot market in December and $314 in January. Even the
average $69 per megawatt-hour price of the contracts announced by
Governor Davis compares unfavorably to prices available last summer. If
the State had approved new generation in a timely manner or allowed
utilities to enter into long-term contracts, we would not be here today
discussing price caps. Instead, California utilities have until
recently been required to buy huge quantities on the spot market,
driving up wholesale costs for themselves and others in the West.
Hence, the effects have extended beyond California's borders.
This Administration is certainly concerned about high energy
prices--whether in California or anywhere else in the United States. We
agree that energy prices should be reasonable and support the recent
action by the Federal Energy Regulatory Commission (FERC) to order
refunds to Californians charged unjust and unreasonable rates. And this
Administration will work closely with California and the West to
develop measures to help the State and the region meet its projected
energy shortage.
The Task Force chaired by Vice President Cheney will soon make a
series of recommendations on meeting America's energy demands. In the
meantime, we will continue helping expedite California's efforts to
increase generation and reduce demand.
But let me be clear on this, any action we take must either help
increase supply or reduce demand. If a proposal does not increase
supply or reduce demand, it is not a solution. If it decreases supply
or increases demand, it will only make the current crisis worse.
It is with that framework in mind that the Administration opposes
imposition of price controls such as those proposed in the legislation
that is the subject of this hearing. Price caps will not increase
supply or reduce demand. In fact, they will aggravate the supply
crisis, since they will discourage investment in new generation while
eliminating incentives to reduce demand.
This is not theory, but the product of experience. Price caps have
already been tried and have already failed. California has long had a
price cap that set a ceiling price for electricity sales into the
State. That ceiling price was steadily lowered throughout last year,
from $750 per megawatt-hour to $500 to $250 to finally $150. Proponents
of price caps then made the same arguments that proponents make today:
price caps will control high prices, while guaranteeing adequate
electricity supply.
They were wrong.
Price caps failed in California in part because they only applied
to part of the market--some power suppliers were subject to the price
cap, while others were exempt. The result was market distortions. Price
caps gave in-State generators every incentive to sell power out-of-
State and power exports from California rose 85 percent. Price caps
reduced California's electricity supply, since 3,000 megawatts of power
were exported. The lesson was clear: price caps on only part of the
market will distort the market and drive supply out of markets with
price controls into unregulated markets.
And, what happened to prices? The lower the price cap was set, the
higher average electricity prices rose.
Notwithstanding that failure, we are here today discussing a
different kind of price cap on a broader scale: the entire West.
Proponents argue that a price cap that limits power producers to cost-
recovery plus a fixed rate of return, if imposed across the entire
West, will succeed where price caps that set a ceiling price failed.
However, these proposals suffer from the same flaws contained in
previous proposals.
First, imposition of cost-based price caps will reduce electricity
supplies in the short-term. Governors Davis, Locke and Kitzhaber, along
with a former Chairman of FERC, have proposed a version of cost-based
price caps that would actually not even guarantee cost recovery, but
instead set a cap at variable costs plus ten percent or $25 per
megawatt-hour, whichever is less. Since power plants with fixed costs
in excess of $25 per megawatt-hour will presumably not elect to operate
at a loss, the region's electricity supply will be immediately reduced.
Regional cost-based price caps will also discourage investment in
new generation at a time when it is most needed. If cost-based price
caps are imposed, independent power producers that are building most of
the new power plants will simply decide to build new generation in
another region or country.
Imposition of cost-based price caps will also split the electricity
market in the West into two markets, one subject to price controls and
the other exempt. This will occur because FERC only has jurisdiction
over 47 percent of the electricity generation in the Western Systems
Coordinating Council. FERC has no jurisdiction over wholesale sales by
State and municipal utilities, rural electric cooperatives, and does
not have authority to impose cost-based rate on Federal power marketing
administrations.
A cost-based price cap that applies to only half the region has
four fundamental flaws. First, the California experience with price
caps--where part of the market was subject to the cap and part was
exempt--will be repeated. The result will be the same: distortion of
electricity markets, reduction in electricity supply, shifts in
electricity supply from capped markets to uncapped markets, and, most
importantly, failure to control prices. Power producers would seek to
make sales through entities not subject to price caps and independent
power producers would have an incentive to build projects in the
service areas of entities not regulated by FERC and make exempt sales
through those entities.
Second, electricity exports to the U.S. from Canada and Mexico will
almost certainly decrease since these producers could get a higher
price selling within their own countries. In short, we would lose
supply just when we are encountering shortages.
Third, a split electricity market would create winners and losers.
Winners would be large municipal utilities in the West that have
significant surplus generation, since they would be exempt from price
caps. These utilities have been collecting substantial revenues from
sales at market-based levels. Indeed, according to FERC most of the
excess power costs that the California Independent System Operator
claims were collected in January 2001 were collected by entities not
regulated by FERC. These utilities are not subject to refund orders and
would be exempt from price caps. Not surprisingly, some of these
utilities are advocates of price caps that would apply only to others.
The losers, of course, would be buyers that cannot purchase
electricity from an entity subject to the price cap that must resort to
the unregulated market where prices will be extremely high.
Fourth, the creation of two electricity markets recalls the days of
natural gas price controls--with ``old gas'' and ``new gas.'' Prices in
the two markets will diverge sharply, with prices in the unregulated
market rising higher than existing levels. A buyer that needed more
power would obviously look first to the market subject to price caps.
However, if the buyer could not purchase power in the capped market, he
would have to resort to the uncapped market, and pay even higher prices
than current market levels. Since electricity is a fungible commodity,
some unscrupulous parties would take advantage of the split markets and
sell capped electricity at market-based prices, as occurred under oil
price controls.
Some advocates of cost-based price caps have proposed exempting new
generation from the cap, which implicitly concedes that price caps
discourage investment in new generation. A more practical concern,
however, is that this scheme would also fail because of the fungible
nature of electricity.
Although FERC lacks authority over the Federal power marketing
administrations, the Secretary of Energy has authority to impose a
cost-based price cap on the Federal power marketing administrations.
Such a step would be highly risky. A cost-based price cap would reduce
Bonneville's ability to generate revenue through seasonal surplus sales
outside the region, since Bonneville would be forced to sell
electricity at a rate far below market levels, foregoing revenues that
could have been used to defray Bonneville costs and lower rates charged
to preference customers.
At the same time, Bonneville must purchase power at certain times
of the year. There is no reason to assume that Bonneville will be
fortunate enough to purchase power from only those entities subject to
the price cap, and Bonneville may well have no choice but to purchase
power at extremely high prices from nonjurisdictional entities. Cost-
based price caps would thus put Bonneville in a position where it also
sells low and buys high, and could force Bonneville to raise wholesale
rates charged to regional customers.
The only way to apply price caps to all generation in the West is
to amend Federal law and grant FERC authority to set rates for
wholesale power sales by State and municipal utilities and rural
electric cooperatives. However, doing so would be inconsistent with
nearly 70 years of Federal electricity regulation. FERC has never had
authority over these sales, and any such proposal would be opposed by
many in the West, including presumably members of this Committee. I
certainly would not support such a proposal.
These are the reasons for the Administration's opposition to
imposition of cost-based price caps in the West. The Administration is
not alone in its opposition to price caps. Last month, eight of the
eleven Western governors sent me a letter expressing opposition to
price caps. In that letter, the eight governors stated ``caps will
serve as a severe disincentive to those entities considering the
construction of new electric generation, at precisely the time all of
us--and particularly California--are in need of added plant
construction.''
By contrast, advocates of price controls have failed to indicate
how price caps would increase supply, decrease demand, or prevent
blackouts this year.
In that price controls and power shortages are inversely related,
the ultimate question thus becomes whether our goal is to control
prices or lessen the frequency of blackouts. This Administration
believes our responsibility is to help minimize electricity shortages
and the blackouts and the economic and public health and safety
problems such shortages produce. Therefore, we do not favor price
controls.
Regrettably, our well-founded opposition to price caps has been
claimed by some to suggest the Administration either does not care
about California and the West, or is doing nothing to address the
problem. This is simply untrue. One day after being sworn into office,
the President directed me to call Governor Davis to discuss the crisis
and ask how we could help address the power shortages. Three days after
taking office, at Governor Davis' request, we extended the emergency
electricity and gas orders to give California time to enact reform
legislation aimed at maintaining electricity supplies. Last month, also
at the request of Governor Davis, President Bush issued an executive
order directing Federal agencies to expedite permits relating to
construction of new power plants in California. The U.S. Environmental
Protection Agency has issued air permits for three power plants in the
past month. President Bush and I have engaged in discussions with the
Government of Mexico about increasing electricity imports from Mexico.
Last week, at the behest of Governor Davis, I sent a letter to FERC
asking that the agency act on his request for an extension of the
waiver for qualifying facilities from certain fuel requirements. In
response to a request by the State of California, the U.S.
Environmental Protection Agency has provided other assistance,
clarifying rules relating to operation of backup generators. And FERC
recently required suppliers who charged unjust and unreasonable rates
to refund those payments to California buyers, as provided by the
Federal Power Act. We will continue to work with California and the
West to develop effective solutions to this crisis.
In short, the only action the Administration has opposed is price
caps.
LEGISLATIVE PROPOSALS
I would like to offer some comments on the legislation that are the
subject of this hearing. All of these bills provide for imposition of
cost-based rate caps in California and the West, so the general
arguments against price caps detailed above apply to all four
proposals. Following are our views on the major provisions of these
bills:
S. 26
This bill, introduced by Senator Feinstein, would amend the
Department of Energy Organization Act to compel the Secretary of Energy
to impose price caps on wholesale power sales in the Western Systems
Coordinating Council by jurisdictional entities whenever FERC or the
Department make certain findings, although the findings the two
agencies can make to trigger price caps are entirely different. The
Western Systems Coordinating Council is a region composed of eleven
Western States (Arizona, California, Colorado, Idaho, Montana, Nevada,
New Mexico, Oregon, Utah, Washington, and Wyoming), Baja California,
and western Canadian provinces that share an interconnected
transmission system.
In effect, the bill directs the Department to take over FERC's
ratemaking role, although the Department has no capacity to discharge
FERC's responsibilities. Unlike FERC, the Department does not have
expertise in ratemaking.
The standards used in S. 26 are unclear. The bill compels the
Secretary of Energy to impose price caps whenever he determines rates
exceed marginal costs ``by a significant amount or for a significant
length of time'' and continued existence of such rates ``threatens
public health and safety or the economy of any State or region'' and
FERC ``has otherwise failed to act to improve the situation.'' None of
these terms are defined and none have meaning in Federal electricity
law.
The bill would diffuse Federal authority over wholesale power
sales, giving both FERC and the Department authority to set wholesale
power rates. It would be a mistake to bifurcate Federal authority to
establish rates under the Federal Power Act. Under S. 26, both FERC and
the Department could set price caps, but under very different statutory
standards. FERC would retain its discretion under the Federal Power Act
to impose price caps if it finds rates are unjust and unreasonable, a
standard that has governed Federal rates for wholesale power sales for
nearly 70 years. Under S. 26 the Department would have no discretion,
but would be compelled to impose price caps if it finds rates exceed
marginal costs, either ``by a significant amount'' or ``by a
significant length of time.'' Since rates can be just and reasonable
while exceeding marginal costs the situation could arise where FERC
determines rates are just and reasonable and declines to impose price
caps, the Department agrees with that determination, but concludes
rates exceed marginal cost by an insignificant amount but for a
``significant length of time.'' The Department would have no choice but
to impose price caps, since S. 26 affords the agency no discretion.
Since electricity is traded in both real-time and hour-ahead markets, a
``significant length of time'' could be a very short period.
For these reasons, the Department opposes S. 26.
S. 80
This legislation, introduced by Senator Boxer, would require FERC
to order refunds of rates and charges for wholesale power sales or
transmission if it finds such rates or charges are unjust,
unreasonable, unduly discriminatory or preferential. The bill
significantly expands FERC's authority to order refunds. Under current
law, the effective refund date is limited to no earlier than 60 days
after the filing of a complaint. S. 80 provides for retroactive refunds
extending back two years.
S. 80 also mandates that FERC establish cost-based price caps in
the West--and only the West--if it determines that rates charged for
wholesale power sales are unjust, unreasonable, unduly discriminatory
or preferential. The bill does not expressly grant FERC authority to
remove price caps. S. 80 compels FERC to impose treble penalties on any
person who violates these new refund and price cap provisions.
S. 80 would significantly discourage investment in new generation
in the West. The independent power producers that are building most
generation in the U.S. are unlikely to expose themselves to refunds
that stretch back as far as two years. In addition, there is
significant uncertainty about the duration of price caps. Since the
refund and price cap provisions only apply to the eleven States in the
Western Systems Coordinating Council, investment in new generation
would shift away from those States and towards the rest of the United
States and other countries.
Notably, the refund provisions of the bill are limited to
jurisdictional entities. Nonjurisdictional entities such as State and
municipal utilities, rural electric cooperatives, and Federal power
marketing administrations have also sold power at market-based rates.
According to FERC, most of the excess power costs that the California
Independent System Operator claims were collected in January 2001 were
collected by nonjurisdictional entities. To the extent those entities
sold power at market-based rates, they received the same rates as
jurisdictional entities. However, they would be exempt from both the
refund provisions and price caps. Two classes of wholesale power
sellers who made sales under same rates are treated very differently
under S. 80.
For these reasons, the Department opposes S. 80.
S. 287
This measure, introduced by Senator Feinstein, directs FERC to
impose cost-of-service based rates on wholesale power sales by
jurisdictional entities in the ``western energy market'' within 60
days. The term ``western energy market'' is defined to include the
States of Arizona, California, Colorado, Idaho, Montana, Nevada, New
Mexico, Oregon, Utah, Washington, and Wyoming.
Under this bill, the Congress would assume FERC's authority under
the Federal Power Act to set ``just and reasonable'' rates. The bill
makes a legislative finding that current wholesale power rates are
``unjust and unreasonable'' and compels FERC to implement a ratemaking
decision made by Congress. With all due respect, Congress has no
expertise to make ratemaking decisions. If this bill were to be
enacted, we would find ourselves on a slippery slope. Decisions
regarding rates would be made in a political environment by a political
body, not by an independent regulatory commission that relies on nearly
70 years of experience, is guided by a statute whose meaning is well-
understood, and whose decisions are subject to judicial review.
S. 287 will significantly discourage investment in new generation
in the West at a time when it is most needed. The duration of the price
caps is uncertain, and may be more permanent than temporary. The fact
that price caps only apply to the West will likely encourage investment
in new generation to shift from the West to other regions of the U.S.
and other countries. Moreover, the fact that price caps would apply to
only 47 percent of the electricity supply in the West guarantees that
price caps will create two electricity markets, distorting the market
and driving up prices in the uncapped market even higher than current
levels.
For these reasons, the Department opposes S. 287.
Smith Amendment to S. 287
The Smith amendment waives application of price caps imposed by S.
287 on wholesale power sales in States that prohibit public utilities
fro m either (1) passing wholesale power costs through to retail
consumers or (2) paying for such purchases. Since California has not
permitted State-regulated utilities to pass these costs through to
retail consumers, the amendment waives price caps on wholesale power
sales in California by public utilities. The Smith amendment also
prohibits the Department or FERC from ordering electricity and natural
gas sales in States that prohibit public utilities from either passing
wholesale power costs through to retail consumers or paying for such
purchases unless there are guarantees the full purchase price will be
paid when due.
The Smith amendment authorizes States in the Western Systems
Coordinating Council to prevent public utilities from selling
electricity in States that prohibit public utilities from either
passing wholesale power costs through to retail consumers or paying for
such purchases if a public utility is not meeting electricity demand in
its service area. In effect, the amendment authorizes Western States to
regulate interstate commerce, a power otherwise reserved to the
Congress and the Federal government by the U.S. Constitution. This
authorization is inconsistent with nearly 70 years of Federal
electricity law.
The Smith amendment reflects the concerns of the Pacific Northwest
about the impact that the failure of the California electricity
regulatory scheme has had on the region. The impact of this regulatory
failure has been felt more in the Pacific Northwest than in California,
as a result of the retail rate caps in California. I appreciate these
concerns of Senator Smith and his colleagues from the Pacific
Northwest.
The Department opposes the Smith amendment, for the reasons stated
above.
I appreciate the opportunity to share the Department's views on the
legislation, and look forward to responding to your questions.
Senator Bingaman. Well, thank you very much for being here.
I think we will have 5-minute rounds of questions, each
Senator asking questions for 5 minutes. Let me start.
I take it from your testimony that the bipartisan bill that
Senator Feinstein and Senator Smith talked about in their
opening statements is something that will not get the support
of the administration and is opposed by you in any variation
that you can envision.
Secretary Abraham. Mr. Chairman, what I would say is this.
I have not, obviously, looked at the new legislation. I heard
the report that Senator Smith outlined, and so there seemed to
be a lot of components to it. I would not say, without studying
it, that every part of the bill would be something we would
oppose.
But to the extent, as I have tried to outline in my
remarks, that we move in the direction of price controls, then
we are going to find ourselves I think in clear opposition to
legislation, especially if it is at a time like this where we
are trying to deal with shortages that present real immediate
crises in terms of blackouts, in terms of resultant economic
and other sorts of consequences. That is our view.
Senator Bingaman. Let me ask about the real immediate
crises that you are referring to. This idea that we are going
to resolve this or to some extent resolve it by increasing
electricity imports from Mexico. I do not know. I have not made
a real study of it, but that is not a solution to an immediate
problem, is it? Maybe long term there is some benefit we could
gain from increasing imports from Mexico, but there is no
infrastructure to accomplish that at the current time.
Secretary Abraham. Actually it is interesting, Mr.
Chairman. Right now in the State of California, as I outlined,
we are dealing with an immediate challenge for the summer of
trying to address an approximately 5,000 megawatt differential
between projected peak demand and supply. Every megawatt counts
in that kind of setting, or else we will find ourselves with
the sort of rolling blackout projections coming through that I
mentioned in my statement.
Last week at a hemispheric energy ministers conference in
Mexico, I followed up earlier discussions which we have had
with the Mexican Government about the possibility, over the
next 6 to 9 months, of increasing the possible imports of power
generation, electricity generation, from facilities in Baja.
The Mexicans and our administration feel there is actually a
very significant possibility of increases.
The biggest problem we have with respect to infrastructure
is on our side of the border between the border and San Diego
where right now we cannot bring very much power beyond what is
currently being sent. But there is the potential for some
increase. Right now we are looking for every possible way that
we can provide assistance to increase California's capabilities
for the summer. So, in fact, there is that possibility for the
next 6 months that we would see increases.
Senator Bingaman. I guess what I am still unclear on is, if
the Feinstein and Smith legislation is unacceptable and all of
the other proposals that have been developed here are
unacceptable, what is the solution that the administration
offers for this problem of a $45 million a day cost being
charged to the treasury of California? I do not see that coming
to an end. If anything, as we get into the summer and
electricity use increases, I would expect that the crisis could
worsen, and I do not see any solution being offered to deal
with it.
Secretary Abraham. Mr. Chairman, let me say this. There are
two issues here. As I said in my testimony, I am afraid we have
diverted attention away from what I believe to be and what the
administration believes to be the central crisis facing
California this summer, which is people without power at
periods of time when this would have significant lifestyle
impact, significant impact in terms of the potential health of
residents of the State, impact on the economy of California.
That is what we are trying to work on primarily.
Now, I am not in any way suggesting we do not care about
higher prices. We do. I believe the action which was taken by
FERC last week in its decision to follow up on earlier
decisions it had made with respect to the reasonableness and
the justness of prices being charged was an important step
within the context of Federal actions that can be taken about
prices.
But our primary goal right now is to try to make sure that
California does not start a wave of blackouts that could reach
beyond its borders. What we are doing in that respect, as I
outlined, is a variety of things we have been working with the
Governor of California on to try to address either an increase
in supply or a decrease in demand. I am not saying that people
in California do not want lower energy costs, but I know that
for sure they do not want to be sitting this summer without
electricity at all, and our goal is trying to avoid that as the
primary public interest responsibility of this administration.
Senator Bingaman. My time is expired. Mr. Chairman, it is
your turn I guess.
The Chairman [presiding]. Thank you, Senator Bingaman.
Mr. Secretary, are you familiar with the situation in
Pennsylvania where they have wholesale caps, retail caps, but
they are quite high? So, there is a lot of flexibility in
there. It is my understanding that in their deregulation plan,
they made sure that there was plenty of supply within the State
of Pennsylvania before they tied into this. So, unlike
California where I understand about 25 percent of the power
comes from outside the State, they have a situation that seems
to be working, at least in the realm of price caps on wholesale
and retail. Is there an application for that concept that would
be workable in your opinion?
Secretary Abraham. Well, as I indicated in my opening
statement, there has been a soft price cap in California. There
was throughout the year 2000. Every time it was brought down,
it was allegedly going to lead to lower prices. The average
price for electricity actually went up, even as the price cap
was reduced.
At the end of the day, the biggest challenge, as I said in
my comments, that California faces I think is the decision that
was made that did not permit the California utilities to have
an ability to diversify the means by which they acquired power
which they had to purchase beyond that which they generated
themselves. When last summer they had the opportunity to enter
into long-term contracts, as I mentioned, for instance, one
with Duke power at $55 per megawatt-hour, they were in a
situation where they would have been paying a price lower than
that which the Governor of California today is able to pay for
long-term contracts. Instead, they were forced to buy all of
their wholesale power on the spot market without sufficient
generation within the State to be able to keep prices under
control. But the real escalation in the prices was, in large
measure, a result of the unique limitations that were placed on
California's utilities with respect to the purchase of power.
The Chairman. Now, let us follow that through a little bit
because, as Senator Bingaman suggested, what we want is a
solution, and the long-term solution sought, obviously, is more
power availability within the State of California as opposed to
outside the State of California. Now that is, of course, a
decision that Californians should make as to where they want to
get their power. But if they are dependent on outside the
State, unless they have long-term contracts, they have some
real exposure on price spiraling, which they have already
experienced rather dramatically.
My question to you though, is, is there enough available
power outside of California that would come in if, if you will
pardon the bottom line expression, they were assured they were
going to get paid? Right now we have got a difficult time
understanding the situation in California because they have not
passed on the true cost of that peaking power to the consumer.
It has been first the capital of the three major utilities that
have basically seen their capital base exhausted, and now it is
a combination of loans and bonds that the State is prepared to
guarantee.
The question is, of course, is the State going to bear that
responsibility, or ultimately are they going to pass it on to
the consumer, or is there any difference really between the
consumer and the taxpayer? It may be politically a little
easier to finesse it off to the taxpayer than the consumer.
But we are looking at trying to address California's need
to get through this crisis, and I am wondering what role you
might recommend of FERC or whatever agency to ensure that the
outside power that has to supply California until they can
generate more capacity within the State would come in and what
assurances do they need from the standpoint of getting payment?
Because when you order payment, what does that really mean? Is
that an obligation of the Federal Government ultimately if
California ratepayers do not pay or the State of California
does not pay the producers of that power? Whose obligation is
it?
So, we have got everybody kind of drifting around here
trying to look for a solution, but if there is enough power out
there to supply California during this interim and they get
assurance that they are going to pay for it and the
representatives from California know that their consumers are
not going to be gouged by necessarily peaking prices, we ought
to be able to work through this thing.
Secretary Abraham. Well, Mr. Chairman, we are working with
the State of California, as I indicated in my testimony. I
called the Governor of California on the Sunday after the
inaugural to find out what immediate things we could do. I
believe you will recall that one of those actions, which I also
mentioned, was to extend for 2 weeks the orders that were in
place with respect to the sale of electricity, natural gas
because Governor Davis indicated that if he had those 2 weeks
and Senator Feinstein and others who talked to me about that
indicated that that would give them time to get the State in a
position to begin buying on long-term contracts to have the
whole faith and credit, if you would, of the State behind the
purchases so that out-of-State sellers would have the
confidence and assurance they could make those sales.
We have since then worked with the Governor on a variety of
other issues that relate to expediting the permitting processes
with respect to new power generation to try to find additional
sources.
The Governor I know is trying to initiate a variety of
conservation measures. Senator Feinstein recently wrote to me
with regard to the issue of conservation as it might affect the
Federal Government, and the fact that quite a significant
amount of Federal Government activity goes on in the State of
California at our facilities. We are looking into that as
another way to try to make the supply level that will be
available at peak points this summer meet the demands that are
anticipated.
I cannot tell you today, as I indicated in my testimony,
that we are at the point where we can guarantee that there will
not be blackouts. There still is a gap. But if the various
actions that the Governor is taking are all successful, then
that gap can be closed.
The Chairman. Along with FERC.
Secretary Abraham. Yes, FERC has played a role. In fact,
FERC made several decisions last week, which I suspect Chairman
Hebert will explain in greater detail, that related both to the
prices that had previously been charged in the month of
January. I suspect and understand there will be another ruling
with respect to prices that were charged in December.
The one thing that I would just note also, because it was
touched on by others and in my testimony as well--I believe you
also mentioned it--is that many of the very entities which we
do not have jurisdiction over are responsible for some of the
most excessive charges that have recently been outlined in
FERC's rulings. Now, those are State entities.
It would seem to me that as we talk about what the Federal
Government should do, it has at least been interesting guidance
to me that no efforts have been undertaken to address any
changes with respect to the pricing policies of those entities.
I am not recommending that. I think it would have the same
negative effect to the extent that I have outlined price
controls' effects can be. I am just saying I think we need to
look at this in a broad context and understand what the Federal
Government role can be and what it cannot be.
The Chairman. But the implication is the power is out there
if there is some degree of certainty that they are going to get
paid.
Secretary Abraham. We are working with California. I again
do not want to make any assertion today that there will not be
rolling blackouts this summer. I indicated the difference that
exists as we project it today. I saw indications in the
California press this morning, in fact, that there may have
been an underestimation of the magnitude of the delta between
supply and demand. We will continue to monitor it very closely.
The Chairman. Thank you very much.
In the order of attendance, Senator Craig.
Senator Craig. Well, Mr. Chairman, thank you.
Mr. Secretary, first of all, let me congratulate you for
the work you have done to come up to speed on this issue very
rapidly. Obviously, by your testimony today, you have
demonstrated your willingness to do so by the very facts that
you put forward and the knowledge you are displaying on this
situation.
I am not going to ask a question. I am going to make a
statement. You may choose to respond to it.
First of all, I agree if we create an artificial market, we
will send the wrong signals without doubt. It has happened in
the past. You have cited those situations, and clearly the
greatest example is now the catastrophe facing California.
In my State of Idaho, a week ago I suggested to its
citizens that they may have to turn off their air conditioners
this summer, except for those elderly who truly need a cooler
environment in which to live. The reason that message might be
heard in Idaho is because most citizens are going to be looking
at 25 to 35 percent rate increases, and they can
correspondingly react by saying, yes, if I do that, I may save
myself some money. Tragically enough in California, that same
suggestion probably would not follow through. It will follow
through in Oregon if a variety of options are given and
citizens are allowed to see how they can effectively conserve
and lower or at least sustain the cost of their power bill as
prices go up. But again, in a false market, those kinds of
signals mean little to nothing, especially if you do not have
to make those kinds of choices.
Idaho is not unlike Washington, and we heard those figures
this morning. We are going to hear from Governor Locke, who was
on national television this morning standing in a middle of a
dry lake. There are many dry or drying-up reservoirs in the
State of Idaho. Our watershed is at 38 to 50 percent of normal.
Our utility people are talking about the rolling brownouts of
California being the rolling brownouts of Idaho. And yet, we
have got to retain a stable power supply, a quality power
supply for some of our industry that cannot afford to shut down
or turn off or intermittently bring themselves on line.
If we work together, we can get through this summer, but
working together does not mean to send a false signal to the
market. Clearly, our utilities are hustling now to try to see
where they can bring additional energy on line in the future.
But in the immediate, cooperative actions on the part of both
the consumer and the producer are going to have to be, in large
part, I believe some of the solution we deal with, Mr.
Secretary.
But I would suggest for those of us in the Pacific
Northwest--and you have heard from Senator Smith this morning--
one of our major players is Bonneville, of course. We will sit
with you very quickly to see where we can offer them optimum
flexibility to deal with the market. They are doing a
reasonable job now as it relates to market pricing and how they
handle it and how they respond and what consumer has
flexibility to go off line to allow greater use of that
resource somewhere else. That will affect Oregon, Washington,
Idaho, and part of Montana.
But I do agree with you that to suggest that we just simply
fix the market now by freezing the market or shoving it down
does not a message send to produce and to solve a problem. So,
thank you very much for what I think is an important and direct
statement in that regard.
Also, let me thank you and the President for being bold and
correcting or clarifying a point that is so essential as it
relates to CO2 and how we deal with that emission.
We cannot continue to send false signals to the market. The
market deserves stability of decision making at the Federal
level. They deserve to know where this Congress and this
President will go, as it relates to Federal regulations, so
they can adjust and adapt appropriately to it. I think that
statement yesterday was key toward heading us in that
direction. It is important that the country understand that we
are truly, as I think the Senator from Nebraska said, in an
energy crisis of substantial proportion, and if we fail to deal
with it responsibly, we will fail our country and our country
will fail.
Thank you very much, Mr. Secretary.
The Chairman. Thank you, Senator Craig.
Now we will hear from and be enlightened by the Senator
from California, whom we are very pleased to have on the
committee. Senator Feinstein.
Senator Feinstein. Thank you very much. Thanks, Mr.
Chairman.
Mr. Secretary. I was really surprised by the ideologic
hardness of your statement. I must tell you that.
I happen to agree with you that we are going to be about
5,000 megawatts short in California this summer. It is enough
power for 5 million homes. It is a lot of shortness.
How do we keep prices down this summer? You addressed
supply and demand issues mostly long term. My question is, what
do we do right now?
California, as you know, is expediting permits, is
expediting peaker plants, is moving as rapidly as it can to
build additional power sources. The 5,000 megawatt shortfall is
not going to be the only shortfall. They are going to be
charging $5,000 a megawatt this summer. What does California do
about that if it is not going to get any help to provide that
stability and reliability over that period of time?
Secretary Abraham. Let me begin by saying that our position
is not a hard ideological position. It is a common sense
position I believe.
Let me tell you what I do not think we should do. I do not
think that we should impose through FERC or the Federal
Government or through congressional action, in the form of a
bill that simply mandates it, the kinds of price controls that
will make the delta between supply and demand worse. And that
is exactly what I think will happen. If we tell people who
generate power in Canada that there is going to be a price cap
on what they can sell that power for in the United States, then
they will not sell it here and your summer differential between
supply and demand will get worse. So, then you will be back and
we will all be back here talking about what do we say to the
people who now are subject to even more energy shortages that
we currently contemplate.
Senator Feinstein. But you are sending a signal that it is
okay to charge $5,000 a megawatt-hour. We know they charged as
much as $3,000 in the past.
Secretary Abraham. Actually I believe the signal that was
sent last Friday by FERC is a signal that you cannot charge
unjust and excessive rates. I think that as people realize that
they are going to be, in fact, forced to respond to FERC orders
and to refund those rates that are above market level, that
they in fact will respond accordingly.
Now, again, this administration is not for unjust and
unreasonable and excessive rates. In fact, we have authority
through FERC to address that. They did that last week with
respect to January. They will be doing it again, I assume
fairly soon, although Chairman Hebert's testimony will probably
comment on this more specifically, with respect to December.
That is the way to address prices that are excessive and
unreasonable.
But in my view to take an action that places an artificial
cap in place is going to cause the shortage problem this summer
to get worse. Moreover, it is going to send a signal, I think,
with respect to new generation that is going to make it much
harder for California and the rest of the West to encourage
people to develop new generation in that region. Companies who
build generation have a choice. They do not have to build it in
the West. They can build it anywhere they want, and they are
more likely, I would think, to build it in areas where they
believe they are not going to be, after they have made major
investments, significant changes in policy with regard to what
the likely return on their investment is going to be.
At the same time, I would just say this. If we impose a
price control that fails to work effectively with respect to
the demand side of the equation, right when the goal of the
Governor of California is to reduce demand, then I think again
you are likely to see the differences between supply and demand
even greater at exactly the time the greatest threat is posed
to the people of your State.
Senator Feinstein. Let me just say this. The Governor of
California is also asking for the help. He is asking for the
help to just create a reliable and stable situation for a short
period of time so that California can get through this crisis.
Let me put it another way.
Secretary Abraham. Can I just comment on that, though? The
Governor of California and I have had a number of meetings and
conversations. The first and foremost thing that he has made
clear to us I believe that he wishes help with is to try to
meet the crisis he sees forthcoming this summer with regard to
shortages, blackouts, and the resultant economic and security
challenges they pose. That is our top priority. I am not in any
way suggesting high prices are a good thing. What I am saying
is that our first priority, according to what your Governor
have indicated to me, is to try to address the shortages and
the blackouts, because I think they would be catastrophic.
I am sorry to have interrupted, but I did want to clarify
that.
Senator Feinstein. Let me just put it in another way. I
would agree with you that the California Public Utilities
Commission was wrong to prohibit long-term contracts. Let me
give you an example. In November, Duke was offering power at
$50 to $55 for 5 years. Today, 3 months later, the State has
had to sign contracts for double that amount and double that
length of time. Why in a span of 3 months has this changed so
dramatically?
Secretary Abraham. Well, again, I think that is a long-term
contract. I do not know whether they were identical contracts,
and I am frankly going to have to defer to the experts at FERC
to try to distinguish that.
But let me point out just a simple fact which you made. If
the State of California had simply allowed its utilities to
purchase either last summer or fall contracts at the $55 per
hour rate, we would be in a whole different situation. We would
not be here today. Again, the question becomes after these
consistent decisions that were made that have precipitated and
forced the purchase of wholesale power on the spot market that
got us into this situation, it is not going to be that easy to
get out of it under any condition.
I would just urge everybody to consider what the first
challenge we have is. The question is not how do we undo bad
contracts that were entered into last year. It ought to be how
do we protect the citizens of California this summer from the
blackouts and the shortages.
Senator Feinstein. Let me just say one thing.
Secretary Abraham. Maybe that is not important to others.
To me it seems to be the primary consideration.
Senator Feinstein. Just one quick comment. I agree with you
it is the State's problem to resolve its bad law. I agree with
you that the market should be able to fluctuate freely. All we
are asking for is help to prevent price gouging.
Secretary Abraham. And I share that view.
Senator Feinstein. And it is taking place.
Secretary Abraham. Senator, I share that view and I believe
that FERC has the responsibility and has last Friday
demonstrated the willingness to address excessive and unjust
prices. That is the proper way to do it.
I do not think the right way to do it is to impose price
caps that will exacerbate the problems the State faces. I am
telling you, I think this summer, if California has worse
blackouts than currently projected, that that would have been a
disservice to the people of your State. If the rest of the West
finds the Canadian energy providers refusing to sell at the
same levels because of price caps and the shortages that are
projected in other States are increased because of that, I
think that is, in my judgment, an irresponsible carrying out of
our public responsibilities here.
So, I just think we have to look at these in terms of
priorities. To me our first priority to the American people
ought to be to try to ensure that there is a reliable
availability of energy this summer when we know there is a
crisis for a variety of factors from the climate issues to the
issues that relate to supply and demand differentials.
Senator Bingaman [presiding]. Senator Smith.
Senator Smith. Spence, I understand supply and demand very
well from many years in a commodity business, but I want to
associate myself with Senator Feinstein's questions because I
am afraid this summer we are going to be in the middle of a dry
lake bed explaining to very angry farmers and homeowners and
former factory workers the lessons of supply and demand. I do
not think they are going to listen. I think we need to increase
our effort to help.
I do not want to send the wrong signals to the marketplace
to produce or to conserve. I do not want to send the wrong
signals, but I will tell you the wrong signal is a recession.
Nobody is going to be investing in an environment when you have
not just energy rates going up, but unemployment rates going
up.
Let me go to where Senator Feinstein was questioning you as
to the ruling that FERC issued in January. It set the just and
reasonable rate at $273 per megawatt, but I think you are
saying that that will discourage investment. I do not think
that will discourage investment. Can we not do that?
We heard lots of economists in an earlier hearing saying
that short-term temporary caps at a high enough rate would not
retard investment. All I am saying is I think we need to give
you more authority and I think you need to use it to mitigate a
catastrophe.
The Wall Street Journal says Washington State is going to
lose 43,000 jobs. My State will not be far behind. I do not
want to be seen as giving economics lessons when we have our
States heading southward in every direction in every economic
indicator.
Can you help me a little more?
Secretary Abraham. Well, of course. Let me just say this.
First of all, I know that people who are concerned about
economic consequences recognize the relationship between
blackouts and economic recessions very clearly. I think that it
would be important and I recommend that the members of this
committee make it very clear to their constituents what we are
trying to make clear, which is that our first goal is to
prevent them from seeing their businesses close down because
there is no electricity, because we see Canadian imports
disappear, because we find, because of price caps, in the long-
term sense there is not enough generation being built in your
region because people decide they ought to build it in the
Southeast.
Now, I am concerned about that. In my judgment there could
be immediate economic consequences if a price caps regime is
placed in effect that makes the summer's shortages even worse.
In my view that should be the primary goal of all of our
efforts here, to deal with the summer crisis in terms of power
shortages.
Now, what do we do about prices? That is a separate issue.
It is not unrelated, but it is a different crisis than the
crisis that I think should occupy our primary focus.
With regard to prices, I believe FERC acted properly last
week in the decision that it rendered, and I believe it has an
ongoing duty to monitor prices to determine if they are unjust
and unreasonable. And we will support that effort. The refunds
that will be required under their order with respect to
January--and I assume there will probably be some kind of
decision, as I have said, made fairly soon with respect to
December--will be ones that I think send a very strong signal
to those who might try to exploit or take advantage of a
situation that we all recognize to be a serious one, that they
are not going to be allowed to get away with it.
In my judgment, that is a way to balance the issue of
making sure prices that are excessive and unjust are not
charged with the separate issue of making sure that the power
does not go out. In my view we have got to try to make sure, as
we approach this, we do it in a way that balances those two
considerations. I do not think you want to say to your
constituents: Good news, FERC just ordered a price cap; bad
news, you are not going to have power for the whole summer.
Now, obviously that is an extreme rendition. But our goal is to
try to address the power shortage crisis first and foremost.
Senator Smith. Spence, I think some of the refund you hope
will be there will be there too late for a lot of small
businesses and a lot of northwesterners. I think we need to
show them we are doing more than I am hearing that we are
prepared to do.
Many have already rushed out and criticized President Bush
to regulate us into safety. I have not done that. I have waited
until I got a signal from a California official that said I
understand the central problem in California is a law that is
broken and it is broken because it caps the retail rate so
there is no conservation signal being sent. If you want to send
a lot of signals to conserve, Senator Feinstein has just done
that or opened up that possibility whereby California, on a
rate they determine, can allocate retail rates that will pass
through costs. That will conserve power.
I believe the caps--we are literally talking about 20
months--will not discourage incentive if the rate is put high
enough and we can go home to very angry people and say we are
helping short term and long term the future is very bright.
But the worst signal in the world, in my opinion, is that
we are unwilling to exhaust every measure, overturn every stone
to try and find a way to help through this crisis because I
think it is going to be very serious.
Secretary Abraham. Senator, as you well know, even before I
appeared for my confirmation hearing and since, you and I have
had numerous conversations with respect specifically to the
Northwest about a variety of issues, especially those that
relate to the Bonneville Power Administration. We have had
meetings with various folks from the region, some of which you
and I both participated in, and our office has, on a regular
and ongoing basis, been working with BPA to try to address the
rate issues that are confronting it as a consequence of a
variety of the factors we have talked about today, the climate
issue in particular.
We are doing our best to try to address that. We hope to
have a plan which will take into account a number of different
kinds of ways of trying to focus on the rate issues that are
particularly significant and sensitive to you. And your
leadership on that in bring these issues to our attention and
making sure we keep focused on them is extremely important.
With respect to the broader issue of price caps, I would
only say this. It is our view that, in fact, the signals will
be very substantial if we move in a direction that suggests
that caps are not only in place, but that a regime now exists
that will significantly affect future investment decisions. We
are trying to look at it for the summer. We are trying to look
at it in terms of how to keep prices under FERC's authority
within the just and reasonable category. And we are also trying
to see how at BPA we can make changes in terms of policy that
will address some of the rate increases projected there. We
will do our best.
We may have a difference of opinion on the effect of rate
caps. Obviously we do, but it is not because of lack of
sensitivity about higher prices.
Senator Smith. Long term we do not. I agree with you
completely. Rate caps are the wrong signal long term. But we
have a short-term emergency. And if California is willing,
under a Federal directive, to change its law, we will conserve
more and we will still incentivize producing more, and that is
what we have to do. Anything less than that is going to leave
the West higher and dryer than it has ever been before.
Senator Bingaman. Senator Cantwell.
Senator Cantwell. Thank you, Senator Bingaman.
I too would like to join my colleagues in encouraging the
administration to think more openly about this policy. We seem
to be trying to draw a conclusion here today that somehow, by
not ensuring that FERC does its job on reasonable rates, that
the opportunity to make sure that Californians or others are
not left in the dark this summer, that that is the flag that we
are waving, when in fact the reality is, with triple digit
increases, there will be people in the Northwest sitting in the
dark. There will be aluminum facilities that will be shut down.
There will be small businesses that will be shut down. So,
while we are talking about protecting people from blackouts,
the reality of inaction here is going to cost us those same
consequences.
I would like to ask a couple of specific questions, and I
appreciate your attention and newness to the job. But
understanding where the administration is as it relates to the
Northwest on a couple of different policies.
First of all, you mentioned the FERC's decision to order
power producers to refund millions to utilities. That was
directed specifically at California. The Northwest and
Washington, even though some of those same providers do
business in Washington, was not included. What about including
those refunds to the Northwest?
Secretary Abraham. This would be a decision that I think
ought to be, obviously, directed at the next witness here who
is the Chairman of the Federal Energy Regulatory Commission.
Senator Cantwell. Do you support including Washington
State, Oregon?
Secretary Abraham. I believe that there is a process by
which any allegation of unjust rates can be addressed by FERC,
and if there is an allegation that that has taken place in any
region, I believe that there is a mechanism in place for that
to be judged by the agency. If they concluded that with respect
to Washington, then they are empowered, as I understand it, to
make similar declarations there.
I am not sure what the process has been that has led to the
decisions so far in terms of whether or not Washington has
sought an appeal or whether or not this was exclusively brought
to their attention by the California ISO. I honestly do not
know the process enough to tell you whether that is why it was
exclusively limited to that one State.
Senator Cantwell. We will certainly ask the question when
he comes up but would seek an opinion from the administration
on that as well.
The second issue, you mentioned the Canadians a couple of
times. Are you currently engaged in the supply side with the
Canadian Government on helping the Northwest on supply?
Secretary Abraham. As a matter of fact, last week in Mexico
City at the hemispheric energy ministers meeting, we had the
first of what I suspect will be an ongoing and growing
trilateral set of meetings with Mexico, Canada, and the United
States to discuss a North American energy strategy or
initiative. We hope to work more closely with the Canadian and
the Mexican Governments with regard to broad continental energy
challenges.
Prior to that, I actually had a separate bilateral set of
meetings with my counterpart, Ralph Godale, who is the energy
minister for Canada. We are in active discussions in terms of
future opportunities to expand the relationship between the two
countries on a bilateral basis.
Senator Cantwell. But those are long-term discussions?
Nothing for the immediate----
Secretary Abraham. No.
Senator Cantwell. Do you expect any results out of that on
the supply side in the next 6 to 7 months?
Secretary Abraham. Because of the nature of the history of
the relationships between Canada and the United States, there
have not been quite as many immediate issues as we have had in
terms of working with our counterparts in Mexico in terms of
power exportation issues. But we intend to continue those
discussions with both Canada and Mexico. I am not prepared
today to make any prediction with respect to a Canadian/
American change in terms of levels of support. That is
something still in discussion.
Senator Cantwell. The third question, if I can. I am
running out of time here. The picture of our citizens from
Washington and Oregon and other parts of the Northwest standing
in dry lakes has been conjured up a couple of times here. I
guess the fact that we are facing these triple digit increases
brings, I think, a very important point to be put on the table,
and that is that sometime this spring we will be facing the
choice about what to do about the shortfall in water supply as
it relates to the biological opinions about salmon. What is the
administration's position on what we should do and options?
Secretary Abraham. At this point, as we examine a variety
of options which confront us with regard to BPA, we are still
in the policy development stage. We, I think, have made it very
clear that the administration does not support the breaching of
dams as a solution. We do not believe in foregoing treasury
payments from BPA as a way of solving the problem either
because I think that would lead to serious reconsideration of
the relationship. And we do not support at this time some of
the proposals we have had to somehow turn Bonneville into a
regional facility.
But we are looking at a variety of other options that range
from voluntary conservation, to purchasing load reductions, to
other sorts of things, and the use of fish mitigation credits
as we try to develop a policy. But when we have a more concrete
proposal to offer, we will be submitting it.
Senator Cantwell. Mr. Chairman, I know my time has run out,
but it would just like to leave the point that I think some of
these questions show that the problems for the Northwest,
without immediate action here, only get worse. So, we are
trying to work in a constructive way to give relief to the
individuals, businesses, and to the environment in the
Northwest.
I would also, at some other point in time, like to ask you
about the DOE's proposed cutting on the energy efficiency
program and what we need to do to make sure that that
investment level gets restored.
Secretary Abraham. I am confident that this committee will
have a number of budget related questions to pose to me when we
finally release our specific budget information in the next
couple of weeks, and I will be glad to try to address all of
them.
Senator Cantwell. Thank you, Mr. Chairman.
The Chairman [presiding]. Thank you, Senator Cantwell.
Senator Thomas.
Senator Thomas. Thank you, Mr. Chairman. I know there are
many witnesses remaining.
One of the important things if we are to get support for
the California idea of some of these kinds of things is I think
we need to be more assured that California is doing some of the
things that clearly need to be done. I must tell you I am not
certain. For instance, the powerplants that are now down could
be brought back into service with some repairs and some
maintenance. Do you know, is that being done?
Secretary Abraham. Senator, I do not know specifically what
might be going on at every facility. I know, as I commented
earlier, that Governor Davis understands or has at least
reflected in statements he has made that the principal
responsibilities with respect to getting California's energy
problems resolved lie in California. They are now targeting new
generation and conservation as part of that solution. But I am
not sure, and I would have to get back to you.
Senator Thomas. I understand. But I think we need to be a
little more assured, if we are going to make some changes and
put some impact on some of the rest of us that will be
impacted. Implementing emergency demand for reduction in use.
Have they done that? I do not know the answer. I do not know
what has been done on the retail pricing for sure.
So, I am sympathetic to the problem. I know that it is a
very difficult one, and obviously the answer is somewhat over
time. But I tell you what. Before I am willing to go ahead with
a great deal of support for doing things there, I want some
assurance that they are going to do some of the things, that
clearly should not have been done in the first place, to find a
remedy for those kinds of things. I will not take more time,
but I can tell you that I am interested in that response.
Thank you.
The Chairman. If I may, before I call on Senator Domenici.
We got into a situation in the last administration where there
were six or seven coal-fired plants that EPA alleged the life
was being extended rather than the position of the operators
who claimed that they were simply maintaining the plant up to
the level of permitting which was required. EPA indicated that
they were prepared to file criminal charges against the
management if these plants were allowed to continue. Now, I do
not know the factual information, but clearly when you are
faced with that kind of a threat, it becomes a full employment
act for many lawyers to make a determination of was the
maintenance done to simply extend the life of the plant or
simply to operate.
It seems to me, Mr. Secretary, that these are some areas
that we need some enlightenment on because if, indeed, those
plants have a capability of producing energy and are not, we
ought to be able to settle that differential because they
clearly can make a significant difference.
We have seen the administration's position on
CO2 which is pretty definitive. They said it was not
a pollutant. Period. I think those of us in the Northwest would
encourage the rest of you to go out and grow some trees because
that helps too.
Senator Domenici.
Senator Domenici. Mr. Secretary, it is good to be with you.
First of all, I want to compliment you. I always knew that you
were a quick learner and certainly you have learned in this
field in enormous leaps. Your statement today is very
interesting in terms of its comprehensive nature, and I
compliment you.
What I want to talk about here today is I want to tell you
a little history. To the Senator from California, I would like
to tell you I have been here long enough to where the price of
natural gas was 7 cents a million cubic feet. You are talking
about $60. Well, that was because the entire natural gas fields
of America in production were regulated by a strange
interpretation of a case that held that the National Government
had authority to regulate, so a group regulated it. We did not
have any natural gas, literally none. A trickle.
We started deregulating. The first bill we did we
deregulated only new gas, deep gas, and gas in wells that you
could easily determine if you put another well in, you do not
hurt anything. We eventually deregulated.
The United States does not know how many million cubic feet
of gas we have it is so many. But, Mr. Secretary, something is
wrong when a producer in New Mexico gets $5 and the gas is sold
to somebody at $60. Somebody has to find out what is happening.
Since I am not going to be here for the FERC Chairman, I am
going to ask the chairman if he could ask him to study that and
give us a report as quickly as he can on what is happening.
The Chairman. Yes.
Senator Domenici. Now, this is not just a California
problem. So you will know, Mr. Secretary, in Senator Bingaman's
and my State, we have 990 workers, the most highly paid workers
in one part of New Mexico, working in a copper mine. They may
be laid off within the next month because their cost of
electricity went from 3 to 4 cents to 21 to 22 cents, and they
are not sure they can produce copper and pay the workers. There
is another one close at hand with similar proportions. Now,
that is on the one hand.
On the other hand, the Senator from California, there are
two major, major powerplants being considered in the State of
New Mexico. One is already completed and New Mexico has given
the go-ahead in a little town of Deming, New Mexico. That is
$250 million to $300 million. Over on the east side of the
State in the city of Clovis, they are looking at another one
and it is bigger.
I get the rumble that the companies that are doing that
have every option to go to California, but they are not going
to go to California because I would suggest to you that there
are still regulations and rules that inhibit the investment as
it is being made in other States that have less of that. And
that may be California's desire. When you talked to me, it was
not. You said we want to build new powerplants in California.
I suggest we ought to find out the reality of it. Is
California today really willing, by its regulatory--and this
will not solve your temporary problem. I know you would
immediately say, Senator, that will not help that. I know that.
But I think we ought to find out. The State of California went
12 years without a powerplant, and while demand went up, it
peaked out. I think we ought to know as a Nation if they are
really ready to let natural gas--that is the simplest one. It
is pure white. Are they really letting them come in or are they
going to expect powerplants to be built around the country and
go in there because they want to keep rules that are harder
than other States have and they are still complying with the
ambient air standards of America?
So, those are my two observations. One, how come the
producer is getting so little and the market is getting so
much? Somebody ought to follow that gas from the panhandle in
New Mexico and Texas or Wyoming and just see what is happening
to it. It comes out at $4, $5 from your field. Where does it
get to $60? I think that would be an interesting thing for us
to find out.
I also want to say to FERC you have to be concerned. Where
is the FERC leader sitting? I cannot be here, but you have got
to be concerned. If you have some regulatory power, you have
got to say there is a number of States getting hit by this
because eventually the price of natural gas in California seeps
through the system. It does not get there overnight, so the
Northeast is not going to get hit with it yet. But New Mexico
may because it is close, and eventually that little piece of
gas that has mobility to move around in the system, which needs
it, is going to feel this extraordinary price that is being
paid in California.
Now, I do not have an answer, Mr. Secretary. But I respect
your statement and I truly respect your concern that we do not
cut off supply and investment and make things worse. But I do
suggest for many States it is pretty bad right now, and can
everything stay as it is for the next 3 or 4 years while we
finally get some natural gas on board? Long term, it may take
10 years to get the supply up. So, I leave that before you. I
say that is a problem. I believe everybody understands that is
a problem.
If you care to comment, I would very much appreciate it.
The Chairman asked for that study and I would certainly hope
that you would pay extra attention to the fact that a number of
us are going to get hit by it and what is the solution to that.
Thank you, Mr. Chairman. Thank you, Senator Bingaman.
The Chairman. Thank you very much, Senator Domenici.
Would you care to respond?
Secretary Abraham. It is obviously an area that we will be
glad to work together with you on, Senator.
The Chairman. In deference to the agenda, I would hope that
we could conclude our questioning with one round. But as a
consequence of the concern of the Senator from California and
the Senator from Oregon, I would be prepared to allow them one
question, should they wish. Then I would like to move on to the
other panel. As you have observed, you have taken much more
time than we thought.
I want to commend you for your forthright answers and I
think particularly the lack of equivocation, which we have been
exposed to from time to time. You have been very responsive and
very knowledgeable, recognizing the fact you have been aboard a
very short time. So, I must commend you.
Senator Feinstein, do you have in conclusion one question?
I am just extending this courtesy to the two of you.
Senator Feinstein. If I may, I would just like to enter
into the record the March 9 letter, signed by the three
Governors, Governor Davis, Governor Locke, Governor Kitzhaber,
essentially asking FERC to help them with the prices.
The Chairman. It will be entered into the record.
Senator Smith.
Senator Smith. Mr. Secretary, would you agree with me that
the central problem of our current crisis is the retail cap in
California?
Secretary Abraham. I believe that the combination of a
half-regulated and half-unregulated California market, combined
with the decisions that were made to prevent the utilities in
California to diversify the way that they obtain that
electricity they needed to purchase beyond what they generated
themselves--those two factors combined with one last factor,
which I talked about, and that is the fact that over the last 5
years, there has been approximately 6,300 megawatts of new
demand in California while simultaneously the total generation
in the State declined. Those combined in large measure, I
think, to precipitate the crisis.
Senator Smith. I believe Senator Feinstein and I are
working on a bill that fixes those short term without hampering
the long-term vision that you and President Bush have for
energy in the West and throughout the country. I would just
invite you to work with us on this and see if there is not
something that we cannot do to fix those two issues short term
and long term.
Secretary Abraham. Senator, I would just say that since I
took this job, I have spent a substantial amount of every
single day working on the issues that confront us in California
and the rest of the West, and I do not foresee at least any
days in the near future, probably the long term either, where
we will not have, as part of our agenda, working with you all
on these issues.
Senator Smith. Thank you.
The Chairman. Thank you very much. I want to thank you
again, Mr. Secretary, and wish you a good day. You have got
more than a half a day left.
What I would like to do now is call panel 2 and 3 together
to expedite our time sequence. That would be the Honorable Gary
Locke, Governor of the State of Washington, along with the
Honorable Curt Hebert, Chairman of the FERC, and the Honorable
Judy Martz, Governor of the State of Montana. We trust we have
got a compatible group here that will proceed as they see fit.
I understand that two of the Governors are catching
airplanes. I always thought Governors had their own airplanes.
But, nevertheless, if they do not, they ought to, at least from
the West. Whoever has the tightest schedule, please respond by
going first. You drew the straw. Governor Locke, please
proceed.
STATEMENT OF HON. GARY LOCKE, GOVERNOR,
STATE OF WASHINGTON
Governor Locke. Governor Martz indicates that she has her
own airplane.
[Laughter.]
The Chairman. Good for you.
Governor Locke. Chairman Murkowski and members of the
committee, I want to thank you very much for the opportunity to
address you about an issue that is of fundamental concern to
the economic health of the State of Washington and, in fact,
all the Western States.
The so-called California energy crisis is really a Western
United States crisis, with high energy costs causing serious
economic harm to citizens, farmers, businesses, schools,
universities, as well as local and State governments. We share
the same electric grid which enables us to share power but also
each other's misfortunes. Now the crisis is hurting irrigators
in Arizona, resort hotels in Nevada, industries in Oregon, and
homemakers in Idaho.
In Washington alone, Georgia Pacific, a woods product
giant, laid off 850 workers just before Christmas. And just a
few days ago, a Tacoma chemical company laid off 80 workers and
cut production in half. They make chemicals for hospitals and
other institutions.
Last summer, I had to invoke emergency powers to help the
State's largest cold storage facility remain open and keep over
1,000 workers employed, as well as to protect frozen fish that
had been caught in Alaska and vegetables and fruit harvested in
our State of Washington.
Public agencies, hospitals, schools are being forced to cut
programs, and homeowners and businesses have experienced in our
State increases in their electricity bills of up to 75 percent,
with more increases expected.
The Bonneville Power Administration has already announced
that it will have to raise rates by at least 100 to 200
percent, and many rural co-ops are 100 percent customers of
Bonneville Power and will have to pass on those price increases
to irrigators, farmers, and food processing plants in eastern
Washington. It will cripple the agricultural economy of our
State of Washington.
I have seen estimates that merchant powerplant operators
are extracting $1.4 billion per month from the Pacific
Northwest economy, $1.4 billion that was not extracted just a
year ago because just a year ago wholesale power prices were
ranging anywhere from $20 to $40 a megawatt-hour. And now they
are in excess of $300 to $400 a megawatt-hour, and a few weeks
ago or a few months ago were as much as $2,000 a megawatt-hour.
The situation is untenable and simply cannot continue. It
cannot continue without permanent damage to the economies of
Washington State and, indeed, the other Western States of
America. Our crisis is getting worse in Washington, in fact,
the Pacific Northwest, because our hydroelectric dams are
threatened by one of the worst droughts in Washington State
history.
The drought notwithstanding, the Western energy crisis is a
Federal problem, and we in our individual States have been
doing all that we can to alleviate the crisis. For example, I
have directed Washington agencies and local government agencies
to reduce their use of consumption by 10 percent, and our State
and local agencies have, in fact, taken up the call and have
responded.
We have also asked residents and businesses to reduce
energy consumption. We received reports that some of our
largest utilities from Seattle to Tacoma have, in fact, cut
energy consumption by 6 to 10 percent in just 1 month alone.
I have used the emergency powers to allow utilities and
industries to operate diesel engines and other temporary
generators to produce the electricity they need.
I have reached agreements that allow operators of older
peaking plants to run continuously 24 hours a day, 7 days a
week, and we have done it with the cooperation of Region 10 of
EPA.
And I have asked the legislature to dedicate funding for
low income assistance to augment Federal block grants to help
people in eastern Washington pay very, very high utility and
electricity bills.
We have a legislative package that offers tax incentives
for the cogeneration of electricity, as well as tax incentives
for the purchasing of energy efficient appliances and lighting.
We have, in fact, over the last several years, sited,
permitted both local and State permits for about a half a dozen
powerplants which, when completely completed, will produce
electricity that will power some 3.5 million households in the
State of Washington. And more are in the process of seeking
approval.
But the real key to reducing outrageously high energy costs
is for the Federal Government to repair the broken wholesale
market structure. We need short-term, temporary wholesale price
caps, or the western economy will remain in jeopardy.
The FERC's cautious actions have brought no relief to the
State of Washington and the Pacific Northwest. Moreover, FERC
is relying on market mechanisms to resolve the problem even
though it has formally found that the markets are dysfunctional
and unable to produce just and reasonable prices for wholesale
energy.
I commend President Bush and the administration for its
efforts to produce a national energy policy, a policy which
will focus on conservation, renewables, tax incentives for
renewables, as well as developing more energy supply.
It is a question of supply and demand, and with a growing
population, we must have more supply of energy. But we in the
West cannot wait 7 to 10 years until new energy sources are
discovered and tapped and brought to market. Washington State's
economy and the economies of the other Western States must be
stabilized and protected now to prevent permanent, irreparable
damage, not in 5, not in 7, not in 10 years.
I believe that we must have short-term, temporary price
caps so that California can get its energy house in order and
so that other States can get more generation on line. I support
cost-of-service based rates, cost-of-service based rates that
ensure full reimbursement for both direct and indirect costs of
producing power, plus an adequate rate of return. Setting the
caps high enough will enable producers to recoup their full
cost of producing power, whatever it might be, and a
sufficiently high rate of return so that it is also an
incentive to continue to pursue additional generation plants.
We simply need a time out. We need a time out for
California to correct its flawed deregulation scheme, but a
time out to allow other Western States to protect their
economies and to get their citizens back to work. We hope that
the Senate and this committee will act favorably on the
legislation that is before it. Thank you
[The prepared statement of Governor Locke follows:]
Prepared Statement of Hon. Gary Locke, Governor, State of Washington
Thank you, Chairman Murkowski, and members of the Committee. I am
pleased to be here to speak to you today about the energy situation in
the Pacific Northwest and the challenges that are facing the citizens
and businesses in my state as the result of continued volatility in the
wholesale energy markets.
You have heard a great deal about the ``California energy crisis.''
But by now you know that what some still call the ``California energy
crisis'' is really a region-wide energy crisis, with high energy costs
impacting citizens, farms and businesses, schools and universities, and
state and local governments throughout the western continental United
States.
It impacts irrigators in Arizona, resort hotels in Nevada,
industries in Oregon, and residential ratepayers in Idaho.
Let me give you some idea of what is happening in Washington State,
where wholesale energy prices have gone up from ten to twenty times the
prices of a year ago:
High energy costs have forced several businesses to curtail
operations and lay off hundreds of workers. Georgia Pacific
laid off 850 workers in Bellingham just before the Christmas
holiday. Pioneer, a chemical manufacturer in Tacoma, has
curtailed operations by 50 percent and taken steps to lay off
80 employees. Nine of the ten aluminum plants in the
Northwest--and thousands of aluminum workers--are now idle.
There are many other examples.
High energy costs are hurting our agricultural sector. Many
farmers worry that they won't be able to afford to pay the
pumping costs for irrigation. And last summer, high energy
prices forced the state's largest cold storage facility,
Bellingham Cold Storage, to curtail operations just as peak
harvest season was under way for both berries and ocean fish.
Only by invoking emergency powers was my office able to secure
an affordable power supply to the facility--not only keeping
1,200 employees at the facility on the job but keeping hundreds
of ocean fishers and family farms from bankruptcy due to lack
of cold storage for their products.
Public agencies, schools and universities are faced with the
possibility of curtailing programs to meet unexpected energy
costs that are double or triple the levels of a year ago.
And utility ratepayers are now facing surcharges as high as
75 percent of their monthly retail power bills. This is not
just a problem for residential customers on a tight budget. For
many small and medium-size businesses--restaurants, coin-
operated laundries, and retail shops--this can be the
difference between profitability and bankruptcy. And the
continued high costs of wholesale power threatens the very
solvency of some of our utilities.
This situation is untenable. The Pacific Northwest is losing as
much as $1.4 billion a month due to high wholesale power costs--money
flowing out of our economy into the pockets of merchant power plant
operators.
Clearly, high energy costs affect not just individual companies,
but all the companies with which they do business. Wood products
manufacturers worry that they will no longer have a steady supply of
sodium hydroxide. Hospitals worry that they no longer have a steady
supply of bottled oxygen and nitrogen. Farmers worry that frozen food
processors will not be around to purchase their crops.
And it is not just an economic issue. The high cost of wholesale
electricity is forcing many businesses and utilities to look at diesel
generation as an alternative source of power. While this may help
utilities make it through the winter, it carries an environmental price
tag of hundreds of tons of particulates polluting our air. And forcing
the Bonneville Power Administration to increase generation to make up
for the power being withheld from the market damages our fish runs and
undermines federally-mandated salmon recovery efforts.
WASHINGTON STATE'S RESPONSE
Unlike other states, Washington declined to deregulate its energy
markets. Yet it has been affected by California's flawed experiment in
deregulation as well as the federal wholesale deregulation that severed
wholesale power generators from utilities' traditional obligation to
serve. The problem's created by these market structures are now
compounded by the record low rainfall and snowpack this year in the
Pacific Northwest, where we are reliant upon hydropower. So while we
did not create the problems with the market structure, we are
nonetheless forced to respond to them.
In Washington, we are taking several steps at the state level.
First, I have called on the citizens and businesses of my state to
reduce energy use by 10 percent. That's an ambitious goal, but citizens
are responding to my call and we are nearing that target. I have also
directed state agencies and local governments to reduce energy use by
10 percent. By reducing demand, we are doing what we can to put
downward pressure on price and help utilities from having to purchase
power on the high-priced wholesale spot market.
Second, we are taking steps to increase power generation, both
long-term and short-term. In January, I declared an energy alert under
state law to allow utilities and industries to install and operate
temporary generating facilities this winter. We have also reached
agreements with our utilities to allow continual operation of older
``peaking plants'' that are usually limited to a few hundred hours a
year. These actions have brought several hundred megawatts of power on-
line to address the immediate need for additional power supplies.
Third, we asked the Washington State Legislature to dedicate
funding for low income assistance to augment the federal block grants
we currently receive. The demand for assistance this year has far
outstripped the federal funding available. The Legislature recognized
this need when it passed its first bill of the 2001 session last
Saturday.
Fourth, we are continuing to site and approve construction of new
power plants, just as we have for the past decade. The state and local
authorities have already approved power plants that will produce more
than 3,200 megawatts of power. Many of these projects are now under
construction or ready to break ground. And the state is in the process
of reviewing proposals for plants that can generate another 4,000
megawatts. Clearly, we are taking appropriate steps to increase
generating capacity in our region.
But there is only so much a state government can do. The key to
reining in energy prices is to fix the wholesale market structure. And
that's a federal, not a state, matter. Without federal action to bring
high energy costs down to just and reasonable levels, the prosperity we
have worked so hard to achieve during the past decade could be
undermined in a matter of months.
federal policy must ensure just and reasonable wholesale prices
I am pleased that President Bush has appointed Vice President
Cheney to chair an energy task force, and I hope that the task force
will work with western governors as it develops its strategies.
However, based on what I read in the press, I am concerned that the
administration's response to the energy crisis so far is simply to
focus on the exploration and development of new oil and gas supplies in
the Arctic and elsewhere.
Such a strategy ignores our immediate problems. It will take
several years before that oil and gas will reach consumers in my state.
Because we face potential energy shortages this summer and fall, and
because our utilities and businesses and citizens continue to face
volatile energy prices, it is imperative that the administration and
Congress direct their attention to those actions they can take to bring
stability to the wholesale energy market as soon as possible.
I have also been disappointed by the lack of action by the Federal
Energy Regulatory Commission (FERC), the federal agency charged with
overseeing the wholesale energy markets. FERC is required by law to
ensure that prices for the wholesale energy are ``just and
reasonable.'' On November 1, 2000, and again on December 15, 2000, FERC
found that prices for the sale of short-term energy were unjust and
unreasonable. It also found that California's wholesale short-term
energy markets were severely flawed, and that those flaws provide
sellers both the ability and incentive to exercise undue market power.
Yet, FERC's response has been to rely on market mechanisms to solve
the problem, even while acknowledging that the markets themselves were
dysfunctional and would not by themselves produce just and reasonable
prices.
Indeed, last Friday FERC essentially said that any costs at or
below $273 per megawatt hour during a Stage 3 alert would be deemed
just and reasonable. In my opinion, prices in this range are exorbitant
and clearly unjustified. They have no bearing on the costs of energy
production--even with today's high natural gas prices--and are more
than ten times the costs of wholesale power from those of a year ago.
Moreover, where FERC has imposed modest price caps, they have done
so on wholesale power sales in California only, once again ignoring
that the problems of high energy costs are a problem affecting the
entire western United States.
Frankly, I think FERC has been asking the wrong questions. The
issue is not whether we can make energy deregulation work in the long
run. The issue is not whether deregulated markets can be improved. The
issue is not whether we should have patience during a long transition
to deregulation.
The issue--the only issue which FERC should now be addressing--is
how to bring wholesale energy prices down now. We can't afford to
wait--not a month, not six months, not a year. We need action now.
It is unfortunate that FERC has resisted calls for direct action to
bring price stability to the wholesale energy market. Yet with each
passing day, the economy of my state and all of the western states
continue to suffer as the result of high energy costs. I am hopeful the
new members of FERC less trusting of market mechanisms, and will be
more open to taking strong actions to address these adverse economic
impacts.
I applaud this Committee for considering strong measures to bring
stability to the wholesale energy markets in the months to come. I look
forward to working with members of the Committee as it moves forward in
its deliberations.
The Chairman. Thank you very much, Governor Locke.
Governor Martz.
STATEMENT OF HON. JUDY MARTZ, GOVERNOR,
STATE OF MONTANA
Governor Martz. Thank you, Mr. Chairman and members of the
committee. For the record, my name is Judy Martz and I am the
Governor of the Big Sky State of Montana.
I appreciate the interest of this committee that you have
shown in the struggles of the Western States to deal with this
emerging energy crisis.
I would like to frame my testimony around a simple concept
which is supply. As you know, the Western United States has
experienced substantial growth in population and energy needs
in the past decade. While we have seen increasing power needs
for economic development and other consumptive uses, we have
seen nearly zero development in sources to provide additional
power.
The primary reason that we have not seen interest in
developing power generation is what we have been living in, the
regulated energy market. There have been no incentives to
develop additional power, and to make matters worse, while we
have not developed additional power generation, there also has
been a move to dismantle existing power generating facilities.
Montana entered into deregulation in 1997 in an effort to
stay ahead of the curve. Our industrial customers have been
deregulated since 1997 and our residential customers will enter
into a free market in 2004.
Unforseen circumstances hit the Western States last summer
with historically low winter snow packs and drought continuing
to present time. This gave us less water to produce electricity
through hydroelectric facilities while maintaining stream flows
to comply with mandates under the Endangered Species Act.
California compounded our problems, both as the largest
user of electricity and as a partially deregulated electricity
market. California capped retail prices and did nothing to
address wholesale generating prices. Adding to the problem,
they had not built a generating plant within the past decade.
With this scenario on place, there was almost no incentive
for investment of additional power nor an investment for
California consumers to conserve. The result was a power drain
from all Northwestern States to meet the demands of the
California consumers.
This chain of events has hit Montana hard. Montana
industrialists that gambled on declining future power prices
have been hurt by the resulting power prices. I could go on
over the same litany that Governor Locke has of lost
businesses. We have seen several closures in Montana, a State
whose economic base cannot afford to lose even one single job.
Montana currently has significant or sufficient energy
supplies to meet our own needs. However, because we are tied
into the Western grid, any excess energy is pulled to other
States. This past summer, industries that chose to shop for
energy found their traditionally low rates of about $30 per
megawatt rise to about $300. The artificially high prices
brought ``closed for business'' signs to several businesses in
Montana.
While Montana is facing one of the biggest challenges we
have ever experienced, we are looking at one of the biggest
opportunities we have seen for quite some time.
Montana is a resource rich State. From vast super-compliant
coal fields to miles of timberland in the west, Montana has the
natural resources to quench the thirst for energy across
Nation. Montanans are anxious for the opportunity to contribute
to the economic health of this country through responsible and
environmentally sensible development of these resources.
This Nation has the ability to generate affordable and
reliable energy. But we must be careful that we do not stifle
the increasing interest to development with additional power
caps. An overly heavy-handed Federal Government can stymie
efforts to address the long-term solution for our current
energy problem. Capping prices regionally will take away
individual States' flexibility to address the problem. Capping
does not take into consideration the difference in economies or
per capita income. A reasonable cap to California may be
prohibitive to Montana. And importantly, it extinguishes
incentives to invest not only in conservation methods, but also
additional generating capabilities.
Just yesterday before coming here, I had a conversation
with a representative of an out-of-State interest that is
considering investing $200 million in a power generating
facility in Montana. Now, $200 million may not be a lot of
money to this body because you always talk in billions, but to
Montana that is a tremendous investment. And the beauty of this
proposal is that it helps address generation concerns not only
for Montana and the West, but also helps create good paying
jobs.
It is important to note that I had a simple message
delivered to me in that very conversation, and it was this.
``Just keep government out of the way.'' They want to compete.
Mr. Chairman and members of this committee, all of us in
the Western States are struggling to deal with a situation that
has no easy answers. While I recognize the intent of the price
caps is to protect the consumers, I believe it will only
exacerbate an already difficult situation. We need to address
our energy needs for the long run. Short-term responses such as
this will only deter serious efforts to come up with long-term
solutions. The ultimate long-term solution is the creation of
additional power sources and transmission. Capping prices does
not provide incentives to conserve. And capping prices does not
provide incentives for additional generation.
The Western Governors Association recently reviewed
possible solutions to the Western crisis, including capping
electricity rates. However, some of the Western Governors, 8
out of 10 that were at the meeting in Portland, voted
ultimately and delivered a letter to the President opposing
price caps. And as Governor of Montana, I signed that letter,
recognizing that capping prices creates disincentives for long-
term solutions for our State.
While we do not want the Federal Government to come down on
Western States with a heavy regulated hand, we do want to work
with the Federal Government to arrive at meaningful solutions.
So, I ask you to work with us in an effort to address problems
associated with the Western grid straining to keep electricity
flowing. Work with us by allowing individual States the
flexibility to address the energy shortage by creating new
generating facilities and transmission capabilities, and work
with us to create incentives to conserve existing resources
while developing new resources. Work with us, please, not
against us.
Thank you.
The Chairman. Thank you, Governor.
The hour is about 11:25 and we have got other witnesses.
So, I am going to ask you to try to summarize your statement.
We will try to be brief with our questions.
The Honorable Curt Hebert of FERC, good morning. Please
proceed.
STATEMENT OF CURT L. HEBERT, JR., CHAIRMAN,
FEDERAL ENERGY REGULATORY COMMISSION
Mr. Hebert. Good morning, Mr. Chairman. I will certainly do
that. I have a brief summary here on a couple of pages. I would
ask at the conclusion of that that my summary, as well as my
entire statement, be entered into the record, please.
The Chairman. Without objection.
Mr. Hebert. Thank you for the opportunity to appear here
today to discuss the topic of Western energy markets and
possible legislative reforms.
Wholesale and retail electricity markets in California and
throughout much of the West are in a state of stress. Wholesale
prices have increased substantially for a variety of reasons.
Consumers are implored to conserve as much as possible, and
utilities are facing growing financial difficult. As a result,
many now argue that we need to return to cost-based regulation
instead of relying on market-driven solutions.
First, in my view price caps are not a solution. We need to
promote new supply and load reductions. Market prices are
sending the right signals to both sellers and buyers, at least
those not subject to a rate freeze over which the FERC has no
control. Market prices will increase supply and reduce demand,
thus correcting the current imbalance in the system. A price
cap imposed through regulation or legislation will have exactly
the opposite effect.
Second, infrastructure improvements are greatly needed
throughout the West and especially in California. We need to
create the appropriate financial incentives to ensure that new
generation is built, that the transmission system is upgraded,
and that new gas pipelines are built as well.
Finally, we need a regional transmission organization, an
RTO for the West. California is not an island. It depends on
generation from outside of the State, as the two Governors to
my left have made clear. The shortages and the prices in
California have affected the supply and prices in the rest of
the West. A West-wide RTO will increase market efficiency and
trading opportunities for buyers and sellers throughout the
West.
Consistent with these three points, the FERC has been
aggressively identifying and implementing market-driven
solutions to the problems: by stabilizing wholesale energy
markets, by identifying additional short-term and long-term
measures that will increase supply and delivery infrastructure,
as well as decrease demand, by promoting the development of a
West-wide regional transmission organization, and by monitoring
markets and market conditions.
Let me highlight the commission's most recent actions.
Last Friday, the Commission took further steps to mitigate
prices in California, specifically the prices charged in
California's spot markets during stage 3 emergencies in January
of this year. After examining prices charged in these periods,
the Commission identified many transactions that warranted
further investigation. The Commission required these sellers to
either refund certain amounts or offset these amounts against
amounts owed to them or provide additional justification for
those prices. Specifically, the Commission required potential
refunds or offsets of approximately $69 million based on the
market clearing price that would have occurred if sellers had
bid their variable costs into a competitive single price
auction.
The ISO and the California Electricity Oversight Board
asked the Commission to require larger refunds. However, the
Commission's order explained the difference between their
approach and the FERC's.
First, they include over $170 million for refunds for non-
public utility sellers, such as the Los Angeles Department of
Water and Power. The Commission has no authority to order any
refunds from those sellers.
Second, they include refunds for sales during all hours of
January. The Commission limited its approach to stage 3
emergency hours when supply and demand imbalance is most severe
and sellers know their power is most needed.
Third, they use a pay-as-bid approach instead of the
Commission's proxy market clearing price approach and they use
bids only slightly above variable costs.
Finally, they include refunds for December 2000. The
Commission will address the December transactions in a separate
order. The Commission's approach fully protects consumers from
exercises of market power during emergency conditions while
still providing clear price signals encouraging sorely needed
new generation and load reductions.
Also last Friday, the Commission's staff issued a proposal
on how the Commission should monitor and mitigate prices in
California's wholesale spot power markets. This proposal is
based on monitoring and mitigating prices on a before-the-fact
basis instead of through after-the-fact refunds.
After receiving and considering public comment, the
Commission intends to implement appropriate changes to its
current market monitoring and mitigation requirements by May
1st of this year.
Yesterday, the Commission issued an order seeking to
increase energy supplies in California and the West. It is our
intention to squeeze absolutely every megawatt out of the
California system that is possible for this summer.
The Commission implemented certain measures immediately.
For example, the Commission streamlined regulatory procedures
for wholesale electric power sales, expedited certification of
natural gas pipeline projects in California and the West, and
urged all licensees to review their FERC-licensed hydroelectric
projects in order to assess the potential for increased
generating capacity.
The Commission also proposed and sought comment on other
measures such as incentive rates for new transmission
facilities and natural gas pipeline facilities completed by
certain dates this year or next.
Let me close, Mr. Chairman, by emphasizing that the
Commission remains willing to work in a cooperative and
constructive manner with other Federal and State agencies. The
Commission will continue to take steps that, consistent with
its authority, can help to ease the present energy situation
without jeopardizing longer-term supply solutions. As long as
we keep moving toward competitive and regional markets, I am
confident that the present energy problems, while serious, can
and will be solved. I am also confident that market-based
solutions offer the most efficient way to move beyond the
problems confronting California and the West.
I cannot emphasize enough to you, Mr. Chairman and members
of this Senate committee, the importance of our RTO process and
order 2000 and how we understand what both of these Governors
just told us, that in fact we are in this together and that we
sink or swim together, that we cannot survive it alone.
We do remain at the Commission vigilant in monitoring the
market. Yesterday's show cause order of Williams and AES, which
is the first show cause order against generators and marketers
in the 3\1/2\ years that I have been with the Commission,
proves our vigilance and the fact that we do not approve of
unjust and unreasonable rates and are willing to look into
those.
Mr. Chairman, you, as well as the other members of this
committee, know that the Commission is willing to work with
you. Senator Feinstein and I had a meeting. Senator Boxer and I
have had meetings. And I have heard their approaches and I do
have an open mind and the Commission has an open mind. We will
continue to be vigilant. We will continue to work and we look
forward to your comments and questions.
[The prepared statement of Mr. Hebert follows:]
PREPARED STATEMENT OF CURT L. HEBERT, JR., CHAIRMAN, FEDERAL ENERGY
REGULATORY COMMISSION
Wholesale and retail electricity markets in California and
throughout much of the West are in a state of stress. Wholesale prices
have increased substantially for a variety of reasons, consumers are
constantly implored to conserve as much as possible, and utilities are
facing growing financial problems. As a result, many now argue that we
need to return to cost-based regulation, instead of relying on market-
driven solutions.
First, price caps are not a long-term solution. We need to promote
new supply and load reductions. Market prices are sending the right
signals to both sellers and buyers (at least those not subject to a
rate freeze). Market prices will increase supply and reduce demand,
thus correcting the current imbalance. Lowering prices through
regulation or legislation will have exactly the opposite effect.
Second, infrastructure improvements are greatly needed throughout
the West and especially in California. We need to create the
appropriate financial incentives to ensure that new generation is
built, that the transmission system is upgraded and that new gas
pipelines are built.
Finally, we need a regional transmission organization (RTO) for the
West. A West-wide RTO will increase market efficiency and trading
opportunities for buyers and sellers throughout the West.
Consistent with these three points, the Federal Energy Regulatory
Commission has been aggressively identifying and implementing market-
driven solutions to the problems: (1) by stabilizing wholesale energy
markets; (2) by identifying additional short-term and long-term
measures that will increase supply and delivery infrastructure, as well
as decrease demand; (3) by promoting the development of a West-wide
regional transmission organization; and, (4) by monitoring market
prices and market conditions.
Other regions that have not adopted California-type restrictions on
electricity competition have demonstrated that consumers can and do
gain from electricity competition and restructuring. California and
Western consumers similarly can share in these gains, once market rules
are in place that will make California and other Western states an
attractive place for investment.
I. OVERVIEW
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to appear here today to discuss the
topic of Western energy markets and possible legislative reform.
Wholesale and retail electricity markets in California and throughout
much of the West are in a state of stress. Wholesale prices for
electricity have increased substantially for a variety of reasons in
the last year. California power consumers face near-daily pleas to
conserve. California load-serving utilities are under severe financial
stress. Companies supplying wholesale power into California are unsure
how much, or even whether, they will be paid for their supplies.
While the situation in California is not representative of other
parts of the country that are successfully developing competitive
markets, it nevertheless underscores the fundamental infrastructure
problems facing the country. The demand for electricity continues to
expand while supply fails to keep pace. The development and licensing
of new hydroelectric capacity--which provides much of the existing
power supply in the West--is nearly exhausted. Very little fossil-fired
generation has been added in many regions of the country over the last
few years, and in California no major plants have been added in the
last decade. And the existing electric transmission grid is often fully
loaded and, absent necessary expansion, is often incapable of
delivering power to those regions where it is valued the most.
I would like to make three main points with respect to these
problems and to identify the steps the Commission is taking to address
these problems.
First, price caps are not a long-term solution. We need to promote
new supply and load reductions. Market prices are sending the right
signals to both sellers and buyers (at least those not subject to a
rate freeze). Market prices will increase supply and reduce demand,
thus correcting the current imbalance. Lowering prices artificially
will have exactly the opposite effect.
Second, infrastructure improvements are greatly needed throughout
the West and especially in California. We need to create the
appropriate financial incentives to ensure that new generation is
built, that the transmission system is upgraded and that new gas
pipelines are built.
Finally, we need a regional transmission organization (RTO) for the
West. California is not an island. It depends on generation from
outside the State. The shortages and the prices in California have
affected the supply and prices in the rest of the West. The Western
transmission system is an integrated grid, and buyers and sellers need
non-discriminatory access to all transmission facilities in the West. A
West-wide RTO will increase market efficiency and trading opportunities
for buyers and sellers throughout the West.
Consistent with these three points, the Commission continues
aggressively to identify and implement solutions to the problems:
First, in recent months, the Commission has issued a number of
orders intended to restore market stability. The Commission has acted
to move utilities out of volatile spot markets to enable them to
develop a portfolio of risk reducing and credit-worthy contracts.
Second, my fellow Commissioners and I are working to identify and
adopt additional measures that will increase supply and delivery
infrastructure, as well as reduce demand for electricity in the Western
Interconnection.
Third, the Commission is continuing to work with market
participants on developing, as quickly as possible, a West-wide
regional transmission organization. Such an organization will bring a
regional perspective and offer regional solutions to regional problems.
Fourth, the Commission is monitoring market prices and market
conditions with the goal of ensuring long-term confidence in Western
markets. Moreover, the Commission's staff has proposed a new plan to
monitor and, when appropriate, mitigate the price of electric energy
sold in California's spot markets on a before-the-fact basis, instead
of addressing prices through after-the-fact refunds. The Commission
intends to act on this proposal by May 1, 2001.
By itself, however, the Commission can contribute only a small part
of the solution to today's energy problems. A more comprehensive and
permanent solution requires the involvement of the states and other
federal agencies and departments. I am encouraged by all of the hard
work and effort undertaken in recent months by the State of California
and other Western states. The issues are difficult and the stakes are
high. While reasonable minds can differ over the appropriate solutions
to these problems, the Commission is committed to resolving these
problems deliberatively.
An attachment to my testimony provides an analysis by Commission
staff of the specific provisions of pending bills (S. 26, S. 80, S.
287, and amendment No. 12 to S. 287) that are the focus of today's
hearing.
II. HOW DID WE GET INTO THIS SITUATION?
A. Legislative Design
The State of California has been widely questioned for its
restructuring legislation (A.B. 1890), enacted in 1996. While mistakes
were made, California is to be commended for realizing that consumers
are better off if supply and pricing decisions are based on market
mechanisms, not bureaucratic fiat. The premise of this legislation is
that consumers will enjoy lower rates and increased service options,
without compromising reliability of service, if electricity providers
are motivated to serve by market forces and competitive opportunities.
There were two major flaws in California's market design. First,
the three utilities were forced to divest almost half of their own
generation, and buy and sell power exclusively through the spot markets
of the California Power Exchange (PX). This prevented the utilities
from hedging their risks by developing a portfolio of short-term and
long-term energy products. Second, the State mandated a retail rate
reduction and freeze, eliminating any incentives for demand reduction,
discouraging entry by competitors for retail sales and, more recently,
threatening the financial health of the three utilities by delaying or
denying their recovery of billions of dollars in costs incurred to
provide service to retail customers.
However, California's situation does not demonstrate the failure of
electricity competition. To the contrary, it demonstrates the need to
embrace competition fully, instead of tentatively. Other states, such
as Pennsylvania, have been successful in implementing electricity
competition. California needs to move forward on the competitive path
it has chosen, allow new generation and transmission to be sited and
built, and allow its citizens to benefit from the lower rates, higher
reliability, and wider variety of service options that a truly
competitive marketplace can provide.
B. Other Factors
Until last year, California's spot market prices were substantially
lower than even California's mandated rate freeze level. This allowed
the California utilities to pay down billions of dollars of costs
incurred during cost-of-service regulation. However, several events
resulted in higher spot electricity prices beginning last summer. Those
events included one of the hottest summers and driest years in history,
as well as several years of unexpectedly strong load growth. Other
factors influencing prices recently include:
Unusually cold temperatures earlier this winter in the West
and Northwest;
California generation was unavailable to supply normal
winter exports to the Northwest;
Very little generation was added in the West, particularly
in Washington, Oregon and California, during the last decade;
Environmental restrictions limited the full use of power
resources in the region;
Scheduled and unscheduled outages, particularly at old and
inefficient generating units, removed large amounts of capacity
from service; and
Natural gas prices increased significantly, due to higher
commodity prices, increased gas demand, low storage, and
constraints on the delivery system.
Taken together, these factors demonstrate that the present problems
in electricity markets are not just ``California'' problems. Normal
export and import patterns throughout the West have been disrupted.
Reserve margins throughout the West are shrinking. Already this winter,
when the demand for electricity is relatively low, Stage 3 emergencies
in California have become commonplace.
III. THE COMMISSION HAS TAKEN IMPORTANT STEPS TO HELP
These problems require bold and decisive action. Both the federal
government and state governments have critical roles to play in
promoting additional energy supply and deliverability and decreasing
demand. Through its authority to set rates for transmission and
wholesale power and to regulate interstate natural gas pipelines and
non-federal hydroelectric facilities in interstate commerce, the
Commission can take a range of measures to promote a better balance of
supply and demand, but its jurisdiction is limited. The Commission can
set pricing policies which encourage entry, but it is state regulators
that have siting authority for electric generation and transmission
facilities, as well as authority over local distribution facilities
(both for electricity and natural gas). These authorities can go a long
way in improving the grid for both electricity and natural gas. More
importantly, state regulators have the most significant authorities to
encourage demand reduction measures, which can greatly mitigate the
energy problems in California and the West.
A. Promoting Market Stability
In an order issued on December 15, 2000, the Commission adopted a
series of remedial measures designed to stabilize wholesale electricity
markets in California and to correct wholesale market dysfunctions. The
Commission recognized that the primary flaw in the California market
design was the requirement for the three California utilities to buy
and sell solely in spot markets. The Commission concluded that the
foremost remedy was to end this requirement and allow the utilities,
first, to use their own remaining generation resources to meet demands
and, second, to meet much of their remaining needs for power through
forward contract purchases. This measure freed up 25,000 MW of
generation that the utilities owned or controlled, which could be used
directly to serve their load without having to sell it into the Power
Exchange and buy it back at a much higher spot price. Our action
returned to California the ability to regulate over one-half of its
peak load requirements.
B. The Commission's Latest Efforts
Last Friday, the Commission took further steps to mitigate prices
in California, specifically the prices charged in California's spot
markets during Stage 3 emergencies in January of this year. After
examining prices charged in these periods, the Commission identified
many transactions that warranted further investigation. The Commission
required these sellers to either refund certain amounts (or offset
these amounts against amounts owed to them) or provide additional
information justifying their prices. Specifically, the Commission
required refunds or offsets of approximately $69 million dollars, or
all prices charged during Stage 3 hours in excess of $273 per
megawatthour. This analysis seeks to use a proxy price based on the
market clearing price that would have occurred had the sellers bid
their variable costs into a competitive single price auction.
The ISO and the California Electricity Oversight Board
(``California parties'') asked the Commission to require larger
refunds. However, the Commission explained the difference between their
approach and the Commission's. First, they included over $170 million
for refunds from non-public utility sellers, such as the Los Angeles
Department of Water and Power. The Commission has no authority to order
any refunds from these sellers. Second, they included refunds for sales
during all hours of January; the Commission limited its approach to
Stage 3 Emergency hours, when the supply/demand imbalance is most
severe and sellers know their power is most needed. Third, they used a
pay-as-bid approach instead of the Commission's proxy market clearing
price approach and they used bids only slightly above (10 percent)
variable costs. Finally, they included refunds for December 2000; the
Commission will address the December transactions in a separate order.
In sum, the Commission's approach fully protects consumers from
possible exercises of market power during emergency conditions while
still providing clear price signals encouraging sorely needed new
generation and load reductions.
Also last Friday, the Commission's staff issued a proposal on how
the Commission should monitor and mitigate prices in California's
wholesale spot power markets. This proposal is based on monitoring and
mitigating prices on a before-the-fact basis, instead of through after-
the-fact refunds. Comments on the staff's proposal are due on March
22nd. After receiving and considering public comment, the Commission
intends to implement appropriate changes to its current market
monitoring and mitigation requirements by May 1, 2001.
IV. OTHER WAYS IN WHICH THE COMMISSION CAN HELP
Since the supply of electricity in California and the West this
summer may be significantly less than the demand, we must do more than
just hope for mild weather and rain. We must focus on measures that
will promote electricity supply and deliverability and decrease demand.
Such measures are critical if we are to meet our goal of ensuring an
adequate supply of power for consumers at reasonable prices.
An important element in this effort is upgrading energy
deliverability--through enhancements to electrical transmission and
natural gas pipeline systems. Without these upgrades, constraints and
bottlenecks increasingly will block energy supplies from reaching load.
With these concerns in mind, the Commission must remove obstacles
to increased generation and supply in Western markets. Similarly, the
Commission must identify and develop strong incentives to build
necessary electric and natural gas infrastructure. The Commission, by
itself, cannot solve all of the energy problems facing California and
the West. But, we may be able to offer valuable short-term
contributions to help ease the current shortages, as well as medium-
and long-term contributions to help avert future recurrences. My fellow
Commissioners and I have discussed such steps and we hope to implement
a wide range of such steps in the near future.
V. PRICE CAPS WOULD MAKE THINGS WORSE
Some advocate price caps or cost-based limitations as a temporary
way to protect consumers until longer-term remedies alleviate the
supply/demand imbalance. The issue of price caps in the West has been
raised on rehearing of the Commission's order of December 15, 2000,
and, accordingly, is pending before the Commission. For this reason, I
cannot debate the specific merits of price caps for California or the
West. However, I will reiterate briefly the views I have stated
publicly on this issue.
As a general matter, I do not believe that price caps promote long-
term consumer welfare. Price caps will not increase energy supply and
deliverability or decrease demand. Instead, price caps will deter
supply and discourage conservation. At this critical time, legislators
and regulators need to do everything they can to promote supply and
conservation, not discourage them.
My belief is based on experience, not just economic theory. The
summer of 1998 demonstrates my point. Then, wholesale electricity
prices in the Midwest spiked up significantly. The Commission resisted
pleas for immediate constraining action, such as price caps.
Subsequently, suppliers responded to the market-driven price signals,
and today the Midwest is not experiencing supply deficiencies.
In short, price caps can have long-term harmful effects because
they do not provide appropriate price signals and may exacerbate supply
deficiencies. Supply and demand cannot balance in the long-term if
prices are capped.
With respect to the bills that are the subject of today's hearing,
I do not believe Congress should mandate specific ratemaking standards
for the Commission to carry out. The Commission already has sufficient
authority to implement price caps if the Commission determined they
were needed.
S. 26 and S. 287 would require ``cost-of-service based rates,''
while S. 80 would require ``cost-based rates.'' Either of these
``cost'' standards likely would require on-the-record, trial-type
procedures which would be lengthy, costly and contentious. Litigating
such a rate case for one seller requires a significant commitment of
resources. Concurrently litigating such cases for scores of sellers in
the West would be overwhelming both for the Commission and the
industry. Moreover, neither buyers nor sellers would be sure of the
prices until the conclusion of this litigation. This delay in price
certainty would be unfair to customers and discourage new investments
by suppliers.
Many leaders share these views. In a letter to the Secretary of
Energy, dated February 6, 2001, eight Western governors expressed their
opposition to regional price caps. They explained that ``[t]hese caps
will serve as a severe disincentive to those entities considering the
construction of new electric generation, at precisely the time all of
us--and particularly California--are in need of added plant
construction.''
In the face of the current challenges, we all must have an open
mind to any proposals that may mitigate the energy problems in the
West. I remain unconvinced that price caps will help solve the problems
and I do not believe they are in the long-term interest of consumers.
vi. conclusion
The Commission remains willing to work in a cooperative and
constructive manner with other federal and state agencies. The
Commission will continue to take steps that, consistent with its
authority, can help to ease the present energy situation without
jeopardizing longer-term supply solutions. As long as we keep moving
toward competitive and regional markets, I am confident that the
present energy problems, while serious, can be solved. I am also
confident that market-based solutions offer the most efficient way to
move beyond the problems confronting California and the West. Thank
you.
The Chairman. Thank you, Chairman Hebert.
Let me ask you just very briefly on your show cause
investigation on the peaking power price that you just
mentioned. What is your specific authority if you find, indeed,
that these are deemed to be unrealistic peak prices that were
charged? On the other hand, you offset that with whatever the
traffic will bear, which may be the case and may not. What
enforcement authority do you have? Do you have authority for
refunds, penalties, fines?
Mr. Hebert. As you know, the penalties themselves are not
something that we possess. We do have market-base rate
authority. We do have the ability to issue refunds. This matter
itself, Mr. Chairman, to be clear, is a non-public matter and
is something that I am not at liberty to discuss. The record
will speak for itself.
The Chairman. Do you have authority to do it?
Mr. Hebert. Yes, sir.
The Chairman. Why have you not moved on it sooner?
Mr. Hebert. Well, we just issued the order yesterday, Mr.
Chairman.
The Chairman. I know but this has been around for a while.
We have heard from our California friends about the tremendous
price of this peak power once they deregulated and the shortage
became evident.
Mr. Hebert. As you know, Mr. Chairman, I have been Chairman
for about 6 weeks and that is about as quickly as I could move.
The Chairman. That is a good answer. You better quit there.
[Laughter.]
The Chairman. Governor Locke, you talk about the
conservation, the emergency orders, the other aspects of action
that have to be taken, including the increase in the supply.
From the standpoint of one unique case that I have always kind
of wondered about, the theory of Bonneville was to recognize
the tremendous hydroelectric resource that you had there for
the region, to serve the region. It was paid for by all the
taxpayers of the United States, but it benefits primarily your
State, Oregon, to a degree Idaho and a few other States. But
over the period of time we have seen Bonneville go down, say,
to California. It benefits California. It does not benefit
Washington.
A case in point is your municipal utility, Seattle Power
and Light. It contracts with Bonneville because they can buy
long term and then they wheel down to southern California and
contract with the Nordstrom stores and displace investor-owned
power in California. That causes a shortage in the Pacific
Northwest and higher rates. Is that, in your opinion,
appropriate procedure for Bonneville to follow? Or does charity
begin at home?
Governor Locke. Some of this is beyond my expertise, but
let me just say that Bonneville has always been part of a
region-wide system. Bonneville has sold electricity and
produced electricity normally in the wintertime for California
when the needs of electricity are very low for our customers.
Excuse me. In the wintertime, we normally receive power from
California because our nights are longer and it is a colder
temperature. So, we normally receive power from California in
the wintertime, and then when our days are warmer in the summer
and the days are longer, we use that water from the reservoirs
and the runoff from the snow to supply electricity to
California as they experience heat waves and need air
conditioning and so forth. We have always had this exchange.
The Chairman. Are you buying power from California now?
Governor Locke. Except this time, this winter we had to
send California electricity and we had to really conserve as
much as possible to free up that electricity to help California
avoid the rolling blackouts.
The Chairman. But as you help California, you do so at the
expense of your own constituents.
Governor Locke. Many of our utilities, private-owned
utilities, investor-owned utilities, have sold power to
California without any guarantee of repayment. Our utilities
are owed tens of millions of dollars. Now, Bonneville has been
able to ship electricity down to California, but actually has
gotten that electricity back on an exchange basis. But because
we are not receiving that electricity that we normally do in
the wintertime, it has caused considerable angst amongst our
citizens because it is otherwise power that we could be using
for ourselves. But we realize that we are part of the grid and
we have to help each other out.
The Chairman. This is a parallel and it is a little closer
to home, but in view of the limited time and the fact that we
only get one round, I want to present you with a parallel that
I think affects your State, Washington, of course, Oregon and
California to a degree. The parallel is this. California has
found itself dependent on outside energy by about 25 percent of
what it consumes. As a consequence, because of that shortage,
they have had to buy outside and prices have spiraled.
The entire west coast is dependent on Alaskan oil.
Washington. Oregon does not have any refineries. Certainly
California. As our oil production declines, if it is allowed to
decline, these three States particularly are going to get their
oil anyway. They are going to get it from foreign sources in
foreign tankers. It does not create the jobs or the U.S. flag
vessels that carry Alaskan oil from my State to your State or
the State of California.
I just wonder if the residents of those areas really care
where their oil comes from, whether it comes from the scorched
earth of a Columbian rain forest where there is no
environmental oversight. There just does not seem to be a
conscious awareness, Governor, of whether or not they care
where their oil comes from or what environmental sensitivity is
associated with the development of that.
As you know, you have been to Alaska. You know that Prudhoe
Bay has supplied this Nation with about 20 percent of the total
crude oil for the last 27 years. It is in decline. We have
opportunities to open other areas. The question is can we do it
safely.
But there does not seem to be much awareness or
consideration as to where the oil comes from, as long as it
comes. My point in making this statement is if you do not get
it from us, you are going to get it. And you are going to be
dependent not on a neighboring State; you are going to be
dependent on the whims of foreign governments and foreign parts
of the world. So, I would encourage the ladies from Washington
and California, as well as the Governor and others, to spend a
little time and consideration of the merits of where you want
it to come from.
My time is up. Senator Bingaman.
Senator Bingaman. Thank you very much. Let me ask
Commissioner Hebert a couple of questions.
As I understand it, the commission last fall set $150 per
megawatt-hour as a so-called breakpoint or a benchmark for
wholesale rates. I believe that was agreed to by the
commission. Then last Friday, you came out with the decision
that charges in excess of $273 per megawatt-hour would be
unjust and unreasonable or would be required to be refunded.
I guess I am having trouble figuring out how this
calculation is made. Is it just every month or every few weeks?
How do you make the decision as to what is unjust and
unreasonable?
Governor Locke made, I thought, a pretty good point where
he said that your decision Friday essentially said that any
costs at or below $273 per megawatt-hour during a stage 3 alert
would be deemed just and reasonable. Is that what you decided
on Friday?
Mr. Hebert. Senator, what we decided, consistent with what
I believe to be the December 15 order, was that the $150
breakpoint was never intended to set a proxy price. It was in
fact to set the bid at which anything above that, reporting
information would be required to the FERC on a weekly basis. We
envisioned an opportunity to use those reportings that were
made to the FERC so if we did see problems in the market
breaking down at some point.
What we deemed necessary with the $273, which is a separate
order, which we had the opportunity to look at those reporting
requirements that were brought to us, is that the proxy of the
$273 is what we believe to be an accurate reflection of a
clearing price under competitive conditions. And that is how we
came up with that amount.
So, the $150 and the $273 are not inconsistent. If
anything, they are very consistent with each other.
Senator Bingaman. So, your idea of just and reasonable is
that you look at essentially what the market will pay for the
power, and that is the price. Is that how you determine what is
just and reasonable? You say if there is a competitive market,
the market will pay the $273 and so that is all we are going to
allow people to charge.
Mr. Hebert. What we said, Senator, is anything over the
$273, that we would require them either to refund those amounts
or explain to us why and how they can cost justify those
amounts.
Senator Bingaman. There is some cost determination in your
calculation, though.
Mr. Hebert. Absolutely. The $273 indicates what we believe
the amount to be, what the staff believes the amount would have
been had there been a competitive market. And we are going to
look at anything above that.
Senator Bingaman. It is not tied to the cost of providing
the power. It is tied, instead, to what the market will pay for
the power at that time and place.
Mr. Hebert. What it accurately reflects is an inefficient,
high-cost generating unit on the margin in California. It is
tied to cost----
Senator Bingaman. You think it is tied to the cost.
Mr. Hebert. It is tied to the cost of the generation of
that unit.
Senator Bingaman. Why did the Commission limit the refunds
to sales during stage 3 alerts? Last November, the Commission
said prices were unjust and unreasonable. That was before there
were any stage 3 alerts. So, why did you limit the refunds to
the stage 3 alert?
Mr. Hebert. The Commission wanted to make certain that, as
we move down this road of trying to correct this market in
California, that we distinguish between scarcity and high
prices and a point at which supply would end and the lights
would go out. In doing that, when the margins get at around 1.5
percent at a stage 3, we deem that is the point that the FERC
should inject itself into the process.
I know it leads into a conversation, Senator Bingaman,
about how far do we go here. How much farther are you willing
to go in coming in and injecting yourself into price
mitigation? We have to be very careful through this process
because, quite frankly, the one thing that we must give to this
industry is certainty.
Senator Bingaman. Which industry is that?
Mr. Hebert. The energy industry. We have got to give
certainty because it is only fair to give certainty so that the
consumers in the end can get not only the supply they deserve
but the supply at a cost that they deserve to receive it at. If
we get this out of balance and if we start injecting ourselves
anytime prices might get high, we are going to cut off any
conservation measures, we are going to cut off price
indications which, quite frankly, would bring in needed
infrastructure to regions like California.
Senator Bingaman. Why did you limit your order to January?
Do you intend to address other months?
Mr. Hebert. We are addressing February by the end of the
week.
Senator Bingaman. But you are not going to address anything
prior to January?
Mr. Hebert. Well, we are. The problem that we are running
into right now, as far as turning it around as quickly as we
did January, when we set the December 15 order into motion,
when we issued it, the $150 breakpoint which required the
reporting requirements, which this will prove the necessity of
that and the benefit of it, did not kick in until January 1.
So, we did not automatically get the information that is
required to make that type of decision. We are gathering that
now. I have instructed the staff to move at all deliberate
speed and we are going to turn this around quickly I assure
you. So, we are looking at December as well and we are looking
at the other months.
Senator Bingaman. The other months being prior to December.
Mr. Hebert. Forward. The other months are subject to
rehearing at this point and we will rule on that later.
Senator Bingaman. Thank you very much, Mr. Chairman.
The Chairman. Senator Bingaman, we have got a vote on. We
have two votes, as I understand it. I believe you have agreed
to be kind enough to come back after the votes. I have an
annual commitment that occurs today beginning at noon. So, I
would encourage the Senators to probably recess and come back
and catch both votes. I was under the impression that there was
one vote, but now there are two.
Senator Craig. Mr. Chairman, you have got a time crunch
with these Governors.
The Chairman. I understand. Let us go ahead and ask a
question. Perhaps we can conclude with the Governors at least.
I do not know how else to play it.
Senator Feinstein. Mr. Chairman, I think it is
extraordinarily important to hear from the utilities. That is
where there is $13 billion of debt.
The Chairman. We will ensure that. Let us finish with the
Governors.
Senator Craig.
Senator Craig. Thank you, Mr. Chairman. I will be brief. I
appreciate our circumstance and the circumstance of the
Governors.
Governors, as a neighboring State, do not think I am not
sensitive to this problem. Oregon and Washington quite often
get mentioned in this. Idaho is under the same circumstance, as
is Montana, at this moment. We are all inside that market and
we are at the headwaters of the problem, if you will. At the
same time, it is a very similar situation.
Obviously, you two are at conflict as to how we approach
this short term as it relates to price caps. I have already
entered into the record the statement of my Governor, Mr.
Chairman, Governor Kempthorne as it relates to his agreeing
with the Governor from Montana and other Governors of the West
that price caps send a wrong signal.
At the same time, Governor Locke, I do not dispute the
immediacy that obviously the Senator from Oregon is attempting
to respond to at this moment, as is the Senator from
California. My guess is, absent price caps, that we have got to
come together on a short-term approach toward this difficulty.
My guess is that we have to send some pretty bold signals to
the consumer out there to get them to do some things for us,
including reduce their power usage substantially so we can keep
our industries operating.
It is unique that we have industries in your State whose
employees often live in my State. Industries have put their
folks on furlough and turned their pots off--and I am talking
about the aluminum industry--and are selling the power and
making more money than operating their industry. That is a
tragedy in the making. Soon those contracts will no longer be
in existence, and that will have to change dramatically.
So, I hear you. I have no questions for you, but we must
get this resolved short term, at least to get us through the
summer. I flew out of Boise the other day and the tops of our
mountains are brown. That means there is no snow on them. When
there should be 10 and 12 feet of snow, there is no snow.
Therefore, our runoff this spring at the headwaters of the
Columbia is going to be very, very sparse. As a result, there
will be little hydro or less hydro.
Commissioner Hebert, let me thank you very much for the
leadership that is emerging out of the FERC at this moment to
deal head on with this within the confines of the Federal law
that you have to deal with and the decision making that you are
moving on. We appreciate that.
I guess it is a request more than it is a question because
we have got 4 minutes left in this vote and we have all got to
get there to vote.
We have got a crisis in the West. Let me suggest to you
that you bring the Commission West. Sit down and listen to our
people and listen to our utilities. Get out there on the ground
with us and see where we are. I think it would be extremely
valuable, and I would recommend you do it sooner than later.
Within the confines of your authority, I think that would be
extremely valuable. We understand the California situation: You
can deal with 50 percent of it but you cannot deal with the
other 50 percent. We understand that. But there is a great deal
you can deal with, and I think it can be very helpful. You can
send the right signals to the market, absent the kind of
capping that could go on at the request of some that might send
the wrong signals. So, would you consider that in behalf of us
westerners? We think it would be extremely valuable to have you
and your other commissioners on the ground.
Mr. Hebert. I would do that, Senator Craig. What I will
make certain and do as well, because as a part of our E-1
docket that we issued yesterday in trying to come up with some
short-term remedies, as well as some long- and medium-term
remedies, one of the things that we discussed in there was
having a conference of some type, a Commission conference, in
the Northwest. I will make certain that it is understood that
it would be your request that we do so quicker rather than
later, and at the same time, I am assuming that that would be
an invitation to have it in Idaho.
Senator Craig. Well, it certainly is. We would be more than
proud to facilitate that. I am not quite sure, but we could
probably open up one of our rodeo stadiums. The crowds will be
rather large.
[Laughter.]
The Chairman. Let me call on Senator Feinstein, followed by
Senator Cantwell. We are basically out of time. I apologize,
ladies, and I apologize to the two Governors and the
Commissioner, but that is just the way it is. So, please
proceed.
When you leave, the hearing will be recessed until Senator
Bingaman comes back and we will start on the last panel.
Senator Feinstein. Excellent. Thank you very much.
Mr. Hebert, I have real differences with your commission. I
do not think the commission's responsibility is only to provide
certainty for the industry. I think it is also to provide
certainty to the people that they can afford electricity.
I would like to get your explanation of this chart. This
chart shows that in the last 2 years in California demand has
remained essentially the same. Here there is a 4 percent
differential between lines. Also during this period, natural
gas prices were low. Look over the 2-year period. This is
November 1999 into the year 2000. Look at the price spike. What
is your explanation for that price spike?
Mr. Hebert. Well, I think there can be a lot of different
reasons for it. If you understand--and I know we do--that
certainly supply was tight during that time period, demand was
high----
Senator Feinstein. Demand was the same over the 2-year
period.
Mr. Hebert. Show me your demand curve. I am sorry.
Senator Feinstein. This is the demand curve between the 2
years. Right in here there is a 4 percent differential. That is
all.
Mr. Hebert. Could I read the bottom of the chart, please? I
am sorry.
Senator Feinstein. What it says is: ``Markets do not
produce competitive prices. Under similar medium load
conditions, 2000 prices have increased 700 percent over 1999
levels.''
Mr. Hebert. I think it is clear that the market was working
in 1999. I think that is probably the first assumption we could
make. I guess the question that we come up with is what is
broken about the market. Why is it not at competitive levels?
Or is it, in fact, at competitive levels for 2000?
Senator Feinstein. This has nothing to do with putting
price on consumers. This is just straight demand and price.
Mr. Hebert. I am sorry. I thought he was saying something.
Senator Feinstein. No. Well, clearly there is no fast
explanation. This is a 700 percent increase in electricity
wholesale prices during that period of time. That is what we
are trying to get FERC to address, to not have this happen this
summer because I believe it will happen absent some control. I
can relate this directly. I do not begrudge anybody making a
profit, but the profit is extraordinary.
Mr. Hebert. Let me say this. I will be glad to give you a
formal answer, as I have done on some other measures that you
have requested, on this chart.
Let me just say I do want to make it clear obviously to you
and for the record itself, I have never felt like, nor do I
currently feel, that we should not be very clear in what we are
trying to do for consumers as well. Actually my comment a
moment ago said that. Give certainty to the industry and
consumers as well when it comes to not only getting adequate
supply and having it delivered, but having it delivered at a
reasonable price.
Now, we are moving forward with measures right now--I know
you have seen the orders. I have forwarded them to your
office--where the staff is recommending market mitigation. It
will be ex ante mitigation, so we will do it immediately as
opposed to coming back and dealing with refunds. It would
certainly give the type of certainty that you are looking for I
believe.
I do not think there is any question. I think you and I
agree we had a great conversation in your office. The market
has problems certainly during periods. We have seen some price
volatility. We are going to figure out a way to get through
that. I think we are doing that right now.
I know that you know the commitment of the Commission and
that the Commission is working very hard to respond to these
problems. We have almost issued something on a weekly basis in
trying to respond and correct this. I will give you a further
comment on it, but I want you to know we are resolving it.
Senator Cantwell. I want to thank the panel as well, and I
think I will submit my question in writing, Mr. Hebert, about
your decision as it relates to last Friday on power producers,
on refunds, and specifically consideration of Washington State
and the Northwest.
Unfortunately, we have to go and vote and I want to make
sure our Governor has a chance to talk to some of the Northwest
folks who are here before adjourning. We will be back and would
love to, if you are still available, either individually
respond to some of these questions. But I do want to thank the
Governors for being here as well.
Notwithstanding the previous comment about the red-eye, I
want to thank Governor Locke. Given that our State's earthquake
has caused significant damage to the State capital, your office
is not without a home but is not in the State capital right now
and we have been greatly displaced. So, your time and focus on
this issue, as well as that, is much appreciated. Thank you.
[Recess.]
Senator Bingaman [presiding]. Could we find the witnesses
and we will go ahead with this next final panel.
[Pause.]
Senator Bingaman. Why do we not go ahead. What we would
like to do, if we could, on this panel is to have everybody
summarize their statement, make the points that they believe
are most essential, and we will try to limit every witness to
about 5 minutes here in summarizing their statement. We will
have this light to indicate when your 5 minutes are up. Then
Senator Feinstein and I and any other Senators who have shown
up will have a few questions.
So, why do we not start with you, John Bryson with Edison?
Please go right ahead. Welcome. Welcome to all of you. We are
glad you are here. Sorry it has taken so long to get to this
panel.
STATEMENT OF JOHN E. BRYSON, CHAIRMAN, PRESIDENT AND CEO,
EDISON INTERNATIONAL, ROSEMEAD, CA
Mr. Bryson. Senator Bingaman, Senator Feinstein, thank you
very much for this opportunity and thanks also to the other
members of the panel.
I actually will not summarize my statement at all because
there is something that I think is more striking, more
important, and more promising. I did not know that Senator
Feinstein and Senator Smith this morning would come together
with a joint conceptual proposal for how to deal with this
problem. This has been a very, very difficult 10 months in
California. There have not been many heartening moments. The
proposal, Senator Feinstein, that you and Senator Smith propose
to jointly co-author is one of the few heartening moments we
have had.
It seems to me the kind of practical, problem-solving
leadership approach that we need at a point of urgent crisis.
One of the big challenges that we have faced in seeking
practically at the point, frankly, where the rubber hits the
road, at the point of buying power and serving it to
consumers--one of the few practical approaches to bring
together the core problem--and the core problem has been a
large and vastly growing gap between retail prices under the
jurisdiction of the California regulators and wholesale prices
under the jurisdiction of the Federal regulators.
We at Southern California Edison and others in California
have been in a position for a long time where in retail rates
we receive only 6 cents to 7 cents a kilowatt hour. I think
PG&E actually slightly less. But at the wholesale level, the
prices being paid are steadily rising and, in the last month,
have been about 35 cents a kilowatt hour. So, the multiple of
the wholesale rate to the retail rate is something like 10
times, and it is likely to be yet higher this summer.
In the wake of the FERC decision just this last week, the
so-called refund decision that has been discussed this morning,
the forward price at Palo Verde, one of the gate points to
California, was in excess of 50 cents a kilowatt hour, 53 cents
to be specific.
The FERC refund decision, because it was so limited and so
narrow and so unexpected, has been reacted to in the market as
a kind of further pass on disciplines in the market. It was
limited to only stage 3. Senator Bingaman, you addressed that
point. It did not bear at all on the previously set $150 per
megawatt hour cap. It appeared not to discipline the market
but, rather, to further open the door in an already broken
market.
So, the notion that a bipartisan approach, one that
addresses both Federal regulation and State regulation, one
that would establish a kind of halt on the broken market in a
period of what Senator Feinstein described as stability and
reliability, to bring together all the pieces towards a
practical solution so that we can get through this summer and
beyond at lower cost than likely otherwise will prevail, is
extremely important. I hope the committee and ultimately the
Senate and other public leaders will see the practical elements
of that approach and move towards it.
I want to underscore just how intense the situation is in
closing. We are in a situation now in which Southern California
Edison and Pacific Gas & Electric have borrowed to the limit of
their borrowing ability. We have no further credit worthiness.
We are, in a practical sense, substantially insolvent unless a
practical solution is found.
Most of the focus now is on providing adequate supply of
generation power. That is an appropriate focus. There is
nothing about $500 per megawatt prices that will bring more
power on this summer. Nothing whatsoever.
It, I believe, is a mistake to reach the conclusion that
somehow prices at this level are essential to bring new supply
on. They simply are not. Competitive markets are a desirable
approach to bringing electricity supply to customers, but those
markets have to be competitive and they have to work. And these
are broken markets; they are not working.
So, we need a kind of temporary time out and that is what
has been proposed by many this morning. We need the regulators
to act on that.
Because of the lack of credit worthiness now of Southern
California Edison and Pacific Gas & Electric, we can no longer
procure power for customers. In fact, for some period of time,
there has been a kind of risk premium on the part of generators
that had to sell into California, and the State had to take up
procurement. That is not a good step. The State has no
experience in it. The Wall Street Journal now reports that the
State itself at these high prices has gone through 64 percent
of California's very considerable budget surplus just to buy
power on an interim basis.
So, we cannot allow to continue this gap between the State
on the one hand, where there is a preference that the Federal
regulators act, and the Federal regulators who prefer that the
State regulators act. There needs to be a coming together.
So, I confine my remarks entirely to what seems to me the
promising and practical step that is being proposed by Senator
Feinstein and Senator Smith and that seems, judging by the
panel's reaction, to be endorsed by others on the panel. I
think it is extremely important.
Thank you very much.
[The prepared statement of Mr. Bryson follows:]
PREPARED STATEMENT OF JOHN E. BRYSON, CHAIRMAN, PRESIDENT, AND CEO,
EDISON INTERNATIONAL, ROSEMEAD, CA
Good morning Mr. Chairman and Senators. I am John E. Bryson,
Chairman, President, and CEO of Edison International, parent company of
Southern California Edison. I appreciate the opportunity to testify
before you on federal legislation to address the crisis in electricity
supply and prices now affecting California and the Western United
States. I use the word ``crisis'' deliberately. There is no other word
for California's experience with electricity markets since last May.
And there is no other word for what is facing California and the entire
West in the months ahead.
On January 31, 2001, my colleague, Steve Frank, President and CEO
of Southern California Edison, testified before you on the very serious
problems threatening Southern California Edison, California and the
West. A month and a half later, the same threats remain, becoming more
immediate with every passing day. I will not repeat Mr. Frank's
testimony, but some review is necessary.
As of the end of January of this year, after nine months of buying
wholesale electricity at unjust and unreasonable prices and reselling
at artificially low prices, Southern California Edison incurred $5.5
billion in undercollections. We financed the shortfall by borrowing in
unprecedented amounts until we exhausted our credit. To preserve our
limited cash reserves we suspended payment for power and some of our
outstanding debts. Our creditors have been extraordinarily patient,
largely because everyone realizes that there are no real winners in a
bankruptcy and because we and the state are taking steps to address
this crisis. Southern California Edison has implemented major cost
reduction measures including reduced capital expenditures and layoffs.
And we eliminated common dividend payments for the first time in our
100-year history. Now, we are essentially out of the power procurement
business, although it remains somewhat uncertain whether we will be
expected to pay for power that the state is procuring through the
Department of Water Resources.
Since January, the Department of Water Resources has been the major
buyer of electricity in the state. It is spending $45 million or more
per day to keep the lights on. To date, the state has spent
approximately $3 billion in power procurement costs, quickly going
through its reserves. Although the state is attempting to reduce its
reliance on the spot market by entering into long-term contracts with
generators, this has been a difficult task because prices for the near-
term remain extraordinarily high throughout the West.
The Governor and the state legislature have also been working to
return Southern California Edison and Pacific Gas & Electric to some
semblance of fiscal health. A key feature of the Governor's plan is the
purchase of the utilities' transmission systems by the state. I
understand that some in Washington have reservations about this.
Certainly, we would have preferred not to do this. We would have
preferred to obtain gradual retail rate increases and meaningful
federal action to reform a broken wholesale electricity market. Our
countless efforts to this end--in the courts, at FERC and elsewhere--
have met with no success. Indeed, many of the people who have been most
critical of the state's purchase of our transmission have opposed an
affirmative federal role in addressing this crisis and have told
California to solve this problem itself. I ask them to put themselves
in our position. What choice do we have? What better alternative do you
offer?
We continue to negotiate the details with the state. However,
nothing we, or the state, can do will adequately address the broken
wholesale market. Make no mistake, this broken market continues to
guarantee unjust and unreasonable prices that are a principal
impediment to a realistic solution to this crisis.
The Federal Energy Regulatory Commission (FERC) is obligated under
the Federal Power Act to ensure just and reasonable rates. FERC found
wholesale rates in California to be unjust and unreasonable on November
1, 2000. FERC reiterated this finding in its December 15, 2000 order
when it imposed a ``soft cap'' of $150. Since then, and possibly as a
result of FERC's order, wholesale prices have climbed and have stayed
at levels more than twice the soft price cap. As illustrated in the
chart attached to my testimony, prices before the FERC finding averaged
up to as much as $152.65/MWh in August 2000. After the FERC finding on
November 1, prices continued to rise to $219.28/MWh in December and
reached $260.23 in January 2001 after the FERC order imposed the ``soft
cap''.
After months of complaints and literally thousands of pages of
pleadings, reports and evidence establishing that California's
wholesale electricity market is broken, FERC at long last issued an
order on March 9 that might require 13 California power sellers to
refund $69 million for sales in January 2001. Even if FERC actually
orders such refunds, this would be less than one and one-half days'
worth of state spending on power. In contrast, the Independent System
Operator (ISO) petitioned FERC for refunds totaling $315 million in
January.
FERC ruled that prices up to and including $273 per megawatt hour
were acceptable for January, and apparently that any prices charged at
times other than periods of Stage 3 emergencies are acceptable also.
There is good reason to question the economic assumptions underlying
FERC's order. I will note one of those concerns here.
$273 per MWh is nearly ten times higher than the average wholesale
price in January 2000 of $30 per MWh. A more legitimate definition of
``just and reasonable'' rates would have resulted in refunds for
January five times higher. And what about preceding months? FERC itself
found wholesale prices in California to be unjust and unreasonable long
before any Stage 3 emergencies were ever declared.
Of additional concern is the FERC staff Recommendation on
Prospective Market Monitoring and Mitigation, also issued on March 9 of
this year. Under this proposal, the soft caps will end on May 1, 2001,
and a limit on real time market prices equal to the highest-cost
generator will be put in place only during emergency conditions such as
Stage 3 alerts. At other times, no market power mitigation will exist
whatsoever for California's dysfunctional market. If adopted, this
proposal would leave California at a much greater risk of market power
exploitation than during 2000.
FERC's ``too little, too late'' attempt to address this crisis
makes it all the more important to adopt Senator Feinstein's bill, S.
287. Only temporary cost-plus wholesale caps will adequately address
the problems in our broken market. Without federal action compelling it
to do so, it is clear that FERC will not act to ensure just and
reasonable wholesale rates in California or the rest of the West.
Those who argue against such intervention should be aware that
FERC, itself, has now imposed a cost cap (at least for January), but
one that appears to us to be too high and too selectively applied to be
useful. Moreover, it is established after-the-fact. This means that
those selling into California do not know at the time they sell what
price will be deemed acceptable by FERC. I would suggest that
establishing, for some limited period of time, a system of cost-plus
regulation for all WSCC generators, as Senator Feinstein's bill would
do, is far preferable to FERC's after-the-fact caps. I emphasize here
that this is a remedy for the West.
If wholesale prices are not comprehensively, though temporarily,
regulated it will not matter what the state does. The extraordinary
transfer of wealth from California and the West to power generators
will continue to benefit only a handful of companies at the expense of
the economies of the entire region.
Were there mistakes in how California designed and implemented its
restructuring? Absolutely. But, as I think is now apparent to this
Committee, this is not only ``a California problem,'' and California
alone cannot resolve it. Other states in the West are already feeling
the effects of unprecedented growth and a tight supply of electricity.
Many states have raised rates and imposed strict conservation measures.
Others, including California, have acted to expedite siting and
construction of new generation. While these actions will help address
the long-term problems in a manner that may ultimately produce a
workably competitive wholesale electricity market in the West, we will
never get there if the short-term crisis is not addressed.
For this reason, we urge prompt passage of S. 287. It provides for
temporary imposition of cost-plus rates similar to those with which
FERC has ample experience. It offers generators a healthy return on
their investment, especially when you consider that some generators in
the California market have already recovered all of their initial
investment in the plants they bought.
We understand Senator Gordon Smith's concerns in wanting California
to raise retail rates in line with increasing wholesale electricity
prices. We, after all, have borne directly the brunt of California's
failure to do this, and have done everything we know, from litigation
to negotiation, to obtain an increase in the costs we may recover from
retail consumers. We agree that an increase in retail rates is long
overdue, but such action must be complemented by federal action on
cost-plus wholesale rates to bring this market under control. Senator
Smith's amendment acknowledges the need for action at both the state
and federal levels, and we appreciate that acknowledgement.
Some argue that cost-plus profit caps will discourage additional
generation, but: 1) it should not take exorbitant profits to encourage
entry into the California market; 2) much generation is being planned
elsewhere in the country where electricity prices are far lower; and
finally, 3) if a generator's costs are covered and they are assured of
earning a reasonable profit, this will be an attractive proposition.
Some may also argue that this regulation will be too difficult to
implement and too burdensome. Let's all remember that before FERC
authorized market-based rates for this generation, all except the
newest of this generation was subject to cost-of service regulation. It
has been done. It can be done again. There is nothing novel or unduly
complicated about this.
Let there be no misunderstanding about the absolute necessity of
federal action here. Average prices per KWh have increased from 5 or 6
cents to as high as $1.80. If consumers were exposed to all of these
price increases, it would be analogous to paying $20 for a gallon of
milk or a gallon of gasoline. If this were any other product, continued
federal inaction would be intolerable. It should not be different just
because we are talking about electricity. If anything, the case is more
compelling because electricity is not a luxury; it is an essential
service. And no one can afford the luxury of waiting any longer for
federal action.
Finally, let there be no doubt that continued inaction will only
serve to further erode trust in our governmental institutions' ability
to respond adequately to economic crises. Throughout this crisis and
our efforts to work our way out of it, we have heard plenty on the
principles of a free market. But a workable free market in California
does not exist. California may have been the first to restructure,
admittedly with disastrous results, but it is also clear that state and
federal agencies have shown themselves incapable of responding
efficiently to a very dynamic situation. The California Public
Utilities Commission failed to provide timely authority for power
contracting and failed to affirm our right under federal law to recover
our wholesale procurement costs in retail rates. The FERC has been
similarly slow to act to ensure just and reasonable wholesale rates or
to deal adequately with this crisis. For example, we are still being
fined by FERC for not scheduling load in a day-ahead market that has
been non-existent for two months.
California's mistakes aside, we can understand other states
stepping back from deregulation until they develop more generation and
receive stronger signals that our governmental institutions are up to
the task and can be trusted to respond efficiently to avoid results
diametrically opposed to the consumer benefits sought by deregulation.
Thank you.
Senator Bingaman. Thank you very much.
Steve Baum, who is chairman, CEO and president of Sempra.
Glad to have you here.
STATEMENT OF STEPHEN L. BAUM, CHAIRMAN, PRESIDENT AND CEO,
SEMPRA ENERGY, SAN DIEGO, CA
Mr. Baum. Thank you very much for the opportunity to
address this panel, and thank you, Senator Feinstein, and
thanks to Senator Smith for their leadership in putting forth
S. 287.
I would like to echo what John Bryson said, and I do not
want to repeat it. But I would like to bring up a couple of
other items and to emphasize some items.
I do believe we face, at the root of the problem in the
West, a serious supply and demand problem. There has not been
an adequate number of new generating plants built nor have
there been an adequate number of new transmission facilities
sited to meet the rising demand not only in California, but
also in the surrounding States. I do not think it is lost on
anyone that California has, in the past, depended upon
neighboring States to supply its energy, its excess needs, and
those States themselves have now grown dramatically, at rates
exceeding those of California. So, we really do have a supply
and demand problem that has to be addressed.
One of the things that is a characteristic of the broken
market in California and in the West that I would like to
emphasize--and it is something that John Bryson and others have
mentioned--and that is the lack of demand-side response that
exists in California because of the retail price caps. Any
attempt to cap wholesale prices needs absolutely to be
accompanied by an easing of retail price caps. I believe it
would be a serious error to continue with those caps because
there would not be the response necessary to the price signals
that we need to have to have conservation. California does make
a large, kind of sucking noise in the West and brings in energy
from surrounding States because it has not curbed its own
demand. And I believe that is absolutely a necessary
concomitant to wholesale price caps.
We endorse temporary, targeted, cost-based caps for old
generation in the West for a medium period, as contained in S.
287, in order to carry us through to a time when the coming
construction will bring new generation. I completely agree with
John Bryson that there is adequate price stimulation currently
and with these proposed caps to have that generation come on
line, particularly since new generation would not be subject to
those caps.
Affiliates of my company are building in excess of 2,500
megawatts of new power both in Arizona and northern New Mexico
and in California. I can tell you directly that we will
continue to do that to meet the needs of California regardless
of price caps being put in place.
I would also like to address another issue and that is the
interplay of natural gas prices with generation in the West. I
know that witnesses that have come before this panel in
previous hearings have suggested that the price of power in the
West is largely driven by high natural gas prices. Well, I
think there is a relationship between high fuel costs and high
generation costs. I do not believe there is a correlation
between the spikes we see in electric costs and rising natural
gas prices. One can see that through the comparison of natural
gas prices last summer to natural gas prices today and the
price of power last summer, as well shown in Senator
Feinstein's chart, and the price of power today. There were
price spikes that went to $2,000 a megawatt-hour last summer
when natural gas prices were still quite low.
That is not to say that there is not an issue with natural
gas prices and, in particular, an issue with the transportation
costs to California for natural gas. When prices spiked up into
the $50 range for delivered gas at the California border, the
basin prices were still under $10. So, that transportation
differential is caused by a squeeze in that market and it is an
area that I think FERC ought to address.
We think two things ought to happen. Our company has filed
a complaint at the FERC asking the FERC to look into
transportation costs. We believe that is an area that ought to
be investigated. But also we believe there should be an order
unbundling the cost to the commodity--that is, the natural
gas--from the cost of transportation so that customers and the
market can distinguish those costs.
But in summary, I would like to say that we fully endorse
temporary, targeted, cost-based price caps for old generation
in the West. We believe that will cause California to be able
to remedy its problems. We are encouraged by the conservation
efforts that Governor Davis has recently come out with. For
example, it is a bid to consumers who are willing to reduce
their demand by up to 20 percent to get paid for that. That I
think will help. We would encourage him also to raise
residential rates.
[The prepared statement of Mr. Baum follows:]
PREPARED STATEMENT OF STEPHEN L. BAUM, CHAIRMAN, PRESIDENT & CEO,
SEMPRA ENERGY, SAN DIEGO, CA
Good morning. I am Steve Baum, Chairman, President & Chief
Executive Officer of Sempra Energy. Sempra Energy is a Fortune 500
energy services holding company whose subsidiaries provide electricity
and natural gas services. Sempra Energy's two California regulated
subsidiaries are San Diego Gas & Electric (SDG&E) and Southern
California Gas Company (SoCalGas). I want to thank you for the
opportunity to provide input on S. 287, and to discuss events in the
California electricity marketplace.
Let me begin by commending you, Mr. Chairman, and Senator
Feinstein, for working toward helping to solve the ongoing energy
crisis. Sempra Energy recently testified before this Committee
regarding actions that we believe the federal government must take to
stabilize the chaotic energy marketplace, actions that only the federal
government can take because it pre-empts state action in this wholesale
market. We are pleased that Senator Feinstein's bill, S. 287, seeks to
implement ``Cost of Service Plus'' electric energy rates, an action
that we have advocated as a necessary, near term step in solving the
energy crisis.
First, I would like to speak to a question I have heard regarding
whether the order issued by the Federal Energy Regulatory Commission
(FERC) last Friday, March 9, addresses the problems in the western
market. Let me be very clear about our assessment of that order. In
that order, the FERC drastically limited potential refunds for sales
into the electricity market during January. After numerous FERC
pronouncements on the California electricity crisis, the Commission has
crafted a strange, new, one-price-fits-all cut off point for reviews of
transactions that does not appear to be based upon any of its preceding
work. While after many months of inaction we are heartened by FERC's
attention to this crisis, the Commission's action is far too little and
far too late. As noted in the dissent, ``this order, limiting the
potential for refunds to transactions that occurred during State 3
alert hours and bids in excess of a $273 proxy market clearing price,
is arbitrary, capricious and an abuse of discretion.'' This order will
do little to discipline the wholesale electricity market. If anything,
this order solidifies my support for S. 287.
S. 287
S. 287 takes a critical step toward instituting a much needed
cooling-off period for California's chaotic energy market by imposing
``Cost of Service Plus'' rates. Under ``Cost of Service Plus'' rates,
each existing generator would provide to FERC the unit cost per kwh to
operate its plants. FERC would then include a profit margin to the
price per kwh that is high enough to provide generators with an
incentive to continue producing energy but low enough to meet
consumers' concerns regarding energy prices. It is important to note
that nothing in this proposal should be viewed as a disincentive to new
construction. I strongly believe that new generation facilities should
not be subject to such a cap. To stimulate additional investment in
needed generation facilities in the West, new construction should be
rewarded by being permitted to charge market rates.
Other market participants involved in the energy crisis have
testified before this Committee and have argued that the cause of high
electric commodity prices is the high cost of natural gas and the high
cost of environmental compliance. They have pointed out that the costs
of operating the different types of generation facilities vary widely,
and that a flat cap would be a disincentive to supply. These arguments
are all addressed by the proposal in S. 287, as the actual costs of
operating each plant would be accounted for in the price that could be
charged. By avoiding the implementation of a ``one size fits all''
price cap, ``Cost of Service Plus'' rates would protect both consumers,
by providing price stability, and generators, by assuring that plant
costs, including a profit, will be fully covered.
I endorse this concept with the understanding that price caps are
clearly not a long-term solution to the energy crisis. However, when a
market is as broken as the western region is today, failure to protect
consumers from runaway prices while the market is being fixed is simply
not an acceptable alternative. When astronomically high prices were
passed directly through to consumers in San Diego over the summer of
2000, the economic shock was severe. In fact, in California we
experienced a reality that some economists are ignoring in this
situation: there is also an issue of ``political elasticity;'' which is
that consumers will not long tolerate prices that are so completely
disconnected from actual costs. The magnitude of the crisis requires an
immediate tempering of the market to reach a solution that is fair and
reasonable to both electric producers and consumers. ``Cost of Service
Plus'' rates offer that solution.
At the same time, I would be remiss if I did not mention efforts
undertaken by me and others at Sempra Energy to argue strenuously
before Governor Davis, the California Public Utilities Commission, and
the Legislature for a demand side response to help solve this crisis. I
believe that an orderly and predictable relaxation of the retail price
caps will provide appropriate incentives for consumers to reduce their
energy consumption. We expect that a demand response to incrementally
increased retail rates will enable California to avoid blackouts during
the upcoming summer months. We would also expect that reduced demand
would place downward pressure on the wholesale price of electricity.
Demand can be also reduced if rate designs are developed to charge more
for increased use of electricity and if customers had energy meters
that allowed them to see on a real time basis the impact of higher
usage on the price they will pay for electricity.
Because Senator Feinstein's proposal addresses a dysfunctional
market, I strongly agree with the concept in S. 287 that the caps must
only be a temporary provision. Some opponents have argued that there is
no such thing as a temporary cap. I disagree. Building into the
authorization a sunset provision, whether a date certain or, as in this
bill, a change in condition in the marketplace, fully addresses this
argument.
Another argument used against caps is the pragmatic one: that they
simply don't work. Opponents have pointed to the caps in California to
show that caps failed to control prices. Indeed, caps triggered actions
to circumvent them. The major way to circumvent them was to move into
the broader western regional market instead of the one-state market of
California. Again, S. 287 addresses that problem by imposing a cap that
is region wide, protecting all of the consumers in the western states.
HIGH GAS PRICES IN CALIFORNIA
As I have already stated, the approach to price caps proposed in
this bill addresses the impact of natural gas costs on the costs of
generation. Nonetheless I would like to take a moment to address that
particular question.
First, I do not concede the statement that some witnesses have made
before this Committee that natural gas prices of themselves explain the
explosion in electricity prices in California. That is simply an
oversimplification of natural gas supply and demand, which I will
discuss later in my testimony. Rather, while there is limited cost-of-
service justification for the astronomically high price of electric
energy that has been seen over the past nine months in California, the
interrelationship between the price of natural gas and the magnitude of
change in electric commodity prices is terribly out of alignment. For
example, in the summer of 2000, the price of natural gas was $3.50 per
mcf, yet the electric commodity price was as high as $2,000 per MWh. To
me, these numbers provide little justification for the skyrocketing
electric prices that have been charged in the wholesale market,
contrary to what has been argued.
A good example of this argument can be found in the letter sent to
this Committee by Mr. Keith Bailey, CEO of the Williams Company on
February 14, 2001. In his letter, Mr. Bailey concluded that the cost of
electrical generation in California is high, largely due to the high
cost of natural gas. We have reviewed that letter and rebutted some of
its conclusions in a letter that we have sent to the Committee under
separate cover.
In short, I have heard no explanation that adequately or reasonably
correlates high electric prices with the increased cost of natural gas.
While it is fair to suggest that there has been upward pressure on
electric rates as a result of increased natural gas prices (resulting
from year round rather than cyclical demand and storage shortages), I
have seen no evidence suggesting that high natural gas prices justify
the skyrocketing electricity prices we have seen recently.
However, we do believe that the recent escalation in natural gas
prices at the California border has made it exceptionally difficult to
negotiate with sellers of electricity for reasonably priced power, has
led to extremely adverse impacts on the California economy, and has
rendered largely meaningless FERC's ``soft cap'' on wholesale electric
prices. On February 6, 2000, FERC issued Order No. 637 on an
experimental basis. In that order the Commission waived its regulations
that had capped capacity release transaction rates at the interstate
pipeline's maximum firm transportation rate. The result of this failed
experiment has been a substantial increase in the price of natural gas
at the border of California--not because of an increase in the cost of
the commodity, but because of vast increases in the imputed value of
using the pipe.
While well intentioned, eliminating the cap did not achieve the
objective of a more transparent and liquid market, and in fact had the
unintended consequence of increasing the price of delivered gas at the
California border to levels far beyond what the market had experienced
to that point. For example, at one point last December the average
daily cost of gas delivered to California shot up to $59.42/mmBtu (with
some purchases at the $70.00 level), while the cost of the gas itself
was around $10.00/mmBtu. Thus the imputed value of delivery to the
California border, which under regulation was $0.67/mmBtu, rose to
S49.00/mmBtu.
If Congress were to address this problem in conjunction with the
electricity ``Cost of Service Plus'' price cap under consideration in
S. 287, the combined impact could help lower the ultimate price of
electricity throughout the western region. This is the case because the
cost-of-service cap would make wholesale electricity sales reflective
of the actual cost-of-service, and reinstatement of the cap on pipeline
capacity transactions would help limit the input costs of generators
and eliminate demands for pricing premiums based on stated concerns
over the delivered price of natural gas.
Furthermore, the price of gas in California has compounded the
price impact of electricity for residential consumers and businesses,
some of whom are seeing price spikes for both commodities at the same
time. If the Congress were to require FERC to terminate the ill-fated
experiment in waiving the cap on the secondary market, we would
anticipate a substantial reduction in the average price and volatility
of delivered natural gas prices at the California border.
Congress should also require FERC to develop regulations that
require interstate shippers to disclose separately the cost of the gas
and the cost of the transportation of the natural gas when selling
bundled gas and transportation services. Such a provision will clearly
identify to natural gas market participants the key components of
pricing of natural gas and, by leading to greater price transparency,
would provide FERC the tools it needs to enforce the cap. By clearly
delineating pricing information, market participants can make better
decisions about their gas purchases, and regulators will be better
equipped to enforce their regulations and understand the economic
drivers in the current natural gas marketplace.
I would reiterate that the provision for a ``Cost of Service Plus''
electricity price cap in S. 287 already addresses any impact of natural
gas prices on electric generation costs, by factoring them into the
allowable charges for each facility. But these prices themselves
exhibit problems that must be addressed. As a result, it is imperative
that FERC be required to re-impose caps on interstate natural gas
transportation services.
CONCLUSION
Nationally, we are confronted with a need to develop our overall
energy infrastructure. We have, in part, turned to the market to guide
this transition. What we are confronting now are problems that arise as
we make the transition, and in particular, we are confronting the
question of how we assure some economic stability while still allowing
the market signals that will guide our investment.
S. 287 offers both near and long-term solutions to alleviating the
current energy crisis. The bill takes into account the need to create a
temporary ``time out'' to bring market participants to the table today
so that a lasting long-term solution can be reached. We strongly urge
the Committee to quickly pass S. 287, and send the bill to the Senate
floor as soon as possible. Federal legislative action is urgently
needed to fix the wholesale market, and S. 287 takes the necessary
steps to achieve this objective.
There is clear and compelling evidence that the electric wholesale
market is not working in the western region, and that without ``Cost of
Service Plus'' rates, it will continue to flounder and spread economic
harm. The states in the region are moving aggressively to address the
disastrous impacts of the existing market structure, and to expand the
supply. Senator Feinstein's bill, S. 287, offers a much needed
``cooling off'' period to protect consumers, and our economy, as we
resolve this critical situation.
Thank you again for the opportunity to testify today. I appreciate
your interest in this important issue, and am available to answer
questions,
Senator Bingaman. Thank you very much.
Next would be Bruce Worthington, who is senior VP and
general counsel with PG&E Corporation.
STATEMENT OF BRUCE WORTHINGTON, SENIOR VICE PRESIDENT AND
GENERAL COUNSEL, PG&E CORPORATION, SAN FRANCISCO, CA
Mr. Worthington. Thank you very much, Senator Bingaman and
Senator Feinstein, as well. I appreciate the opportunity to be
here to talk about this. I am a substitute for Bob Glynn, and
his comments I would like to have submitted to the record of
this proceeding.
Senator Bingaman. They will be included in the record.
Mr. Worthington. Thank you.
Senator Feinstein, I want to really acknowledge your
concern and help and involvement and fortitude for persisting
in this crisis in California and in the West.
I echo the comments of the other two California-based
utilities in the urgency in which this needs to be addressed.
We have talked about long-term and medium-term solutions for
this, but for the upcoming summer, the proposal embedded in S.
287, I think, is absolutely necessary. We do not normally think
that the sort of market-distorting caps or cost-based rates are
a good thing, but in California for the summer, I am not aware
of any other measure that is going to do it. We are going to do
all we can to reduce demand. There are short-term peaking
supplies that I know the Governor in permitting is trying to
get on line faster, but that is not going to bridge the gap. If
the Secretary was right this morning that there is a 5,000
megawatt gap, I do not understand how that is going to
otherwise be met.
So, in order to avoid that chart that you showed us this
morning being duplicated again in the summer or 2001, I do
think we need either the Secretary or the FERC to exercise
their wholesale price controls. The market, where it is clearly
broken, where you can set short-term temporal limits on it and
apply it to existing generation so we do not discourage the
siting and development of new generation, which we absolutely
need for the long run, I think is an appropriate mechanism to
control the prices.
With that summary, I will finish. Thank you.
[The prepared statement of Mr. Glynn follows:]
PREPARED STATEMENT OF ROBERT D. GLYNN, JR., CHAIRMAN, CEO AND
PRESIDENT, PG&E CORPORATION
Good morning, Chairman Murkowski, Senator Bingaman, and members of
the committee. I'm Robert D. Glynn, Chairman, CEO and President of PG&E
Corporation. Thank you for the opportunity to appear before you today,
as you continue your examination of California's electricity shortages
and related price impacts across the West. Let me also acknowledge my
own Senator from California, Senator Feinstein, and thank her for her
interest and fortitude in helping find solutions to these difficult
problems.
As you know, wholesale electricity prices in California and the
West remain at unprecedented levels--the estimated average price for
February in California was $228 per megawatt hour, with no relief in
sight for consumers or the utilities and retail energy providers
serving them. Supply, both in terms of available megawatts and the
natural gas used to produce electricity, is extraordinarily tight.
Hydropower, in particular, continues to be short. At this point, it
appears certain that the availability of hydropower across California
and the Pacific Northwest will be substantially below normal. Recent
storms have improved the California hydro outlook slightly from as
recently as a month ago, and our utility currently forecasts hydro
availability of about 70 percent of normal. The Northwest outlook
however, is unchanged: BPA continues to forecast hydro at just over 60
percent of normal.
As we look to the peak usage summer season, the dire predictions
you heard at the last hearing on this subject seem, if anything, to be
optimistic now. At best, according to the California ISO, the state
will be short 2 to 3 thousand megawatts for the summer, and that
forecast may not fully reflect current hydro conditions in the
Northwest.
In that context, the implicit theme of your hearing today, ``How
can we moderate or limit electricity price impacts this summer, while
simultaneously sending the correct market signals to promote supply-
demand equilibrium?'' is precisely the correct short-term question.
Given the fact that broad resolution of the supply problem is
necessarily a longer-term activity, the immediate answer to the price
impact component of the question in the short time frame between now
and summer is that California and the West will be scrambling to use
all tools currently available to address the problem: 1) bringing power
plants now down for maintenance and repairs back on line; 2) siting and
building new ``peaking'' power plants in an expeditious manner; and 3)
implementing emergency demand reduction efforts. All three of these
measures are the best mechanisms available to address the very top of
the demand peaks that will occur--and to help mitigate prices without
exacerbating the supply problem.
In short, we must act immediately to provide market-oriented
solutions that attack the supply problem first and encourage fast-track
supply projects, such as is being done now with peaking units. In the
interim, a combination of supply and demand initiatives is imperative--
everything from the longer-term bilateral contracts being implemented
now between the state of California and suppliers, as well as demand-
reduction incentives comparable to those that were initiated last
summer. We also believe that prices at the retail level in California
need to be adjusted further to better reflect the true cost of
electricity so that adequate signals can be sent to encourage more
responsible electricity use.
Even then, given the extent of the expected supply/demand imbalance
for this summer, it is not clear that these tools will fully mitigate
the potential economic impact this summer. This leads us to the pieces
of legislation before you today that address price caps in one way or
another.
Historically, PG&E Corporation has not supported price caps; over
the long term, they create market distortions and have unanticipated
and perverse consequences. In a functional market, they mask the peak
price signals that spur conservation, changes in usage patterns,
investment in energy efficiency and in new supply. Often, they make
matters worse. That said, in June of last year we recognized that in
circumstances where power markets are not fully competitive, short-term
implementation of price caps might be necessary.
We adopted a corporate policy statement (attached) that addressed
those circumstances, which can be summarized as follows: where markets
are clearly broken, for example, where FERC has determined that prices
are not ``just and reasonable,'' short-term offer caps may be
warranted.
This was not an easy decision on our part, because in addition to
Pacific Gas and Electric Company, the utility that serves much of
northern and central California, we also own the National Energy Group,
which builds, owns and operates power plants across the country. So, as
you might anticipate, there was a fair amount of discussion and thought
in the process that led to our corporate policy.
With that process in mind, I'd like to address regional price caps
for the West, for the summer of 2001. Based on what we know today,
there is a very good chance that the West is heading for a meltdown
where--due to short supplies--the price of power could increase from
today's already historically-high levels to sustained stratospheric
levels for the summer. That would inflict severe hardship on households
and the economies of the Western states to no good end; prices are
already high enough to incent new generation, which is being built as
fast as it can be permitted and constructed.
In order to avoid that meltdown, policy makers should create a
mechanism, which would allow either the Secretary of Energy or the FERC
to implement temporary price caps, should our worst fears be realized.
It seems only prudent to create the policy tool and carefully describe
the circumstances under which the tool can be used, including the
duration of use. For example, any price cap should have an explicit
start and sunset date, for instance, May 1 and September 30 of this
year. And in order not to inadvertently discourage new, badly needed
power plants, the price cap should apply only to existing generation.
With respect to setting a price cap, it must be simple enough to be
easily administered, and it should allow suppliers to make a reasonable
profit. Most options being given serious consideration involve
benchmark rates that build up from a cost basis. Frequently discussed
are technology-specific caps that would cover suppliers' costs plus a
stipulated profit margin. Under this approach, caps would be set at
different levels based on the type of generating resource--natural gas,
coal, hydro, etc. Other options include fixed price caps at levels high
enough to accommodate input price fluctuations, such as variations in
the price of natural gas, or indexed caps equal to some multiple of
current input prices.
I strongly believe in markets; if I didn't, we would not have
invested money in building power plants across the United States to
participate in competitive wholesale power markets. A meltdown in the
Western power market this summer would be a huge setback to the
development of a national wholesale power market, and markets in
general.
Mr. Chairman, I would be pleased to answer any questions.
Senator Bingaman. Thank you very much.
Next is William Hecht, who is the chairman and CEO and
president of PPL Corporation in Allentown, Pennsylvania. Thank
you for being here.
STATEMENT OF WILLIAM F. HECHT, CHAIRMAN, PRESIDENT AND CEO, PPL
CORPORATION, ALLENTOWN, PA
Mr. Hecht. Thank you, Senator.
PPL Corporation is an energy company that markets
electricity in 42 States and Canada and operates about 10,000
megawatts of generating capacity in Pennsylvania, Montana, and
Maine and delivers electricity to about 6 million customers on
three continents.
In addition to representing the views of PPL, I am also
appearing on behalf of the Electric Power Supply Association, a
national trade association representing competitive suppliers.
While there are many contributing factors to the
electricity supply crisis in the West, the underlying problem
is that California does not have enough electricity supply. The
State has an electricity load of about 48,000 megawatts and in-
State generating resources of only about 38,000 megawatts.
The real solution to the problem is not in artificial price
controls but in a focus on the forces of supply and demand
which will both discourage consumption and encourage
production. Reflecting actual current economic value of
electricity through retail prices in some form for at least
some users would exert downward pressure on consumption,
immediately helping to reduce the mismatch between supply and
demand. This in itself would help reduce wholesale prices.
Even more importantly, prices set by supply and demand will
send the proper price signals to investors, encouraging the
construction of new generating facilities.
Price caps would, on the other hand, reduce the incentive
to invest in new production and unnecessarily prolong and
exacerbate the existing supply and demand imbalance. This free
market lesson is one that we have learned elsewhere in the U.S.
energy industry as a failed experiment with natural gas price
controls would attest. Allowing the free market to function and
to send the right price signals will result in the significant
capital investments that are needed to build the next
generation of American powerplants.
There is ample evidence that such a process is working in
places other than California. Across the country, more than
125,000 megawatts of generating capacity are under construction
or in advanced development in markets where investors believe
they can successfully site plants and receive a fair return on
their investment.
My company is but one example of this process at work. PPL
has explored acquisition and development of power generating
facilities at more than 100 locations in the United States and
even overseas. In each case, we carefully study available
supplies in the region, our estimate of future marketplace
prices, the likelihood of success in constructing a facility,
and a host of other factors. This very selective process has
resulted in our acquisition of about $1 billion in generating
assets, principally in the State of Montana, and PPL is
developing plants in eastern Pennsylvania, Eastern United
States, and in Western U.S. markets that could result in an
investment of approximately $2 billion more. As I speak today,
we are developing powerplants in Connecticut, on Long Island,
in Pennsylvania, in Washington State, and in Arizona.
It goes without saying, of course, that we are developing
these plants, which will add more than 4,000 megawatts of
supply, because they are located in key markets where the power
is needed and that offer long-term opportunities for our
shareowners. Put another way, if the wholesale markets in these
regions were not sending the appropriate price signals, we
could not justify building the plants there.
I am convinced that there is only one way to ensure
adequate supplies of electricity for the people of California
and the rest of the country: We must encourage the building of
new powerplants. These new supplies, however, will be put at
risk if we begin to artificially manipulate or threaten to
artificially manipulate the wholesale markets. For the reasons
I have detailed in my written testimony, imposition of price
caps or a return to cost-based rates would actually result in
two very problematic, unintended results: reduced likelihood of
new powerplant construction and, ironically, over time higher
average prices for electricity.
The bills before you also propose refund requirements on
companies that own generating facilities, essentially rewriting
the rules under which the transactions were made. These
interventions in the market not only would hurt the very
companies that are part of the potential solution, they would
also discourage those who are considering such development.
Some say that the building of new powerplants is too
complicated, too environmentally threatening, and too time
consuming to address the current situation. This is simply not
true. New generation can be installed rapidly in compliance
with existing laws and regulations that fully protect
environmental quality.
Further, modern electric generation technologies are
cleaner and more efficient than those in use only a few years
ago. Higher efficiencies mean that less fuel is used to produce
each kilowatt hour of electricity and cleaner technologies mean
that even the fuel that is burned produces fewer emissions.
There are some steps that the Federal and State governments
can take to ensure that new generating units can be built
quickly and efficiently.
For instance, environmental review can be accelerated
procedurally without reducing the participation of
knowledgeable intervenors or compromising the quality of the
outcome. Government can also make sure that the electric
transmission system is fully open and accessible to all market
participants. Such enhancements, combined with the time-proven
forces of supply and demand, can result in new supplies being
available in as little as 24 months for conventional generation
and sooner for distributed generation which has higher cost.
In conclusion, I believe that the California experience
underscores the need for a renewed commitment to competitive
electricity markets.
Thank you very much.
[The prepared statement of Mr. Hecht follows:]
PREPARED STATEMENT WILLIAM F. HECHT, CHAIRMAN, PRESIDENT AND CEO,
PPL CORPORATION, ALLENTOWN, PA
I am William F. Hecht, chairman, president and chief executive
officer of PPL Corporation. Thank you for the opportunity to appear
before this Committee to share my views on S. 26, S. 80 and S. 287.
These legislative proposals raise issues that are central to the
future of the nation's energy supply.
In addition to representing the views of PPL, I am also appearing
on behalf of the Electric Power Supply Association, a national trade
association representing competitive suppliers, including independent
power producers, merchant generators and power marketers.
PPL, with headquarters in Allentown, Pa., is a rapidly growing
international energy company with revenues of nearly $5.7 billion.
We operate four principal subsidiaries:
PPL EnergyPlus markets wholesale electricity in 42 states
and Canada and markets competitively priced retail electricity
in several Eastern and Western states. PPL EnergyPlus also
provides energy services in the Mid-Atlantic and New England
regions.
PPL Generation owns and operates U.S. power plants. Its
portfolio includes nearly 10,000 megawatts of generating
capacity in Pennsylvania, Maine and Montana. In the East, our
8,500 megawatts areis primarily coal-fired and nuclear
generation. In Montana, our 1,150 megawatts are coal-fired and
hydro generation. Our Montana plants were acquired from The
Montana Power Company in late 1999, and since that time have
been used primarily to serve Montana electricity customers
under a wholesale agreement that we signed with Montana Power
at the time of the purchase. We have sold a limited amount of
wholesale power into the California market since acquiring the
plants.
PPL Electric Utilities delivers electricity to 1.3 million
customers in eastern and central Pennsylvania.
PPL Global owns distribution businesses in the United
Kingdom and Latin America that deliver electricity to 4.4
million customers. The company also develops and acquires
generation in key U.S. markets. It now has more than 4,000
megawatts of capacity under active development.
the solution for the california market is new generation
The electric supply situation in California has reached nearly
crisis proportions. California and other Western states now face
economic dislocations due to the high cost of electric power, and
California itself also faces a fundamental reliability problem.
There are many reasons for the current economic and reliability
problems. Gas prices increased. Electricity demand increased rapidly.
It was a ``low-water'' year for hydroelectric generation. The West
Coast experienced a heat wave.
However, the underlying problem in the Western System Coordinating
Council--the interconnected system of which California is a part--is
that there simply is not enough generating capacity to meet load
requirements. This generating capacity shortfall is directly traceable
to California, which has a load of about 48,000 megawatts and in-state
generating resources of only about 38,000 megawatts.
This means that California must import large quantities of
electricity to satisfy its demand. And, much of the in-state generation
is old and inefficient. California has not built a significant
generating facility in more than 10 years. Further, transmission
limitations sometimes exacerbate the generation shortfall.
The solution to this problem is to permit the forces of supply and
demand to set prices, and to allow those prices to both discourage
consumption and encourage production.
Reflecting the actual economic value of electricity through higher
retail prices--in some form for at least some users--will cut
consumption, immediately reducing the mismatch between supply and
demand. This, in itself, would help reduce wholesale prices.
Even more importantly, prices set by supply and demand will send
the proper price signals to investors, encouraging the construction of
new generating facilities. And, additional generation is the solution
to the root problem.
This additional generation can be installed rapidly, with existing
laws and regulations fully protecting environmental quality. Further,
modern electric-generation technologies are cleaner and more efficient
than those in use only a few years ago. Higher efficiencies mean that
less fuel is used to produce each kilowatt-hour of electricity. And,
cleaner technologies mean that even the fuel that is burned produces
fewer emissions.
There are a number of steps that federal and state governments can
take to ensure that new generating units can be built quickly and
efficiently. For instance, environmental review can be accelerated
procedurally, without reducing the participation of knowledgeable
intervenors or compromising the quality of the outcome. Government also
can make sure that the electric transmission system is fully open and
accessible to all market participants, especially new generators.
Even with such enhancements, however, new generation will be
developed only if we allow the forces of supply and demand to operate
unencumbered, to freely set the price of electricity. Price caps would,
on the other hand, reduce the incentive to invest in new production and
unnecessarily both prolong and exacerbate the current supply and demand
mismatch.
This free-market lesson is one we have learned elsewhere in the
energy industry. When the federal government limited the wellhead
prices of natural gas, producers had no incentives to develop wells,
resulting in severe supply shortages and restrictions of customer hook-
ups. As soon as the price caps were lifted, drilling activity expanded,
resulting in ample supplies and lower prices for customers.
DEREGULATION
Under the regulated structure of the past, public utilities
operated in franchised service territories and had mandatory
obligations to serve customers. As part of this obligation, the
utilities were required to build capacity to meet load requirements.
This structure, which proved to be inefficient, has been replaced
with a deregulated marketplace in which generation is built based on
the forces of supply and demand. Power plants are now built in response
to price signals with increasing prices signaling the need for new
capacity. Over the long-term, this deregulated marketplace will lead to
prices for end-users that are lower than they otherwise would have been
under regulation.
In a deregulated energy marketplace, the mere existence of high
prices does not necessarily mean that a market is dysfunctional. In
fact, in any correctly functioning market, high prices are simply a
proper and normal signal of demand outpacing available supply.
This is not to suggest that we should--in any way--tolerate market
power abuse or collusion. In cases where there are proven instances of
abuse of market power, the Federal Energy Regulatory Commission has
adequate powers to correct those abuses. Certainly, the Justice
Department and state agencies also will address any issues of collusion
or anti-competitive behavior.
Allowing the free market to send the right price signals except in
the case of illegal activities will encourage the capital investment
that we need to build the next generation of American power plants.
There is ample evidence that such a process is working in places other
than California. Across the country, more than 125,000 megawatts of
generating capacity are under construction or in advanced development.
My company is a good example of this process at work.
PPL has explored acquisition and development of power generation
facilities at more than 100 locations in the United States--and even
some overseas. In each case, we carefully studied available supplies in
the region, our estimate of future marketplace prices, the likelihood
of success in siting and constructing a facility and a host of other
factors.
This very selective process has resulted in our acquisition of
about $1 billion in generating assets, principally in the state of
Montana. And, PPL is developing plants in key Eastern and Western U.S.
markets that could result in additional investment of approximately $2
billion.
As I speak here today, we are developing power plants in
Connecticut, on Long Island, in Pennsylvania, in Washington state and
in Arizona. It goes without saying, of course, that we are developing
these plants--which will add more than 4,000 megawatts of supply in
these key regions--because we believe they will benefit our
shareowners.
Put another way: If the wholesale markets in these regions were not
sending the appropriate price signals, we could not justify building
plants there.
I am absolutely convinced that there is only one way to ensure
adequate supplies of electricity for the people of California and the
rest of the country:
We must encourage the building of new power plants.
PRICE CAPS
These new supplies, however, will be put at risk if we begin to
artificially manipulate the wholesale markets. Imposition of price
caps, or a return to cost-based rates, actually will lead to decreased
supplies--and thus, higher prices.
Price caps interfere with the most important part of any functional
market--the price signal.
Caps are designed to clip the peaks of price movement in the
market, with the goal of thereby reducing average prices. The
California experience itself has shown that price caps tend to
encourage higher average prices, which could actually lead to an
increase in costs to consumers. Caps also can result in a transfer of
capacity to higher value markets. That will surely happen in the West,
as resources seek higher-priced markets elsewhere or even, in certain
circumstances, shut down if they cannot achieve sufficient revenues for
operation.
Second, the caps signal developers to go elsewhere. Developers of
generation look for the best returns they can find, on a risk-weighted
basis. They are not limited to California, the Western United States or
even the United States as a whole. Putting a cap in place will send a
strong signal to developers that the western United States is coming
more and more under price controls and government interference.
Developers will respond to that signal by avoiding those markets.
Moreover, the history of price caps so far in California has been one
of change. Price caps in California last year changed regularly between
$150 and $750 per MWh. Such uncertainty and changeability produces
additional caution, leading to higher required returns for project
development, eventually resulting in higher prices for consumers. In
the extreme, price caps, along with their variability and lack of
predictability, may lead to generation development being canceled in
favor of projects elsewhere.
Third, a cap tends to reduce the volatility of a market, which can
lead to reduced trading and hedging instruments. A critical part of
evaluating any market is understanding the volatility of that market.
Volatility is the tendency of prices to move up or down--higher
volatility means that prices change more often and to a greater degree.
A price fixed by government fiat has essentially zero volatility. By
limiting the upper range of price spikes, prices will change less often
and by not as much. Since energy traders make their money on price
changes, a less volatile market will have fewer traders in it providing
liquidity. Reduced liquidity results in less price discovery--the
knowledge about what the price of electricity may be in the future.
Developers need as much knowledge of future prices as possible to make
informed decisions about investments. Traders, generators and consumers
also need the forward market to allow for the hedging through long-term
contracts that has been touted as a short-run solution to California's
woes.
There is a fourth harm from caps that also stems from the loss of
volatility--developers will make the wrong decisions. A volatile market
is sending out a price signal for peaking generation. Prices
occasionally spike upwards (or downwards); the appropriate generation
response to such spikes is a peaking unit that only runs occasionally.
The peaking unit will pick-off the higher prices, thereby reducing
them. Alternatively, if there is lower volatility and higher average
prices, the appropriate business decision is to build baseload plants
that are designed to run relatively cheaply and all the time. This
takes advantage of higher average prices and does not really address
price peaks.
Caps tend to distort the market signal in favor of baseload
generation. With the scarcity problem in California, that may not seem
like an important problem right now since any generation would be
helpful. However, baseload plants can cost several times as much as
peaking units and take considerably longer to construct. The market
will either pay to recover those costs or those plants may go bankrupt
and cease operations in the future. Regardless, efficient economic
decision-making by developers requires the correct price signal coming
from the market.
For all these reasons--higher average prices, reduced development,
reduced forward liquidity and inefficient price signals--price caps are
inappropriate and dangerous for California and the Western United
States.
The legislation before you also proposes refund requirements on
companies that own generating facilities, essentially rewriting the
rules under which the transactions were made. These interventions in
the market not only would hurt the very companies that currently are
part of the potential solution to the supply crisis, they would
discourage those who are considering such development.
Returning to cost-based rates can be a particular problem. Under
regulation, vertically integrated public utility companies had
mandatory obligations to serve within their franchised territories.
This meant they were required by state regulators to build whatever
capacity was required to meet demand.
Because of the mandatory obligations to serve, regulated companies
had to build whatever capacity was needed even though rates were capped
or cost-based. Today, however, that archaic system is gone in many
parts of the country. In California, Pennsylvania and many other
states, independent generating companies, not regulated public
utilities, now build generation. Local electric distribution companies
no longer have an obligation to build generating facilities, and the
generation function has been deregulated.
If rates for generation are ``capped'' or returned to old ``cost-
based'' structures or if other economic restrictions are placed on
these new unregulated generating companies, they simply will not build
the facilities needed to serve the public because they will have no
incentive to build and there is no obligation to construct plants. The
capital with which those plants would have been built will go
elsewhere.
Ironically, price caps may actually serve to benefit companies such
as PPL, which currently own significant amounts of low-cost, efficient
generation--our Montana power plants, for example.
The reason for this benefit to companies like PPL is
straightforward. Price caps would have the effect of prolonging the
time before new, efficient generation is constructed. Prices that
otherwise would have declined with added generation will remain at
capped levels for a longer time--and for more hours--than would have
been the case. Existing generation would remain more valuable than
otherwise would have been the case.
CONCLUSION
The real solution to the long-term supply issues in California and
the West is inescapable: We need to build new power plants. And, those
new plants will be built only if we allow the competitive market to do
its job.
If we use the California experience to further improve our
commitment to truly competitive electricity markets, then our nation's
energy supply future can be a bright one.
And, I am confident that--after considering all the facts--we will
reach the conclusion that electricity deregulation not only is sound
public policy . . . it is the only way that we will be able to ensure
adequate electricity supplies at fair prices.
Senator Bingaman. Thank you very much.
Our final witness is Steve Fetter, who is the managing
director of the Global Power Group with Fitch. Welcome.
STATEMENT OF STEVEN M. FETTER, MANAGING DIRECTOR, GLOBAL POWER
GROUP, FITCH, INC., NEW YORK, NY
Mr. Fetter. Thank you, Mr. Chairman and Senator Feinstein.
I appreciate the opportunity to offer my views with regard to
the important issue of Federal price caps or controls for the
protection of consumers.
I note that in some ways, though, you have presented me
with my own worst nightmare. I am surrounded on this panel with
Fitch bond rating clients and they have taken positions on all
sides of this issue.
Senator Bingaman. Now you know how all of us in politics
feel.
[Laughter.]
Mr. Fetter. Yes, exactly. So, now you have asked me, Mr.
Fetter, so what do you really believe? So, I guess the only
path I can take is to offer my sincere thoughts.
As a former State regulator, I see nothing wrong with
continued cost-based regulation for service obligations that
the traditional utilities are still mandated to provide for
core customers who have chosen not to receive alternative
competitive supply from a third party provider.
At the same time, from my vantage point on Wall Street, I
believe that if you are going to have competition, policy
makers have a duty to let markets operate.
To the extent possible, under a competitive framework, it
is important to reduce the role of government. I have long
adhered to the controversial view offered years ago by then
California PUC president Greg Conlon who said that divestiture
of transmission was the best model for dealing with market
power concerns and ensuring non-discriminatory market access
for new energy providers. It could even reduce or even
eliminate the need for quasi-governmental organizations, such
as the California ISO and the Power Exchange and similar
entities elsewhere. But divestiture of transmission was never
ordered due to political concerns and timeliness issues at that
time.
Instead, California took the flawed path of encouraging,
virtually to the point of mandating, utility divestiture of
most of their generating capacity. California government also
placed strict limitations on a utility's ability to procure
electricity supply for its core residential customers. We are
all familiar with the sad results of that strategy.
So, from where we find ourselves now, can price caps help
the situation?
I am willing to go so far as to admit that Federal
enactment of a uniform price cap at a high level--let us say
$1,000 per megawatt-hour--might serve a useful purpose. It
could operate as a circuit breaker or safety valve to cap
wholesale prices during the brief periods of time when
extremely volatile circumstances result in a market that cannot
be contained by any manner of competitive forces. It also
probably would not interfere with strategic decision making by
generation suppliers because prices at the $1,000 per megawatt-
hour level do not enter into their financing models.
However, to go below that level, indeed to go anywhere near
the $250 per megawatt-hour or even $150 levels that proved
ineffective in California would in my opinion slow the Nation's
movement towards an efficient, competitive wholesale market.
Suppliers would seek alternative market outlets or slow their
production of electricity and they certainly would reassess
further investment in the generation sector where such price
caps were in place.
I would also not be surprised to see litigation brought by
those who purchased generation assets at very high prices based
on reliance on State legislative enactment of laws defining the
new competitive market orientation, the theory being an
unconstitutional taking of private property in the form of
decreased valuations without fair compensation.
I offer further thoughts in my written testimony that the
ongoing negotiations over sale of the three California
utilities' transmission assets could conceivably provide a
second chance to take the road not taken several years ago.
I would be happy to respond to any questions that you may
have. Thank you.
[The prepared statement of Mr. Fetter follows:]
PREPARED STATEMENT OF STEVEN M. FETTER, MANAGING DIRECTOR, GLOBAL POWER
GROUP, FITCH, INC., NEW YORK, NY
I appreciate the opportunity to testify before the Committee on
Energy and Natural Resources to offer the views of Fitch on S. 26, a
bill to amend the Department of Energy Authorization Act to authorize
the Secretary of Energy to impose interim limitations on the cost of
electric energy to protect consumers from unjust and unreasonable
prices in the electric energy market; S. 80, the California Electricity
Consumers Relief Act of 2001; and S. 287, a bill to direct the Federal
Energy Regulatory Commission to impose cost-of-service based rates on
sales by public utilities of electric energy at wholesale in the
western energy market, and amendment No. 12 to S. 287. I will speak
from the perspective of a member of the financial community as well as
former Chairman of the Michigan Public Service Commission.
In 1995, Fitch formulated an Electric Industry Time Line (see
attachment) that forecast the general evolution of power markets within
the United States. I am happy to say that restructuring activities
across the country have to a large degree tracked Fitch's predictions.
However, substantial divestiture of generation assets in many states,
most notably California, left the endpoint of the analysis--that
utilities would be operating under regulated and competitive supply
models concurrently--in question.
Fitch's conclusions were based on the belief that when competition
was in place after 2000, utilities would be operating under a
bifurcated structure: a lower risk regulated market and a higher risk
competitive market. Within the lower risk regulated market, integrated
utilities would generate or purchase power to meet an obligation to
serve core residential customers, much as they have under the
traditional system of cost-of-service-based regulation. But in addition
to that familiar framework, there would be a competitive market under
which utility generation subsidiaries, independent power producers, and
power marketers could compete to supply electricity to industrial and
large commercial users, and aggregated smaller customers (both small
commercial and residential). This half of the model, by its very
nature, would be a higher risk undertaking for both seller and
purchaser.
California's restructuring plan encouraged utility divestiture of
generation and substantial government involvement in the operation of
the transmission grid (through an independent system operator, or ISO)
and the power market (through a power exchange, or PX). For those who
believe that the catastrophic events in California in late December and
early January came without warning, I invite attention to ``Procuring
Power in California: A Potential Stranded Cost,'' a September 2000
Fitch report by Lori Woodland, detailing the pressures soon to be faced
by California's three investor-owned electric utilities, Pacific Gas &
Electric (PG&E), Southern California Edison (SCE), and San Diego Gas &
Electric (SDG&E). A copy is attached.
California's restructuring model called for a high proportion of
customer demand being met by spot market supply from day-ahead or
hourly transactions. This exposed the state's three investor-owned
utilities, which were operating under retail price caps, to extreme
financial risks due to wholesale market volatility. By contrast, in
more rational market structures for electricity and other energy
commodities, approximately 85-90% of demand is normally provided
through long-term contracts, with at most only 15% subject to spot
market fluctuations. The extreme volatility of price at the wholesale
level has given rise to urgent calls for a ``fix'' in the form of lower
and lower price caps.
So will price caps provide the solution?
I am willing to go so far as to admit that federal enactment of a
uniform price cap at a high level--such as $1000 per mwh--might serve a
useful purpose. It could operate as a circuit breaker to cap wholesale
prices during the brief periods when extremely volatile circumstances
result in a market that cannot be contained by any manner of
competitive forces. It also probably would not interfere with any
strategic decision making by industry participants since builders of
new generation or transmission would not employ prices at that level
(or higher) in their financing models.
However, to go lower than such a safety valve-type level would
undoubtedly slow the nation's movement toward an efficient competitive
wholesale market. We have already seen that imposition of a low price
cap, such $250 per mwh or even $150 per mwh, can have the negative
effect of encouraging suppliers to seek alternative market outlets or
even to slow production. Continued tinkering with market rules,
especially if at the macro federal level, is sure to create uncertainty
among energy investors and delay implementation of their business
plans, especially in light of recent ambiguous economic signs.
A further concern for market participants is that major investments
have been made in California and other states based on the particular
competitive frameworks mandated by state legislatures. Price levels for
generation asset auctions were driven by the new market orientation; a
retrenchment by state policymakers back to a form of cost-of-service
regulation could be challenged as an unconstitutional taking of private
property without fair compensation. Below-market price caps would
contribute to this situation and could conceivably result in the
government being ordered to pay the difference between the market value
of assets in a competitive environment versus in a newly-tariffed
regime.
Interestingly, the ongoing negotiations about sale of the
California transmission grid to the state hearkens back to a
controversial point of view then-California Public Utilities Commission
(CPUC) President Greg Conlon espoused during the early stages of
implementation of electricity industry competition. Speaking to the
National Association of Regulatory Utility Commissioners Electricity
Committee in July 1997, Conlon explained that an ISO was not the first
choice of the CPUC for controlling the market power of utilities owning
transmission lines. Rather, Conlon said, the statewide ISO was a
compromise; the best model he believed for dealing with market power
concerns and ensuring nondiscriminatory market access for new entrants
was divestiture of transmission to third parties. That action was never
taken because of political concerns and timeliness issues. (See
attached Fitch report, ``Divestiture Gets A Boost,'' August 18, 1997.)
Now it appears California will revisit the question of divestiture
of transmission through its negotiations to sustain the financial
viability of its state's utilities. However, early signs are that a
purchase of the transmission systems from PG&E, SCE, and SDG&E may be
followed by the leasing of the assets back to the utilities to operate.
Instead, the state might want to consider seizing this new opportunity
to create an independent owner or, at least, operator of the state's
transmission grid. Such a step would allow the state to remove itself
from amidst the electricity supply morass and reduce its activities to
the more appropriate role of facilitating private sector investment in
enhancing the state's energy infrastructure. This of course could
include increased generation investment by the three California
investor-owned utilities without fear of creating competitive conflict.
Breaking the tie between generation and transmission would allow the
state's utilities and third-party players to compete on a level playing
field with minimal state interference.
I continue to believe that the bifurcated utility structure
described above creates the proper balance between retail choice and
customer protection. In the final analysis, policymakers who thought
retail choice could only be a win-win proposition need to reassess
their stance. There are customers who believe themselves savvy enough
to participate in energy markets in an attempt to improve their
financial situation while bearing the risk that they will not. They
should be given that option. At the same time, there is another group
of consumers the vast majority of residential users who never wanted
things to change. For them, the provision of a cost-of-service
regulated alternative is a necessity.
Senator Bingaman. Thank you very much. Thanks to all of you
for your very good testimony.
Let me ask Mr. Hecht. I am concerned. I guess I am still
confused. In order to incentivize companies like yourself, your
own company and others, to generate power for sale in the
California market, why is it essential that you allow prices to
go as high as they have gone? I can understand how you would
want to have a good return on your investment, but why do you
need prices in the ranges that they have been? Why should we be
concerned about protecting the ability of people to charge
prices in those ranges, on the theory that they are going to
lose interest in producing power, if we do not protect those
rights?
Mr. Hecht. There are several good examples that I will give
you.
First of all, fuel cost alone in a few cases has exceeded
$500 a megawatt-hour. In a few cases, delivered price of
natural gas has been in the range of $50 a million Btu's. And a
good round number for some gas turbine generators is 10,000
Btu's per megawatt-hour. Simple arithmetic: $500 a megawatt-
hour.
Some other examples. There are some things that can be done
in the near term to increase supply even for this summer. For
example, it is true that installing conventional generation can
take 24 months and longer. But installing some forms of
distributed generation can be done much more quickly but at
much higher cost. Sending the right price signal to the end
user will give that end user the economic incentive to install,
even for this summer, some distributed generation, which can be
done in that time frame. So, there are some important reasons
why prices should be allowed to follow the market.
The prices are high. The market has been called
dysfunctional. I do not think that there is evidence that the
market is dysfunctional. Those high prices are telling you
something, telling you that there is a dramatic mismatch, not a
mild mismatch, between supply and demand. And we ignore that
signal at some peril.
Senator Bingaman. We have this chart that Senator Feinstein
has got up there. Could you put that one up? The way I read
that is the two lines that run across there show the power
generation in 2000 and the power generation in 1999.
Mr. Hecht. Yes.
Senator Bingaman. And the gap between those is modest.
Mr. Hecht. Yes.
Senator Bingaman. And you are saying that the mismatch is
so enormous that that explains the prices that are reflected on
the chart. The truth is the mismatch is pretty minimal compared
to the price changes that have been observed.
Mr. Hecht. Yes. I saw that chart this morning, and I am
anxious to speak to it because that chart just plots price
against time. If you were to plot price against demand, at
periods of low demand, periods when there is a surplus of
generation, the curve would be relatively flat, plotting price
against demand. At periods of high demand, periods when demand
and supply are almost matched, when demand is on the verge of
exceeding supply, as it has in California during the stage 3
alerts, the price/demand curve gets very steep. So, modest
increases in demand or even small reductions in supply can
produce dramatic changes in price. If you were to look behind
the numbers on that simplistic chart, I think you would see
that.
What that chart does not reflect is the example I gave
earlier of $50 a million Btu gas resulting in a fuel price
alone of $500 a megawatt-hour for a 10,000 Btu per kilowatt
hour plant.
It also does not reflect reductions in capacity which
occurred in California. Some small power generators actually
shut down because they were not paid. Some hydro facilities
were less available because it was a low hydro year. There was
also a reduction in capacity resulting from other forces as
well.
Senator Bingaman. You are saying that that much was not
generated. Basically you are saying that that red line there
that shows how much was generated in the year 2000 is wrong.
Mr. Hecht. No. The generation matches load on an hour-to-
hour, minute-to-minute basis, but the generation that was
called for approached the absolute capability of the system. In
fact, that is the definition of the stage 3 alerts that have
happened in California that we have all read about. And during
those periods, it is perfectly expected for prices to get high.
I can give you some other examples as well. This is not
unique. Those prices are in the several hundred dollars a
megawatt-hour range. As early as 1998 in the Ohio region, the
so-called east-central area reliability region, during a period
of a number of nuclear plants being forced out of service,
prices hit $3,500 a megawatt-hour and higher. So, that is not
unprecedented.
In PJM in the Eastern part of the country, prices have hit
$1,000 a megawatt-hour during short periods.
Senator Bingaman. Let me give you my lay person's view of
why prices may be hitting these very high levels, and then I
will defer to Senator Feinstein because my time is up here.
What you have here is a requirement on the utilities, the
certificated utilities, in the area to provide power, and they
are required by the commissions in their respective States, in
this case California, to provide that power in whatever way
they can. So, when they see a shortage, they will pay whatever
they have to pay to obtain that power. So, in a lot of ways, it
is not a traditional market where you can either buy or not buy
depending on whether the price is to your suiting.
Mr. Hecht. That is correct.
Senator Bingaman. In this case, you have got utilities that
are under legal obligation to buy that power at whatever price
they have to pay and continue to buy that power at that price
until they themselves go bankrupt.
Mr. Hecht. You make a very good point. The forces of supply
and demand in most markets are allowed to act not only on the
supply side of the equation but also on the demand side of the
equation. And because retail prices are fixed in California,
there has been no demand response. You are absolutely right.
That has increased the volatility of those markets.
Senator Bingaman. Yes, and the legislation that Senator
Feinstein and Senator Smith have put together would try to
address both, as I understand it.
Senator Feinstein.
Senator Feinstein. Thanks very much, Mr. Chairman.
Mr. Baum, do you remember our conversation in San Diego and
you told me that when Sempra had to purchase power in the
middle of the night, it was 500 times higher in cost?
Mr. Baum. Yes, I do.
Senator, I would like to, if I may, make a comment about
your chart and respond to some of the things that have been
said.
Senator Feinstein. I would appreciate it.
Mr. Baum. First of all, I think we could correct the record
that during the period of time shown in that chart, at least
through the summer spike period, I do not believe California
had a stage 3. The stage 3's have come up subsequently. So, the
assumption that we actually had a shortfall of whatever--I
think it is once they go below a 1.5 percent reserve, that it
is stage 3--did not occur.
Furthermore, natural gas prices remained fairly steady
during that period. They have recently spiked, particularly
through the transportation costs.
So, neither of those factors in this picture that is
portrayed on this chart--and it defies any reason to believe
that in the nighttime hours, when demand is actually quite low,
that prices would have remained at very, very high levels,
above $100 a megawatt-hour quite often during that summer
period and even higher today in the nighttime hours. That can
only be accounted by market distortions or irregularities in my
opinion.
Senator Feinstein. Thank you very much.
PG&E, Edison, and Sempra together sell power to how many
customers? Mr. Bryson?
Mr. Bryson. The number would be about 10 million customers,
approximately. It is the largest part of the State of
California. 10 million customers would probably mean 25 million
people, something like that.
Mr. Baum. I think that is about right. I think there are
about 12 million meters in the State, something like that. The
other two would be with the municipalities.
Mr. Worthington. We have 4.8 million meters and a lot more
people represented by that.
Senator Feinstein. So, these are, in effect, the largest
distributors of power in our State.
Now, one of the things that was pointed out and is very
much correct is that the 1996 law forced these utilities to
divest themselves of their generation facilities. I wanted to
ask this question. When you generated electricity, what was
your megawatt cost?
Mr. Bryson. Our cost for a long period of time had been on
the order of $35 a megawatt or 3.5 cents a kilowatt hour.
Senator Feinstein. PG&E, could you respond?
Mr. Worthington. I am not exactly sure of the number but I
believe that is the order of magnitude for our historic cost-
based rates as well.
Senator Feinstein. Mr. Baum.
Mr. Baum. Yes. That is about correct, depending on which of
the generating units, whether they were nuclear or gas fired
units.
I would comment too that those very plants that produced
that electricity at those costs were the plants that were
bought by the generators when we divested.
I wanted to go to one of the points about the targeted caps
and whether that would be an ex post facto taking or somehow
unfair. Those very generators that bought those plants made a
filing at the FERC, not long after they had acquired them,
asking the FERC to recognize that the costs that they had paid
the utilities for those plants were to be considered, should
cost-based rates be put in place, the cost that they should
have in their rate base. As I recall, the FERC said no, that it
should be the book cost that existed on the books of the
utilities at the time those plants were acquired. So, I would
dispense immediately with any notion that there was some
unfairness or lack of notice or taking that would occur should
cost-based rates be imposed on an old plant that was acquired,
which is all I believe targeted caps would do.
Senator Feinstein. Thank you. That is very helpful.
The point I am trying to make, Mr. Chairman, is they were
able to generate power at $35 a megawatt hour. A year or so
later, the people that bought those same facilities were
charging these same people up to what a megawatt-hour? Mr.
Bryson?
Mr. Bryson. Certainly the market at times has gone--there
was one case when it went to $800 a megawatt-hour. That is not
standard. But if you take again the Wall Street source 2 days
ago for the entire market--so that would include these people
that bought our plants--$353 a megawatt-hour I believe was the
number. So, approximately 10 times what the prior cost-based
pricing had been.
Now, an important reality addressed today is that natural
gas prices in that period had gone up. Some underlying costs
had gone up. So, cost-based pricing would be substantially
higher than the traditional $35 a megawatt-hour, but we do not
believe it would be anywhere near the 10 times that.
If I could, there has been much reference this morning,
including on the part of Mr. Hecht whose views I respect, that
the price of current wholesale cost needs to be seen by the
retail consumer. But as a practical matter, increasing utility
rates by 10 times overnight would have such enormously
dislocating and disruptive consequences that it just is not a
practical or desirable thing to do.
What I am concerned about is when people address this
problem strictly as a matter of theory, they come to nice
solutions that in practical effect would hurt deeply lots and
lots of people and already have hurt badly the California
utilities and California customers. We have this theory
competition between those who say rates ought to not go up at
all, that current rates were fine a year ago so do not raise
them, and those that say current price signals ought to be put
into retail rates all the time. That theory competition has led
to an absence of real action and real practical problem
solving. We have to get urgently now the practical problem
solving, and that will mean, unavoidably, some increase in
retail rates. I believe it absolutely will require, to be
practical, some controls on a fundamentally broken market that
is vividly demonstrated by that chart.
Senator Feinstein. Mr. Baum, could you comment on the
highest prices you paid on a generation of $35 a megawatt-hour?
What prices were you required to pay?
Mr. Baum. Well, SDG&E would have paid similar prices to
Edison because we were mandated to make all of our purchases
from PX and/or whatever was passed through from the ISO, which
was common essentially to the utilities. So, the answer would
be very similar.
I would like to make a comment about what Mr. Bryson just
said. San Diego was the first to pass through real-time prices,
which it did during that time last summer, and it caused what I
call a French Revolution syndrome that people were looking for
heads to cut off not only of politicians but of utility
executives. I believe, just as John Bryson has said, that it is
impossible or impracticable to pass through prices that are 10
times what people are paying. But I do believe that prices
should be passed through in an orderly and predictable fashion.
Let me say that what we saw during that time in San Diego
was an immediate drop in consumption of about 10 percent. I do
not believe--and I think there is ample evidence and research
at the Electric Power Research Institute--that one needs to
have double or triple the bill to get a 10 percent reduction.
There is some significant elasticity of demand even at lower
price increases.
But there is a secondary effect too if price increases are
predictable and come in over time, and that is that then
consumers and businesses can take the time to plan and can
justify capital expenditures as against these higher prices for
energy efficiency in their operations. So, I think there is
reason to believe that as much as a 20 percent reduction can be
achieved over a longer period of time.
So, I fully endorse the notion that at both ends, both the
supply and the demand side, we need to be orderly in what we
do. We need to raise prices in an orderly, predictable fashion,
but we also need to cap them temporarily.
Senator Feinstein. Yes.
Mr. Worthington, could you respond to my question as well?
And my question is, when you were generating at $35 a megawatt-
hour and you then sold that facility, what was that facility
then charging you for power at its most?
Mr. Worthington. Much like was just said. When we first
sold them, the prices remained near the price that we had
encountered when we owned them. It was only really later,
starting about June 2000, that the prices from those very same
facilities started skyrocketing in price. In fact, in that one
month of June 2000, we under-recovered from our customers $700
million compared to what was embedded in the rates that we were
entitled to charge under the retail frozen rates. To give you
just an order of magnitude, in one month it popped up $700
million and that was the delta over what was embedded in our
rates, and that was more than enough to cover the cost of those
plants ahead of time.
Senator Feinstein. My concern is how do we get through this
summer. Respectfully, Mr. Hecht--I listened very closely--I do
not think your solution would get us through this summer----
Mr. Hecht. May I give you some suggestions for the summer?
Senator Feinstein. Can I just finish? Let me just make my
point. I will be happy to listen to you.
Mr. Hecht. Sure.
Senator Feinstein. We are building power. Powerplants are
being fast-tracked. As a matter of fact, I have a list of nine
plants due to go on line with about 7,000 megawatt-hours of
capacity. That is happening. I mentioned earlier the peaker
plants. Just as fast as the Government can process them. They
are not going to be there this summer. Ergo, this summer is
going to be the same situation. You have got the major
utilities close to bankruptcy right now. What would you advise?
Mr. Hecht. Let me make a number of suggestions. I, in fact,
thought about the short-term issues and what might be done.
I already mentioned increasing retail prices, not by a
factor of 10, carefully explained, merely for at least some
consumers in some fashion. As Mr. Baum pointed out, sometimes
even modest increases in price do constrain demand.
Secondly, the installation of new capacity in small amounts
in certain ways can be accomplished for this summer,
particularly if the end user sees a higher price. Distributed
generation, small powerplants, micro-turbines, fuel cells can
be installed for this summer and can be done if the consumer
has the right pricing because they are more costly per
kilowatt-hour than larger generating plants that take longer to
install.
Thirdly, I would suggest that the State closely examine all
environmental regulations that may impede or inhibit the
utilization of existing facilities, existing generation. Might
there not be at least some regulations that could be amended at
least temporarily in some minor way that would increase
production capability? Some production was off line during
periods of very high prices during this past year because they
ran out of NOX emission allowances.
Another thing that might be considered--and I do not mean
this facetiously--is that the utilities and the State pay for
the energy that has been used but not paid for. Energy
marketers and producers do have choices. Opposite party credit
risk is one of the factors influencing that choice. To the
extent that they have choices, producers and energy marketers
will sell energy elsewhere than California where they perceive
the opposite party credit risk to be less. It has been
commented that these high prices are unjust and unreasonable.
Prices set by supply and demand, reflecting the actual
imbalance between the two, may well be one definition in
competitive markets of just and reasonable. I would submit that
paying zero for energy which has been consumed is, in fact,
unjust and unreasonable.
I also think that even the conversations about price
controls can reduce new production, even for this summer. Let
me give you one very small example.
My company, jointly with Duke, is constructing a powerplant
now in Kingman, Arizona which will be part of the Western
market. That plant is due to come on line this summer. Each
company has put more than a million dollars additional into
incentive awards for the contractors working on the facility to
get the facility in service merely 4 weeks early. That is a
multi-million dollar commitment that must be recovered in a
matter of weeks.
So, there are things that can be done for this summer. I do
respect the fact that a lot has been done for this summer. I do
not believe this summer need be the crisis that it is shaping
up to be.
Senator Feinstein. Mr. Bryson, Mr. Baum, Mr. Worthington,
would you respond?
Mr. Bryson. I would be pleased to. I think much of what Mr.
Hecht presents is old history and out-of-date and does not
apply in a practical way to the urgent and difficult situation
we face in California. Part of the problem that we face here is
that so much time is spent on theory and in pointing at the
past and mistakes made or allegedly made in the past.
The reality is that in a practical way California now is
doing every practical thing that I know that can be done to
site powerplants, to allow existing plants to produce and
produce at full capacity, to allow existing facilities to go
beyond contracts and nameplate and produce more, to site small
facilities, to waive or change environmental requirements that
might restrict production.
Believe me, as utilities we believe and would want nothing
more than the ability to pay for past incurred power. We simply
do not have the capacity to do that, and now the State is
taking that up.
Practical steps are being taken, but they are not much
solved by application of pure theory and old bromides.
With all due respect, I have just been handed a note that I
think puts an accent on this. The reason that I try to get
concrete and use numbers is to get away from theory. That is
textbook.
I am told that this morning, I believe, the California
Independent Operators Market Surveillance Committee--now, that
is an independent group of primarily economists that were
established with the adoption of the California deregulation to
review the competitiveness of the market and make judgments
about it. As perhaps you are aware, they have repeatedly
concluded--and these are people who have no commercial stake.
These are a combination of academics and other independent
close observers--that regrettably the wholesale market in
California is not competitive.
Here is the practical situation we are facing. They are
projecting, as of today, a 10-fold increase in the price of
power in the aggregate to California, from $7 billion in 1999--
and 1999 is a benchmark because it was prior to any of the run-
up in prices that began last May--all the way up to $70 billion
projected for year 2001. The number in 2000 was $28 billion.
So, this is a terrible problem. And just the experience of
8 months in the year 2000 put us into practical near
insolvency. Projecting, going forward, for 2001, current year,
is more than double the cost of last year.
So, something absolutely has to be done, and it does not
do, in my judgment, to say just let markets go forward. The
markets are not working. I believe in competitive markets. I
believe that competitive markets can work in electricity, but
they are not working now and we have a terrible crisis and we
need a practical solution. Imposition of cost-based rates in my
judgment ought to be temporary. It ought to be short. It ought
to exist only under clear parameters. The proposed legislation,
Senator, offered by you is clear on that point. All the
comments I have heard this morning have been clear on that
point, but we simply cannot go forth with inaction on the part
of either the State or the Federal Government.
Mr. Baum. Let me say that in my opinion there is little
that can be done that has not already been done or is in the
works for the supply side for this summer. I think we are
pretty much baked as far as that is concerned. There are plants
in the works and there are some peaking turbines and a variety
of other efforts that are underway.
But I do think there is a lot that can be done with respect
to price. Mr. Hecht does have a point in bringing up the credit
issue. I believe that built into the prices that we are seeing
currently is a significant portion of the price that relates to
the uncertain credit worthiness of the ISO, of the utilities
themselves, and frankly, unfortunately, even the State of
California. Mr. Fetter may want to comment on what Fitch's view
of California's continuing credit worthiness may be at these
prices. But I believe that unless we do something to stabilize
the price, to stabilize the ability of the market participants
to pay, that we will see that continuing credit component
appearing.
But last, I think the main thing that can be done for the
summer, apart from this bill that you have put forth, is to
work on the demand side of the equation. I think much can be
done in that area.
Mr. Worthington. I would concur with the comments that I
think the State and we have done what we can with respect to
the supply side for this coming summer. It is mid-March
already. Not many months left.
On the demand side, I know the Governor about a day and a
half ago came out with his proposal to provide an additional 20
percent rebate to customers who save 20 percent of energy usage
over this coming summer. I think that type of proposal does
need to get attention and other demand-side management. But I
do not think even with an aggressive demand-side management
program, as fully implemented as we could for this summer, will
meet the gap that we are going to have.
That is why I fully endorse the temporary limits of price
caps or cost-based rates for existing generation. I do not see
any other way that we are going to otherwise avoid those very
startling numbers that we just heard of what the estimate for
the total California energy cost could be for the year 2001.
Senator Feinstein. Mr. Fetter, and then I will conclude. I
think if you could comment on what might happen to the State's
credit rating as well.
Mr. Fetter. I would say the expectation of everyone on Wall
Street, not only on the credit rating side, but on the equity
side as well, from the start of this crisis would be that rates
would go up. Rates going up would improve the credit profiles
of the three companies represented here. In fact, all four
companies would be strengthened if rates came closer to what
the market structure was intended to be.
As far as the State's credit rating, we recently reaffirmed
it at AA. We are in the process of reviewing bridge financing
which will fill the gap until the $10 billion bond issuance
occurs later this year.
But one question that has come up on the generator side is
the Division of Water Resources which is an agency of the State
and so is not backed by the State's full faith and credit. It
is making certain purchases where the generators are not sure
what is backing those purchases and whether, at a later time,
that agency may say that the prices they agreed to purchase
power at were unjust and unreasonable, so we do not intend to
pay those prices. And that I think is chilling some of the
interest on the part of generators, both in State and out of
State, and their willingness to supply power to California.
Senator Feinstein. Let me just thank you all very much. I
appreciate your coming so far for this. Thank you.
Senator Bingaman. I also wish to thank all the witnesses. I
think it has been a useful hearing. We will try to get a
consensus to move ahead. Thank you very much.
[Whereupon, at 1:26 p.m., the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
Federal Energy Regulatory Commission,
Washington, DC, April 17, 2001.
Hon. Frank H. Murkowski,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Senator Murkowski: Thank you for your letter of March 26,
2001. In that letter, you requested that I provide responses to
questions from Senators Cantwell and Wyden that arose following my
March 15, 2001 testimony before your Committee. Please find enclosed my
responses to these questions.
If I may be of further assistance, please let me know.
Sincerely,
Curt L. Hebert, Jr.,
Chairman.
[Enclosures]
RESPONSES TO QUESTIONS FROM SENATOR WYDEN
Question 1. California is trying to work out a deal to sell 26,000
miles of transmission lines now owned by private utilities to the
State. This sale is one of the key components of a deal to help bail
out California utilities and pay back those who are owed for power sold
to the utilities. Does the Commission have jurisdiction to review this
deal?
Answer. Yes. The Commission has jurisdiction to review the sale of
jurisdictional transmission assets owned by public utilities and also
review any transfer of operational control of jurisdictional facilities
by a public utility. Section 203 of the Federal Power Act requires the
Commission to review sales, leases or other dispositions of
transmission facilities owned by public utilities, when such facilities
have a value over $50,000 and they are used for transmission in
interstate commerce.
Question 2. If a deal goes through that involves the State of
California acquiring transmission lines, won't this raise regulatory
concerns with the Commission? For example, FERC Order 2000 requires
participants in a Regional Transmission Organization (RTO) to give up
operational control of those transmission lines. Regulatory concerns
have been raised about how the Bonneville Power Administration (BPA)
could participate in an RTO without giving up control of the
transmission lines it owns. Won't state ownership of transmission lines
raise the same regulatory issues as have been raised by the BPA? How
would this regulatory concern be addressed in the case of California?
Would the State have to give up control of the lines it acquires from
private utilities?
Answer. Yes, state ownership of transmission lines could raise
regulatory concerns similar to those raised with respect to BPA and
other non-public utilities. Non-discriminatory open access to
transmission service in interstate commerce and the formation of
Regional Transmission Organizations (RTOs) are crucial to achieving
competitive markets in electric power. California transmission lines
are an integral part of the western interstate transmission grid.
If the sale of transmission lines to the State of California
occurs, the Commission would need to decide whether the transaction is
consistent with the public interest, based on all relevant
considerations. The need for a non-discriminatory transmission grid and
coordinated, efficient markets in the West could be undermined if
California acquires the transmission facilities of the public utilities
in California, but chooses not to apply or follow the same non-
discriminatory transmission rules as public utility transmission owners
regulated by the Commission. Similar concerns could be implicated if
California chooses not to include those transmission facilities as part
of a west-wide RTO. While there are various means the Commission could
use to attempt to address these interstate concerns, it is not possible
to comment in detail without knowing more about California's proposal
to acquire and own transmission lines.
RESPONSES TO QUESTIONS FROM SENATOR CANTWELL
Question 1. With Washington State as the backdrop--with surcharges
and rate increases now approaching triple digits--what new supply do
you expect to see triggered between now and summer by the kind of price
increases we've seen? Are we really dealing with a market signal here
or are we burdening consumers with price signals that cannot work?
Answer. The Commission is doing everything within its powers to
promote new supply and conservation and thereby bring back down, as
quickly as possible, the price increases to which you refer. As for
this summer, higher than normal prices experienced in the West during
the summers of 1999 and 2000 will permit and encourage more generation,
and thereby enhance reserve margins, whereas low prices may leave some
generation idle. Furthermore, higher prices may provide the financial
wherewithal needed to adequately maintain these older plants and
thereby preserve the reliability of electrical grid operations. I would
also note that an appropriate price signal may prompt additional supply
over the long term and help to ensure adequate generation in the summer
of 2002 and beyond. Finally, as you know, approximately 50 percent of
the generation in the West is not jurisdictional to the Commission.
More importantly, on the demand side, an appropriate price signal
will encourage conservation, both in terms of consumers using less
electricity, and consumers making investments in more efficient
electricity-consuming appliances. Although I am not aware of estimates
of the conservation potential in Washington State, I do know that
estimates of the conservation potential in California are significant.
Conservation has the effect of lowering prices for all consumers by
balancing supply and demand at a lower level of demand.
Question 2. Washington state has price increases far larger than
those that have shown up in California. Demand reduction is running
about 6% overall. However, the major reason is that industry shuts down
and lays off workers. Is that kind of price signal desirable? Would you
not agree that the reason for this response--shut downs and layoffs--is
that price signals are not meant to be effective in short-term, crisis
situations? Can we expect market signals to work when there's an
incomplete or ineffective market?
Answer. We recognize the importance of an effective, well-
functioning bulk power market which can send appropriate price signals
to consumers to reduce demand and to generators to increase supply. It
is regrettable that high prices have caused industrial shut-downs,
worker layoffs, and other economic dislocations. But it is to be
expected that some industrial firms, being the most price sensitive
sector of the economy, will respond first. Some industrial firms have
benefitted from purchasing a significant amount of their energy needs
at low spot market prices for several years, and are only now feeling
the effects of high spot market prices.
However, I understand your concerns about high Western power prices
and the implications for Western electricity consumers. While there are
no easy answers to these problems, it is my belief that market-based
solutions offer the most efficient way to move beyond the severe energy
shortages confronting California and the West.
In fact, appropriate prices, even high ones, can and do elicit some
very potent short-term effects that work to lessen the impact of supply
shortfalls. The fact that industrial electricity consumers shut down in
some cases due to high electricity prices allows the electricity they
would have consumed to be used by others, including hospitals, schools,
and public safety consumers such as police and fire safety. In that
event, all purchasers of electricity should pay lower prices, and
actual shortages (blackouts) ought to be reduced in scope and duration.
In the future, industrial firms may begin to choose differently
than they have in the past when purchasing their energy services. In
light of the experience of the last year, industrial firms may choose
among the number of strategies available to address the risk of
volatile spot market prices including the choice of maintaining a more
diversified supply portfolio so that they purchase more energy in long-
term markets where prices are likely to be more stable.
Question 3. Your press release on March 14 encompasses a lot of
FERC activity in an effort to respond to criticism that you have not
adequately addressed the Western electricity crisis. I commend the
effort, but question the scope. Why does your proposal not address
prices? How much energy will this proposal add to the grid and on what
timeline? When fully implemented, how many megawatts are you expecting
to produce with these supply initiatives? What effect on rates would
you estimate from this increased supply?
Answer. The Commission's March 14 order was issued to increase
energy supplies and reduce energy demand in California and the West.
The Commission implemented certain measures immediately, including: (1)
streamlining regulatory procedures for various types of wholesale
electric sales (including sales of backup or on-site generation and
sales of demand reductions); (2) expediting the certification of
natural gas pipeline projects into California and the West; and (3)
urging licensees of hydroelectric projects to assess the potential to
increase the generating capacity of FERC-licensed projects. The order
was issued after taking a broad look at the Commission's regulatory
responsibilities and addressing measures the Commission can implement
immediately. The Commission also proposed, and sought comment on, other
longer-term measures (such as incentive rates for transmission or
pipeline construction completed by specified dates).
The March 14 order does not directly address prices because pricing
issues are being addressed in other dockets and orders, in particular
the Commission's December 15 order, which created a $150 breakpoint and
directed Commission staff to propose market mitigation to be put in
effect as of May 1, 2001. On March 9, and 16, the Commission issued
orders requiring California power sellers to make refunds or offsets of
approximately $124 million for January and February 2001 transactions
or provide further justification of their prices. In addition, the
Commission held a conference in Boise, Idaho on April 10 addressing
price volatility throughout the West.
Where the Commission can act to enhance the energy infrastructure
in the West it has done so. On April 6, 2001, the Commission issued a
certificate of public convenience and necessity authorizing the
construction of 135,000 Mcf per day of new natural gas pipeline
capacity to California by the Kern River Transmission Company. This
authorization issued within three weeks of Kern River's application to
the Commission.
In my judgment, the most effective way to lower Western energy
prices in all time periods, and to keep them low, is to increase
Western energy supplies. By way of example, I offer the summer of 1998,
when wholesale electricity prices in the Midwest increased
significantly. The Commission resisted pleas for price caps or other
constraints. Subsequently, suppliers responded to the market-driven
price signals and today the Midwest is not experiencing supply
deficiencies. In the West today, we have market prices and barely
adequate supplies. If we reduce prices below market levels, supplies
will go elsewhere, risking greater reliability problems.
The Commission's March 14 order was intended to increase energy
supplies in the West. Although it is not clear how much additional
energy will be available this summer or the effect it will have on
rates, we believe that the Commission's order will permit many existing
sources of energy to operate more efficiently. For example, of the 326
hydroelectric projects licensed by the Commission within the WSCC, 200
have provisions that limit operational flexibility. These 200 projects
represent a total capacity of 21,000 megawatts. Greater flexibility in
the dispatch of this capacity, consistent with protecting environmental
resources, could provide additional energy to enhance the reliability
of the system.
Commission staff held two conferences, on April 9 and 10 in
Portland and Sacramento, to discuss with agencies, licensees, and
others, ways of expediting proposals to increase power generation at
existing licensed hydroelectric power projects. The conferences were
attended by representatives of the hydropower industry as well as
resource agencies and nongovernmental organizations. In general,
industry representatives set forth proposals for increasing electrical
generation that ranged from modifying minimum flows and reservoir
elevations to installing additional generating units and enhancing the
efficiency of existing facilities. The resource agencies and
nongovernmental organizations expressed a willingness to expedite
processing of such proposals. Commission staff urged all of the
industry representatives to comprehensively review their projects, in
partnership with the resource agencies and other interests, to find
ways of increasing power generation while preserving environmental
resources.
I find another example of a positive response to the Commission's
March 14 order in a press release issued by Avista Utilities just last
Friday, on April 13. In that announcement, Avista states that it has
filed with the Washington and Idaho public utility commissions to
implement an all-customer electric energy buy-back program.
Specifically, Avista would offer a credit of five cents per kilowatt-
hour for each customer which reduces electric use by more than five
percent. This is precisely the type of demand reduction program the
Commission has encouraged, and represents the type of cooperative
relationship between federal and state agencies that is necessary to
make it through this difficult summer.
Question 4. A possible variation on cost-based rates could be to
exempt new generation from the cost-based requirement. Would you
support this approach?
Answer. While I have strong reservations about returning to cost-
based regulation, I agree that it is very important that market forces
be allowed to work in ways that encourage investment in new generation.
I have an open mind to pricing approaches that ensure this result.
However, it is difficult to design and police a tiered system in
which pricing policies are different for existing and new generators.
Existing generators will have an incentive to sell power through
intermediaries whose power sales are either not subject to the
Commission's jurisdiction, or are outside of the scope of any cost-
based regulatory rule. (Past experience with vintage rate setting
schemes in the pricing of natural gas suggests that it may be
impossible to craft rules which are not subject to circumvention and
arbitrage, or lead to other unintended undesirable consequences.)
Accounting for the components of the sale to ultimate consumers may
require significant transaction tracking and auditing activity.
Some may also be concerned with the disturbing precedent of a boom-
bust regulatory cycle: deregulation, followed by re-regulation.
Following deregulation, some utilities sold off their generation
assets, either voluntarily or pursuant to state directive. The
companies acquiring these assets did so based on the knowledge and
belief that their future sales would be made at market prices, and set
acquisition prices (often at levels far in excess of book value) based
on those beliefs. Subsequent re-regulation of these assets, could
create further regulatory uncertainty in the future as for-profit
companies consider whether to invest in the electric power industry in
general, or in Western electricity markets in particular, unless such
re-regulation were known to be of limited duration during extraordinary
circumstances. Ultimately, I believe that market certainty is one of
the most important goals we can seek to achieve for electricity
producers and consumers alike.
Question 5. In your March 14 press release, about the order
regarding ways to increase the supply of electricity in the West, you
say that: many hydro projects have the potential to more fully use
their available water resources to increase generation. This may be
done through additional capacity units, generator and/or turbine
upgrading and other operational improvements. The Commission asks that
all licensees immediately examine their projects and propose and
efficiency modifications that may contribute to increased power
supplies.
(a) How fast is FERC prepared to act on efficiency modifications
proposed by hydro licensees? Can you commit to a specific number of
days? My concern is that summer is fast approaching, and we need to get
the most out of our hydro system to keep the lights on in the West. If
FERC does not act promptly on these proposals, it will be too late to
do us any good.
(b) Your press release also mentions the need to expedite the
Endangered Species Act consultation process. Specifically, how do you
plan to do that? Will you work with the resource agencies (e.g., the
Fish and Wildlife Service) to assure that endangered species are
protected during this process?
Answer. In its March 14, 2001 order, the Commission ordered the
removal of obstacles to increased electric generation and natural gas
supply in the Western United States. The Commission will act on any
efficiency modifications as promptly as possible. Where there is broad
support for an amendment and the environment, including endangered
species, is adequately protected, we would expect to act on a proposal
in a matter of days. As I noted in my response to Question 3,
Commission staff has held two conferences in the WSSC region. As stated
above, the conferences revealed a commitment of the industry and other
participants to identify proposals that would provide for additional
power generation that are consistent with environmental protection.
Question 6. On March 9, you issued an order regarding potential
refunds for California electric power sales. Why was that order
restricted to California when it is clear that much of the Northwest is
paying as much or more for electricity on the current distorted market?
Why does the ``justness and reasonableness'' evaluation only apply to
transactions that took place during Stage 3 conditions? One could make
the case that higher prices are more nearly warranted when a Stage 3
emergency is declared because they are just trying to keep the lights
on. The price gouging that is of most concern is at Stage 1 and Stage
2. The limited time period and limited conditions under your refund
order are inconsistent with FERC's authority to look at just and
reasonable rates. How can consumers be protected if you don't use your
delegated authority?
Answer. The Commission's March 9, 2001 order put 13 California
power sellers on notice that they must either make refunds for certain
power sales or provide further justification of their prices. This
order followed the Commission's December 15, 2000 order adopting
specific remedies to address dysfunctions in California's wholesale
bulk power markets and to ensure just and reasonable wholesale power
rates by public utility sellers in California.
The December 15 order found that California's flawed market rules
caused rates that were unjust and unreasonable during certain periods.
The order addresses specific market flaws in California wholesale
electricity markets and made public utility sellers that bid above
$150/MWh subject to weekly reporting requirements to ensure just and
reasonable rates. The sales of all public utility sellers into the ISO
and PX markets were also made subject to potential refund. Under the
conditions in the December 15 order, the Commission must issue written
notification to a public utility seller within 60 days of each weekly
reporting filing that the seller's transactions are still under review
or refund liability for those transactions will automatically cease.
In the March 9 order, the Commission established a proxy price
screen applied to transactions that are above $150/MWh breakpoint and
that take place during Stage 3 emergencies. The Commission reasoned
that the potential for market power abuse is most likely to occur
during periods of severe supply deficiency. The Commission limited its
approach to Stage 3 emergency hours, when the supply/demand imbalance
is the most severe and sellers know their power is most needed.
The Commission has considerable discretion in establishing just and
reasonable rates under the Federal Power Act. In setting rates, the
Commission may take into account non-cost factors, including the need
to encourage new supply. See Permian Basin Area Rate Cases, 390 U.S.
747 (1968). In the refund order at issue, the Commission's focus only
on the highest stage of emergency serves to target the Commission's
intervention where it is needed most. Stage 3 emergencies (when reserve
margins dip below 1.5%) are the periods when supply and demand are on
the verge of imbalance. As the March 9th order reasoned, at Stage 3,
the least efficient simple-cycle combustion turbine unit (CT) would be
the marginal source of power, and therefore represented a reasonable
point for developing a proxy price screen. The Commission's order did
not want to mask scarcity costs because doing so will blunt the price
signals needed to induce supply entry. And because current technology
is much more efficient than marginal CT units, the proxy price leaves
room for price signals to stimulate market entry. I would note,
however, that these issues are subject to rehearing.
Others have suggested, as you do, that the Commission should extend
its approach in California to other parts of the Western markets. While
I have an open mind on this issue, there are certain fundamental
differences between California's centralized market design and the
bilateral contract regime that exists elsewhere in the West. As a
result, our approach in California does not adapt readily to other
parts of the West.
______
The Secretary of Energy,
Washington, DC, April 10, 2001.
Hon. Frank H. Murkowski,
U.S. Senate, Washington, DC.
Dear Senator Murkowski: In response to a number of inquiries from
Members of Congress, and in light of recent discussions of possible
legislation addressing energy issues in the West, and particularly
California, I thought it would be helpful to provide you with an update
on the crisis.
First, it is important to note that this crisis is a supply crisis.
Simply put, the principal problem--and thus the proper focus of our
attention--should be on the problems of the blackouts and shortages.
Proposed solutions that do not either lead to increased supply or
reduced demand will not address the core problems confronted in the
West.
Thus, the Administration has taken a number of actions to support
California in its efforts to address critical supply issues.
One day after being sworn into office, the President
directed me to call Governor Davis to discuss the crisis and
ask how we could help address the power shortages.
Three days after taking office, at Governor Davis' request,
we extended the emergency electricity and gas orders to give
California time to develop legislation aimed at maintaining
electricity supplies.
In February, also at the request of Governor Davis,
President Bush issued an executive order directing Federal
agencies to expedite permits relating to construction of new
power plants in California. The U.S. Environmental Protection
Agency has issued air permits for three power plants in the
past month.
President Bush and I have engaged in discussions with the
Government of Mexico about increasing electricity imports from
Mexico. DOE is also working expeditiously to approve two cross-
border electricity expansions between California and Mexico
that should be approved later this year.
In early March, at the behest of Governor Davis, I sent a
letter to the Federal Energy Regulatory Commission (FERC)
asking that the agency act on his request for an extension of
the waiver for qualifying facilities from certain fuel
requirements.
In response to a request from the State of California, the
U.S. Environmental Protection Agency has provided other
assistance, clarifying rules relating to operation of backup
generators.
While the imbalance between supply and demand is the reason
for high energy costs and power shortages, the Bush
Administration was the first to take action on overcharges.
FERC took unprecedented action and ordered the first-ever
refunds to address overcharges by generators on market-based
rates after we took office and after a Republican took over as
Chairman.
On March 14, FERC issued a series of orders designed to
expedite energy supplies to California, including streamlining
regulatory procedures for wholesale power sales, expediting
natural gas pipelines, and urging hydropower licensees to
assess the potential for increased hydropower generation.
As follow up to a meeting with Governor Davis, I issued a
letter indicating that the Administration did not oppose the
State's proposed purchase of the California utility
transmission systems, conditioned on the adherence to open
access requirements.
Just two weeks ago, I met with a group of California energy
suppliers to impress upon them that the next several months
should not be viewed as ``business as usual,'' and to ask for
their help to avoid foreseeable disruptions in supply.
Last week, I met with a group of electricity experts to
discuss the California electricity crisis and to explore
actions that could be taken by the Federal Government and State
to increase supply or reduce demand.
As you can see, the Administration has taken constructive action
from its first day to help California deal with its electricity crisis.
Governor Davis has expressed his appreciation to both the President and
me for this help.
Regrettably, our well-founded opposition to price caps has been
claimed by some to suggest the Administration either does not care
about California and the West or is doing nothing to address the
problem. Certainly, the actions described in this letter show this is
simply untrue.
The only thing we have opposed has been the imposition of price
controls because they would not prevent blackouts and would drive away
the new supply California and the West so badly need. The
Administration is not alone in its opposition to price caps. In
February, eight of the eleven Western Governors sent me a letter
expressing their opposition to price caps. Those eight governors
reiterated their opposition in an April 6 letter to FERC Chairman Curt
Hebert, calling them ``penny wise and pound foolish.''
By contrast, advocates of price controls have failed to indicate
how price caps would increase supply, decrease demand or prevent
blackouts this year.
I appreciate the opportunity to brief you on the numerous actions
the Administration has taken since our first day to support California.
Please be assured that we will continue to look for constructive ways
to remove obstacles to new electricity supply in California and the
West.
Sincerely,
Spencer Abraham.
______
Federal Energy Regulatory Commission,
Washington, DC, April 3, 2001.
Hon. Frank Murkowski,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: At your Committee's March 15, 2001 hearing on
Western Energy Problems, Senator Pete Domenici asked that the Federal
Energy Regulatory Commission report on the reasons for the significant
differential between wellhead prices for natural gas produced in New
Mexico and the delivered price of gas at the California border.
Specifically, Senator Domenici questioned why producers in New Mexico
were receiving $5 for natural gas while natural gas was being sold for
$60 at the California border.
I have attached a Staff paper discussing the operation of natural
gas markets. I hope these answers are helpful to you. If I can be of
any further assistance in this, or any other matter, please do not
hesitate to contact me.
Sincerely,
Curt L. Hebert, Jr.,
Chairman.
[Enclosure]
STAFF PAPER ON NATURAL GAS MARKETS
There are various ways in which a natural gas buyer in California
(or elsewhere), whether it is a local distribution company (LDC),
industrial customer, or electric generator, can get gas to the state
border. First, the customer can buy gas in the various producing
basins, either on the spot market or through a long-term gas supply
contract, and transport the gas on an interstate natural gas pipeline
using capacity that it has purchased directly from an interstate
pipeline serving California. In that circumstance, the customer would
pay the interstate pipeline's tariff rate, which is regulated by the
Commission, plus the price of gas at the wellhead.
A second option would be for the customer to purchase gas in the
producing basins and transport the gas to the state border using
capacity that was released to it by an entity holding interstate
capacity. If the customer purchased released capacity, the price the
customer pays for the interstate capacity could exceed the pipeline's
maximum tariff rate because, pursuant to Section 284.8(i) of the
Commission's regulations, ``[u]ntil September 30, 2002, the maximum
rate ceiling does not apply to capacity release transactions of less
than one year.'' Under this option, the customer would still pay the
congressionally deregulated price of natural gas at the wellhead.
However, while the price paid for the interstate capacity could exceed
the pipeline's maximum tariff rate, capacity release transactions do
not appear to be causing the $60 gas prices. Capacity release data
received by the Commission for November and December 2000 show that
there were relatively few short-term capacity release transactions and
nearly all of those transactions were small volumes priced at the
interstate pipelines' maximum tariff rates.
The final way in which the customer could get gas would be to buy
it in a bundled sales transaction. In that circumstance, the customer
does not contract for its own interstate capacity and has not purchased
released capacity. Nor has it entered into any long-term gas supply
contracts. The customer would enter into a contract with another entity
who would make arrangements to deliver the gas at the California border
for an agreed upon price. The entity would have its own gas supply or
purchase gas on the spot market in the producing basins. The gas would
be transported using the entity's own interstate capacity as described
in the first option or firm capacity that it obtained through a
capacity release arrangement as described in the second option. While
these transactions appear to account for the $60 natural gas prices at
the California border, a review of Gas Daily index prices for December
indicates that the price spikes of $60 occurred only for a few days.
The price that producers receive for their natural gas at the
wellhead reflects the value of the natural gas in the production area,
while the higher price received at the California border appears to
reflect the value a natural gas customer without interstate pipeline
capacity places on having gas delivered to the California border. Any
entity who has both gas supplies and interstate capacity is able to
capture this value. In order for producers, including producers in New
Mexico, to sell natural gas at the California border, they can elect to
secure any available transportation capacity directly from the
interstate pipelines or through capacity release transactions. In doing
so, however, the producers would bear the cost responsibility of
retaining interstate capacity.
The Commission's jurisdiction over bundled sales transactions is
limited. The Commission retains jurisdiction to regulate sales for
resale by interstate pipelines, intrastate pipelines, LDCs and their
affiliates, except when they produce the gas that they sell. The
Commission also does not have jurisdiction over bundled sales
transactions that are direct sales. In addition, the Commission cannot
regulate the price of gas imported from countries with free trade
agreements, including Canada and Mexico. Based on information contained
in the California Energy Commission's November 2000 report entitled
California Gas Analysis and Issues, the Commission estimates that
between 12 and 17 percent, but no more than 35 percent, of gas sales
into California would be subject to the Commission's jurisdiction. The
percentage of gas subject to the Commission's jurisdiction could change
daily depending on a number of factors including the seller of the gas,
the buyer of the gas, the source of the gas and how the transaction is
structured. Any reregulation of the price of natural gas could
bifurcate that natural gas market into jurisdictional and
nonjurisdictional elements. This bifurcation could send inaccurate
price signals to gas consumers and could cause distortions in the
natural gas markets, similar to those that occurred in the 1970s, when
interstate natural gas sales were subject to federal regulation and
price controls.
Appendix II
Additional Material Submitted for the Record
----------
The Stella Group, Ltd.,
Washington, DC, February 20, 2001.
Hon. Frank Murkowski,
Chairman, Committee on Energy & Natural Resources, U.S. Senate,
Washington, DC.
Dear Senator Murkowski: As a leading firm in the marketing of
distributed renewable energy technologies, I would like the opportunity
to testify before the Committee on the following Department of Energy
renewable energy programs relating to solar energy, distributed energy,
combined heat and power, and energy storage. Particularly on how it
relates to electricity reliability and price stability.
The Stella Group, Ltd, is a strategic consulting firm to the
distributed power industry founded in 1995. The firm receives no
federal funding or subcontracting. Previously, I served 14 years
concurrently as Executive Director of both the Solar Energy industries
Association and the National BioEnergy Industries Association.
I hope for the opportunity to provide short testimony in regard to
these important programs.
Sincerely,
Scott Sklar,
President.
______
Morrison & Foerster, LLP,
Attorneys at Law,
Washington, DC, February 21, 2001.
Hon. Frank Murkowski,
Chairman, Senate Committee on Energy and Natural Resources, Washington,
DC.
Dear Senator Murkowski: We are submitting two news articles for
inclusion into the record of your Committee's hearings on the
California Energy Crisis.* These articles are from the Wall Street
Journal, California Edition, and the Los Angeles Times, Orange County,
regarding AES' efforts to restart two mothballed units in Huntington
Beach, California. If the necessary permits can be secured, AES would
bring on line 450 megawatts of generation to help meet next summer's
energy needs in California. We also enclose AES' recent firm
announcement on its plans to reactivate the Huntington Beach units.
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* Attachments have been retained in committee files.
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AES is the world's largest global power company, which 19 years ago
began developing, building and owning cogeneration plants in the U.S.
AES' experience includes owning generation businesses in competitive
markets in Australia, Argentina and England and Wales. In California,
AES has owned and operated a 125 MW combined cycle power plant in Santa
Clarita since 1988. Ten years later, we purchased from Southern
California Edison power plants in Redondo Beach, Huntington Beach, and
Long Beach representing 4000 MW.
Please let us know if you have any questions.
Sincerely yours,
Robert H. Loeffler,
Attorney for AES.
______
State Capitol,
Boise, ID, March 14, 2001.
Hon. Curt Hebert, Jr., Chairman,
Hon. William Massey, Commissioner,
Hon. Linda Breathitt, Commissioner,
Washington, DC.
Dear Chairman and Commissioners: You are aware of the energy
challenges confronting my state of Idaho and other Western states this
year due to historically low water levels. We face a critical imbalance
between the demand for energy and the supply of energy.
Some have offered temporary solutions for a long-term problem. Of
those solutions, price caps have been discussed as a possible remedy.
You may recall that on February 6 of this year, eight western
governors, including myself, asked Secretary Abraham not to impose
price caps on electricity and natural gas. Just as I opposed price caps
then, I oppose price caps now.
Although price caps are intuitively appealing in our current
situation they may ultimately undermine our efforts to offset the
energy situation that we are experiencing. One of the major drawbacks
to price caps is that it discourages investment in new generation
facilities. That is something that we cannot afford to do. Instead,
bringing new facilities on-line is a long-term solution to this
problem. Another issue surrounding price caps is that they jeopardize
current short-term and long-term energy contracts that are already in
place. This would exacerbate the problem for the entire region.
We have seen the devastating effects price caps have had on
California. We do not want that to spread into the other western states
that are proactively seeking real solutions to this real situation.
In a September 11, 2000 speech before the Senate Energy and Natural
Resources Committee, then Commissioner Hebert stated the following:
``In a report dated September 6, 2000, the Market
Surveillance Committee of the California ISO concludes that
price caps have little ability to constrain prices . . . If the
FERC is serious about increasing generation supply, it should
act immediately to withdraw all price caps in generation
markets. They distort price signals and inhibit entry into
competitive markets.''
Furthermore, it was concluded in a September 24, 1998 report from
the FERC staff to the Commissioners on Midwest electricity price spikes
the following:
``. . . The team believes that price caps, whether they are
applied generally of intended for specific, emergency
situations, create a situation in which prices are not allowed
to perform their rationing function. In addition, they can
distort market signals and prevent the efficient allocation of
resources resulting in shortages.''
As I have already stated, we must have long-term solutions to this
situation. Price caps only offer a false sense of security and do
nothing to remedy the problem. Common sense approaches such as reducing
demand and increasing supply and siting new generation facilities is
the only sure way of solving the problem. These are the discussions
that we should be engaged in that will offer real solutions, and I am
hopeful that the Commission understands that.
I appreciate this opportunity to share my concerns with you about
price caps. The economy of our region depends upon successfully
managing this energy challenge that we are facing. With your help, we
can do that.
Sincerely,
Dirk Kempthorne,
Governor.
______
State Capitol,
Sacramento, CA, March 15, 2001.
Hon. Frank Murkowski,
Chairman, Senate Energy and Natural Resources Committee, U.S. Senate,
Washington, DC.
Hon. Jeff Bingaman,
Ranking Member, Senate Energy and Natural Resources Committee, U.S.
Senate, Washington, DC.
Dear Chairman Murkowski and Ranking Member Bingaman: Thank you for
convening today's hearing to discuss legislation introduced in the U.S.
Senate to address the problem of high prices and shortages of
electricity in the West. This is an issue that affects the citizens in
all of our states to varying degrees.
I want to commend Senators Feinstein and Boxer for their leadership
in advancing these proposals. Their legislation makes a clear and
compelling case for greater levels of intervention by the Federal
Energy Regulatory Commission (FERC) in responding appropriately to
California's electricity situation. I appreciate the Committee's
willingness to hear testimony on these measures, and I urge the
Committee to seek ways to advance the underlying goals of the
legislation.
Since my January 30, 2001 letter to you we have made significant
progress in our comprehensive strategy to tackle the myriad issues
before us. We are maintaining our aggressive efforts to increase new
generation, decrease demand, reduce our reliance on the spot market
through long-term contracting, stabilize the financial viability of our
utilities, and plan for electricity and natural gas transmission
improvements, Attached for your information is a more detailed
discussion of recent developments in California.*
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* Attachments have been retained in committee files.
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I want to assure you that my Administration continues to pursue
this course of action with spirit and determination. We are doing
everything humanly possible to meet this challenge. However, the
federal government has an obligation and responsibility to take
corrective and decisive action on one issue that falls squarely on the
shoulders of Washington--excessively high wholesale energy prices.
In the near term, these wholesale prices--which have been found by
the Independent System Operator (ISO) to greatly exceed the actual cost
of production--need to be brought down to reasonable levels. The
excessive charges levied by generators have brought California's two
largest utilities--Pacific Gas & Electric and Southern California
Edison--to the edge of bankruptcy. Last week the FERC itself found that
13 generating companies may have to refund $69 million for overcharging
on power sales in January alone.
Earlier this week, Governor Locke of Washington, Governor Kitzhaber
of Oregon and I formally requested that the FERC take steps on an
interim basis to restrain the unreasonably high wholesale costs in our
region. We specifically suggested that the FERC give serious
consideration to a plan proposed by Commissioner William Massey. The
essence of the plan centers around a temporary cost-based price cap on
spot market sales in the western interconnection. The price cap could
be calculated on a generator-by-generator basis at each generator's
variable operating costs plus a reasonable rate of return in the range
of $25/MWh.
As a purely temporary measure that enables generators to recover
all of their operating costs and receive a return, this proposal would
not discourage the development of new generation. In addition, federal
power marketing agencies that are not controlled by the FERC, such as
the Bonneville Power Administration, would agree to adhere to such a
plan if adopted by the FERC.
S. 287, S. 26, and S. 80 before you today are all reasonable
approaches in pursuit of just and reasonable wholesale electricity
prices. I urge the Committee to carefully review the situation we face
in the West with respect to current wholesale prices. Any objective
review will adequately justify congressional action to implement a cost
plus pricing strategy.
Mr. Chairman, it is clear that this market has become
dysfunctional. Nothing less than the nation's economy and the economies
of all of our states are at stake. Federal action to enact a temporary
cost-based price cap is necessary and warranted in order to protect
consumers and businesses in the West from the vagaries of this
dysfunctional market. If the FERC refuses to exercise its full
authority under the law to restore price stability, I believe it is
appropriate for the Congress to do it for them.
Thank you again for holding today's hearing and for the opportunity
to share my thoughts with you.
Sincerely,
Gray Davis,
Governor.
______
STATEMENT OF THE AMERICAN PUBLIC POWER ASSOCIATION
The American Public Power Association (APPA) is pleased to present
this written statement for the record to the Senate Energy and Natural
Resources Committee for their March 15 hearing, ``Western Energy
Problems.'' APPA is the national service organization representing the
interests of over 2,000 municipal and other state and local community-
owned utilities throughout the U.S. APPA member utilities include state
public power agencies, and serve many of the nation's largest cities,
but the majority of our members are located in small and medium-sized
communities in 49 states, all but Hawaii. In fact, 75 percent of our
members are located in cities with populations of 10,000 people or
less. APPA members serve about 14 percent of all kilowatt-hour sales to
ultimate consumers throughout the United States.
We share many of the energy policy objectives held by President
Bush and members of the Committee. Chief among these are developing a
balanced national energy policy that emphasizes fuel diversity,
appropriately integrating energy and environmental issues, and
resolving problems in the wholesale markets for electricity. Congress
and the Administration must focus on creating a more competitive market
for wholesale sales of electricity in order to protect consumers from
wildly fluctuating prices and ensure reliability. Recent developments
across the country, but especially on the West Coast, reinforce the
fact that wholesale electricity markets (and wholesale energy markets
in general) are interstate in nature and disturbances in the market cut
across all industry segments. The Committee's hearing is timely because
solutions to the problems in the Western electricity market and heading
off similar problems in other regions require quick and coordinated
action at federal, state, and local levels. Moreover, these policies
should recognize the problems that ensued when federal and state
policymakers ignored the cautions raised about market structure and
instead put blind faith in the ideology of open markets and made
inaccurate assumptions about competitive market forces.
In this statement APPA outlines some of the root causes of--and
possible solutions to--the Western energy crisis, and emphasizes that
the ``California problem'' is not exclusive to that state alone.
there are three issues to address: scarcity, structure, and skepticism
The problems encountered in the Western electric market, and new
problems beginning to be seen in other regions, have three distinct
characteristics: scarcity of supply, generation capacity and
transmission; imperfect, or dysfunctional, market structure at the
wholesale level; and consumer skepticism that market participants are
capitalizing on scarcity and imperfect markets. Each of these problems
must be addressed as Congress, the White House, and the Federal Energy
Regulatory Commission (FERC) develop and implement a cohesive set of
policies applicable to all regions of the nation.
SCARCITY
Lack of generation capacity has contributed to California's failed
electricity experiment. But that is just part of the equation. Lack of
sufficient transmission capacity, scarcity of fuels, particularly
natural gas, low water levels, and few serious conservation efforts are
other factors. To address these scarcity issues, APPA recommends that
federal policies incorporate the following principles:
The use of all types and sources of electricity production
must be encouraged while maintaining our national commitment to
a clean environment.
Production incentives for both renewable energy as well as
environmentally acceptable means of using fossil fuels should
be provided, and such incentives must be available to all
entities, including not-for-profit publicly owned utilities.
Regulatory policies, including but not limited to the
hydroelectric relicensing process, that reduce the capacity of
existing generating facilities without ensuring an appropriate
balance of both energy and environmental needs, must be
reviewed and modified as necessary.
Our nation's dormant commitment to efficient use of energy
must be renewed, and conservation must become an essential
component of the solution.
IMPERFECT MARKET STRUCTURE
Many of the market problems in California can be attributed to
policymakers; both at the state and federal level assuming that market
forces alone would be sufficient to forge competition out of an
industry structure that had been monopolistic in nature since
inception. Consumers have paid the price for the consequences of
premature decisions by federal regulators to allow a transition to
market-based rates without first requiring the existence of a
competitive wholesale market structure. The California experience makes
clear that FERC should permit wholesale sales at market rates only in
regional markets that meet predetermined criteria that clearly define
the characteristics of workable competitive wholesale markets. These
and other market structure issues need to be addressed in any federal
policy, including the following principles:
Transmission is an interstate commerce matter within the
jurisdiction of Congress. Regionally integrated planning and
expansion of the grid is essential to create and maintain a
structure that can sustain regional reliability and wholesale
competition. Federal eminent domain authority to ensure
reliability and competitive wholesale markets must be provided
for construction of new transmission facilities, either to
properly structured, independent RTOs, Regional Transmission
Organizations, or in their absence to transmission builders
pursuant to a FERC issued certificate of public convenience and
necessity.
The lack of effective RTOs that can ensure truly neutral
management of the nation's transmission facilities is the
single biggest obstacle to a properly functioning interstate
electricity market. Private utilities that control vast amounts
of the nation's transmission systems have a long history of
denying access to their systems, or providing access at highly
discriminatory rates and unfair terms. It is vitally important
that federal policies encourage the development of independent,
properly configured RTOs.
Wholesale sales at market rates into improperly structured
and dysfunctional markets will not produce just and reasonable
rates for consumers. Congress must clearly define the
fundamental characteristics of workable competitive wholesale
markets, and FERC should permit wholesale sales at market rates
in regional markets that are consistent with these
characteristics and require sales at cost-based rates in those
that are not. Senator Feinstein's bill, S. 287, directs the
FERC to do just that.
Repeal of the Public Utility Holding Company Act (PUHCA)
prior to the creation of a new market structure that can
sustain effective competition would only make a bad situation
worse and should not occur. Indeed, numerous parallels can be
drawn between the market conditions that existed in 1935 which
led to the enactment of PUHCA, and the market conditions that
exist today. These parallels highlight its continued
importance. For example, the number of registered holding
companies has expanded from 14 to 30 in the last eight years.
In addition, today's 150 registered and unregistered holding
companies have a combined total of 240 utility subsidiaries and
4,200 non-utility subsidiaries. And, the ongoing rapid
consolidation of the marketplace has seen 54 mergers completed
or announced during the past two years alone--in addition to 24
mergers of U.S. utilities with foreign companies over the same
period of time. This consolidation limits the number of
potential competitors, and requires additional oversight to
prevent market power abuses that put consumers at risk.
CONSUMER SKEPTICISM
With postings of enormous profits, billions of dollars changing
hands, and cries of market manipulation, it is easy to understand the
level of skepticism held by California officials and consumers. APPA
believes we all have a responsibility to rebuild consumer confidence as
soon as possible, and we urge Congress to adhere to several principles
when developing federal policy:
A national reliability organization with the authority to
establish and enforce reliability standards, assure adequate
generating capacity reserves in each relevant wholesale market,
and oversee and coordinate maintenance outages, must be
created.
Complete and timely market information on capacity,
transactions and prices must be available to regulatory
agencies, public officials and all market participants.
The FERC must be directed to monitor the wholesale market,
and given the resources necessary to do so. It must also be
delegated the authority to provide remedies and impose
penalties as appropriate.
CALIFORNIA IS NEITHER AN ABERRATION NOR EXCLUSIVELY A STATE PROBLEM
The failure of electric utility industry restructuring in
California has had and continues to have broad and far-reaching adverse
effects throughout the Western States Coordinating Council region.
Electric utilities and their consumers in Western states are
experiencing unprecedented volatility of electricity prices. Utilities,
both public and private, are near the financial edge and some are
threatened by bankruptcy. The collapse of these utilities would
challenge the financial stability of major banks, energy producers and
marketers, as well as businesses and industries that provide products
and services (and credit for such products and services) to the
electric utility industry throughout the region.
As Federal Reserve Board Chairman Greenspan has noted, the
magnitude of the current electricity problem is sufficient to disrupt
the economy of the entire country. If left unchecked, the problems will
become more severe. If addressed, this near brush with disaster should
provide a sobering message that such problems cannot be allowed to
arise in other regions.
There are two critical lessons that must be understood from
California's crisis. First, electricity is the oxygen of our economy.
While lip-service has been paid to this fact in the past, the reality
of this proposition is now being driven home with frightening force.
The electric utility industry is simply too important to the well-being
of the entire nation to permit hasty ``experiments'' and unquestioning
and untested reliance on the ability of ``deregulated'' retail markets
without viable wholesale electric markets to provide reliable and
adequate supplies (and sufficient reserves) of electric energy and
capacity to all consumers at reasonable rates.
Second, and equally important, wholesale electric markets are
interstate in nature. What is happening today is not simply a
``California problem''--consumers in Arizona, Utah, Idaho, Montana,
Oregon and Washington are directly affected, and there will be ripple
effects throughout the economy. Regardless of its origin or cause, this
is a national problem and the solution requires federal action.
The failure of California's electricity plan has made clear the
important role that wholesale markets have in determining the
effectiveness of the retail competition plans enacted by the states.
For several years, APPA and other organizations have emphasized that
state objectives for retail competition will only succeed if supported
by a workable wholesale marketplace. While many factors have
contributed to the rolling blackouts and high prices in California's
electricity market, it is apparent that improvements in the structure
of the interstate electricity marketplace would go a long way toward
helping to avoid such problems in the future.
Congress must finish the job it started with the Energy Policy Act
in 1992, the first major step in creating competitive wholesale
markets. It must take further steps to strengthen the electricity
market. This can be accomplished, as outlined above, by ensuring
consumer protection and by eliminating the problems caused by market
abuses.
With regard to the specific issue of today's hearing, we support
Senator Feinstein's legislation, S. 287, calling on the FERC to impose
cost-based rates in the Western energy market on an interim basis.
While we support this legislation, we believe FERC must enforce the
statutory standard of just and reasonable rates in all wholesale
markets that fail to provide just and reasonable rates through
competition and market forces.
Senator Feinstein's bill, S. 26, is a viable option. S. 26 would
amend the Department of Energy Authorization Act, to authorize the
Secretary of Energy to impose interim limitations, or price caps, on
the cost of electric energy. However, because it allows for individual
states to opt out and because price caps inevitably allow the price to
rise to that cap, we believe S. 287 is a better alternative.
Attached you will find APPA's recently adopted policy resolution
calling on FERC to enforce the Federal Power Act by taking action to
prevent wholesale sales of electricity at costs that exceed just and
reasonable rates. As you know, FERC has already acknowledged that rates
in the Western market have not met the just and reasonable standard--
yet it has failed to fulfill its obligation under the Act to remedy
this situation.
CONCLUSION
The essential purpose of federal initiatives should be to establish
a structure for interstate commerce in electricity that promotes
effective wholesale competition in order to reduce rates and improve
service. Despite California's failed experiment, APPA still believes
truly effective wholesale competition can benefit every consumer in
America, and this is the responsibility of the federal government. If
properly exercised, all may benefit. If not, all will suffer.
______
STATEMENT OF HON. ANNA G. ESHOO, U.S. REPRESENTATIVE FROM CALIFORNIA
Chairman Murkowski, Senator Bingaman, thank you for the opportunity
to share my views with the Energy Committee. I want to thank Senator
Feinstein for her important leadership in the Senate. She has been a
great advocate for the State of California, particularly during this
energy crisis.
In January, Representative Duncan Hunter and I introduced H.R. 238,
the House companion bill to S. 26, introduced by Senator Feinstein.
Since January, over half of the California Congressional delegation has
joined us in cosponsoring this legislation, and many more share our
view that federal intervention is needed to stabilize the western
energy market.
Simply put, the Feinstein-Hunter-Eshoo bill would allow the
Secretary of Energy to set temporary cost-of-service based rates or
regional price caps for wholesale electricity in the West. This
authority parallels what the Federal Energy Regulatory Commission
(FERC) already has; however, we need this legislation because FERC has
failed to adequately protect consumers in California and the West.
FERC's decision last Friday to order generators selling into
California to refund $69 million for overcharges stemming from
transactions made this January was a positive first step. Although many
believe that this figure is on the low side, FERC has sent an important
message to power generators--that they can't continue to gouge
consumers without repercussions. While the Commission's order moves
ahead, we must anticipate the future. We need prompt and prudent
federal action to preempt current and future overcharges as we head
into summer.
Much has been written about the failure of electricity deregulation
in California and the state's failure to invest in new generation. As
Californians, we accept our share of the blame for the energy crisis,
and we are doing everything within our power to correct the problem.
California now ranks second in the nation in energy conservation, with
per capita energy use at 37 percent below the national average.
Business and residential consumers have taken steps to reduce their
energy consumption even more--eight percent in February alone.
[Governor Davis has announced incentives for consumers who cut their
energy use by 20 percent during this summer.] It's estimated that this
initiative could save 2,200 megawatts per day. The Governor and the
California Energy Commission are also working to expedite the review of
new power plants and expect to have more than 2,300 megawatts of new
capacity on-line by the end of the year.
The effects of the energy crisis reach beyond California's borders.
So do the causes. While California failed to increase production during
the 1990's, so did its neighbors to the north. According to the
Northwest Power Planning Council, demand in the northwest increased 24%
in the last decade while generation has only grown 4%.
Whatever the causes, the reality is that the western electricity
market is dysfunctional due to a growing imbalance between electricity
supply and demand. With regional demand expected to increase this
summer, political leaders outside California are recognizing that their
constituents will also experience acute electricity shortfalls. Oregon
Governor Kitzhaber and Washington Governor Locke have been calling for
federal intervention since January. Most recently, these governors
joined Governor Davis in a March 12, 2001, letter to FERC requesting
that the Commission impose cost-service-based rates for the region.
Mr. Chairman, the scarcity of supply today is allowing generators
to exert tremendous influence over wholesale electricity rates in the
region. By withholding even marginal amounts of power, generators have
successfully driven prices to unprecedented levels.
Despite the accusations that ``greedy'' California consumers are
gobbling up every megawatt they can, the facts tell a different story.
The demand this winter has not been great in comparison to previous
winters or peak summertime periods. A March 11, 2001 San Francisco
Chronicle review of California Energy Commission data demonstrated that
December 2000 demand was actually lower than December 1999 demand. The
real difference was in the supply.
FERC has reported that in December between 6,000 and 11,000
megawatts of power were not available, guaranteeing that supply barely
met demand. Meanwhile, generators were able to charge investor-owned
utilities an average price of more than $400 per megawatt, compared to
approximately $30 per megawatt one year earlier. With rates this high,
generators have no financial incentive to build new capacity. Instead,
they have a strong incentive to cut supplies and charge higher rates.
Critics of federal intervention, including FERC Chair Curt Hebert,
have said that consumers should absorb the cost of these outrageous
wholesale rates. Only then, they argue, will consumers receive the
proper market ``signals,'' adjust their consumption, and prompt
generators to build more capacity. Unfortunately, the West's up-side-
down electricity market has said to generators, lower production leads
to higher profits. Higher consumer rates will not change that reality.
This is why we need temporary federal intervention. There's a
substantial difference of opinion within FERC itself. Commissioner
William L. Massey wrote to me on February 21, 2001, telling me of his
support for aggressive federal intervention in the western energy
market, and I'm enclosing, for the record, a copy of Commissioner
Massey's letter. Separately, the Seattle Times reported on March 3,
2001 that Commissioner Massey said, ``A federal hands-off approach, in
my judgment, is absolutely unlawful. It is an abdication of our
responsibility under the [Federal Power] act.''
I'm a believer in free-markets. Period. The western wholesale
electricity market is not free. Consumers and utilities have no choice
about where they buy their power because there is not enough supply to
foster competition among generators. Chairman Hebert's views
notwithstanding, regulators and market observers agree that consumers
need protection until there is sufficient generation capacity for a
truly competitive marketplace.
Mr. Chairman, Senator Bingaman, and Senator Feinstein, thank you
for holding this essential hearing. I look forward to working with you
to address the western energy crisis, and I believe that Senator
Feinstein's bill is a good place to start.
______
STATEMENT OF TERRY SMITH, CHAIRMAN OF THE CALIFORNIA INDEPENDENT
PETROLEUM ASSOCIATION
Mr. Chairman, distinguished members of the committee, thank you for
allowing me the opportunity to participate in this proceeding to share
our thoughts on this issue of critical importance to California's
economic health and well-being.
I am submitting testimony on behalf of the California Independent
Petroleum Association--a non-profit trade association representing over
450 independent producers of oil and natural gas, service companies,
and royalty owners. California produces about 40% of the oil it needs,
the remainder comes from Alaska and foreign producers. California is
the fourth largest producing state behind only Alaska, Texas and
Louisiana and has the largest untapped reserve base for oil production
in the lower 48 states. We believe that given the right conditions, we
could produce more.
California's petroleum industry finds itself in the same
circumstance as many of the state's other large power consumers--stung
by high electricity costs. Continued high electricity costs could
potentially make a large portion of the state's oil production
uneconomic, however, given the proper incentives, CIPA and our member
companies can be part of the solution to the energy supply problem
facing California energy consumers.
There are two basic ways to help ease the energy supply crisis
faced by California:
The first is to increase energy production. Policy makers must
recognize the geographical advantage of in-state oil, natural gas and
energy production and develop incentives to identify additional energy
supplies that already exist in California. Laws and regulations that
target and stimulate these critical resources and move energy supplies
to the consumer quickly must be adopted. The siting of new in-state
power plants of all sizes should be encouraged and expedited.
The second way to ease the crisis is to reduce energy consumption.
Innovative financial, tax and regulatory solutions to reduce energy
consumption that benefit both energy users and consumers should be made
available. Examples of additional incentives to encourage business
owners to shift electric load are interruptible tariffs, demand side
management programs and demand side bidding. The ability of oil and
natural gas producers to utilize distributed generation, self-
generation and co-generation technologies should also be facilitated.
CALIFORNIA OIL AND NATURAL GAS PRODUCERS PERSPECTIVE ON THE
ENERGY SUPPLY CRISIS
I've chosen to contribute to this dialogue because today's topic is
of critical importance to the members of my association. For most
independent producers in California, electricity accounts for up to 60%
of the cost of doing business. California oil is costly to produce
because it requires steam injection driven by natural gas to get it out
of the ground. California producers also use a lot of electricity to
pump the oil out of the ground. Environmental rules prevent them from
using crude oil to make electricity so they use natural gas. High
natural gas prices and unreliable supplies of electricity have resulted
in making California crude costly to produce--and are threatening to
severely curtail the amount of oil we produce on an annual basis.
CIPA has placed an extraordinary priority on assuring that it has
access to a reliable and economic supply of electricity and on ensuring
the state's private utilities are kept viable and solvent. 1ndependent
oil and natural gas producers are some of the largest electricity
consumers in the state, and are economically vulnerable to unreliable,
high-priced electricity supplies.
Disruption in electricity supplies can result in reduced production
of indigenous oil, natural gas and energy supplies produced by CIPA
members. Almost all of the oil and natural gas produced in California
is consumed in California.
What happened to California's electrical system that has resulted
in the problems we see today? As someone representing large consumers
of electricity, I would offer the following insights.
The problem, in essence, comes down to exceptionally stringent
environmental siting guidelines and a low return on investment that
kept new power plants from being built in California during the past
twelve years. Over the past ten years, few people anticipated the
strong demand for electricity brought about by a surging economy and
technology infrastructure. California policymakers thought that other
neighboring western states would sell us their excess power if we
couldn't keep up with our own demand. They didn't anticipate the growth
of our neighboring states' economies and the fact that they might want
to keep that power for their own use.
In 1996, when the California Legislature passed legislation
deregulating California's electrical market, it did so only partially.
Not all of the market was deregulated, just the generation portion.
Investor owned utilities like PG&E were required to sell their
generation so they wouldn't be seen as competing with independent power
producers or holding back the new electricity market. In addition, the
law imposed a mandatory rate freeze that had been in effect during the
past couple of years. The rate freeze was intended to allow the
utilities to recover, from businesses and consumers like you and me,
all the past costs of purchasing infrastructure and facilities. This
also shielded ratepayers from the true cost of providing electricity.
This arrangement worked great as long as wholesale power costs were
lower than the rates utilities were allowed to collect from customers.
But, when wholesale power costs rose, the utilities tried to get the
rate freeze removed by the California Public Utilities Commission and
be allowed to pass along the true cost of wholesale power to their
customers. To date, the Governor, Legislature, and the CPUC have all
said `no' thereby forcing the utilities to continue assuming the price
differential of how much they purchase power for and how much they can
recover.
To compound the problem, the new regulatory structure set up by AB
1890--the legislation that created the deregulated market--put a price
cap on what independent power producers could charge for their power
and restricted the ability of these same producers and the utilities to
enter into long term contracts.
Finally, all of these factors converged at the same time natural
gas prices began reaching historically high levels. Higher than
expected demand throughout the west, reduced supplies, and disruptions
on major pipelines serving California all served to drive prices up,
thereby further exacerbating the generators' cost of producing
electricity.
All of these trends have manifested themselves into the current
crisis facing the committee today.
Having identified the problem as we see it, where do we go from
here? California's independent producers believe we can be part of the
solution if allowed the proper opportunities. As companies based and
operating in California, we believe we are uniquely situated to
mitigate the strains that are being placed on the supply side of the
energy equation. Given the proper combination of regulatory relief and
incentives, we believe we can increase our levels of both oil and
natural gas production beyond their current levels.
ADDING IN STATE NATURAL GAS SUPPLY
According to the California Division of Oil and Gas, California
continues to have some of the largest proved reserves of oil and
natural gas anywhere in the United States. Proved reserves of over 21
trillion cubic feet (tcf) have been identified along the West Coast of
the United States while over 3 tcf of proved onshore reserves have been
identified to date. With the advent of new, increasingly accurate
technology, new reserves of oil and gas are being found throughout the
state in areas previously thought to be barren.
Despite the presence of such substantial reserves, and the state's
rapidly growing demand for increased supplies of natural gas, in-state
production in California today accounts for only 10-15% of the state's
total annual natural gas needs. In the past, California production has
accounted for as much 25% of the state's total needs.
Although much of this trend can be contributed to some of the same
factors I referenced earlier--stringent environmental laws, high
drilling costs, historically low gas prices throughout the 1990's and
labor shortages--many experts believe a large part of decline can be
tied directly to the policies of the state's major gas utilities.
Existing law provides the utilities with almost exclusive authority
in setting the terms and conditions under which pipeline connections
for new natural gas wells are accommodated. Historically, many
producers have felt that the utilities have used this authority to
stifle California production and limit competition in favor of taking
larger supplies of gas from out of state sources such as Canada, the
Rocky Mountains, and the Southwest.
For the past ten years, independent producers throughout the state
report experiencing delays of six months to a year before receiving
utility approval to install a new pipeline interconnect for newly
completed wells. Overly burdensome and expensive terms of conditions
imposed by the utilities as a condition of new interconnections are now
thought to be the rule rather than the exception. In many cases,
producers have elected to simply abandon new exploratory projects
rather than try to meet the demands being imposed by the utilities.
One of the largest impediments to increasing gas production in
California are the utility's own management policies relative to its
existing pipeline infrastructure. Representatives from PG&E recently
announced that the company would no longer be adding any new metering
systems along its pipeline system in Northern California. If enacted,
the new PG&E policy would require all new wells to be connected through
an existing metering site along the pipeline--requiring in some cases
miles and miles of new pipelines to be constructed in order to connect
a remote exploratory well. Given such terms and conditions, most
exploratory projects would become automatically unfeasible. In an
related move, PG&E has also recently embarked on an ambitious plan of
``retiring'' large sections of its pipeline gathering and delivery
systems--further limiting the potential points of interconnection for
new gas wells. Many of the sections being targeted by the utility
continue to remain in operational condition. The hardest by these new
policies would be the Northern Sacramento Basin--one of the most
proliferate dry gas fields in the United States and the source of over
one-third of all the natural gas produced in California.
Significant evidence suggests that much of California's long-term
gas needs could be addressed be expanding production, and reforming the
regulatory relationship between the independent producers and the
utilities. Suggested reforms that could help accomplish this goal
include:
Establishing mandatory timeframes under which a utility must
respond to a producer's request for a pipeline interconnection.
Encouraging new exploration activity by requiring the
utility to install new metering sites, rather than requiring
producers to construct miles of new pipeline for every
exploratory well.
Allowing producers to expedite the installation of new
interconnects by authoring them shoulder costs such as pipeline
construction and labor costs if the utility's workforce is
already overburdened.
Facilitating the development of new pipeline gathering
infrastructure that enables more gas to get to market.
Requiring the utility's to sell off its existing gathering
systems to interested producers and co-ops, and provide the
producers the authority to maintain and service the gathering
systems.
By making some of these minor changes, and facilitating the ability
of California producers to get their gas to market, we believe we can
begin to help mitigate at least one element of the problems driving our
state's current crisis.
IN-STATE GENERATION OPTIONS
On a related note, CIPA believes that Federal policymakers must act
to eliminate federal policies that discourage co-generation, self-
generation and distributed generation. Many California oil and gas
producers are uniquely situated to generate their own electricity. Some
have excess supply which could be sold to other consumers if reasonable
utility connection, siting and standby policies were in place. We
encourage you to examine the ways in which FERC, the DOE and other
agencies of the federal government could encourage and incentivize
utilities, and the regulatory community in California, to act to
approve new facilities.
In closing, independent oil and gas producers are price takers and
have no ability to set the price of crude at the wellhead where we
produce it. Independent oil and natural gas producers are like energy
farmers. We take our commodity out of the ground and sell it for the
market price set by OPEC and other producing countries, usually to an
independent refiner or integrated oil company who then refines it into
products like gasoline. As such, our members are extremely vulnerable
and can be dramatically impacted by any combination of events that
force their costs to rise suddenly. We appreciate the committee's
attention to this extremely serious matter and stand ready to work with
you in finding the proper solutions.
______
STATEMENT OF MARCIA MERRY BAKER, EIR NEWS SERVICE
Dear Chairman Murkowski, members of the Committee, and Senator
Boxer: The draft Federal energy bills now before you--S. 26, S. 80
(both introduced Jan. 22), and S. 287 (Feb. 8), by the California
Senators, deserve full support for the policy direction they propose.
Namely, they are a move toward Federal government regulation of the
vital service of electric power, for the interest of the general
public. The limitations--which we address below, are not as important
as the fact that these two bills, and very few others (one is that of
Rep. Peter DeFazio, D-Oregon), favor serving the general welfare, and
go against the Administration's crazed continuance of deregulation,
which is equivalent to throwing gasoline on a burning house.
Moreover, the additional danger at present, is the political fact
that, without such measures, the process of worsening energy
emergencies--for the Northwestern states, and New York, as well as
California, can be taken by the Administration as the pretext for
``rule-by-decree,'' on exactly same principle as in Hitler's 1933
takeover. We do not exaggerate. This prospect was the inherent danger
in the confirmation of John Ashcroft for Attorney-General, who
ideologically opposes Federal government measures to protect and
advance the General Welfare. Without reregulation, however, the crisis
will worsen to the point of creating a national emergency.
In opposition to the mantra of ``free markets,'' there are moves
now in all states, to delay, roll-back or reconsider energy
deregulation, to prevent economic destruction, and the threat of chaos
or dictatorship. In particular, the emergency policy proposals made by
economist Lyndon LaRouche--contributing editor to EIR News Service, are
under review at town meetings, lobbying days, and policy sessions in
dozens of states.
In brief, LaRouche's proposals call for re-regulation of energy,
and Ch. 11 Bankruptcy for the California utilities, and others in the
same position. These are traditional precedents from the FDR era.
LaRouche, who forewarned decades ago, of the consequences of
deregulation, and allowing a ``casino'' economy of speculation and
concentrated ownership, has released on Feb. 6 a policy document on the
``California Energy Crisis, As Seen and Heard on the Salton Sea,''
400,000 copies of which are circulating in the form of a mass pamphlet,
through the LaRouche-in-2004 Democratic Presidential campaign. Excerpts
of this document were provided to the Committee in EIR testimony to the
Jan. 31 hearing on the California crisis.
We remind you of what it means to continue to back deregulation. In
data tables below, we provide the statistics of the 30% to 200% profit
rates for Y2000, made by Bush Administration-aligned Enron and the new
energy ``merchant'' and speculation companies, off California and other
power crises; these companies also made mega-donations to elected
officials. However, beyond simple corruption, the point shown is that
any expectation that the financial and economic system which is based
on this level of hyperinflation, and cartel control, can continue, is
insane.
Either you start to think, as implied in the Feinstein/Boxer bills,
that something can and must be done to set controls on the markets, or
you are on the side of chaos and destruction. First, we provide the
Committee the economic assessment given by Lyndon LaRouche at an
international policy conference President's Day weekend in Reston,
Virginia; and then some documentation of the nature of crisis, and why
there is no other policy direction than what LaRouche proposes, like it
or not.
LAROUCHE'S ASSESSMENT: HYPERINFLATION
On Feb. 17, in an address titled, ``A Branch in the Road of
History,'' LaRouche said, ``What you're seeing in the energy prices,
what you're seeing in the costs of supplies--manufacturers' supplies--
combined with what you're seeing in the collapse of retail sales, what
you're seeing in terms of the mass lay-offs, in one industry after
another, which is now building up into an international chain-reaction,
is a process of a depression, caused like that of Weimar Germany in
1923--worldwide--caused by the collapse of a financial bubble, which
has gone into a hyperinflationary phase.
``That's why Alan Greenspan has lost his marbles. He probably
didn't have too many to begin with, but whatever he had, he's lost.
``So, we are now at the point, where it is impossible, by the
present methods, to keep this system going. It is in the process of
going into a deep depression. And nothing that these guys are
proposing, or will accept, will work. The idea of more deregulation,
the idea of tax reductions, all these kinds of things--cutting down the
role of government, opposing re-regulation--all of these things ensure
nothing but the greatest depression in world history. Globally.
``Because, what happens is, the U.S. is the importer of last
resort, nations all over the world have been depending on dumping
cheap-labor products on the U.S. market, for the products we no longer
produce. As our market declines, as you saw in the last-quarter retail
sales, which is the big Christmas retail business, from the last
quarter of the year: That collapse set into motion a chain-reaction
collapse around the world, which, together with the financial collapse,
caused by the hyperinflation, has sunk the world economy. We can no
longer finance that kind of subsidy for imports, as we were doing
before; therefore, we can't do that. Therefore, our suppliers, who have
used us as a market, are now being shut down.
``For example, Mexico can expect, 20, 30, 40% of its exports into
the United States to be wiped out, very soon. One of the biggest.
Canada is already suffering, as you've seen from some reports recently
from there. This is a global process.''
REQUIRED: REREGULATION AND CH. 11 BANKRUPTCY
LaRouche continued, by describing what is required. ``Take the
California energy crisis. We have a worldwide energy crisis, and
especially a West Coast energy crisis. There's only one way you can
deal with that energy crisis: You've got to go back to regulation. Use
what we prepared in the 1930s--Chapter 11 bankruptcy protection for the
entire industry. You see, in this kind of Chapter 11 bankruptcy, you
protect, not only the creditors and debtors; you protect the general
public. You see, because the people of California, for example, have to
be defended. The interests of the firms of California, the farms, have
to be defended. Whether or not they're involved in the relationship
between the creditors and debtors, is irrelevant.
``The fundamental interest of the United States, is that our people
have electricity! That our firms have the power to operate on. That our
hospitals function. That our farms function. When we go into court with
a Chapter 11 bankruptcy, these interests come on the table, and
actually have the greatest say, in how the bankruptcy will be
renegotiated. The creditors and the debtors go into a second tier. What
comes up front, is the interest of the nation; the interest of the
people; the interest of the economy.
``So, we need Chapter 11 protection, for all the imperiled sections
of vital infrastructure for our national economy.
``Secondly, we can not do this, without both a combination of
Federal and state re-regulation.
``If we do that, we have enough energy available to manage this
crisis, and can manage this at prices, at charges to people who are
using electricity, to ensure the electricity they require, and to
ensure that it's delivered to them, regularly, at a decent price. We
can guarantee that.
``If we do that, the energy crisis is brought under control.''
WHO OPPOSES CONTROLLING ENERGY PRICES?
LaRouche then turned to, who would oppose solving the energy
crisis, asking, ``But, what does that mean? That's in the interest of
the nation. How can any patriot oppose that? George Bush has to be
opposed to it. If you look at the combination of financial interests,
which is represented by the people that gave the money to make Bush
President: These guys would be wiped out, by an honest deal. Because
they make their money by looting; they bid up the price. The reason
that the prices go up, is purely that these fellows are looting the
United States, as well as other countries. Therefore, the interest, the
reaction, the response of these people, is against the interest of the
people of the United States; against the national security interests.''
The following two tables,* reproduced here from the March 2 issue
of EIR, ``Energy Crisis Update, Feb. 22'' give data analyzed on the
energy cartel mega-profits, and mega-donations to political campaigns.
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* All tables have been retained in committee files.
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NOT A ``SUPPLY AND DEMAND'' PROBLEM
The tables above, listing the companies making hyper-profits off
hyperinflationary energy prices, also raise the point that the problem
in run-away energy prices is emphatically not a ``supply-and-demand''
issue. While the energy infrastructure and resource base of the United
States has been degraded (from aging transmission lines, to the lack of
new nuclear plants) over the last 30 years, today's energy price spikes
are clearly speculation and gouging.
The graphs below, for three power commodities--oil, natural gas and
electricity (California), all show that while supplies (and
correspondingly, use) remain almost level, prices soared over Y2000.
During this same time, demand did not jump. The price take-off came
directly from deregulated energy ``markets'' and speculation.
Two more points should be brought out in this respect. Natural gas,
because it is federally deregulated, is soaring in price (from
speculation and gouging) all across the continent, with terrible
economic dislocation and financial chaos. Where natural gas is part of
the electricity generation, a double whammy is hitting the locale.
Secondly, price rises for petroleum, do not correspond with non-
existent swings in supply or demand for oil. Prices soar from
speculation and gouging.
In the best estimates of financial analysts, every barrel of oil
entering world exports, is traded up to 15 times over on the London and
New York commodities' futures exchanges. This is called, ``paper oil.''
Natural gas is traded on the New York Stock Exchange 8 or 10 times more
than the volume that exists. Electricity futures are traded many times
over the actual unit volume and production costs.
``GO THE WHOLE WAY''
These few facts demonstrate that only policy that will ``go the
whole way'' with energy price re-regulation, and Ch. 11 bankruptcy
protection of the public interest, is appropriate to the nature of the
crisis we now face. Half-way measures, or partial ``bail-outs'' are
doomed, along with the economy, if we don't take an across-the-board
reregulation approach.
Thus, from this point of view, the principle of public interest
embodied in the Feinstein/Boxer bills is in the right direction, but
too limited, given the reality of the depression.
S. 26--``To impose interim limitations on the cost of electric
energy to protect consumers from unjust and unreasonable prices in the
electric market; and
S. 80--``To require the Federal Energy Regulatory Commission to
order refunds of unjust, unreasonable, unduly discriminatory or
preferential rates and charges for electricity, to establish cost-based
rates for electricity sold at wholesale in the Western Systems
Coordinating Council . . .''
S. 287--``To impose cost-of-service based rates [meaning, to cover
cost of production, and a reasonable return on invested capital] on
sales by public utilities of electric energy at wholesale in the
western market.''
[The states covered by the bills are defined as the ``Western
Energy Market''--Arizona, California, Colorado, Idaho, Montana, Nevada,
New Mexico, Oregon, Utah, Washington, and Wyoming.'']
It is in the best interests of the nation, that these draft bills
be expanded to cover all power modes, be nationwide, re-instate
regulation, and facilitate Ch. 11 Bankruptcy actions where needed.
______
STATEMENT OF GEORGE FRASER, GENERAL MANAGER, NORTHERN CALIFORNIA
POWER AGENCY
The Northern California Power Agency \1\ (NCPA), urges the
Committee to adopt legislation implementing cost-based wholesale power
rates in California and the other Western States on an interim basis.
We do not currently enjoy a truly competitive market for electricity in
California at this time, and consumers cannot wait for a competitive
market to materialize.
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\1\ NCPA is a nonprofit California joint powers agency established
in 1968 to generate, transmit, and distribute electric power to and on
behalf of its fourteen members: cities of Alameda, Biggs, Gridley,
Healdsburg, Lodi, Lompoc, Palo Alto, Redding, Roseville. Santa Clara,
Ukiah, the Port of Oakland, the Truckee Donner Public Utility District,
and the Turlock Irrigation District and seven associate members: cities
of Davis, Santa Barbara, ABAG Power, Bay Area Rapid Transit District.
Lassen Municipal Utility District, Placer County Water Agency, and the
Plumas-Sierra Rural Electric Cooperative serving nearly 700,000
c1cctric consumers in central and northern California.
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Today, in California, we are struggling to develop solutions that
will get us beyond the mistakes that have been made in restructuring
that market. It will take some time to develop and implement the best
solutions. But even if we knew today the exact recipe for creating a
workably competitive market, those changes would take time to
implement. Without cost-based rates, unfettered prices for electricity
will continue to create disincentives for correcting the flaws in the
market and impose significant societal and economic harm.
California's municipal utilities were not required to participate
in the state's retail, choice program and largely remain vertically
integrated utilities that retain an obligation to serve their retail
consumers. NCPA members generally have sufficient generation resources
to meet their consumers' electricity needs. At times, NCPA has excess
generation that we sell into the market and, at other times, we must
also occasionally purchase power on the market. On aggregate, NCPA
members are net market purchasers.
NCPA has long supported steps to foster and promote sustainable and
effective competition in the wholesale electricity market. Regrettably,
the market conditions needed to sustain effective wholesale market
competition are not present in California today. Consequently, NCPA
supports efforts to re-impose cost-based rates as a temporary measure
until such time as competitive market conditions exist.
CAUSES OF THE CURRENT CRISIS
While there is no value in finger pointing, it is clear that many
factors contributed to the current crisis--a crisis that spills beyond
California's borders and infects the regional power market. At its
core, the California and associated Western power market lacks the
conditions necessary for a competitive market: multiple sellers, ease
of entry, free flow of commerce and price transparency. In California:
There is a shortage of installed and operable generation in
California. This shortage has allowed market participants to
withhold generation, strategically bid and game the system to
maximize profits.
There is a shortage of transmission capacity within the
State. Alleviating current transmission constraints between
northern and southern California would have avoided the recent
rolling blackouts. However, no party has both the
responsibility and authority to relieve such constraints.
There is a shortage of transmission capacity to import
generation products from outside California.
The absence of a seamless, independent regional transmission
system impedes commerce and narrows the relevant market.
From its inception, the Cal-ISO and PX lacked proper rules,
procedures and mechanisms to promote competition, monitor
market conditions and take corrective action.
Market forces can only serve to check prices when competitive
market conditions exist. In the absence of such conditions, sellers are
able to dictate prices without suffering competitive responses that
reduce sales and revenue. Although the Federal Energy Regulatory
Commission (FERC) should only approve market based rates when
competitive market conditions exist, FERC approved the California
restructuring plan and the use of market based rates.
CALIFORNIA MUNICIPAL UTILITIES HARMED BY DYSFUNCTIONAL MARKET
The general perception is that California's municipal utilities
have been insulated from the volatile market. While it is true that
California's municipal utilities retained the generation assets needed
to serve load, our consumers have been far from insulated from the
dysfunctional market. NCPA and its members:
Voluntarily participated in the Cal-ISO load curtailment
programs and have been subject to rolling blackouts--even
though we had sufficient resources to meet our load.
Have drawn down the reservoirs at our hydro projects to help
meet the electricity demands of the state, putting at risk our
ability to generate power at these projects during the critical
peak Summer months.
Operated gas-fired combustion turbines at the sole direction
of the Cal-ISO, using 20 percent of available air emissions in
the first 20 days of January (at a time when the plants would
usually not operate)--again reducing our ability to operate the
plants during the Summer.
Purchased power on the market at rates above what would
exist in a truly competitive market.
Sold power to the Cal-ISO, for service to the state's
investor-owned utilities, for which we've since been told we
will not be paid.
As consumer-owned utilities, the effects of these developments will
be felt directly and exclusively by our consumers. We have no
stockholders to ``share'' in the pain.
PRICE CAPS AND COST-BASED RATES
NCPA recognizes the shortcomings of hard price caps. The level may
be arbitrarily set too high or too low, either unnecessarily enriching
low-cost producers or preventing marginal generators from economically
operating. While a $250 price cap seemed more than adequate one year
ago, natural gas prices and emission credits--not to mention
opportunity costs--combine, at times, to make the cost of operating one
of NCPA's gas-fired combustion turbines more than $800 per megawatt. It
is clearly difficult to divine a single number to impose as a cost cap
throughout the west.
It is equally clear that failure to impose regulatory cost
discipline--in the absence of effective market discipline--will cause
excessive and unacceptable burdens on residential consumers, businesses
and the California, regional and national economies. Just as the stock
markets employ ``circuit breakers'' to halt trading when the market
rises or falls too precipitously, so too must we call a ``time out'' in
the western wholesale electricity market.
Ultimately, additional infrastructure--both generation and
transmission--is needed to restore supply-demand equilibrium and enable
markets to function competitively. NCPA strongly supports such
investments and is aggressively pursuing generation and transmission
additions. However, the most critical transmission addition will take
at least two years to complete and generation projects will take even
longer. Consumers in California and neighboring states cannot wait that
long.
To protect consumers during this intervening period, NCPA supports
a temporary re-imposition of cost-based rates and supports the intent
of the legislation pending before the Committee. We commend Senators
Feinstein and Boxer for recognizing the need to act and for pursuing
the temporary re-imposition of cost-based rates.
NCPA understands that there are differing opinions on the need for
and design of any regulation of the regional power market. While we are
willing to work with the Committee, the Administration and other market
participants on the design of the effort, we believe expeditious action
is imperative.
Issues that the Committee might consider include:
``cost plus'' rates in which higher than normal profits
would be temporarily allowed to ensure operation of existing
generation;
exempting generation additions from cost-based rates as a
means of encouraging new plant construction;
the types of transactions subject to the cost-based rate
requirement (e.g., all transactions or only short-term
transactions); and
the ``trigger'' for when the cost-based rate requirement
would be lifted.
At a minimum, Congress should ensure that the current ``soft cap''
imposed by FERC is properly enforced. As intended, power sales at
prices above the FERC-imposed ``soft cap'' would be allowed but
reviewed to ensure that they were cost-justified. It is unclear whether
FERC is adequately collecting and reviewing the cost data needed to
determine whether above-cap bids are in fact cost-justified. Congress
must ensure that this minimal protection is, in fact, operating.
LONG-TERM MARKET REFORMS NEEDED
Re-imposing cost-based rates is merely regulatory triage,
temporarily treating the problem. It is not a long-term solution, and
it is equally important that Congress and FERC use the time afforded by
this temporary ``band aid'' to address the systemic issues and provide
long-term solutions.
The recent California experience has taught us a number of critical
lessons:
Without clear authority on RTOS, FERC accepted inadequate,
inferior and flawed filings from the Cal-ISO. FERC needs clear
authority and direction on RTOs to promote truly effective,
regional and independent transmission management.
While California would be the 6th largest country in the
world based on GDP, it is not big enough to serve as a stand-
alone energy market. Markets are regional, and the transmission
system must be run in a manner that supports interstate
commerce.
There are numerous transmission constraints in California
that have contributed to the rolling blackouts and locational
market power. While the Cal-ISO identifies these constraints,
it has no authority to take corrective action. Current
transmission constraints--like Path 15--must be eliminated and
immediate federal funding assistance, through the Western Area
Power Administration (WAPA), for environmental, engineering and
rights-of-way acquisition is needed. Ultimately, RTOs should
have clear authority and responsibility to plan and expand the
transmission grid. Federal transmission siting authority is
also needed.
Creation of contrived markets--within the PX and ISO--don't
work and exacerbate market problems. While there is a need for
institutions to ensure independent grid management, these
institutions should have minimal market involvement.
Markets do not work well when there are too few market
participants and scarcity of supply. FERC must establish clear
and effective rules to promote sustainable competitive markets
prior to granting authority for market-based rates.
While there are conflicting accounts on whether generators
have exercised market power, manipulated supply and bids, taken
advantage of poorly designed market rules or simply profited
from scarcity, it is clear that there is little public
confidence in the current system. Reformatting FERC's role so
that it is an effective market monitor, with clear authority
and direction to detect and correct market manipulation or
abuse, is needed.
Congress and FERC have exclusive authority over inter-state
commerce in the sale of electricity. The interstate market is not
currently working and will not sustain effective competition. It is
critical that the structure and mechanisms necessary for a competitive
market be established.
NCPA is a participant in the Electricity Stakeholders--a diverse
coalition supporting wholesale market reforms--and urges the Committee
to adopt legislation consistent with the Stakeholder principles.
CONCLUSION
NCPA remains committed in its belief that an effectively
competitive market is beneficial to all consumers. However, such a
market will not miraculously appear simply by declaring markets
deregulated. As California has demonstrated, deregulated markets that
lack the structure to support effective competition will simply cause
consumer and economic hardship.
As a first-step, FERC must re-impose regulatory discipline in the
uncompetitive western power markets. The pending legislation is a
critical step in achieving this necessary relief. But we cannot stop
there. Congress must also provide FERC with necessary guidance and
authority to promote and monitor effective competition in the wholesale
market.
NCPA looks forward to working with Senator Feinstein and the
Committee in promoting both of these objectives.
______
STATEMENT OF PHILLIP H. TOLLEFSON, EXECUTIVE DIRECTOR,
COLORADO SPRINGS UTILITIES
Mr. Chairman and members of the Senate Energy and Natural Resources
Committee: My name is Phillip H. Tollefson and I am the Executive
Director of Colorado Springs Utilities (CSU). I appreciate this
opportunity to submit testimony for the record on behalf of Colorado
Springs Utilities and in support of legislation that is intended to
address recent, dramatic increases in the price of wholesale
electricity in the West. I also want to thank each of you for your
willingness to consider this statement as you look for interim
solutions to address the dramatic increases in electrical bills that
western consumers have faced as a direct result of rapidly rising
wholesale electricity costs.
Colorado Springs Utilities is a municipally owned utility which
provides water, wastewater, gas and electric services to the citizens
of Colorado Springs. We generate 82% of the City's electric power needs
(approximately 623 megawatts) and we purchase an additional 11% from
the Western Area Power Administration and through other long term
contracts. Only 7% of our annual requirements are purchased on the
``spot'' wholesale market. CSU currently provides electric service to
approximately 417,000 people.
While a great deal of attention has been focused on the State of
California in recent months, I want to make it very clear that the
rising price of wholesale electricity is not just a California issue.
Since the summer of 2000, the wholesale price of electricity all over
the West, including Colorado, has been rising precipitously. For
example, in 1998 the average price of a megawatt hour of electricity on
the wholesale market in Colorado was approximately $30. In 2001, we
estimate that we will pay $130, over four times what we paid in 1998,
per megawatt hour. Seasonal and monthly variations are even worse;
prices this coming August are expected to approach $400 per megawatt
hour. The price of power on the spot market far exceeds the actual
costs of generation as is demonstrated by the fact that CSU expects
that the 7% of power we anticipate buying on the spot market will
account for 43% of our total annual electric supply costs!
It is an unfortunate fact of life that even the most well
maintained power plant will occasionally be forced out of service
unexpectedly. Up until last year, it was generally possible to purchase
necessary replacement power on the ``spot'' wholesale market at
reasonable costs. Last summer, a cracked steam header at one of our
plants took a week to repair. Replacement power cost us $11 million, or
about six times what it would have cost us to generate the power
ourselves. The current futures markets suggest a similar incident this
summer could well cost us over $30 million for a single week. This is
not a functional wholesale market.
As a result of these unreasonable wholesale increases, electric
consumers in Colorado and throughout the West face skyrocketing utility
bills. Further, we believe that the economy of our city, our state, our
region and even our entire nation will feel its effects. This situation
has reached a crisis level and calls for the involvement of the federal
government.
Many theories exist to explain the specific reasons that wholesale
prices have increased so dramatically. Generally however, the consensus
seems to be that the problem is a result of a combination of factors,
including: scarcity in terms of generation capacity due to aging
facilities; transmission delivery systems with inadequate capacity and
the existence of bottlenecks; imperfect market structure at the
wholesale level and, in the case of California, the retail level, and;
market abuses by energy providers who have taken advantage of narrow
supply margins to ``price gouge'' consumers. Certainly one could argue
about the relative weight and impact of each of those factors and there
are, no doubt, other factors here left unmentioned. What is important
however, is that the price increases have resulted in consumers being
forced to pay unjust and unreasonable amounts for electricity. Those
who are low income or on fixed incomes, the elderly, and non-profit
organizations and small businesses with narrow operating margins have
been particularly hard hit. If nothing is done, the situation will grow
far worse this summer.
The legislation being considered today is crucial precisely because
it can provide some measure of relief to those consumers. By granting
to regulators the authority to implement rate caps on the wholesale
price of electricity, the dramatic fluctuations we have seen recently
in wholesale electricity prices can be mitigated. That ``leveling off'
of wholesale prices that is the desired result of the legislation will,
in turn, lead to some relief for the retail consumers. Opponents of
rate caps may argue that such caps could serve as a disincentive to the
construction of new generation. However, I believe the proposed
legislation addresses that argument by expressly allowing the rate caps
to include a reasonable rate of return that would continue to provide
an incentive for the construction of new generation capacity. Only
unjust and unreasonable rates would be affected by this legislation. In
fact, many companies that saw fit to add generation in the past made
healthy profits for decades at prices far below current levels.
The rate caps proposed in this legislation are being advocated
precisely because electric wholesale prices in the West have become
unreasonable and unjust and it is clear that consumer price gouging is
occurring. In fact, the Federal Energy Regulatory Commission has
previously concluded, in an order issued on November 1, 2000, that
prices in California and the western energy market were ``unjust and
unreasonable.'' In the short term, the only means available to protect
consumers from price gouging is to implement rate caps. Ultimately,
additional generation and transmission capacity will have to be
developed to bring stability to the wholesale market, but today's
prices are not necessary to justify such construction.
Another issue I would like to briefly address is reliability. It is
critical that in addressing the pricing problems of the wholesale
electricity market, Congress not inadvertently impair electric
reliability. Congress should ensure that any measures it implements for
the purpose of solving the electric wholesale problems not create
conditions which would result in a reduction in the availability of
power in the West. The laws of physics do not necessarily recognize
state boundaries. Imposition of a cap in one part of the Western grid
but not in others could have severe unintended operational
consequences.
Colorado Springs Utilities supports the concept of temporary
electric wholesale rate caps as a means to protect consumers from
market abuses and bring prices under control. I urge the Committee to
act quickly in moving legislation to address the current wholesale
crisis.