[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
ELECTRIC UTILITY INDUSTRY RESTRUCTURING: THE CALIFORNIA MARKET
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND POWER
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 11, 2000
__________
Serial No. 106-167
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
67-633 WASHINGTON : 2001
_____________________________________________________________________________
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COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
BILL LUTHER, Minnesota
LOIS CAPPS, California
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Energy and Power
JOE BARTON, Texas, Chairman
MICHAEL BILIRAKIS, Florida RICK BOUCHER, Virginia
CLIFF STEARNS, Florida KAREN McCARTHY, Missouri
Vice Chairman TOM SAWYER, Ohio
STEVE LARGENT, Oklahoma EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina RALPH M. HALL, Texas
ED WHITFIELD, Kentucky FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma BART GORDON, Tennessee
JAMES E. ROGAN, California BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING, RON KLINK, Pennsylvania
Mississippi JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Barr, Gregory, Vice President, Power Generation, Solar
Turbines, Inc.............................................. 46
Breathitt, Hon. Linda Key, Commissioner, Federal Energy
Regulatory Commission...................................... 111
Byron, Jeffrey D., Energy Director, Oracle Corporation....... 26
Guiles, Edwin A., Chairman, San Diego Gas and Electric....... 132
Hebert, Hon. Curt L., Jr., Commissioner, Federal Energy
Regulatory Commission...................................... 114
Hoecker, Hon. James J., Chairman, Federal Energy Regulatory
Commission................................................. 104
Kean, Steven J., Chief of Staff, Enron Corporation........... 146
Keese, William J., Chairman, California Energy Commission.... 16
Lynch, Loretta M., President, California Public Utilities
Commission................................................. 129
Massey, Hon. William L., Commissioner, Federal Energy
Regulatory Commission...................................... 122
Shames, Michael, Executive Director, Utility Consumers'
Action Network............................................. 32
Sladoje, George, President and CEO, California Power Exchange
Corporation................................................ 58
Smutny-Jones, Jan, Executive Director, Independent Energy
Producers.................................................. 41
Stout, John, Vice President, Southwest Region
Commercialization, Reliant Energy.......................... 140
Tyler, Roy, Owner, Tyler's Taste of Texas.................... 24
Winter, Terry, President and CEO, California Independent
System Operator............................................ 52
Material submitted for the record by:
Blalack, Ken, letter dated September 6, 2000, enclosing
material for the record.................................... 177
Fraser, George, General Manager, Northern California Power
Agency, prepared statement of.............................. 184
(iii)
ELECTRIC UTILITY INDUSTRY RESTRUCTURING: THE CALIFORNIA MARKET
----------
MONDAY, SEPTEMBER 11, 2000
U.S. House of Representatives,
Committee on Commerce,
Subcommittee on Energy and Power,
San Diego, CA
The subcommittee met, pursuant to notice, at 9 a.m., in
room 310, County Administration Center Building, 1600 Pacific
Highway, San Diego, California, Hon. Joe Barton (chairman)
presiding.
Members present: Representatives Barton and Shadegg.
Also present: Representatives Bilbray, Filner, and Hunter.
Staff present: Catherine Van Way, majority counsel; Ramsen
Betfarhad, economic adviser; and Sue Sheridan, minority
counsel.
Mr. Barton. The Subcommittee on Energy and Power of the
Commerce Committee, U.S. House of Representatives field
hearing, the situation in the electricity markets in
California, will come to order.
Before we have opening statements, a few housekeeping
announcements, and then we want to hear from Commissioner
Dianne Jacob, who is going to formally welcome us, I believe,
to San Diego County.
This is a formal hearing of the subcommittee, so we have an
official record. We have got the 16 witnesses that have been
scheduled to testify. Their statements will be in the record in
their entirety. We will allow the Congressmen to ask questions.
Because of the sensitivity of this issue, we've got a
number of Congressmen here from the local area who are not on
the committee. They will have full rights to question, make
opening statements. Those rights will be honored after the
subcommittee members who are in attendance will be heard.
With that, I would like to ask Supervisor Dianne Jacob to
come forward, because I'm told that she has a welcoming
statement for the subcommittee.
Ms. Jacob. Good morning, Mr. Chairman and members of the
committee. I'm here on behalf of the Board of Supervisors and 3
million people and businesses in the San Diego region. And
believe me, they are absolutely thrilled and delighted and very
thankful that you have come to San Diego to hear our plight,
and particularly to our local Congressmen, Congressman Hunter
and Bilbray and Filner, for being here today also for their
help and support on this issue.
I'd like to set the tone for you, perhaps share in a very
vivid way our plight to start the hearings today. San Diego
County, without question, is in a state of emergency, and we
are on the brink of human and economic disaster, and there's no
question about it.
Over the last 3 months, our electricity rates have jumped
from some 3.2 cents per kilowatt hour to over 21 cents per
kilowatt hour. That means doubling and in other cases tripling
the prices paid for electricity in this region from just a few
weeks ago, and with no real end in sight.
Many residents and businesses, frankly, just can't afford
to pay these exorbitant rate increases that have been thrust
upon our region basically without warning. The increases place
an incredible burden on San Diego residents and many
particularly who are elderly and on fixed incomes.
The several local residents such as the 100,000 mostly
senior citizens who live in mobile home parks have no choice
but to pay their full electricity bill or face eviction,
because it's a pass-through. Many of these people have had to
make some tough choices, such as buying food or medicine or
operating life-saving medical devices or to pay their
electricity bill. Those are not choices that these folks or
anybody should be faced with.
On the other hand, the San Diego region is a $100 billion
economy. We rank 37th in the world as far as an economic
powerhouse. And these skyrocketing rates threaten to cripple
our vibrant economy in this region.
Businesses have already begun to cut back hours, to lay off
workers, and to add surcharges to their prices. And the ripple
effect has only begun. As the first region in the Nation to
experience truly electricity deregulations, San Diegans
unquestionably are the guinea pigs in a bold new experiment.
And so far, the experiment has failed, and we need a course
correction.
People are suffering. Businesses are hurting. San Diego is
in a crisis. The people and businesses in San Diego are
innocent victims. We did not cause the problem, and we should
not have to pay the price. Deregulation so far has not worked
in San Diego, for several reasons, including, but not limited
to, a lack of market competition which has basically caused an
unregulated monopoly to exist.
Also, a California public utilities commission that has
failed to provide aggressive oversight and actions to protect
consumers, a power exchange that is required to set market
price based on the last highest bid, and the inability of the
energy service providers to be able to purchase electricity
from any and all available sources.
I am hopeful that the information that you receive today
will help not only in addressing the problem in San Diego, but
also in preventing a similar situation from occurring
throughout California and in other States throughout the Nation
that are moving toward a deregulated electricity market.
If this problem cannot be solved for 3 million people in
San Diego, what are the consequences for the 30 million
Californians or others throughout the United States?
In response to the crisis, the County Board of Supervisors
and several city councils, including the city of San Diego,
declared a state of emergency, and we've asked our State
Legislators, the Governor, State regulators, and others to take
immediate action to provide consumers with immediate relief
until permanent solutions are found to reduce and stabilize
electricity rates in San Diego.
In response, legislators and regulators have put in place a
6.5 cent rate cap for most San Diego consumers. While the
action is a welcome action, it is only a temporary stop-gap
measure, and in and of itself, this rate cap is simply an
installment plan with a big balloon payment at the end of 2003.
We must begin immediately to assure that San Diego
consumers are held harmless for the accumulated debt in this
balancing account and the more daunting task of deciding what
additional actions must be taken to ensure that the energy
market throughout California and markets throughout the Nation
offer consumers a reliable and reasonably priced electricity
supply.
I'm certain that you're going to hear from panelists today
that there is a need to increase power supplies to drive down
market prices. While this is extremely important and badly
needed, we also know that the additional power supplies are
unlikely to come on line anytime soon enough.
And meanwhile, the debt resulting from the 6.5 cent rate
cap will continue to grow each day. Under the legislation
signed by the Governor, the debt is estimated to be as high as
$800 million at the end of 2003 with interest, I might add.
And unless investigations determine culpability and those
who are blamed are required to pay, are forced to pay, the
innocent people and businesses in San Diego will be forced to
pay the $800 million balloon payment, and we cannot afford it,
and that is absolutely not fair.
Therefore, I ask you to use your power to convince the
Federal Energy Regulatory Commission to impose lower caps on
generators throughout the western region as soon as possible.
This action would reduce or eliminate the huge accumulation of
debt as a result of the difference between that 6.5 cent rate
cap and that current outrageous market rate for electricity.
Believe me, 21 cents a kilowatt hour is not a just and
reasonable rate for electricity. This action will give us some
real--some real, not artificial--temporary relief while we work
on these permanent solutions.
On August 17, the Board of Supervisors hosted a conference,
bringing together deregulation experts to provide us with some
recommendation as to what actions need to be taken to solve the
current prices.
The Board is expected to adopt an action plan later this
month based on those recommendations, and we will be forwarding
these to the Governor, Members of the State Legislature, State
and Federal regulators. And I would also be happy to make sure
that your committee is given a copy of our plan after the Board
takes action.
Again, I want to thank you all very much for being in San
Diego today. I look forward to working with you, as the rest of
my colleagues on the Board do, too, to return San Diego's
electricity prices to a reasonable and fair level while
protecting consumers throughout California and the Nation from
having a similar crisis as we have here. Happy to answer any
questions you may have. And again, thank you once again.
Mr. Barton. Thank you, Supervisor. We appreciate those
remarks.
Is Mayor Golding here or her representative? Okay. Well,
before Supervisor Jacob leaves, we want to thank you and your
staff and the county staff for all the courtesies that have
been extended to the subcommittee in arranging for the location
and the room and all of the equipment and things like that. We
really appreciate that.
The Chair would recognize himself for an opening statement,
and then all other members of the committee, and then the
visiting Congressmen will also be recognized.
We are here today in the second field hearing of the Energy
and Power Subcommittee. Our first field hearing was done in
Nashville, Tennessee, last spring on the situation in the
Tennessee Valley authority and all of the issues that are
involved in that region of the country.
We are here today because Congressman Bilbray, who is a
member of the full committee, formally requested to both myself
and to the full committee Chairman Tom Bliley of Virginia, that
we come to San Diego County and firsthand get a look at the
situation that's developed as a result of restructuring here in
California.
As Congressman Bilbray has told me, the electricity
customers here in the San Diego area, by and large, are paying
some of the highest prices in the country for their
electricity. Without talking to the California legislators that
passed the bill several years ago, I can state unequivocally
that that was not the goal of the great State of California
when they restructured their electricity industry.
I want our hearing today, if at all possible, to be
helpful. It should be a fact-finding exercise to determine
exactly what is happening here in California, what the State of
California might do to alleviate the problem, and what role, if
any, the Federal Government, either on the regulatory side at
the Federal Energy Regulatory Commission, or the legislative
side in the U.S. Congress, should do to try to help solve the
problem.
I personally am a very strong believer in the rights of
States, and I'm a strong believer that free markets will work
well for consumers if they're properly structured. I believe
that Congress should not tell California or any other State how
or when to deregulate its energy markets. I think the Congress
can be helpful, though, if we actually do listen, listen to the
experts, perhaps convene experts to first understand exactly
what California has done and how this fits into the national
picture.
I want to commend California for its effort to restructure
its electricity industry. California's initiative encouraged
many other States to act. No other State has identically
restructured its electricity system like California has, and
there are many experts outside the State that have questioned
some of the things that California has done and commented on
the potential problems that these steps might create.
One area of concern is California's complex and lengthy
permitting process, stringent environmental laws, and its
history of what I would convey as general opposition to new
power projects. Because of all of these factors, no major new
power plants or transmission lines have been built in the State
in the last 10 years.
The one statistic that I have been told--and I'm not sure
that this is the gospel--but I have been told that the State of
California's peak load requirement is approximately 46,000
megawatts. Unfortunately, the State of California has a
generating capacity of only 38,000 megawatts.
That means that California, if these facts are true, if
these numbers are true, is a net importer of almost 15 percent
of its electricity. This puts an upward pressure on prices in
the best of circumstances.
In the past 3 years alone, the facts that have been
presented to me indicate that California's demand for
electricity has risen about 5300 megawatts. Supply has only
risen 600 megawatts. The good news is that 25 project
applications, with a total generating capacity of 15,000
megawatts, have been submitted since 1997.
The bad news is that the State has only approved 5
projects, 4 of which, thankfully, are in construction, and that
only 1400 additional megawatts will be available by next
summer. If supply does not equal demand, the market will
naturally produce higher prices.
I understand that the State Legislature has recently passed
and the Governor has signed a new law about permitting and
siting, but I have been told that while these are steps in the
right direction, it doesn't go far enough because these new
legislative initiatives only apply to a small percentage of the
pending projects.
No other State requires its distribution utilities,
including San Diego Gas and Electric, who is going to testify
later today, to purchase all of their power through the
centralized power exchange or PX, an independent system
operator or ISO.
Even more puzzling is the requirement apparently to force
most power purchases to the day before or the actual day the
electricity is consumed. Often, all purchasers must pay a
market clearing price, which is the highest price of the last
peak power needed rather than the average price.
The more I learn about the rules for purchases from the
California Power Exchange, the independent system operator, the
less I like them and the more it appears to me that they may be
part of the problem.
If distribution utilities in California were allowed to
enter into long-term fixed-price bilateral contracts, price
volatility would be lower, and average prices should be lower.
The ability to hedge power prices through the centralized
exchange or individually would also help reduce retail prices.
I'm told that under existing California regulations, such
hedging is not allowed.
It is always easier in hindsight to point out the flaws of
a new system. Based on my preliminary analysis, it appears that
the rules promulgated by the--what I'm told is called the Pease
Bill are imperfect and have caused many problems. Now is the
time to look at reforming these rules so that prices hopefully
will moderate in the future.
Let me turn a minute to what Congress can do to help
California. We can continue to encourage wholesale competition
as we started in 1992 with the Energy Policy Act. We can
require all utilities to interconnect with any generator using
one agreed-upon Federal standard for interconnection. We can
require incentive rates to get more transmission capacity
built. We can remove restrictions that discourage public power
and rule electric co-ops from opening their markets and
competing. And we can compliment State actions, making the
State restructuring more effective without telling States what
to do.
Federal legislation which passed my subcommittee last year,
which hopefully in a reform process, will come before the
subcommittee and the full committee in the next Congress, does
many of the things that I've just outlined. It won't solve the
problems overnight, and there's some things that California
must do itself.
I'm confident that California can correct the current
situation. First and foremost, Californians need to agree on
the rules and regulations that allow new power plants and
transmission lines to be built in a reasonable timeframe.
When supply of power is more in line with the demand for
power, prices will moderate.
I look forward to hearing the testimony today, and I want
to thank, again, Congressman Bilbray for requesting the
subcommittee to come to California and hear what the facts are.
With that, I would recognize Congressman Bilbray for an
opening statement.
Mr. Bilbray. Thank you, Mr. Chairman. Mr. Chairman, allow
me to say with a little pride, I want to welcome you to our
little corner of paradise, San Diego, that at the moment seems
to be going through electricity Hell.
I want to also thank you and Chairman Bliley for taking the
time and the effort and the resources to hold this hearing, a
hearing that is not only absolutely essential to the citizens
and the consumers of San Diego County, but I think is essential
for the rest of the Nation to learn from mistakes that occurred
here in California and have severely impacted the consumers of
San Diego.
I want to thank the County Board of Supervisors and their
staff for providing this room that I am not a stranger to and
the facilities for this hearing.
Mr. Chairman, I think that you've been briefed on the
crisis before the San Diegan consumers, the tripling in the
last year of the consumer rates, the absolute devastating
impact on small business and senior citizens on fixed incomes
and families who are struggling to try to pay their energy
bills while paying all the rest of their bills.
And the big question is why. How did this happen, and how
can it be corrected here in San Diego, and how can it be
avoided in the rest of the Nation. And that's why I'm very,
very pleased that you're here as someone who has really taken a
leadership role.
In the national energy dereg, I think that as an old
history major, you learn real quick the saying that those who
do not learn from history are doomed to repeat it, and I think
you are here today in no little way to learn to make sure that
the mistakes made in California do not occur in the rest of the
country.
Mr. Chairman, last week our committee held major hearings
on the Firestone tire issue. And you saw people piling in and
discussing that item, and you saw a lot of people talk about
that hundreds of Americans were affected, even to the point of
death.
And though there has not been any documented deaths related
to this issue, I want to point out that with all of the
attention that the Firestone tire issue got last week in
Washington that affected hundreds of people, this is an issue
that affects millions in San Diego County and, if it is not
corrected, could affect 32 million people of California. And if
it is not learned from the mistakes, could affect the 200-plus
million people of the United States.
The difference is, last week we spent time watching private
sector and government officials point fingers at different
business community and different business elements to find
blame. I don't think we need to do that today. This is a
mistake that rests mostly in the hands of those of us in
government, one way or the other.
I think that those in government who are involved in this
mistake know it was a mistake, are open to it and are open to
correcting the problem. So I think that in this hearing, we
have the challenge of moving beyond finger-pointing and moving
toward finding solutions and not problems. We all know where
the problems lie.
I have major questions, as you do. Interesting to hear that
under the terms of a proposal that was supposed to be
deregulation, it appears to me that a public oversight body
that was abandoned and a new group called the PX or the Energy
Exchange, which was basically a group of providers and
generators with distributors, were the ones who were going to
determine price for the consumers of San Diego County and the
State.
I have major questions about was this deregulation or
reregulation under a different title. I have major questions
about what's the ability of the Federal Government to step in
at this time to protect the consumers right now with real long-
term protection.
I would like to know what the FERC can do, what the Federal
Government can do to come in and to initiate what the law says
is supposed to be fair rates. And I think, as the chairwoman of
San Diego County said quite clearly, no one in their right mind
can point to what the San Diego consumer is paying today and
say that it is fair.
And so the big challenge is, where can we find what the
State needs to do to correct their side of the problem, but
what we can do to help the State to get themselves out of this
problem, but most importantly--I would have to say this as an
old lifeguard. What we need to do is figure out not why
somebody went swimming, not why somebody got caught in a
terrible situation, but how we can get in and help rescue them
and get them back on good fiscal and fair soil and good rates.
So I would like to say, Mr. Chairman, thank you very much
for being here, and I'd just ask us to try to work together to
find those answers so that the consumer on the bottom line is
treated fairly, as our Federal and State laws specifically say.
And again, thank you very much for taking the time. And I
would like to thank my colleagues for being here because I know
there's a lot going on all over this country, and it's nice to
see that those of us in San Diego have finally gotten some
attention to the fact that our crisis here is something the
Nation needs to listen to and learn from and help correct. And
I yield back, Mr Chairman.
Mr. Barton. Thank you, Congressman Bilbray. And again, we
are very appreciative of you calling the issue to our attention
and asking us to come to California.
The Chair would now recognize the Congressman from Arizona,
the Phoenix area, Congressman John Shadegg, a member of the
subcommittee, for an opening statement.
Mr. Shadegg. Thank you, Mr. Chairman. In deference to the
16 witnesses we have here today, I'll try to keep my remarks
brief. I would request unanimous consent to insert my entire
written opening statement into the record.
Mr. Barton. Without objection.
Mr. Shadegg. Let me begin by commending you for holding
this hearing. We in the West face a number of issues that are
very, very important to us. This is a critical one for all the
people of the San Diego region and a critical issue for all of
the people in the Southwestern United States.
I also want to commend my colleague on the full committee
and my colleague on the subcommittee, Mr. Bilbray. He is
consistently in the lead in taking care of issues for the
people of California, and we have looked at his work with
regard to gasoline and the problems that are now being caused
to our water table, and indeed in Arizona try to follow some of
the lead he's made on that issue. And again, on this issue, I
commend you, Brian, for holding this hearing.
Everyone in San Diego knows that most Arizonans are Zonis.
That is, when summer comes, we all come here to get out of the
Arizona heat. And having spent a part of the weekend here in
Arizona--I mean here in San Diego in the San Diego area, I can
assure you that this is a delightful place, and I understand
why many of my constituents spend time here.
The issue of electricity deregulation is an important one
for the Congress and for the people of California and for the
people of the Nation. My goal here today is to try to listen
and try to learn from California's experience to try to find
out what has gone wrong and to try to make sure that, as we in
Arizona pursue electricity deregulation, and as we in the
Congress do so on a national level, that we can learn from the
process that was adopted here, perhaps recognize some of the
errors that were made.
I commend California for having had the courage to get out
into the restructuring field. The goal, as the chairman
indicated, of restructuring is not to produce higher prices,
but rather to produce both lower prices and better service. And
I believe we can go in that direction.
I join you, Mr. Chairman, in your comments about deference
to State and to State discretion in this area. I do not see the
Federal Government as being the be all and end all for
structuring the electricity market and for imposing on the
various States a one-size-fits-all process.
So I think it is a great opportunity today to learn from
California, to learn what they have done right and perhaps what
they have done wrong. I also concur with Mr. Bilbray and his
plea that we not so much spend today looking at who is to
blame, but rather what is to blame and how we can fix it.
With that, Mr. Chairman, I'll conclude only by saying that
having spent the morning and the evening here last night and
enjoyed the weekend, one of the tempting recommendations that
this committee ought to come forward with, in my opinion, is
that we move the capital from Washington, DC to San Diego,
because I like it here much better than Washington.
Mr. Filner. Second.
Mr. Barton. Well, that may be a move in the right
direction. I'm not sure we'd get this far west, though.
Mr. Shadegg. You'd probably go along with Texas, wouldn't
you, Mr. Chairman?
Mr. Barton. Somewhere closer to the Mississippi, anyway.
The Chair would now recognize the gentleman from San Diego
County, Congressman Filner, of Congressional District 50, which
just as an aside, Texas and New York are the second largest
delegations in the Congress, and we each have 30. So it says
something about the strength of the California delegation.
Congressman Filner is number 50, and I'm told that Congressman
Hunter represents District 52. So that's a lot of folks from
out here.
Congressman Filner is on the Transportation Committee. His
district is in San Diego County, and obviously he's got an
interest in this issue. So welcome to our subcommittee and our
full committee, and you're recognized for an opening statement.
Mr. Filner. I thank the chairman, and I do have an opening
statement for the record that I'll try to summarize. As the
other--as all of us from San Diego join in, we welcome you
here. We thank you for being here. It's important that you're
here, and I appreciate the courtesy of being allowed to sit on
the committee with you.
Mr. Shadegg's statement about moving the capital will
appear in the Phoenix papers tomorrow, so we thank you for the
compliment.
Let me, in my opening statement, make my attitude clear on
this. No. 1, this State should never have deregulated in the
situation where you have monopoly control of a basic commodity.
It's absolutely predictable that this would have occurred under
this situation, and now we are struggling for ways to correct
it. It should never have happened to begin with. We have a
basic commodity. We have a monopoly. It doesn't mix for the
consumer.
Let me also say that I think we ought to be focusing--as
the chairwoman of the County Board of Supervisors pointed out,
we have a short-range problem which deals with the suffering,
the fear, the panic of hundreds of thousands of people in this
county, people facing going out of business, people facing the
possibility of life-and-death decisions. That has to be
corrected immediately. And we have the long-range solution,
which others on this body have referred to.
Let me say in terms of the first one, the State
legislature--excuse me--under the leadership of some of our
representatives here, State Senator Alpert, Assemblywoman
Davis, I think produced a bill that went as far as possible in
terms of what was achievable at the State level.
But as the supervisor--the chair of the supervisor has
pointed out, this is a deferment of a bill that will become due
at the end of the 2 or 3-year period. What we must do is get
rid of that potential.
Several people said, ``What can FERC do? What can the
Congress do?'' Let me tell you, when you hear from the FERC
commissioners, they will tell you, as I've read their
testimony, that they are not--they do not have the authority to
roll back prices retroactively.
They have the authority to impose some caps. They do not
have the authority to roll back prices retroactively. Which
means that our consumers are still on the hook. I hope the
chair will consider, when he gets back to Washington, HR-5131,
a bill which I introduced last week, which was referred to this
committee, Mr. Chairman, which directs the FERC to roll back
wholesale prices in the western region to the prices they were
before deregulation.
And it orders the wholesalers to refund the price over that
level to the consumer. That is the only way, I would submit,
Mr. Chairman, that this Congress can--that the consumers will
not suffer. It's what Congress has the authority to do. We must
give FERC the authority to roll back those prices. My bill is
called Halt Electricity Price Gouging in San Diego Act or HELP
San Diego, and we should help it now.
So I hope, Mr. Chairman, you'll be considering this. I hope
my colleagues from San Diego County will join me in sponsoring
this legislation. It's only a retroactive roll-back that will
prevent our small businesses and our individuals from facing a
balloon payment of who knows how much at the end of the 2 or 3
years.
Just one brief statement in terms of our long-range
solution. I applaud again the chairwoman of the board of
supervisors for asking her body to look at local control of
electricity industry, the so-called municipalization of power.
I think the only way that we in San Diego are going to get
control of our own energy future is take the generation
decisions out of the hands of monopoly and put it under the
hands of our own people. We should be looking at that right
away.
My colleagues referred to that we are the poster children
for the rest of California, that if we don't act to avoid the
problems, 32 million people will be affected. I would like to
amend that because probably close to 10 million Californians do
have their own electricity utilities. The city of Los Angeles
has their own power company, basically. The city of Sacramento.
So there are millions of Californians that are not going to
suffer this future because they have control of their own
pricing. So let us look to those areas and begin to looking at
local control of our own energy future. I thank the Chair.
Mr. Barton. We thank you, Congressman Filner, for your
remarks. Now recognize Congressman Duncan Hunter, whose suite
is next to mine. His office is right next to mine in the
Capitol. Congressman Hunter is a subcommittee chairman of the
Armed Services Committee and has done tremendous work in
providing for a national defense and is a recognized expert in
that area. Welcome to the Energy and Commerce Committee, and
we'd recognize you for an opening statement, Congressman
Hunter.
Mr. Hunter. Mr. Chairman, thank you and thank you so much
for coming on this mission, which I hope to some degree will be
a rescue mission.
You know, I left my district in east county a few minutes
ago to get over here and had a chance to talk to some of my
small businessmen, as we've all been doing, and our consumers.
And I think one part of the factual base that you're going to
receive this morning is that this is an emergency, and it's a
crisis that is bigger in proportion than any natural disaster
San Diego has ever had.
The amazing part of this is the amount of life savings,
money that could go to mortgage payments, go to educate
children, and in the case of small businessmen, the capital
base for many small businesses has already left or is in the
process of leaving within the next couple of months.
You'll hear businessmen who will talk about small machine
shops going from a $25,000-a-month electricity bill to $90,000
a month. And that is consistent across the industry and the
small business base in San Diego County, and I think you'll
hear that testimony today.
What we have right now is quite unusual, to say the least.
You've got this exchange where literally the real time energy
costs can be bid up and have been bid up to what our staff
calculated out to be 9,000 percent increases, where you have to
go in and for the next several hours buy electricity from the
lowest bidder.
And this is similar to having the oxygen supplier in a
hospital literally 5 minutes before a life-saving operation
being allowed to auction off his oxygen. There is no
competition. This is not a competitive situation, and it's not
a competitive situation because we lack the one most important
element in a competitive situation, and that's a consumer with
some choice.
A consumer can't walk across the street and buy that other
loaf of bread at a lower price. They have one socket that they
can plug their electrical appliances into, literally, or a few,
and they are totally captives of the situation.
So you've got the patient laying there ready to be operated
on, literally with their life savings at stake, and you have a
system where the suppliers can auction off in real time that
life-saving commodity, and it's gone up again to 9,000 percent
of what it was just a few hours earlier. That is--and I'm
speaking about the $90 per kilowatt hour costs that have
occurred.
You know, I've got FERC's--the Federal law here in front of
me that FERC operates under, and it says--and I quote--any such
rate or charge that is not just and reasonable is hereby
declared to be unlawful. That was put there for a reason.
In my estimation, although this is a State law that we've--
and a State deregulation, the Federal Energy Regulatory
Commission not only has jurisdiction, but they have a charge to
cap these rates, and they haven't done it.
So I think that the only thing we should come away from
this hearing with the agreement that 9,000 percent increases
are not just and reasonable, and the overall 400 or 500 percent
increases that we've seen, the 21 plus cents per kilowatt hour
charges, are not just and reasonable, and the Federal
Government should act, even though this has been a State--this
has been a State creation.
Second, I think for San Diego County, it's clear to us
we're going to lose our industrial base here. And we're not
going to attract a high-paying industry and good jobs because
the one thing that businesses big or small want to avoid is
unpredictability. And the situation that we have right now is
one where there is total unpredictability.
A machine shop that's thinking of moving to San Diego
County or a major aerospace concern has to look at what's
happened with this incredible volatility of our prices for
energy and conclude, like some of our businesses now that are
paying $100,000, $200,000 a month more than they were for
electricity alone just a few months ago, that it's a risky
business to locate in San Diego County.
So we have to have stability. The only way we can achieve
that stability right now, because of this incredible situation
where you bid the oxygen off just before the operation, so to
speak, is to have a district, a municipal district in San Diego
County operated by a subdivision of the State.
And the proposal that I made on this a couple of weeks ago
to the County of San Diego was to the effect that we take one
asset that we have right now, which is a 36-inch natural gas
line at Miramar Marine Corps Air Station. We also have a plug-
in to the power grid at that location.
We buy some of the new high-tech equipment, like the
General Electric LM-6000 generators that generate for
Sacramento right now at 3.5 cents per kilowatt hour, or some of
the machines that our own company, Solar Turbines, has in San
Diego County. Their machines can handle 17 to 20,000 homes per
machine or the equivalent. And we build our own power station.
And by doing that, we establish predictability and
stability for the industrial base, the small business base and
the consumer base in San Diego County. So that--under the
current law, that, to me, appears to be the only way off this
extremely volatile exchange, which literally is robbing San
Diegans right now of their life savings. And in cases of
businesses, of their total cash reserves in just a period of a
few months. Thank you for being with us, and I look forward to
a good hearing.
Mr. Barton. Thank you, Congressman Hunter.
That concludes the opening statements. All members of the
subcommittee who are not present that wish to put a written
statement in the record, the Chair would ask unanimous consent
that that be allowed. Hearing no objection, so ordered.
Mr. Filner. Mr. Chairman, may I ask a question of
procedure?
Mr. Barton. Sure.
Mr. Filner. I take it we--the public--this is a hearing, so
there is no public testimony that's allowed?
Mr. Barton. There is no sign-in sheet for people that just
show up today, no, sir.
Mr. Filner. I mean, I would hope if we--if we sometime--if
we conclude the hearing in some reasonable fashion, that
members of the public be allowed to speak. But more
specifically, one member came in to me this morning and said he
thought he had been on the agenda. He happens to be the
business manager of the local IBEW union here, International
Brotherhood of Electrical Workers, a major stakeholder in all
of this, and was surprised that he was not on the agenda. Is
there any way we can either add him or get his statement for
us?
Mr. Barton. Well, we have 16 witnesses scheduled. We can
certainly get a written statement and let both staffs of the
committee look at it, and I'm sure we can put that into the
record.
Mr. Filner. I would hope, if we have time, that we might
hear from those who have big stakes in this that we have not
scheduled in advance, depending on your time. I know that you
have time constraints, Mr. Chair.
Mr. Barton. Well, we will not be allowed to add witnesses
to the panels today, but we can certainly, again, take a
written statement, let both staffs look at it, and I would be
surprised if we couldn't put that written statement into the
record.
And my guess is that members of the California delegation
could certainly meet individually with representatives that are
not on the formal witness panels. And based on that, perhaps do
another hearing at a future date in Washington. Thank you.
We'd now like to call our first panel forward. We have Mr.
Roy Tyler, who is the owner of Tyler's Taste of Texas, which
seems to me to be an oxymoron in California, but we'll see. Mr.
Jeffrey Byron, who is the Energy Director of the Oracle
Corporation. Mr. Michael Shames, the Executive Director of the
Utilities Consumers' Action Network.
Mr. Jan Smutny-Jones, who is the Executive Director for
Energy--Independent Energy Producers. Mr. Greg Barr, who is
Vice President for Power Generation for Solar Turbines,
Incorporated. Mr. William J. Keese, who is Chairman of the
California Energy Commission. Mr. Terry Winter, who is the
President and CEO of the California Independent System
Operator. And Mr. George Sladoje who is President and CEO of
California Power Exchange.
Welcome, gentlemen. I believe that Congressman Hunter and
Congressman Bilbray both want to give a little bit more formal
introductions to some of these panelists. We'd recognize Mr.
Bilbray. If you want to give us a little more detail about one
of the witnesses.
Mr. Bilbray. Yes, Mr. Chairman.
Mr. Barton. You've got to flip that little switch. He's
been here a long time. He knows.
Mr. Bilbray. It's been a while since I--I was just trying
to make sure I'm on. Oh, there it is.
Mr. Chairman, it's my pleasure to introduce Mr. Barr, who
is the vice president of Power Generation for Solar Turbines.
Solar Turbines actually has been keeping me informed of the
challenges of the small generator being able to get on line or
the medium-sized generator being able to get on-line onto the
grid to be able to provide alternative to the large traditional
power generators.
The vice president has been very, very innovative of not
only the ability to produce fair and cost-effective
alternatives to traditional power sources, but also very
environmentally friendly and economically viable power.
And so I'd like to welcome the vice president and thank him
for being here. And I'd like to say sincerely, thank you for
all the time you've taken trying to educate this member of the
Congress committee.
In fact, I--the chairman of the full committee has said
that my appointment on the task force, the special task force,
was because they figured I'd listen to your facts and figures
enough to where if anybody knew how to address this issue of
interconnection and the whole concept of allowing more people
on line, you were able to educate me on that, and I want to
thank you very much for that.
Mr. Barton. Congressman Hunter, do you want to give us a
little more formal introduction on----
Mr. Hunter. Sure. And I know we've got to get going here,
Mr. Chairman, but I just wanted to let you know, we have Roy
Tyler, who is my----
Mr. Barton. Turn your microphone on, please.
Mr. Hunter. Thank you, Mr. Chairman. Roy Tyler, who has a
business in San Diego County, I think, will have a great
description of what happens when you mix an entrepreneur who
came to San Diego with just a few bucks in his pocket with 20-
hour work days and the creation of three restaurants now that
are nationally recognized as being some of the finest in the
Nation, and you have a chance to juxtapose that against this
incredible disaster that has befallen all of us small business
folks.
And Roy was just, I might say, on national television with
one of the best dinner theaters in the United States of
America, has had great publicity as a result of that. Brought a
loot of entrepreneurial skills from Texas and applied them to
California and helped all of us in doing that.
So I welcome Roy, and I welcome also all the panelists who
are with us here today. Now let's go to work.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. John D. Dingell, a Representative in
Congress from the State of Michigan
I commend the Subcommittee for holding this hearing to examine the
results to date of California's experiment with electricity
deregulation. This presents something of a moving target, however,
since the California legislature enacted two new laws modifying the
original deregulation statute and a third is pending.
Representative Bilbray has rightly noted that ``sometimes
governments make mistakes, and this is one of them.'' It is fortunate
that California's problems have not yet spread to the rest of the
country and that other states have been left to make their own
judgments about what is in their citizens' best interests. In
retrospect, Members of Congress should breathe a sigh of relief that
they did not jump on the bandwagon for a federal retail competition
mandate, a concept promoted in several bills referred to the House
Commerce Committee, before fully grasping its consequences.
The bill reported almost a year ago by this Subcommittee wisely did
not include a federal mandate. Unfortunately, I was unable to support
my good friend Chairman Barton's effort because it contained a number
of other ill-conceived measures which did not seem likely to benefit
the average consumer. In particular, the bill was weak on market power
issues, limiting the Federal Energy Regulatory Commission's authority
to review mergers and set transmission policy. The bill also took an
overly friendly approach towards the federal power agencies, preserving
the public power preference for present Bonneville Power Administration
customers which Rep. Bilbray has rightly questioned in recent weeks.
In short, while the Subcommittee recognized the folly of forcing
deregulation on the states through a federal mandate, no alternative
has emerged that would address concerns about market power. Nor is it
clear that federal legislation could resolve the sort of problems
California has experienced, first and foremost being the lack of
adequate generation capacity.
The testimony presented today will doubtless prove helpful to
Congress when it convenes next year and takes up the electricity
restructuring debate once again. The States are our laboratories and
there will be much to learn from the California experience. One lesson
from California's experience is look before you leap--a caution that
applies equally to state and federal legislatures. I hope that
California can straighten out its current difficulties and achieve the
benefits of competition. In terms of the role of Congress in the
restructuring debate, however, it is imperative that we learn from the
states' experiences and enact new federal electricity laws only when it
is clear that the effect on consumers will be positive.
______
Prepared Statement of Hon. Tom Campbell, a Representative in Congress
from the State of California
The problems encountered in the Bay Area and in San Diego point out
the danger of partial deregulation of electricity generation. Until
complete wholesale deregulation occurs in the US, a step requiring
federal law, the promise of lower prices from deregulation in
California may not result.
From both an economic and environmental perspective, I believe the
solution is to focus attention on fostering renewable energy and energy
efficiency. This will shift us away from dependency on fossil fuels,
which are inherently subject to large and unpredictable shifts in
price.
In the long run, fully competitive electricity production is in the
nation's and California's interest. However, recent events have
highlighted some systemic changes that must be made in the way full
deregulation is pursued. I strongly advocate these changes.
Here are the main points:
1. Increase Supply
New electricity-generating capacity must be created, and I believe
it is necessary to build new cleaner, power plants. Among these, there
should be several that are not vulnerable to the fluctuations in price
seen in fossil fuels.
A government-provided fiscal incentive is necessary to induce the
construction of facilities that generate electricity from renewable
sources. This incentive should be financed by a surcharge on
electricity from non-renewable sources.
Recently, I took the opportunity to testify in favor of the siting
of a new electrical generating facility in Silicon Valley. Many
neighbors were upset with me, but could not see how I could call for
more supply of energy to California but demand it be built elsewhere.
We also need to build more transmission capacity to bring
electricity into our state. Without that, Californians will be captive
to the providers of electricity located in California only.
2. Decrease Consumption
The waste of energy in California is still one of the largest
causes of shortage. We need to lighten the load on the power grid; for
example, a full 30% of the peak energy consumed is due to A/C use.
The U.S. Department of Energy should move at once to upgrade
minimum efficiency standards substantially for new air conditioners by
at least 30%. California' Public Utilities Commission must provide all
consumers with enhanced information, on-line and otherwise, on the
largest sources of wasted energy.
We need to extend California's incentives for long-term energy
efficiency investment, as proposed in bipartisan legislation that is
now on the Governor's desk. And we should take the relatively simple
steps that consumers can take to reduce that waste.
We should also require real-time metering for all industrial and
large commercial users, now, including commercial users, do not know
the cost of the energy they are using in real time, so they have no
incentive to ration their use by time, or to invest in conservation.
3. Meet the Demands of the ``Gap'' Between Producers and Suppliers
Wholesale price caps already exist. Retail price caps set at the
inflation-adjusted level before deregulation are needed as an interim
measure. They should continue at least until several months after
national electricity markets are fully competitive.
Relying on the supply and demand to keep down prices, before
national sources of energy production and transmission became available
for San Diego, proved inadequate to prevent a hugely damaging price-
hike here.
I expect that eventually competition will bring prices down; but as
long as deregulation has only partially been implemented, the potential
for distortion is great. The key to future price stability remains the
reduction of our dependency on fossil fuels while we continue to foster
renewable energy and focus on energy efficiency.
I thank you for the opportunity to submit this testimony, and I
look forward to working with the Congress toward a more cohesive
strategy that assures that our energy supplies are both readily
available and reasonably affordable for consumers.
Mr. Barton. And I'm told that Congressman Filner wants to
make one special introduction.
Mr. Filner. I'd like to welcome Mr. Michael Shames, who is
the executive director of what we call UCAN, Utility Consumers'
Action Network. He is the one person in this county who has
exercised an independent stance, an independent expertise on
what is going on.
And I will tell you, when this crisis broke, there was
virtually no public official who did not call Michael Shames.
And I want to thank him for maintaining your expertise and your
independent judgment throughout many, many, many years. And we
look forward to hearing your perspective on this today.
Mr. Barton. Well, gentlemen, we want to welcome you to the
panel. Now, we've got 16 witnesses, and each of you are very
important. We can't tell you how much tugging and hauling we
had to do to narrow it down to 16, but we are going to have to
ask that your opening statements be in the range of 5 minutes.
And we have a little egg timer, so I'm going to click you at 5
minutes. If it takes another minute or so to wrap up, that's
fine. I apologize in advance for having to be that
constraining.
I'm told that Mr. William Keese has a pending engagement
somewhere else, so I'm going to start with you, Mr. Keese, and
then we'll just go back to Mr. Tyler and start down the road.
So we'll get your statement first, and then if you need to
leave, you would be excused. Hopefully, you could stay for some
questioning. Mr. Keese.
STATEMENTS OF WILLIAM J. KEESE, CHAIRMAN, CALIFORNIA ENERGY
COMMISSION; ROY TYLER, OWNER, TYLER'S TASTE OF TEXAS; JEFFREY
D. BYRON, ENERGY DIRECTOR, ORACLE CORPORATION; MICHAEL SHAMES,
EXECUTIVE DIRECTOR, UTILITY CONSUMERS' ACTION NETWORK; JAN
SMUTNY-JONES, EXECUTIVE DIRECTOR, INDEPENDENT ENERGY PRODUCERS;
GREGORY BARR, VICE PRESIDENT, POWER GENERATION, SOLAR TURBINES,
INC.; TERRY WINTER, PRESIDENT AND CEO, CALIFORNIA INDEPENDENT
SYSTEM OPERATOR; AND GEORGE SLADOJE, PRESIDENT AND CEO,
CALIFORNIA POWER EXCHANGE CORPORATION
Mr. Keese. Mr. Chairman, thank you, and I will stay around
through what's the noon hour. I was elected chairman of the
National Association of State Energy Officials yesterday, and
I'm chairing a 3-day meeting in Redondo Beach starting this
morning dealing with the high fuel prices in the northeast,
dealing with the high gasoline prices across the country, and
dealing with this issue on a national basis.
I do appreciate being here in San Diego, particularly on
behalf of this administration and Governor Davis, who has
indicated that deregulation can work. Deregulation is not
working, but deregulation can work, but we must all, everyone
involved, work together to find the solution.
As you mentioned earlier, the California legislature passed
two bills this year. Passed actually 10 bills, the Governor has
signed two of them. And I'd like to just refer to those two
briefly.
Bill 8970 has granted the Energy Commission $50 million to
give grants in energy efficiency and renewal generation to try
to bring more power on before June 1 of next year, one of our
critical areas.
It also has given us an expedited siting process.
Currently, the Energy Commission cites power plants in a 1-year
timeframe. We do it within 12 months of the acceptance of the
filing for a power plant. The delay in building power plants is
a result of the additional 2 years it generally takes to build
a power plant after it gets licensed.
So we have at least a 3-year process there. We will now
have an expedited siting process for plants that do not have a
significant adverse impact on the environment. I will leave AB-
265 to Ms. Lynch of the Public Utilities Commission. It deals
with the rates in San Diego particularly.
The citizens of San Diego have a right to be concerned with
the prices that they have seen, which were obviously not
intended by the legislation, AB-1890. How did we get here? I
have attached to my written presentation, which I believe the
committee members have, four graphs. And you will see in the
first graph an outline of the States that are growing more
rapidly than the others in the country.
And there is no doubt, when you look at it, that California
is surrounded by Arizona growing at 30 percent, Nevada at 50
percent. Utah, Oregon, Idaho. Every State around California is
growing faster than we are.
Yes, it is true that California did not build a major power
plant in the last 10 years. Actually, very few major power
plants were built anywhere in the country or the West.
The problem is a Western problem. There have been moves now
to start building power plants, and the actual number is 50. We
are now talking to developers of 50 power plants in California
who want to go through the California Energy Commission siting
process.
The second slide would indicate where we are in
reliability. That is, how much operating reserve do we have
when we reach our peak demand. I will just give you a little
fact that if we have a hot year, if we have a hot siege, a heat
storm, we require 4,000 megawatts more than if we have a normal
year. This was not a heat storm year. This was a little above
normal year. So that's 8.5 percent more load.
We're going to need something to accommodate that
additional 8.5 percent that would come if we had a heat storm.
And a competitive market for generation is not the way that you
will achieve that. Because very few generators will be willing
to put the $300, $400 million into building a power plant
that's necessary once a year for 3 days.
The third slide would show you our peak demand. And you
will see that 29 percent of our power at peak goes to air
conditioning in California. Air conditioning therefore becomes
a great target for energy efficiency and for addressing the
issue of peak demand.
Additional generation is a possibility. The last slide will
show you the five projects the Energy Commission has approved,
four of which are under construction, three of which may come
on next summer.
We are doing everything in our power to work with the
developers to see if we can move the dates up. You will see on
the slides----
Mr. Barton. That's 5 minutes. We'll give you 1 more minute.
Mr. Keese. Okay. They're coming on from July to September.
We are working to try to get them facilitated so that they can
come on by June, which is the time we need.
I will just cut to the end and suggest what there is that
Congress could do. And we are very strongly supportive of S-
2718, the Smith bill, Energy-efficient Buildings Incentive Act,
which will deal with buildings and appliances. We would
strongly urge your support of that.
We are strongly urging to either adopt new energy-
efficiency standards for air conditioners, standards that apply
to the west, where it's dry, and to the east, where it's damp.
There's a tremendous difference. We think that's important.
We would like a Federal exemption from the preemption of
the Federal Government in appliance standards for efficiency,
and the bill that was passed asks us to try to expedite that.
Support of communities.
And we would ask FERC to confront the major issues of
wholesale prices and to give California all the flexibility
that they can. Thank you, Mr. Chairman.
[The prepared statement of William J. Keese follows:]
Prepared Statement of William J. Keese, Chairman, California Energy
Commission
Mr. Chairman I appreciate the opportunity to testify before the
Committee in my role as Chairman of the California Energy Commission on
electricity industry restructuring in California.
I would like to thank you for travelling to California and
especially for meeting here in San Diego where the local citizens are
justifiably interested and concerned about both the short- and long-
term prospects of restructuring.
In response to those concerns, the California Legislature passed
and Governor Davis signed two important bills in the past ten days, AB
970 and SB 265.
Two of the principal features of AB 970 are:
First, the allocation of $50 million to the Energy Commission to
implement cost-effective energy conservation and demand-side management
programs. We believe it is critical that we reduce our peak electricity
demand and improve energy efficiency. This allocation of funds is an
important component in achieving these goals.
A second key feature of the bill is the creation of an expedited
siting process for power plant projects. Projects will be eligible for
this expedited process if, on the basis of an initial review, the
Energy Commission concludes there is substantial evidence that the
project will not cause a significant adverse impact on the environment
or electrical system, and will comply with all applicable laws.
AB 265 requires, among other things, the California Public
Utilities Commission to establish a ceiling on the energy component of
electric bills for residential and small commercial customers through
December 31, 2002, retroactive to June 1, 2000.
The citizens of San Diego have experienced firsthand what happens
when a market does not function properly and when there are barely
sufficient resources to meet the demand for electricity during periods
of peak use.
How did we get in this situation? First, population and electricity
demand have grown substantially in California and the West in the past
decade. Remember that California and the West, including British
Columbia and Alberta, are part of an interconnected electrical grid.
Problems in one area can affect the entire western United States.
California, which used to import large amounts of energy from the
Northwest and Southwest during the summer months, has seen these
sources diminish as electrical demand has increased in those areas. In
addition, in the new competitive and restructured market, California
generators are now exporting power out-of-state.
Because of the uncertainty created by restructuring in the latter
part of the 1990s, few power plants were constructed in California.
This meant that electrical reserve margins began to decline.
Today, we find ourselves with inadequate generating capacity during
periods of peak demand which corresponds to hot summer days when people
are using their air conditioners. During these periods, air
conditioning accounts for about 29% of Statewide peak demand.
One solution to our problem in California and the West is
additional generation. In the last year the Energy Commission has
licensed five power plants with a combined generating capacity in
excess of 3600 megawatts (MWs). Three of these facilities are expected
to be on line sometime during the summer of 2001.
In addition, we are currently reviewing an additional 14
applications with a combined generating capacity exceeding 8000 MWs. We
believe this additional generating capacity, combined with new
facilities in the other western states, will create a more competitive
electricity market in a few years.
However, even in the long-term, more generation by itself is not
the answer.
In order for the restructured electricity market to function
competitively, and to provide benefits to consumers in San Diego, as
well as other parts of California, and the rest of the western states,
mechanisms must be in place that allow consumers to respond to higher
prices.
California Power Exchange data suggests that a three percent
decrease in demand at peak hours can reduce market clearing prices by
25%. This means it is more cost-effective to reduce peak demand for
electricity than to build power plants to meet peak demand.
The basic framework to provide incentives to end-users, including
interval pricing and interval data recording meters, are important
elements of a robust competitive market. When consumers reduce demand
during periods of high prices, they will benefit themselves and
concomitantly lower prices for others. This also reduces the need for
additional power plants.
It is also critical to continue efforts to promote energy
efficiency. First, energy efficiency programs will help reduce demand.
This will contribute to both improved system reliability and lower
prices. Second, there are significant environmental benefits associated
with reducing demand since the environmental impacts of constructing
and operating additional power plants are avoided.
Along with additional generation capacity, there is a need for
selected upgrades and expansion of our transmission line system in
California, particularly in constrained areas like the San Diego
region.
The Energy Commission is currently funding a $7.2 million contract
with the Consortium for Electric Reliability Solutions to determine
what solutions might exist to improve the reliability of the electric
grid. DOE is providing approximately $10 million in additional funding.
New transmission lines, however, do not represent a quick fix as
they can take 5 to 7 years to plan, permit, and construct. Also, in
California, they are not always the appropriate fix. It has not been
the lack of bulk transmission lines from out-of-state that has
constrained electricity supply in California this summer. For example,
problems with adequate generating capacity and transformer capacity
constraints were major factors leading to rolling blackouts in the Bay
Area in June.
There are many things Congress can do to help address the electric
supply, price and reliability problems facing California and the West.
Pass the Smith Bill (S. 2718) which would enact the
``Energy Efficient Buildings Incentive Act,'' which will provide
federal tax credits and deductions for energy-efficient design and
construction of residential and commercial buildings.
We believe this will lead to substantial energy savings in
California, approximately 150 MWs annually.
DOE should adopt a new efficiency standard for residential
air conditioners which will lower energy bills for homeowners.
We are recommending the standard be set at SEER 13 (seasonal energy
efficiency ratio) and include an EER (energy efficiency ratio)
requirement because this is based on a hot, dry climate like the
West's, which will do more to reduce peak demand.
DOE should grant California exemptions from federal
preemption for new state appliance efficiency standards covered by
federal law.
AB 970 requires the CEC to consider expedited adoption of
efficiency standards that achieve the maximum feasible level of
conservation that is cost-effective.
Congress should support cool communities by providing
funds for highly-reflective roof research.
The Federal Energy Regulatory Commission must confront and
resolve the issue of wholesale electricity prices. There must be just
and reasonable prices for all ratepayers, something we did not have in
San Diego this summer. And,
States need to be given maximum flexibility and latitude
to implement solutions to their unique set of issues.
The electricity supply problems facing California and the West are
significant and should not be underestimated. However, I am optimistic
they can be resolved if we work together cooperatively to develop
solutions.
I look forward to answering your questions.
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Mr. Barton. Thank you, Mr. Keese.
We now go to Mr. Roy Tyler, of Tyler's Taste of Texas, for 5
minutes.
*COM008* STATEMENT OF ROY TYLER
Mr. Tyler. Thank you, Mr. Chairman. Thank you, council, for
inviting me here.
Mr. Barton. You need to be at some microphone, either sitting or--I
guess you could stand up here at the podium.
Mr. Bilbray. If you go to the podium, they can turn that on.
Mr. Barton. Either one. You can do either one, but we need to hear
you.
Mr. Tyler. Is that on?
Mr. Barton. Yes, sir.
Mr. Tyler. Roy Tyler. My wife and I own and operate Tyler's Taste
of Texas restaurant here in San Diego for 22 years. I appreciate the
opportunity to be here. I speak not for the restaurant industry, but
for small business in general.
In our restaurants, we've had a number of meetings with small
business in San Diego, and also, by the way, I represent the great
State of Texas here in San Diego, of course.
Mr. Barton. That's not an easy job, I guess.
Mr. Tyler. It's a tough job. Somebody has to do it.
It puts me to mind--I had the unfortunate opportunity as a young
man in Texas--one reason I came to San Diego--to be destroyed in a
natural disaster. And I saw the power of the government step in and
save our economy, save our businesses, save our people overnight. I saw
the action.
And since that day, I've also seen government come in and save
something to death. And that's my greatest fear. At this point, this
power failure is equivalent of that hurricane or of an 8.0 earthquake.
And the effects are virtually the same. You haven't seen it yet. I
understand from the business people, which represents a big part of the
economy of this county and small business of this Nation. I've seen the
after-effects of this. We've had an eight-point earthquake already. We
need the Federal Government here now, not study and not talking. We
need some action.
If we were a scientist, we also could say we're sitting on a fault
now that will produce a nine-point earthquake in another few months.
The walls will come tumbling down in small business.
In 22 years, I came here virtually with nothing after a disaster,
and I built some equity. My equity is gone. Effectively today, my
equity has disappeared, as most of my business colleagues and small
business. It's gone. Where is the Federal Government? Not to study it.
We want to see some action from the government. We don't care who's to
blame. We think there was some bad business decisions made. But the
effect is, it's killing us. You know?
My power bill. I can talk about it pretty easily, because it
belongs to me. Our combined bills were $8,500 before the disaster.
Combined last month was $22,456. That's a $13,941 increase in my bill.
That's everything. That's everything I own down the toilet if it's not
corrected. The effect of that on my employees, the ones that pay their
bills at home. We're worried about how do they pay their increased
bills. That's assuming they still have income.
I've got 150 payroll hours from my business, most of the employees
that work for me. Half a dozen people have lost their jobs today. And
I'm not sure what the effect will be next month, because those same
people, their disposable incomes are disappearing. That's my customer.
And when they quit coming in the door, what's next? We're only seeing
the beginning, the first shock of the earthquake. The after-shock, I
believe, will be worse.
Businesses that I've spoken with and met with, Buck Knives--this is
an old chart. It's old numbers. They've almost doubled since then, or
some of them. Buck Knives is up more than 100 percent. What's 100
percent? That's tremendous.
Manufacturing companies, 130 percent. Certified Metal, a small
metal craft shop with 30 or 40 employees, is up $70,000 in 1 month.
They can't survive it. And it's not a matter of months or a few years
when you guys figure out what to do. It's a matter if we don't do
something now, we're all in trouble.
And the trouble will run downhill. Not to San Diego. It'll go to
California, and it'll go to the country, and it very well could go to
the entire world. This is a total economic disaster, and we need relief
from it. Not tomorrow. We need relief today.
Everybody said everything that needs to be said about the free
market. We all understand you can't have more demand than supply and
have a free market. It doesn't work. We have to come up with supply.
I commend Congressman Hunter as being the only person so far that
has stepped forward with a plan that could be immediate.
Mr. Barton. If you could wrap up in about a minute.
Mr. Tyler. Will do it. I'm wrapping now.
We need electric independence in San Diego. Congressman Hunter has
brought us a plan. We should look at the plan. It can be implemented,
from what I'm told, in a matter of a few months. We need to respond.
FERC. I don't understand. Congressman Hunter read the deferred
ruling, and I've been told that the Federal Government has no power to
step in and regulate rates. Explain. The business community would like
the explanation of what just and reasonable means.
If the law is just and reasonable, why can't you step in? That's
our question for the day. And we need somebody stepping in now, not
studying it, not looking it over, not thinking about it. We want you
now. Thank you.
[The prepared statement of Roy Tyler follows:]
Prepared Statement of Roy Tyler, Owner, Tyler's Taste of Texas
It's time to talk about the consequences of the energy crisis. As
well as a homeowner, I am representative of many small business owners
whose electric bills have doubled, tripled and more. I am here to talk
about concerns for the future of small business, which represents a
large portion of the economy, not only of San Diego, but of the entire
country.
Any business, small or large has to budget its major bills.
Heretofore a business owner, in their wildest dreams could not imagine
one of those bills budgeted at $33,000 becoming $75,000 in July and
$91,000 in August.
What would most businesses do? They may have to borrow money to pay
the bill, digging the same hole financial hole to business disaster.
Most business can't raise prices to customers that rapidily. Many
businesses have customers on contract and can't raise prices at all, so
how do they cut costs to keep operating.
Employee salaries are often the only ``variable'' costs he has,
therefore lay-offs become a necessary means of surviving. I have cut
over 150 hours per week for my very small businesses, resulting in loss
of income to many people in our community. These are the people who
will benefit for the rate roll back, but how will they pay any rate
when they don't have a job?
One more utility bill of these proportions and this owner is forced
to close his doors. Multiply this by the over 5 to 20,000 small
operating and manufacturing companies that are dependent on electricity
to operate, and not only East County, but all of San Diego. We are
facing economic disaster to the same proportion of a major earthquake,
with possibly longer lasting devastation. Ironically, at least for a
short period of time the rest of the country is celebrating prosperity
and most of the State of California.
Much of the media attention has been focused on residential needs .
. . the struggles of low-income households and the elderly. The
consequence of ignoring the plight of business can, and will, include
large numbers of unemployed, business closures and business relocations
out of this state. Discretionary income will become non-existent,
retail will suffer and business and housing sales will drop. In short a
major depression is possible in a short time. Already, it is almost
impossible to sell a small business in San Diego County, profitable
businesses a few months ago, that would have sold at a premium sold and
sold quickly, are now not marketable.
The leaders at every level of business and government should be
dedicated to finding both short term and long-term solutions to this
crisis. All should endeavor to avoid the dead end thinking demonstrated
by many that got us into this mess. The county, state and federal
officials, S.D.G.&E, the PUC and FERC, and business leaders should ban
together to prevent the consequences of doing nothing, or of repeating
past mistakes.
Though electricity deregulation was created at the state level, I,
as well as many, believe that fast action and intervention by the
federal government is necessary, and required to reverse the impacts of
the deregulation and prevent a major economic disaster. Free market, in
order to be completive requires a more than adequate supply to meet
demand for any product. Perhaps, if the leaders that drafted the de-
regulation of SDG&E had picked up the phone and called the owner of
most any business, (or their high school teacher for that matter) and
asked how things work, this could have been avoided.
Mr. Barton. Thank you, Mr. Tyler.
We'd now like to hear from Jeffrey Byron, who is Energy
Director for Oracle Corporation.
STATEMENT OF JEFFREY D. BYRON
Mr. Byron. If it please Mr. Chairman and Commerce Committee
members. Thank you for the invitation to provide input to your
deliberations on the----
Mr. Barton. Pull the microphone to you, if that's possible,
so we can hear you a little bit better.
Mr. Byron. Thanks for the opportunity to provide some input
to your deliberations on the electric industry in California
and what Congress can do to address our problems.
My name is Jeff Byron. I'm the Energy Director at Oracle in
Redwood Shores, California. Oracle is a software developer who
sells to many of the Fortune 500 companies and is one of the
largest economic engines of the digital economy.
However, like Mr. Tyler, I'm here today as an end-use
customer of electric commodity and services. Reliability drives
Oracle's energy decisions. It's clear that if we need a higher
level of service, we'll have to take care of it ourselves. And
it's worth a great deal to Oracle to minimize interruptions by
investing in options to mitigate them.
Other digital economy companies have taken similar actions
because it's the absence of electricity that's far more costly
to the digital economy company than the cost of electricity.
We can expect to see more sophisticated end-use customers
in the future because digital economy companies do not only
suffer lost productivity during an interruption of power, they
suffer credibility, customer loyalty and the ability to conduct
business continuously around the world.
It's imperative that there is an adequate supply of
electricity in order to sustain economic growth and meet the
needs of all consumers. These were the correct intentions for
restructuring in California and still are the right issue going
forward.
Now the marketplace must provide customers with the right
to choose the level of reliability and other products and
services that are most important to them. This is the point I'd
like to direct my remaining comments toward. The electric power
issues for digital economy companies are as follows:
One, digital economy companies require higher reliability
than a utility is able to provide or will be able to provide in
the future.
Two, the grid may not be able to provide sufficient
capacity to match increases in demand.
Three, the actions of regulators and legislators may have
unintended negative consequences.
And four, the emerging technologies to address these needs
may be inhibited from entering the marketplace.
These issues must be addressed by legislators and
policymakers. Some programs are currently under way and should
continue or be accelerated. These include programs to improve
efficiency and reduce wasteful energy consumption, siting and
approval of transmission and distribution facilities to address
local capacity limitations, incentive programs to reduce energy
consumption during peak load periods, and continued efforts to
open up the generation market and provide competitive pricing
for new engines.
However, these four solutions will not happen quickly
enough to provide sufficient capacity in California to meet the
growing needs by the summer of 2001. Now Oracle must consider
other options to address an inadequate supply of power and
requirement for higher levels of reliability.
One of the most promising ways to do this is with onsite or
distributed generation. Digital economies require the ability
to install and operate these innovative and necessary
generation technologies in a timely manner.
Conceptually, this is not a difficult or controversial
proposition. However, the details to enable its implementation
are critical. The following are the required steps that will
enable digital economy companies to meet their electricity
needs with onsite generation.
One, digital economy companies may need to operate in
parallel with the utility. To do this, clear interconnection
standards that the utility cannot alter or delay are needed.
Two, customers should be relieved of the stranded cost
payments and rules that prevent privately owed construction of
new electrical infrastructure if the utility is unable to meet
capacity requirements.
Three, standby rates should be unbundled to allow customers
alternative generation sources.
Four, depreciation schedules should be accelerated to
promote more efficient technologies going forward, and
distributed generation owners should be encouraged to use the
cleanest and most efficient technologies through investment or
production tax credits.
Five, digital economy companies must still be required to
self-generate in compliance with all existing environmental and
regulatory statutes.
Therefore, I appeal to Congress to consider legislation
that will expand customer choices to install distributed
generation.
Standardized interconnection policies, unbundled standby
rates and fair environmental standards for onsite generation
should be a high priority for energy policymakers this fall.
Thank you for the opportunity to speak before you today.
[The prepared statement of Jeffrey D. Byron follows:]
Prepared Statement of Jeff Byron, Energy Director, Oracle Corporation
Greetings Mr. Chairman and Honorable Commerce Committee members and
thank you for the invitation to provide input to your deliberations on
the electric industry in California and what Congress can do to address
our problems.
My name is Jeff Byron. I am the energy director at Oracle
Corporation in Redwood Shores, California. Oracle is a software
developer who sells to many of the Fortune 500 companies. I am here
today as an end-use customer of electric commodity and services.
I have been associated with the electric power industry my entire
professional career. I was trained as an engineer at Stanford
University and have worked since then in many capacities in the
electric power industry; nuclear containment, fossil generation, solar
power, and most recently in transmission and distribution systems. I
have worked for General Electric's Nuclear Energy Division, Accurex
Corporation's Aerotherm Division on solar energy, Aptech Engineering
Services consulting firm to the electric power industry, the Electric
Power Research Institute, BrightLine Energy market research firm, and
for the past four years in my current position at Oracle Corporation. I
have nearly 25 years of diverse experience in this industry.
As Oracle's energy director, charged with keeping that aspect of
the company's infrastructure up and running, I do my best to keep
abreast of the industry and the actions taken by others that will
affect us. Like all electric customers, Oracle is at the end of a
supply chain over which we have little control. It is my responsibility
to anticipate and understand the effects of change, make
recommendations, and then take action to maintain the level of electric
reliability the company requires to maintain productivity and
profitability. However, end use customers, like Oracle, have little
influence on the reliability, capacity, and price of the commodity that
is delivered.
I believe Oracle is representative of many of the high tech
companies of the digital-economy. Although I am only speaking on behalf
of my company, my comments are also focused on the energy needs of our
customer companies. I am not authorized to speak for them, but the
reliability of the electric supply is important to our customers, and
therefore, important to Oracle. Therefore, my comments are not just
focused on Oracle's needs, but I hope you find them applicable to all
high-reliability customers.
I operate a 15 megawatt distribution system at Oracle. Like all of
Oracle's operations, we do our best to minimize costs while providing
the optimal infrastructure to run our business. This operation is as
thinly staffed as it can be. I am a one-man operation, whose
responsibility is to maintain the highest level of reliability of
electric supply at the lowest feasible cost. The expertise I bring to
Oracle is not a core competency for the world's second largest software
company. However, in 1996 Oracle had become frustrated with the number
of power outages that were being experienced, and instead of making
substantial expenditures for uninterruptable power supplies (batteries)
that would maintain critical functions through short power
interruptions, Oracle invested in its own substation and distribution
system.
This system was put in service in July 1997 during two consecutive
weekends. It was a monumental undertaking for a software company and it
has proven to be a worthwhile risk. Becoming a transmission customer
has provided Oracle with a higher level of reliability than it had
before. Oracle was able to design and build a more expensive system
than the regulated utility would have been permitted to provide within
its rate structure. This investment cost Oracle approximately $6.5
million and involved taking a risk that few commercial companies have
considered. Nevertheless, the investment has afforded Oracle a
moderately more reliable electric supply than most commercial
customers.
But this independence has also come with a price. Oracle must now
operate and maintain medium and high voltage equipment, including
switchgear, transformers, and miles of underground cable. Oracle has
utilized independent contractors with the necessary expertise,
independent of the regulated utility. And Oracle has instituted
preventive maintenance programs, hired emergency response contractors,
and developed procedures for high voltage switching and emergency
situations. This is not what software development companies normally
do. So, why did Oracle undertake such a venture?
In a word, Oracle ventured into electricity distribution for
improvement in ``reliability.'' Oracle is not the first end user to
take these measures and I am certain there will be many more. Why?
Because it is becoming clear that if customers need a higher level of
service, they will have to take care of it themselves.
Because of what Oracle does, create software, it has always been
difficult to calculate financial losses due to a power interruption or
significant voltage sag. A voltage fluctuation that causes the majority
of Oracle computers to crash and restart is significant to Oracle. This
could be as little as a 25% voltage sag for 0.2 seconds and may occur 6
to 12 times per year. When a voltage sag or outage occurs, the work of
7,000 Oracle software developers comes to a halt. They may lose what
they are working on. Equipment may fail, causing the loss of more work
and data. Overnight porting and program execution may be lost and have
to be recreated. Oracle worldwide data communications may be
interrupted. Sales force demonstrations using web-based software will
not work and sales opportunities for Oracle software may be lost. And
in many cases even that short voltage sag may take hours, if not days,
for a complete recovery of all Oracle data and communications systems.
In all, losses from each event can be many millions of dollars. It is
worth a great deal to Oracle to minimize these interruptions and to
invest in options to mitigate them.
Oracle has also installed power quality monitoring equipment at
each critical building and monitors and collects this information in
real-time. These meters allow Oracle to continuously measure each
fraction of a cycle of the 60 cycle per second alternating current.
When a cycle of power is distorted by switching, faults on the
transmission grid, or equipment failure, we are aware of it
immediately. We know if it occurred on our campus, or if it occurred
outside our system. This information is extremely empowering. Although
we cannot alter the power that we monitor with this system, we can
immediately begin to respond, determine the cause of the problem, and
correct or influence correction of the problem. Information is the
beginning of understanding and provides a sense of control that is
relatively new for an end-use customer.
Oracle has also added emergency power capability for its critical
facilities. This is no different than many other companies who have
installed uninterruptable power supplies and diesel generators to
maintain critical systems during power outages and voltage sags.
Altogether, Oracle has created a more reliable system than most other
commercial customers. Oracle built, paid for, owns, operates, and
maintains this system. Oracle also paid for the installation and
subsequent removal of the system originally provided by the utility.
The cost of these actions were not borne by any other customers.
Oracle is an E20-T rate tariff customer in the service territory of
Pacific Gas & Electric Company. This tariff means that our load exceeds
1 megawatt and electric service is taken at transmission voltage of
60,000 volts or greater. The actions I have described above were all
taken under existing rate structures and had nothing to do with
deregulation. These actions are worthy of mention as they indicate the
level of effort that Oracle has undertaken to improve the reliability
of its electric supply.
Other digital-economy companies have taken similar actions. Some
have installed their own substation and distribution systems, and
others have installed generators and power quality monitors. Some have
installed co-generation to improve energy efficiency, save money, and
improve reliability. While large industrial companies have taken
similar actions in the past, the reasons for doing so were generally
different than they are today for digital-economy companies. For
industrial customers, where energy costs may be a significant portion
of production costs, minimizing electric costs provides an important
competitive advantage. But for the digital-economy companies, electric
costs are typically a very small fraction of revenue or production
costs. It is the absence of electricity that is far more costly to a
digital-economy company than the cost of electricity.
This is a new and critical change in the value proposition for
electricity. For nearly 100 years, all end use customers have received
the same unlimited supply of electrons with interruptions, voltage
sags, and other distortions according to how well the supplier
delivered it to them. This is not a criticism, but recognition of how
the electric power grid works and the service limitations of a
regulated monopoly.
In the past few years we have seen restructuring of the electricity
market and more energy services on the customer side of the meter in
California. Recently customers have become aware of emerging
technologies and service offerings that can improve the reliability of
the electric supply to their critical functions. It has also only been
recently that companies have come to realize that they can invest in
options that can go beyond the ``one size fits all'' offerings of the
local utility. We can expect to see more sophisticated end-use
customers in the future.
The electric power supply needs of the digital-economy companies
are different than those of the traditional-economy companies. The
digital-economy companies are not a one or two shift per day product
line. Rather, they are 24 hours per day and 365 days per year, or 24 by
forever. Any company that has computers, servers, routers, hubs, or
depends on the services of those that do, is a ``digital-economy
company'' and has many of the same needs as Oracle. Digital-economy
companies do not only suffer lost productivity during an interruption
of power they suffer credibility, customer loyalty, and the inability
to conduct business continuously around the world.
Not all digital-economy companies have the identical requirements
for continuous power. Each makes a determination of what optimal
improvements can be made to meet their electrical supply needs. This is
the point I would like to direct my remaining comments towards; the
marketplace must provide customers with the right to choose the level
of reliability and other products and services that are most important
to them.
For the most part, the digital-economy customers are the missing
stakeholder in the deregulation process. I offer that this has been the
case for two reasons. First, most digital-economy companies did not
grasp the significance of what was at stake, except for anticipated
savings from lower energy costs. And second, most energy managers have
operational jobs that greatly constrain their involvement in the
regulatory process. They simply do not have the time or resources to
participate.
We must rely on the policy makers to understand this complex
industry and balance the needs and interests of all stakeholders.
Policy makers must balance many issues in considering what is best in
deregulating this industry, such as:
Encouraging competition and efficiency
Protecting unfair shifting of costs
Sustainability of the UDC
Protecting the environment
Ensuring safety and reliability of the grid
This is a difficult task. The California PUC and legislature did a
thorough and thoughtful job of initiating a fair and open market for
electricity. There is a tendency to search for the guilty when
symptomatic issues, such as high electricity prices, arise and a
tendency to overreact with quick-fix solutions. There is an
overwhelming concern that the best intentions of those who were not
initially involved in this process could result in unintended
consequences and make the situation worse than it currently is. It is
imperative that there is an adequate supply of electricity in order to
sustain economic growth and meet the needs of all consumers. These were
the correct intentions for restructuring in California and still are
the right issues going forward.
I will conclude my comments by outlining what I believe are the
problems facing the electric markets and what steps policy-makers
should take to ensure that customers have reliable and affordable
energy supplies.
The electric power issues for digital-economy companies are as
follows:
1. Digital-economy companies require higher reliability than the
utility is able to provide or will be able to provide in the
future.
2. The grid may not be able to provide sufficient capacity to match
increasing demand.
3. The actions of regulators and legislators may have unintended
negative consequences
4. The emerging technologies to address these needs may be inhibited
from entering the marketplace.
These issues must be addressed by legislators and policy makers
simultaneously on four fronts. Some programs are currently underway and
should continue or accelerated. These include:
1. Programs to improve efficiency and reduce wasteful energy
consumption
2. Siting and approval of transmission and distribution facilities to
address local capacity limitations
3. Incentive programs to reduce energy consumption during peak load
periods
4. Continued efforts to open the generation market and provide
competitive pricing for new entrants
However, these four solutions will not happen quickly enough to
provide sufficient capacity in California to meet the growing capacity
needs by the summer of 2001.
Given these issues, what should a company like Oracle do to make
sure that it does not have significant nor frequent interruptions of
business? As with all other critical business issues and decisions,
Oracle cannot assume others will solve the problem for them. Oracle has
already begun that process by building its own substation and
distribution system, by operating and maintaining this system, and
putting in backup systems to prevent interruption of critical services.
Now Oracle must consider other options to address an inadequate supply
of power and a requirement for higher levels of reliability.
One of the most promising ways to do this is with on-site or
distributed generation (DG). DG is being discussed and considered in
many forms. I would like to ask that you consider DG from the
perspective of meeting the needs of the digital-economy companies.
These companies do not want to sell power for a profit. They do not
want to bypass the utility or strand assets that others may have to pay
for. They do not want to circumvent safety standards that protect
utility workers and the public. Digital-economy companies require the
ability to install and operate innovative and necessary generation
technologies in a timely manner. Conceptually, this is not a difficult
or controversial proposition. However, the details to enable its
implementation are critical.
The following are required steps that will enable digital-economy
companies to meet their electricity needs with onsite generation:
1. In order to prevent business interruptions and losses, digital-
economy companies need to operate in parallel with the utility.
To do this clear interconnection standards that the utility
cannot alter or delay are needed. Timeliness is important to
these businesses and ``Internet speed'' is a phrase not in the
lexicon of the regulated utility.
2. The utility may not be able to serve the growing electric
requirements of an existing company or of new construction. If
the utility's ``obligation to serve'' cannot be met in a timely
manner, then the digital-economy company's ``obligation to
pay'' for stranded assets should not apply. Customers should be
relived of stranded cost payments and rules preventing
privately owned construction of new electrical infrastructure.
3. If a digital-economy company elects to use the grid as a backup
source of power and has access to other backup generation
sources, they should not have to pay for a bundled standby rate
that includes both transmission and generation. Standby rates
should be unbundled.
4. The financial ``playing field'' for distributed generation must be
fair. Distributed generation has a shorter life span than large
centralized power plants. Thus, the depreciation schedules
should be accelerated to promote more efficient technologies
going forward and distributed generation owners should be
encouraged to use the cleanest and most efficient technologies
through investment or production tax credits.
5. And finally, if the digital-economy company must take the necessary
actions to secure its financial success in an uncertain
regulatory environment and with inadequate electric capacity,
they must still be required to do so in compliance with all
existing environmental and regulatory statutes.
conclusions
One goal of restructuring was to promote private investment in new
generation and lower energy prices through increased competition.
Another goal was to encourage the development of new technologies,
products, and services for customers. These remain extremely important
goals. The current crisis in electricity supplies is proof that we must
accelerate our efforts to offer more demand-side options to customers,
including load shedding programs, time of use pricing, and the topic on
which I have concentrated my remarks, distributed generation. Without
quick action on these policy fronts, I anticipate that the problems
we've been having this summer will be an order of magnitude worse next
year.
Therefore, I appeal to Congress to consider legislation that will
expand customer choices to install distributed generation. Standardized
interconnect policies, unbundled standby rates, and fair environmental
standards for onsite generation should be a high priority for energy
policy makers this fall.
Thank you for the opportunity to speak before you today.
Mr. Barton. Thank you, sir. And you actually finished
within 5 minutes. We appreciate that.
We now go to Mr. Michael Shames, who is the Executive
Director of Utility Consumers' Action Network.
Mr. Bilbray. Now the pressure is on Michael.
STATEMENT OF MICHAEL SHAMES
Mr. Shames. Four minutes, 59 seconds. Here we go.
Welcome, committee members, Congressmen, to San Diego, a
region that in the last year has been racked by double if not
triple-digit increases, not just in electricity, but natural
gas, gasoline, housing, rental. Basic necessities of life in
San Diego have substantially increased, thus creating trauma
for all of its customers, all of its residents in a number of
ways.
Truly in San Diego, the cost of living index has turned
into a cost of misery index. And that's why it's so important
that you are here today.
The facts are daunting. You've heard many of them. Five
hundred and eighteen percent increase in electricity in the
last 90 days. I'm sorry, 100 days. We're looking at 185 percent
increase in the average bill for the residential customer. And
as you heard from Mr. Tyler, substantially more for some small
businesses. The impacts are dramatic.
The statement that I have prepared for you, the written
statement, is called, ``Lessons Learned from San Diego.'' And
I've spent about 16 pages, which I will certainly not go over
here, detailing what the problems are, what the lessons were
that can be learned by this committee, and how some fixes can
be made.
All we ask in exchange for these lessons that we've offered
to you is tuition. Now, it won't be cheap, but our terms are
flexible. And some of the means of payment that you can offer
to San Diego in exchange for the very important lessons that we
are providing to you are, first, please use whatever powers you
have to impose upon FERC its obligation to find that the rate
that have been charged to San Diego and to California are just
unreasonable. Gentleman, they cannot be, not given the rate
that have been imposed upon San Diego.
Second, certainly we will not turn away any efforts or any
offerings that you make to help us pay what is going to be a
substantially large bill. The differential, as has been
explained to you, between 6.5 cents and the current 21 cents is
formidable.
SDG&E estimates it's probably somewhere in the billion
dollar range. We expect that figure is lower, but certainly
somewhere in the $400 to $500 million range can be expected.
The San Diego economy cannot afford that, especially given the
trauma that we're feeling from all of the other basic
necessities that have gone up just in this past year.
Three important lessons that I want to share with you in
the 2 minutes I have left. First, lesson No. 1, is it's going
to take longer for the market to respond than you may imagine.
And I think a lot of theoreticians had imagined when
deregulation had begun.
Your facts, Congressman Barton, about generation in
California may not be exactly accurate. Yes, a new generating
plant is not open for a good 10 years, if not more, in
California. A large reason for that was because we relied
heavily on power from out of State that was cheaper.
Only within the last couple of years did it seem as though
it was economically feasible to build in California, and then
we found there are a number of factors--not just environmental
restrictions, but a number of factors that make it very
difficult for generation to be sited.
So it does take a longer time for the market to respond
than I think people had imagined when the legislation was
passed in 1996.
Lesson No. 2. It's also far more complicated to deregulate
or to change regulation. We spent 80 years building a very
complex--I can assure you very complex--regulatory process.
It's going to take more than just 5 years or 10 years to tear
that process apart. And we're seeing that.
We're also seeing two truisms that I think you need to take
to heart. First is that in addition to the fact that there will
be a transition period that will take longer than people
expected. The second truism is that weather is going to have a
significant impact during this transition period.
In the Western States, we've had extremely hot weather
that's caused this shortage of power and the increases in
prices in California. You saw just 2 years ago the Mid West was
racked by substantial increases in power demand due to a heat
wave there.
The Northeast this year looks pretty good. A lot of people
tout Pennsylvania as being a model that should be followed, and
yet Pennsylvania and New York have had an unusually cool summer
with a lot of water, very wet, and yet in New York, power
prices have jumped by 40 percent. Weather will be a major
factor. And I think you needn't necessarily assume that the
California model is clearly the wrong model.
I'm going to end there. My time is up. I'll look forward to
question and answer if we have opportunity. Thank you.
[The prepared statement of Michael Shames follows:]
Prepared Statement of Michael Shames, Executive Director, UCAN
The heralded pioneers that opened the western United States in 19th
century could have taught California the following lesson: the first
one in often never makes it out alive. Perhaps California's pioneering
spirit prompted it to be the first state in the nation to deregulate.
But now, after a summer marked by 510% increases in energy rates for
San Diego residents, the state's regulators are retrenching, utilities
are running for cover, consumers are publicly burning their utility
bills even as the state's politicians adopt rate caps and talk about
windfall profit taxes, or even the dreaded ``r'' word--re-regulation.
San Diego's experience offers the Congress an unparalleled
opportunity to learn from a bungled attempt at deregulation. And from
this deregulation debacle, important lessons can be learned. As will be
explained below, UCAN believes that there are five important lessons to
be gleaned. They are:
It takes the energy market longer to respond to market forces
than anyone predicted.
It is more complicated and more time consuming to unravel the
regulated energy markets than anyone predicted.
The absence of a safety net has caused tremendous damage to
the most vulnerable customers.
Ensure effective monitoring--government can not be blind to
what is occurring in the markets.
Don't confuse customer education campaigns with wish-
fulfillment marketing campaigns
i. setting the stage
The furor pertaining to electric deregulation stretches beyond
California; the economic stakes in this political hot-potato affects
the entire nation. New York is reeling from far more modest electric
rate hikes than those seen in San Diego. Nationally, a booming economy
fueled by an electricity-driven technological revolution has created
unprecedented demand for new electricity capacity.
Deregulation was heavily advertised in California to open the door
to lower rates. The electric service industry restructuring model
adopted in 1996 by California was intended to fundamentally change
electric service and regulation in this state by infusing competition
in the electric generation market to the benefit of all electric
consumers and market participants. That legislation--AB1890--promised a
20% cumulative rate reduction by April 1, 2002 for residential
customers, innovation, efficiency and increased quality in electric
service, with a reduction of costly regulatory oversight; and
``meaningful and immediate rate reductions for residential and small
customers''.
And it promised to open the door to new technological innovations
and greater energy efficiencies. Electricity generation technology in
the form of a new generation of natural gas-fired combustion turbines
were supposed to flow into the state like a second gold rush. New
distributed generation technologies like fuel cells were supposed to
give centralized generation plants a run for their money. And
communications-based energy services offers value-added benefits
unavailable in the regulator-overseen monopoly world.
These new innovations effectively forced changes in the way power
companies are regulated. Throughout the world, new ``disruptive''
technologies are emerging which are changing the economics of
electricity generation. The old paradigm of large centralized power
plants linked to customers via complex webs of power transmission will
soon be obsolete, replaced by new, low-pollution distributed
generation.This transition into the new economics of generation have
made traditional generation investments riskier. But it has pushed
regulators into recognizing that the rules of the past may not apply to
the future.
It is this technological revolution that really has forced a change
in the way the industry is regulated. But de-regulation has proven to
be a challenging task--the dismantling of rules that took 80 years to
develop more resembles a Gordian Knot than a Boy Scout loop knot. But
if full re-regulation in states suffering from rate shock like
California and New York occurs, will the needed capacity, along with
technological innovations and increased productivity be thrown out with
the bath water? Perhaps.
UCAN submits that the transition to a ``competitive'' market for
energy was tougher than California's pioneers bargained for. It was
more complicated, more time consuming and more unpredictable than
California policy makers had expected. And this is compounded by the
fact that the era of cheap natural gas prices appears to be ending. The
price of gas has more than doubled, and more trouble looms on the
horizon. This should come as a surprise to no one. As early as 1990,
energy experts began warning about the cumulative effects of the
utility industry's ``dash for gas.'' These experts predicted much
greater volatility in electricity prices--particularly in a deregulated
market.
They were right. And yet, the energy markets appear surprised. In
the space of just a few months, San Diego ratepayers saw their
electricity bills more than triple. No wonder these consumers are
angry--and rightfully so. Nor has it helped the political climate that
San Diego Gas & Electric's affiliate, Sempra Energy, reported a 34%
increase in its second-quarter earnings.
ii. summer electric storm hits strikes san diego
On its surface, the dysfunction of the state's electric market
appears to have been quick and startling. Within the past 100 days, the
price of electricity for residential consumers has tripled from 3.2
cents per kWhr to 21.4 cents per kWhr. Bundled with distribution,
transmission and other charges, the overall energy rate zoomed from 11
cents to 28 cents per kWhr. For the ``mythical'' average residential
customer who uses 500 kWhrs in the summer, this 182% overall rate hike
translates to a monthly increase of $94. For small businesses, the
increase is substantially larger.
Natural gas prices have also soared. One year ago, the average
residential customer paid 21 cents per therm. Today, SDG&E is charging
core residential customers an average cost of gas in excess of 45 cents
per therm. This 115% increase in natural gas prices has more than
doubled the natural gas component of customers' bills. Additional 40%
increases are predicted for this coming winter; UCAN believes natural
gas prices will be even higher.
But it hasn't been that quick, in reality. Active efforts to reform
the state's energy markets began in 1995, culminating in state law
passed in 1996 that ordered the restructuring of the electric services
market. Utilities' roles changed, a new energy exchange was created and
regulators were compelled to revise most of the regulations that had
been on the books for decades. Since 1996, numerous Commission
decisions have been issued (a rare few good, most really bad) that
paved the way for San Diego to be exposed to an unregulated electricity
market beginning in late 1999.
Deregulation has also spawned many nasty forms of market
manipulation that drives up prices and artificially constricts
supplies. Recently, San Diego Gas & Electric called for an
investigation into the under-scheduling of power and market
manipulation by other investor-owned utilities in California that
resulted in San Diego paying higher energy costs. And it has condemned
profiteering by private generators.
iii. lessons learned from san diego's brush with deregulation
Lesson #1--The Energy Market Is Not A Roadrunner
When AB1980 passed in 1996, the predictions were that by 1998,
California would be rich in new, clean-burning, ultra-efficient
combined cycle turbines producing adequate power for California's
needs. Based upon these representations, the state legislature
unanimously passed the deregulation law. Hindsight shows that the
lawmakers were conned, much like Congress was misled by cable and
telecommunication interests who predicted robust telecommunications
competition if the 1996 federal overhaul of the telecom industry were
approved. It turns out that the market did not speedily respond to the
challenges that faced it. In fact, the market turned downright timid.
For many reasons, the promised generation did not materialized.
Some of the rationales include:
Complications in siting/locating plants--NIMBYism & shortage
of acceptable sites
Unavailability of next-generation generating turbines
Restrictions on emissions.
Uncertainty about regulatory decisions pertaining to the
deregulation law.
Unavailability of low-cost natural gas
Interference by monopoly distribution companies
Absence of uniform interconnection rules
While observers assumed that the market would devise solutions to
many of these problems, it turns out that the problems were not readily
solvable by the market. For one example, stringent air pollution
regulations. Under EPA rules, there are simply no surplus pollution
emission credits available to allow the permitting of a new plant in
San Diego. Moreover, clean air regulations were not developed with
energy issues in mind, so the grandfather-oriented regulations need to
be reformulated in order to allow new, cleaner burning plants to be
located in emissions-constrained areas (which includes almost ALL of
California).
A second problem is more insidious. Through its Sempra affiliate,
SDG&E has a monopoly over the local natural gas pipeline. And it is
building competing power plants just over the borders, in Baja
California and Nevada. That means potential competitors are blocked
from entering the local generation market because they can't get
dedicated gas capacity and interconnection agreements at a fair price.
Sempra isn't eager to accommodate competitors to its own power plant
investments--instead, its proposed solution is building more
transmission lines (to its out-of-region power plants) and changing its
rate structure so that it collects more of its fixed costs through
fixed charges.
These are hardly the only non-competitive element plaguing the
system. About seventy percent of the power sold in California's Power
Exchange is purchased by the state's Big Three utilities. That's an
oligopsony by anyone's standards. Predictably, these utilities have
used their considerable market buying power to manipulate both bidding
protocols and prices. This observation leads us to a major barrier to
entry. Suppliers were reluctant to enter an oligopsony-dominated
market, so only five companies took the plunge into the California
generation market. Effectively, a five-company unregulated oligopoly
was substituted for a three-company regulated oligopoly.
Another underlying problem contributing to this problem has been
market manipulation. For example, where generators bid to provide power
at prices that approach the prevailing price-cap--a ``band-aid'' that
has been applied. Only California has a market structure that is devoid
of major controls on market power abuse. California allows generators
and large loads to bid into any market they wish, without restriction,
subject only to maximum price-cap. The predictable result is the
equivalent of monopoly power which translates inexorably into higher
prices at times when power is scarce in particular regions.
Finally, there is little evidence that legislators anticipated the
unbridled degree of greed that would be displayed by the generators.
Many, if not all, of those companies that purchased California
generating plants at inflated prices have largely recouped their
investment within the first two years of ownership. Record profits and
unabashed exploitation of market loopholes have been the hallmark of
the California experience.
For those who believed that the creativity of the market would
result in rapid response to an energy deficit, the truth was crushing.
It turns out that, like telecommunications, the market is slow to
respond to a transitionary market where a powerful incumbent lays in
wait for any overly ambitious challenger.
Lesson #2--Deregulation Is Complicated Thing
In the years following the passage of the 1996 law, the legislators
and regulators failed deal with the following critical assignments
necessary to making a competitive electricity market function:
Ensure an adequate number of generators existed before
deregulation began;
Protect against market power manipulation and abuses by those
generators selling into the market
Develop effective bidding protocols and congestion management
schemes
Develop effective congestion pricing schemes
Ensure a sufficient number of bidders purchasing power, thus
resulting in some buying power manipulation
Define a clear role for utility distribution companies
Target demand responsiveness, thus giving customers the power
to influence the market
Effectively promote distributed generation, utilizing smaller,
decentralized generation
The result was the absence of a level playing field for competitors
coupled with glaring flaws in the California's incomplete deregulation
model.
It is not as though the regulators haven't had time. The Public
Utilities Commission has been locked in lengthy, time-consuming,
resource-draining regulatory hearings since early 1997 trying to sort
out the very complicated and contentious issues. Well-resourced
utilities have spared little expensive in protecting their interests
and, in doing so, delaying or appealing decisions. The regulators never
had a chance to complete the restructuring process in three years. It
probably won't in ten years.
Lesson #3--The Absence Of A Safety Net
What has happened in the San Diego region is politically
impossible. Yet, it occurred. There is no region in the country that
would tolerate the volatility experienced this summer. It is a
testament to the civility and sophistication of San Diegans that there
was no violence. But the reality is that electricity is not a service
in which extreme rate volatility is acceptable. Ultimately, elected
officials had to intervene and provide some legislatively mandated rate
stability.
The folly of imposing a volatile market upon electric customers
during a time of shortage is perhaps the most obvious failure in this
deregulation debacle. But perhaps the greatest failure of California's
deregulation, at this point, is the fact that consumers have been given
no tools and few options with which to respond to rate volatility and
no safety net to protect against an absence of such options. The worst
case scenario was given no credence by regulators and thus they were
totally unprepared for it. Consumer groups were forced to sit and wait
for the disaster to hit. And when it did, they were ready. But even
then, California regulators were content to fiddle. Finally, the state
legislature was forced to step in and quell a growing ratepayer
rebellion in San Diego.
In addition to not preparing for Armageddon, regulators did little
to assure that consumers had choices or tools with which to deal with
rate volatility. For example:
The demand-side of the equation has been largely overlooked.
There are no ``interval'' or time-sensitive meters that enable
small customers to obtain specific market signals about actual
electricity use and costs.
There are few, if any, energy efficiency and load management
programs available to small customers to help reduce or change
the way in which they use energy.
Self-generation isn't cost-effective yet
The rules for interconnecting to the utility power grid are
not resolved.
Competitive energy providers have been reluctant to enter this
unsettled market;only three such providers are offering mildly
discounted prices to San Diegans.
Without meaningful choices, customers are left powerless and
increasingly frustrated. Perhaps the most galling aspect of these
problems is that the customers who can least afford the rate hikes are
being hit the hardest. For the average consumer, the $94 per month
summer penalty that they have to pay squeezes a family budget already
battered by a similar 70% increase in gasoline prices. Add to this the
recent increases in telephone, cable and home rental prices and you
have an unprecedented mugging of the household budgets of fixed-income
and low-income customers.
One such barrier is the product itself. The visionaries of
deregulation see electricity as just one of a suite of products
competitors can offer customers. Other products offered by these
``network providers'' range from simple billing and smart metering to a
more lucrative bundling of electricity with cable, internet access, and
phone services. It is within this broader suite of products where the
real profit margins lay and where the real incentives to play in the
electricity market exist and other states like Pennsylvania have
recognized this and designed their deregulation model accordingly.
Unfortunately, in California, competitors are effectively limited
to selling electricity as a pure, undifferentiated bulk commodity. To
further stifle competition, the Big Three utilities have also retained
the power to do the billing and the metering for any customers they
happen to lose to competitors; and, of course, they charge competitors
too much for these services. The result: profit margins are simply too
thin to attract enough players to make competition a reality.
Lesson #4--Regulators Are Referees--They Can't Wear Blinders
Perhaps the most egregious mistake by the various regulatory and
quasi-regulatory agencies involved in California's deregulation was
their ignorance of the market. A host of bodies purporting to be trying
to create a competitive market appeared to be blind to what was really
going on in the market. And they had little inkling of the significant
rate volatility that could be expected; or if they knew, they kept it a
well-guarded secret.
With the new reliance upon the competitive market to provide basic
electric services for small consumers, the new regulator's challenges
are, in the simplest of terms:
a. Promote a competitive marketplace with multiple buyers and sellers
b. To arm all consumers with the information necessary to make informed
choices.
These two elements are essential components to a competitive
market. If either of the two elements are missing, then a competitive
market will not materialize. This assertion is a basic economic axiom
that is not disputed by any reputable party.
This underlying premise compels the state regulator to ensure a
multi-seller/multi-buyer marketplace using supply and demand forces.
Supply means using market conduct and incentive to ensure multiple
sellers are serving all customers. Demand means adequately informing
all consumers of choices and ensuring that customers have the necessary
economic incentives to choose among competitors.
Upon the commencement of a deregulated market, the demand upon
regulatory resources will increase due to the increased number of
consumer complaints and inquiries spawned by an uncertain, transitional
environment. A virtual or real direct access world would spawn a number
of aggregators, brokers, marketers and other third parties offering
services to individual retail customers or cooperatives. These
transactions will likely spawn a multitude of complaints, disputes and
disharmonies that will need to be addressed in a uniform and
knowledgeable fashion. Similarly, in the telecommunications market, the
amount of consumer choices and consumer confusion will increase
During the transition years, demands made upon the new regulator's
staff time for complaint resolution and investigation will increase.
Funding levels would have to increase in order for staff to be trained,
armed and capable of fielding the slew of complaints. For example, in
telecommunications California regulators have seen its staff swamped
with a tidal wave of telecommunication service abuses ranging from
benign, but irritating slamming (unauthorized switching of long-
distance service providers) to outright scam artist activity. It has
even found that the large incumbent LECs and the established IXCs have
engaged in illegal or unethical sales practices.
But because of the complexity of energy services, new and more
widespread types of complaints are expected, such as have been spawned
by telecommunications competition. Contractual disputes will abound, as
will new billing, service and jurisdictional disputes. Information-
based infractions (misleading advertising, unrealized expectations,
fraud) will also develop into huge growth industries in their own
right. Current funding levels at most regulatory bodies are simply
inadequate to deal with current demands upon the regulator. The future
demands will likely dwarf current ones, thus further necessitating a
new approach to dispute resolution.
The focus of the state regulator's challenge will be one of
monitoring market conduct. Not only will it need to be vigilant for
market dominance problems (a critical function that California
regulators have proven themselves impressively inept) but it must also
be attentive to whether the competitors are treating customers
responsibly, are providing adequate service, and are not engaging in
unintentional redlining. The problems will be developing at a fast and
furious rate. Most regulators are woefully under-prepared to track, let
alone respond, to these problems.
Lesson #5--Customer Education Shouldn't Be A Misinformation Campaign
In the California restructuring proceeding, R94-04-031, the
California Commission committed to a consumer education process. It
asked stakeholders to create an education process. Pursuant to this
group's recommendation created a trust ``to promote consumer education
and understanding of forthcoming changes in the structure of the
electric industry in California and to educate consumers about service
options available to them in the newly competitive electric
environment.'' (D. 97-03-068) It was the last ``correct'' thing that
the Commission did regarding consumer education.
The trust concept was based on the model of the Telecommunications
Education Trust set up by the California Commission with $16.5 million
in fines paid by Pacific Bell as a result of alleged abusive and
deceptive marketing practices. These funds were disbursed over a six
year period to community groups and other grantees to provide basic
telecommunications educational information, especially to underserved
consumer populations.
The CPUC spent upwards of $90 million during 1997 and 1998 in an
awareness building campaign that turned out to be very controversial
within the state. It created an Electric Restructuring Education Group
(EREG) to advise the Commission on how to spend these monies.
The main failing of the regulator's adopted education plan is that
it failed to adequately differentiate between leading customers to an
information source and providing the substantive information. The
former is focused on educating consumers on HOW to find information.
The latter is focused upon trying to explain the changes to customers.
Greater emphasis should have been placed upon the former during the
first two phases of the effort.
The plan appeared to be based upon an erroneous assumption that the
education of consumers must be done via mass media and is not a simple
message affording a useful tool to consumers. It recommended an
expensive first phase mass media campaign during a very expensive media
market period. Its assumptions were in error because it:
a. Underestimated the amount of independent mass media marketing that
will be done by private marketers;
b. Overestimated the quickness with which mass markets would be served
by competitors.
c. Assumed that a simple message will inadequate;
d. Underestimated the value of targeted public education of opinion
leaders;
e. Undervalued the amount of free education time available via public
service announcements and news programming.
f. It did not anticipate consumer reaction to rate volatility.
In delivering messages, it is more important to direct the
available resources to the more inaccessible, hard-to-reach, small
business and local government. Television and radio are good for
reaching out to the population that is generally not at-risk of being
underserved. Most small business owners and bill payers do not have
much time to watch television or listen to the radio. The best way to
reach these people is through trade journals and/or through trade
association meetings, or mixers, or one-on-one contact through local
CBOs (community-based organizations) such as California Small Business
Association, Minority Business Council, Overall Economic Development
Program, ethnic chambers, Wester Council for Construction, Business
Link, Women Business Association and the California Community College
System.
The message(s) could have been very simple. In the first phase, it
could have been supplemented by advertising done by the private market.
Rather than buying large amounts of expensive airtime, the CPUC could
have disseminated a simple message: ``Change is coming and by calling
1-800-MYPOWER (or some such toll-free number) I can get some useful
info.''
That, combined with an aggressive targeted education campaign to
opinion leaders, community groups and traditionally underserved or
vulnerable communities, should have been sufficient for the First Phase
of the program. The expected free news and public service announcement
time should have been adequate substitutes an for expensive mass media
campaign.
Alas, the Commission didn't do that. Instead, it ran an awareness
campaign that left consumers feeling confused and, ultimately,
betrayed. They were promised savings if they switched providers and
partook in the competitive market. As one current CPUC commissioner
observed, ratepayers have good reason to believe that they were lied
to--at a formidable $90 million cost borne by all ratepayers.
iv. ucan's recommendations
From these observations, UCAN submits that is not yet clear that
deregulation is the problem in California. That is because the
fundamentally flawed nature of the initiating legislation and its
implementation by state regulatory agencies has not yet permitted
functional market to work. Consumers have witnessed lousy regulation--
not deregulation. Nor is re-regulation the solution. It may not even be
possible;with most of the utilities' power plants sold to third parties
at inflated prices, the state may not want these old, inefficient units
back.
Yet, deregulation is now been tainted. And deservedly so. The
dangers of relying upon a market to provide an essential commodity has
been uncovered. States may appropriately conclude that the importance
of reliability and rate stability may outweigh any benefits to be
gained by a fully unregulated electric market. The Federal government
should respect that decision.
However, the federal government has an obligation to ensure that
all consumers are afforded a minimum level of protection in those
states that do adopt a deregulatory scheme. Before getting to these
protections, it is important to establish principles for any
deregulatory scheme. These principles should be considered in any
federal deregulation bill as sacrosanct; and they should be required
for any state embarking upon deregulation of energy.
Essential Deregulation Principles
The wholesale and retail electricity markets in California are
broken. Putting aside the question of whether the process it is
incomplete (as claimed by proponents) or fundamentally flawed (as
opponents insist), it is almost inarguable that what has happened to
San Diego is not acceptable and not an expected outcome of a
competitive energy market. The following principles were not heeded in
California and should be in other states.
A competitive retail market is an impossibility in the absence
of a workably competitive wholesale market. Conversely, a
competitive wholesale market depends upon a reasonably
functional and responsive retail competitive market.
Extreme rate volatility should not be imposed upon customers
who can not effectively respond to such volatility
Electric service must be kept affordable and reliable
The ability of consumers to send price signals to energy
producers must be enhanced
Energy reliability and prices can not be held hostage by
profit-seeking electric generators--market power must be kept
balanced;
Until the competitively market develops completely, energy
efficiency and load management must be encouraged;
Ratepayers should not be locked into long-term, expensive
fixes in this increasingly dynamic market;
Regulators have an important role to play in monitoring the
market and making sure that is working;
Local governments have to play a bigger role in protecting its
citizens and its economy from energy market volatility and they
should have the tools to do so;
Consumers must be given useful information about the market
and about their options; and
The local distribution company must not base its profitability
on selling more power, but smarter power.
Specific Elements of Any Federal Deregulation Law
Some specific applications of the lessons learned from San Diego's
disaster are listed below. This list is in no way exhaustive. But it is
representative of the kinds of minimal steps that must be taken by the
federal government to ensure that no other city or region in this
country experiences the damage suffered by San Diego.
More effective customer protection, information, and education
programs and a safety net for small customers. For retail competition
to work, customers must be comfortable participating in the market.
California's SB477 is a reasonably decent model for the kind of
consumer protections that should be a part of any state deregulation
plan. California's consumer education effort is the opposite--a lesson
in what NOT to do. In educating customers, they must be given tools by
which to take advantages of choices. Finally, they must be afforded
some form of safety net which caps the risk that they can take.
Support aggregation opportunities for small customers. Aggregating
many small customers into one large customer can help overcome both the
supply side and demand side barriers of marketing to and serving small
customers individually. There are too few good examples of small
customer aggregation projects. Any state law impeding aggregation of
customers, especially by accountable public or quasi-public agencies,
should be precluded by law.
Major commitment to energy efficiency and load management. States
must include a commitment to utilizing cost-effective, flexible
efficiency and demand management programs as any part of a deregulation
process. This effort should utilize the combined resources of public
agencies, industry, consumer groups and environmental organizations.
Long-term, capital intensive investments in transmission or central
generation infrastructure must be compared to efficiency investments as
a precondition for them being built.
Expand net metering and other policies to open up the distribution
system to alternative supply sources. California adopted a net metering
statute, which allows small customers who self generate to return extra
kilowatt-hours to the utility grid and ``run their meter backwards.''
Net metering offers opportunities for homes and businesses to connect
small-scale wind and solar applications, save on their power bill and
perhaps contribute increased efficiencies to the overall electricity
production and delivery system. Any state precluding or unduly limiting
consumer access to renewable alternatives can not be tolerated.
Moreover, any state deregulation plan should have some component that
addresses means by which renewable or emerging generation technologies
will be promoted in that state. Innovation may be the true benefit of
deregulation; states should not be allowed to create barriers to these
innovations.
Better definition of the role of the default provider. A default
supplier provides regulated electricity supply to customers who do not
have real supply alternatives or have not switched to a competitive
supplier. The idea of several competing default suppliers is one that
needs to be seriously considered. Whatever default supply method is
ultimately used it should not hamper the development of competition,
where competition is workable. However, an effective default supply
program is essential and must be an early component of any state
deregulation plan. Retail competition should not go forward without a
well-defined role for incumbent distribution companies.
Distribution system policies to support efficiency and resource
diversity. Some experts see energy distribution monopolies of the
future as ``converged'' companies that deliver electricity, natural
gas, and even water. In their view, future distribution monopolies
would be fully separated from production assets and would play an
important role in ensuring reliable, high quality service and
supporting public purposes in a competitively neutral way. Future
distribution providers could also help shape an economically efficient
and environmentally sustainable supply infrastructure through the use
of distributed generation. Also more thought also needs to go into
distribution rate design for deregulated markets--they must not be
designed to impose fixed charges upon small customers. Such charges
discourage efficiency and the cost-effectiveness of alternative,
distributed generation. These matters must be resolved a priori, that
is, before a market is opened to competition.
v. conclusion
UCAN requests that this Committee ensure that the principles and
essential elements discussed above be incorporated into any federal
legislation that sanctions energy deregulation. It also requests that
special attention be paid to reducing barriers to entry by emerging
technologies and that, in fact, the government commit to making
subsidies available to promote these alternative generation options and
enhanced energy service services available to large and small
customers. Ultimately, it will be the generation and energy service
technologies that will make any deregulation scheme a successful one.
These, more than anything else, will ensure that competition blossoms
and that real choice exists for small consumers.
Mr. Barton. Thank you, Mr. Shames.
We'd now like to hear from Mr. Jan Smutny-Jones, who is
Executive Director of Independent Energy Producers here in
California. Welcome, Mr. Jones.
STATEMENT OF JAN SMUTNY-JONES
Mr. Smutny-Jones. Thank you, Chairman Barton and members of
the committee and San Diego Congressmen.
I am Jan Smutny-Jones. I'm the Executive Director of the
Independent Energy Producers. We represent a large portion of
the generation community here in California. Not just gas
fired, but also a significant amount of the renewables, such as
the wind, biomass and the geothermal companies down in the
Imperial Valley, which are a part of Mr. Hunter's district, if
I remember correctly.
Our view of this is the fundamental cause of both the high
prices and reliability problems that California has been facing
is the lack of power plant construction actually keeping up
with the demands of a booming economy.
And let me put this in sort of a back of an envelope
perspective for you just so you understand. Since restructuring
began in 1998, we've had three different summers. The peak has
grown by about 1,000 megawatts per year. If you figure the
average size of a power plant is about 500 megawatts, that's
six power plants in the last 3 years.
Mr. Barton. What is the peak right now, Mr. Jones?
Mr. Smutny-Jones. The peak we hit at the ISO this summer, I
believe, was 46,000.
Mr. Winter. The peak that we----
Mr. Smutny-Jones. Overall it was 50. It was over 50.
Mr. Winter. Yeah. The peak, we had about 45, but in fact,
we had curtailed so much load that we're really looking at
peaks in the 47, 48,000 range.
Mr. Barton. Thank you.
We won't take it away from your time.
Mr. Smutny-Jones. That's fine. In addition to that, growth
in the west, which Mr. Shames just referred to, has gobbled up
about an additional 2,000 megawatts of power we used to be able
to import from Arizona and the northwest. That's another four
power plants.
So just to get back to where we started, just in terms of
the amount of supply out there in the last 3 years, we would
have needed to add 10 power plants. That hasn't happened.
That's the bad news. The good news is, help is on the way.
But I also want to make it very clear that deregulation is
not the cause of power supply shortages in California. Rather,
it's a legacy of a failed regulatory process that failed to add
power plants in the 1990's. We did, in fact, have a process
that went to great lengths to try to identify needs for new
power plants. There were supposed to be about 1400 megawatts
added in 1999 and the year 2000. That was back in 1994, 1995
timeframe. We saw all that coming.
A couple of utilities out here opposed that, went to FERC,
got that decision overturned. Those power plants didn't get
built. They would have come in handy right about now.
That was the old world. Okay. And part of the reason my
membership is supporting deregulation trying to move to a
different world is basically because we believe that in a more
deregulated market, you will see more power plants being
constructed.
In fact, right now, as Mr. Keese indicated, there is a
significant amount of activity going on at the California
Energy Commission. We have five plants that currently have been
licensed, four under construction. There's another 10 or so in
the process right now and a whole slew of them about to follow
that.
That's good news. These are new state-of-the-art clean
resources that will not only add needed capacity to California,
but will be environmentally beneficial as well. Right now we're
estimating it's about $10 billion worth of new investment in
there.
So it's very important to recognize that California has
attracted this new capital base, and these people are here to
build power plants. Maybe they make money, maybe they lose
money, but it's their money, and the rate payors aren't going
to be basically captured or held to that as we had with the old
stranded cost problems that developed in the 1970's and 1980's.
Our obvious concern is is that we don't try to reregulate,
because those dollars can go elsewhere. This is an
international market. We're competing for turbines
internationally, and we need them here in California.
The California legislature has enacted some legislation
that we believe will help speed along siting of power plants.
Mr. Keese referred to that. Governor Davis did, in fact, order
the agencies here to expedite review of various applications
before them while still maintaining the integrity of
environmental law. This is California. We have environmental
laws that people take very seriously, and we're not asking
those be overturned, but we do believe you can trim months off
of the siting process.
From the standpoint of what can the Federal Government do:
one, accelerate necessary Federal review of permits. That's a
relatively easy thing to do. When an application comes in from
a power plant, take it out of the bottom of the ``in'' box, put
it on the top. You don't have to say yes, but you have to
expedite that.
Second, and it's in my testimony, there are some Catch-22's
with respect to how the Federal Coastal Zone Management Act
complies with California laws who are literally in a Catch-22--
I'm almost done--inside a power plant----
Mr. Barton. Go ahead about 2 more minutes because I cost
you a minute when I asked the question.
Mr. Smutny-Jones. Okay. I'll take you up on that.
Last but not least in this is giving the Environmental
Appeals Board of EPA the discretion of all other appellate
bodies out there. We have a real world experience where a power
plant in Northern California jumped through every firey hoop,
is going to be the cleanest gas plant built anywhere in the
world.
Okay. One person sent a letter. Automatically, that plant
got stayed for 4 months. Notwithstanding the fact that every
regulator that reviewed it thought it was a good plan. So
basically, what we're asking is that EPA Appeals Board apply
the same appellate process that if you went to any other court
or any other appellate body, that you basically have to show
that you're going to probably win this and be irreparably
harmed if you didn't.
So in closing, I would just say that what we need to be
doing in California is giving customers meaningful choice so
they actually, you know, have something to choose from, and
building out the generation. It is very critical. This is--
short of repealing the laws of supply and demand--and I haven't
heard anybody suggest that that's where you want to go--it's
very important that we build additional supply out there so
we're able to meet the needs not only of people here in San
Diego, but the rest of the west as well. Thank you very much,
Mr. Chairman.
[The prepared statement of Jan Smutny-Jones follows:]
Prepared Statement of Jan Smutny-Jones, Executive Director, Independent
Energy Producers
Mr. Chairman, members of the Committee, I am Jan Smutny-Jones,
representing the California Independent Energy Producers
Association.\1\ IEP represents the independent generators and marketers
doing business in California. Its members own or operate over half the
generation in California and all of the proposed new generation. IEP
has been an active participant in restructuring efforts in California
over the past decade, a fact reflected in my service as Chairman of the
Board of the California Independent System Operator. I emphasize that
my comments this morning are solely on behalf of IEP.
---------------------------------------------------------------------------
\1\ IEP was founded in 1981 to represent the interests of non-
utility electric generators selling electricity to the state's
investor-owned utilities under long-term contracts. Over the next
fifteen years, the industry grew to nearly 10,000 MW and made
California a world leader in efficient industrial cogeneration and
renewable energy technologies.
In 1996, the State Legislature fundamentally changed the
California's electric industry with the passage of AB 1890. As a
result, California's investor-owned utilities sold all of their gas-
fired power plants and their geothermal power plants.
The purchasers of these assets--some of the largest, most
innovative energy market participants in the world--are now members of
IEP. As a result, IEP now represents the owners of most of the electric
generation in California. Moreover, IEP's membership includes owners
and developers of virtually every electric generation technology in
California. The technologies include conventional and cogeneration gas-
fired power plants, coal-fired cogeneration plants, geothermal plants,
solar plants, biomass plants, and wind farms.
IEP represents its members in a variety state legislative issues
and administrative proceedings. The organization is committed to
maintaining a viable, competitive electric generation industry that can
meet the state's growing electricity demand and reliability needs. With
proper state leadership and an ongoing state commitment to a
competitive electricity market, the industry is poised to invest
billions of additional dollars in the California economy to these ends.
---------------------------------------------------------------------------
Thank you for your invitation to address what has become front page
news in California: this summer's high retail electricity prices and
threats of electricity blackouts. John Stout of Reliant Energy, one of
IEP's member companies, will testify this morning regarding the reasons
for price volatility in California's retail and wholesale markets. I
will not repeat John's testimony, other than to say that IEP concurs
with his key points. Most fundamentally, John is correct in his
conclusion that lack of supply is the fundamental driving force behind
both the price and reliability problems making headlines in California.
My testimony focuses on the causes of this lack of supply, what
solutions are already underway, and some specific further steps that
the federal government might take to help solve this problem.
Although this problem only hit the front pages this summer, the
seeds of California's current electricity shortage were planted over
many years, both on the demand side and the supply side. They were
planted on the demand side in the emergence of the vibrant ``dot.com
economy'' of which Californians are justly proud. But as we advance the
frontiers of ``e-commerce'', let us not forget what the ``e'' stands
for. Indeed, our entire economy and lifestyle should have an explicit
``e'' in front of it. Take a brief moment to consider just how
fundamental electricity is in our everyday lives. When the electric
grid fails, it is not just the lights that go out. Computers, automatic
teller machines, traffic lights, air conditioning, television, radio,
public transportation, and millions of other devices upon which we
depend demand electricity. Everyday we plug more and more of these
devices into our electric grid, taking for granted that some power
plant somewhere will generate when we flip the switch.
Given California's booming economy, not to mention its growing
population, it is entirely predictable that demand for electricity is
booming as well. Indeed, in the famed Silicon Valley, demand for
electricity is growing at 5 per cent annually. In some California
locations electric demand this summer reached levels which until
recently were forecast to be more than a decade away. The California
Energy Commission's 1998 statewide electric demand forecast for the
year 2000--then only two years into the future--was revised upward last
June by a full 5.1 per cent or 2,640 megawatts. And that, of course, is
just the size of the revision in one year, not the overall growth in
demand. Moreover, this growth is occurring throughout the West, not
just in California--which means that electricity once available to
California from other states now serves local loads.
Other seeds of today's shortage were planted on the supply-side--
or, to be more accurate, the seeds of a solution were killed. Despite
its growing population and economy, California's former regulated
monopoly regime brought construction of new power plants to a virtual
standstill beginning in the late 1980's. Although electricity demand
grew by nearly 10,000 megawatts during the 1990's, California's lead
agency for thermal power plant licensing permitted only 1,620 megawatts
of new generation. Moreover, of these permitted facilities, only 1,076
megawatts were constructed. For example, in the case of San Francisco
Energy Company's proposal for a 240 megawatt facility in San Francisco,
local government opposition killed the project despite its ostensibly
preemptive state license.
Lest my Washington friends jump to the ``excessive California
environmental regulation'' explanation, however, I must tell you that
is not the problem. Modern power plants can meet even California's
notoriously stringent environmental standards. In fact, by reducing the
operation of older, dirtier and less efficient generation, new power
plants substantially reduce air and water pollution from power plants
overall in California. While the ``NIMBY'' phenomena is certainly alive
and well, the sophisticated major environmental groups understand and
support the construction of state-of-the-art power plants in markets,
such as California, where the alternative is continued reliance on much
dirtier facilities.
No, the seeds of the supply shortage were not planted by
environmentalists. They were planted by economic regulators who removed
the incentives for new power plant construction. Indeed, those that
deprecate California might be surprised to learn that the most
egregious California electricity supply decision of the past decade
actually occurred in Washington at the Federal Energy Regulatory
Commission. I refer to the FERC's 1995 decision granting the petitions
of two California utilities, Southern California Edison and San Diego
Gas & Electric Company, to overturn a decision of the California
Legislature and the California Public Utilities Commission that would
have resulted in the construction of 1,400 megawatts of cost effective
new gas and renewable generation. These projects would be on-line
today, generating clean power at prices between 3.5 and 6 cents per
kilowatt hour under long-term contracts, had the FERC not overturned
the state's decision authorizing the contracts.
Of course, California made its own flawed supply decisions in the
regulated market as well. The California Energy Commission, in
determining the need for new power plants in 1992, chose to rely upon
over 8,000 megawatts (by 2003) of ``uncommitted conservation''--that
is, conservation representing a ``future commitment'' beyond the
conservation deemed enforceable at the time. (This is in addition to
the Commission's reliance upon ``committed conservation'' such as
adopted energy efficiency standards or other existing programs.) Not
surprisingly, this ``uncommitted conservation'' left California prior
to the wedding without reducing real-world demand.
In short, the problem California is experiencing today is the
result of growing demand and the failure of the economic regulatory
structure in place before deregulation. That former regulated monopoly
regime failed to acknowledge the need for new power plant construction
over the past decade or more. This fact was a major reason, though not
the only one, underlying the decision of the California Legislature to
fundamentally restructure California's electricity market in 1997-98.
That restructuring has been strikingly successful in attracting
proposals for private sector investment in new power plants in
California. Indeed, I must tell you candidly that even I have been
shocked at the swiftness of the private sector response, especially
given the economic and regulatory risks involved in constructing new
power plants in a fledgling market. In the four years since the
California Legislature enacted AB-1890, and as a direct result of it,
over 40 new power plants requiring the investment of over 10 billion
dollars have been planned or filed for licenses in California--all with
private sector capital and no guarantee of capital recovery other than
the opportunity to compete in a real market.
Just the projects which have already filed for licenses would total
over 14,000 megawatts--greatly reducing the threat of blackouts. They
will compete with existing generation and each other to reduce consumer
prices. And, because of that competition, older, inefficient, more
polluting facilities will either operate less or be replaced
altogether, resulting in overall reductions in air emissions, water use
and other environmental impacts system-wide.
The problem, of course, is that most of these power plants are
still on the drawing boards or in the hearing room, not under
construction or operating. To be precise, of the announced projects,
only five projects totaling 3,643 megawatts have been granted licenses
to date or are under construction. 14 additional projects totaling
8,015 megawatts are in the licensing process. Others will be filing for
licenses in the near future.
Governor Gray Davis has made processing of these license
applications a top state priority. While making clear that all
applicable standards will be enforced, the Governor has asked state
agencies to give priority to reviews of power plant applications.
The California Legislature has also already acted to address both
the supply side and demand side problem in California. Within the past
two weeks, the Legislature enacted bills to increase demand
responsiveness, cap retail prices in San Diego and expedite the siting
of power plants. The governor is expected to sign these bills into law
in the next few days.
The legislation to expedite the siting of power plants is limited
to temporary installation of simple cycle peaking facilities and
facilities which have no significant environmental impacts and are in
compliance with all applicable laws, standards and ordinances. The goal
of this legislation is to accelerate the licensing of facilities
without compromising environmental standards. This is an objective
which IEP strongly supports.
As you know, power plant licensing is primarily in the hands of the
states. However, power plants are subject to numerous federal laws and
regulations. Thus, without compromising the substance of these
requirements, the federal government can assist California by making
its administration of these requirements more efficient and less
ambiguous.
Perhaps the greatest single thing the federal government can do is
simply to determine compliance with its standards more quickly and
efficiently. Anything this committee can do to accelerate key federal
permits such as U.S. Fish and Wildlife Service biological opinions or
Environmental Protection Agency determinations under the Clean Air Act
would be an important step.
There are also two other very specific things that the federal
government can do to accelerate power plants without compromising
federal standards. The first concerns determinations under the Federal
Coastal Zone Management Act. As you know, California has numerous
facilities along its coast, many of which are likely candidates for
replacement and repowering proposals. These proposals are particularly
beneficial because they directly replace older, more polluting
facilities with state-of-the-art power plants. There is, however, a
``Catch 22'' created by a conflict between federal and state law
regarding who determines compliance with the Federal Coastal Zone
Management Act.
When the California Energy Commission was created in 1974 by the
California legislature, the legislature sought to consolidate all
permitting issues into that agency. As part of that effort, the
legislature enacted a statute which prohibits the California Coastal
Commission, the agency that would otherwise determine compliance with
the Federal Coastal Zone Management Act as a delegate of the federal
government, from performing that function. The state sought to transfer
this delegation for power plants to the California Energy Commission.
However, according to the California Coastal Commission, federal law
does not recognize the state law on this issue and prohibits any state
agency other than the California Coastal Commission from determining
compliance with the federal law. Thus, power plant developers in
California have been told by the Coastal Commission that the agency is
simultaneously prohibited by state law from making the determination,
yet it is the only agency under federal law which can do so. The
federal government could remove this ``Catch 22'' by designating the
California Energy Commission as the entity which determines the
conformance of power plant proposals in the coastal zone with the
requirements of the Federal Coastal Zone Management Act.
Another area where the federal government can help concerns
expediting the resolution of frivolous appeals to the Environmental
Protection Agency's Environmental Appeals Board. Under current law, an
appeal to the Environmental Appeals Board automatically stays the
challenged permit and therefore prevents commencement of construction
regardless of the merit of the appeal. In other words, unlike virtually
every other appellate body, the Environmental Appeals Board lacks the
authority to determine whether the merit of an appeal warrants a stay
of construction. It has no choice other than to stay construction
pending the final resolution of the appeal which can take many months.
Using this mechanism, a single individual in California, by writing a
one-page letter, was able to delay construction of the first of
California's post-deregulation power plants for several months with
claims that were utterly without merit and had been rejected by the EPA
staff, the California Energy Commission and ultimately by the
Environmental Appeals Board. Recognizing the urgency of the situation
and the frivolity of the appeal, the Environmental Appeals Board gave
this appeal a priority and dismissed it as quickly as it could.
Nonetheless, because the appeal automatically stayed the necessary
permit, the project was significantly delayed, its costs were increased
and its ability to meet the summer peak of 2001 was jeopardized.
The solution to this problem is to give the Environmental Appeals
Board the same sort of appellate injunctive relief role that is typical
of other appellate bodies. Specifically, the filing of an appeal with
the Environmental Appeals Board should be required to justify the need
for a stay of the challenged permit based upon the likelihood of
success of the appeal and the relative harms to the appellate and the
public interest. This would be an important reform as many opponents of
power plant projects in California have become very aware of their
ability to significantly delay projects in this fashion at essentially
no cost to themselves.
In conclusion, the law which is most affecting price and
reliability in California is the law of supply and demand. Obviously,
no one can amend that law and it will continue to apply regardless of
the regulatory structure. The solution to California's problems lies in
reforming the retail market as discussed by John Stout and by
accelerating the licensing of the many projects which deregulation has
brought forward consistent with applicable environmental standards.
While these solutions are primarily the responsibility of state
government, the federal government can support the state's efforts by
accelerating its own reviews, addressing jurisdictional ambiguities and
applying standard appellate rules regarding construction stays to
federal environmental appeals.
Mr. Barton. Thank you, Mr. Jones, and thank you for
changing your schedule to appear. You're one of the witnesses
that I really wanted to hear from, so I appreciate you coming.
We now want to hear from Mr. Greg Barr, who is the Vice
President of Power Generation for Solar Turbines.
STATEMENT OF GREGORY BARR
Mr. Barr. Thank you, Mr. Chairman, members of the
Commission and local Congressmen.
Mr. Barton. Use that big microphone because I think it's a
little bit better.
Mr. Barr. Okay. Solar Turbines is a wholly-owned subsidiary
of Caterpillar, Incorporated, located here in San Diego. And
we, along with our 3,000 employees and other members of the
community at large, have been experiencing extraordinarily high
electricity prices for the last few weeks.
We are a manufacturer of medium-sized industrial gas
turbines. And together with Caterpillar's engine division, we
produce 20 gigawatts of generating capacity per year. That's
the equivalent of about nine Hoover Dams.
I'm honored to be here. My role in the company is to lead
our power division. I'm not an expert on utility regulatory and
legal structure. However, it is clear that the new regulatory
structure did not fully anticipate the electricity market
dynamics.
Restructuring has proceeded slowly. Market forces work
rapidly. Price signals would normally prompt supply and demand
responses. But those responses have been blocked to date by
residual regulation and continuing uncertainty.
The heart of the problem today is a shortage of generating
capacity. We are Solar Turbines make generating capacity. As
such, we believe we are part of the solution.
The gas turbine generators that we make are ideally suited
for distributed generation. And by distributed generation, I
mean generation cited at industrial, commercial and
institutional facilities where the heat and power is used in
their process, as well as generations cited at distribution and
transmission substations that respond to periods of peak
demand.
There are several reasons why distributed generation is a
critical part of the solution that you are looking for today.
It has very short lead time. Barring regulatory barriers, a
distributed generation unit can be operational within 1 year.
It has attractive and predictable economics because it is
customer-driven. However, regulatory uncertainty can undermine
investment criteria and economics. It creates supply side
diversity, which dampens market price swings and addresses
concerns over market power.
It reduces transmission and distribution system constraints
rather than adding to them because it is located near the
consumer. This can defer needed additions to the T and D
system. And in many cases, it can actually reduce emissions
from existing industrial locations by as much as 50 percent.
Economically and environmentally, distributed generation
makes sense. Both Federal and State governments should work to
eliminate barriers to distributed generation. In particular,
Congress should create uniform national standards for
interconnection of distributed generation. Congress should work
to eliminate rate policies that penalize self-generators and
instead should credit them for the benefits they create.
Where generation ownership is not prohibited by State law,
utilities and their affiliates should be permitted to own and
operate distributed resources. Congress should work to
eliminate any requirements that distributed generators be
regulated as public utilities.
We need an electricity market structure that is efficient
economic and fair to all consumers in the way that only an open
and competitive market can be. Distributed generation can play
a major part in such a market.
Thank you very much, and I will be happy to take any
questions that you may have on my testimony.
[The prepared statement of Gregory Barr follows:]
Prepared Statement of Gregory Barr, Vice President, Solar Turbines
Incorporated
introduction
My name is Gregory Barr and I am Vice President of Solar Turbines
Incorporated. On behalf of my company and our three thousand employees
here at our headquarters in San Diego, I am honored to have this
opportunity to testify at this important hearing. We thank the
Subcommittee for holding this hearing to assess the problems that have
occurred in our newly restructured electricity market and to consider
our recommendations for addressing and solving these issues.
Solar Turbines is a leading manufacturer of combustion gas turbine
generator sets. Of the 11,000 Solar combustion gas turbines installed
around the world, over 4,000 generator packages are sited in the United
States. Solar Turbines is currently working in partnership with the
United States Department of Energy to develop high efficiency, low
emissions, low cost advanced turbine systems (ATS) specifically
designed for distributed power generation. Solar Turbines is owned by
Caterpillar Inc., the world leader in the manufacture of earthmoving
and mining equipment. Caterpillar also makes reciprocating engines,
often used for power generation. Together, Caterpillar Inc. and Solar
Turbines are one of the largest manufacturers of electrical generation
capacity in the world, producing each year about twenty gigawatts of
generating plant--the equivalent of nine Hoover Dams.
As you well know and as you have heard from other witnesses this
morning, the restructured electricity market in California is enduring
a very rough ``break-in'' period. Consumers and businesses in this area
have been involuntary participants in what has effectively been a
massive initial experiment in electric industry reform, and the costs
to them have been extreme. Solar Turbines urges this Subcommittee, the
rest of the Federal government, and the California state government to
work closely and quickly to alleviate the huge economic penalty that
has effectively been imposed on this region. In the same way that other
regions and states will be able to benefit from the lessons learned
here about restructuring, it is not unfair to ask that the costs of the
experiment be shared more widely, at least for the benefit of the
residential and small commercial customers who are least able to cope
with them. It is perhaps ironic that Solar Turbines, as a major
manufacturer of electricity generating capacity, has itself been
subject to extraordinarily high electricity rates because of what is
generally recognized to be a shortage of electricity generating
capacity.
In this testimony, Solar Turbines will provide its own perspective
on the general problems, but we will not attempt to compete with the
elaborate analysis of causes and effects the Subcommittee will have
heard from other witnesses. Instead, my testimony will focus on my
company's role as a part of the solution through its business of
providing equipment for high-efficiency, low-emission distributed
generation of electricity. I will note the barriers that have so far
prevented greater application of distributed generating resources and
the policy changes needed to remove those barriers.
the nature of the problem
As the electricity industry is a highly complex group of
enterprises and activities, so too the current problems are highly
complex. The essence of the current problem, stated as simply as I can,
is that there is a remaining mismatch between the new market structure
designed and embodied in legislation and the actual market dynamics of
the electricity business.
There has been a general consensus that in the electricity
industry, as in other industries that were once thoroughly regulated,
it makes sense to allow the competitive forces of the free market to
work their magic in providing price signals to consumers and suppliers
to the extent possible, gaining economic efficiency as a result. Yet
the same consensus holds that many electricity industry activities,
such as transmission, distribution, facility siting, and environmental
emissions, must remain subject to regulation in the public interest--
these are not activities that can be simply deregulated.
Determining how to restructure once-pervasive regulation to allow
market forces to operate where they can operate is not an easy task.
Solar believes that it would have been unreasonable to expect that
electric industry restructuring could have proceeded without any
``glitches.'' By their nature, markets are unpredictable. Newly created
markets are particularly unpredictable. For this reason, Solar Turbines
is unwilling to join in attempting to assign blame to anyone for the
problems that have been experienced. The key questions are what should
be changed to make the new structure work better and how should the
impacts of the problems to date be alleviated.
A major part of the problem has come from the fact that the markets
have moved on while the complex decision-making process of
restructuring was unfolding. Yet the uncertainties about the new
structure of regulations and market incentives kept those who would
earlier have responded to market developments by adding capacity and
transmission from doing so. Key market changes included the following:
Electricity demand grew strongly, driven by resurgent economic
growth in California following several low-growth years in the
early 1990s.
Peak summer weather conditions have added seasonal emphasis to
this demand growth.
New capacity investment awaited clarity in the new
institutional roles of the utilities and other market
participants. It is simply not feasible to make multi-million-
dollar commitments of resources to a new generation plant if
one is uncertain about the terms under which that plant can be
operated, or even whether that plant must be sold to others.
Similarly, new transmission investment was not made, leading
to the perpetuation and growth of transmission bottlenecks.
Transmission bottlenecks isolated and amplified generation
capacity shortages.
On the demand side of the market, very few consumers have the
flexibility or timely information to be able to react to market
price signals by adapting their usage, creating an artificially
inelastic short-term demand curve.
While regulators were focused on reshaping the fundamental
regulatory structure of the electric industry, there was not similar
focus on the underlying siting, permitting, and environmental
regulations applying to electricity facilities. As a result, once the
signals began to emerge from a newly competitive electricity market,
the potential participants were unable to respond in a timely manner.
They continued to be subject to the welter of inflexible, time-
consuming, multi-agency regulations and requirements that not only
delayed new generation, but added significantly to its costs and to the
uncertainty of cost recovery that creates business risk. In a market,
higher business risk means a higher minimum price threshold. It is not
merely hunger for profits, but also knowledge of the risks from
continued uncertainty that leads market participants to seek maximum
returns when returns are available. In short, regulatory speed and
flexibility have not matched the market's speedy evolution or new
requirements.
There has also been a failure to recognize that the very mechanics
of the electricity industry have also been changing as a function of
new technology. In particular, new small-scale electric generation
technologies have in recent years created the potential for a
proliferation of generators sited near load centers. These small power
sources include not only the turbines manufactured by Solar Turbines,
but other technologies that are emerging.
Restructuring policy-makers have been slow to recognize that the
new regulatory structure needed not only to accommodate competitive
electricity markets, but also to accommodate the new potential for
distributed generation. In the same way that the old monopoly
electrical utility industry paradigm (generating, transmitting,
distributing, and selling all by the same company) is being
restructured, Solar Turbines believes that the old paradigm of large
remote power plants, long-distance high voltage transmission, and
networks of distribution wires will also undergo dramatic
reconfiguration. The emerging electricity industry will be much more a
network of both suppliers and consumers, linked together for optimum
reliability and uniformity by a grid of distribution and transmission
wires, and joined in a transparent, broad, and seamless market for
electricity supply pricing. So far, the regulatory restructuring has
been too much designed for the old industry, not the new one.
how can distributed generation help solve the problems?
Distributed generation, i.e., generation sited in numerous places
on the grid, and particularly near load centers, offers solutions to
numerous issues confronting us today. In the face of generating
capacity shortages, distributed generation offers multi-faceted help:
Assembly-line production of medium sized distributed
generation units allows for rapid response to orders, and
therefore promises--depending on regulatory and permitting
delays--exceptionally short lead-times to achieving new
capacity on line. A typical turn-key combined heat and power
installation for continuous operation can be completed in one
year. A peaking unit can be ready to meet periodic requirements
typically in about nine months.
Distributed generators are sized precisely to the need they
are intended to fill. Because they are linked to the demand
conditions of a particular user or area, demands which are
therefore more easily projected, there is no risk of over-
investment which has in the past created problems for electric
rates and utility company financial health.
Distributed generation customers can obtain total certainty of
the capital costs of their generating equipment, allowing them
valuable economic predictability and autonomy. While they may
still be subject to fuel price uncertainty, today's fuel
markets allow hedging in futures and other derivative
transactions in a manner that can also make fuel prices
predictable. Distributed generators can thus protect themselves
significantly from the variability of the broader market.
Perhaps more important to the questions confronting this
hearing, distributed generators can help dampen the market-
price swings that may otherwise occur in the broader market:
when prices are high, they can self-generate and take demand
out of the surging market, perhaps also selling additional
power into that market.
In addition to the benefits of adding new capacity to the market,
distributed generation offers the important additional benefit of
reducing the burdens on the transmission and distribution system. Sited
at load centers, distributed generators require less of the limited
capacity of transmission lines and distribution lines bringing power
from remote central generating stations. Indeed, they may export power
into the grid. Environmental and aesthetic impacts, land use issues,
and land-owner resistance has made it virtually impossible to add new
transmission right-of-way throughout the United States. Increasing the
voltage of existing transmission lines presents major technical,
investment, and timing issues. Distributed generation can be a major
part of the answer to this dilemma by adding generation at the
consumer's end of the line, and thereby improving both the transmission
access and the transmission reliability of all users who continue to
use system transmission and distribution resources.
In addition, distributed generation can mitigate residual concerns
about generating-industry market power by creating a large number of
new and dispersed generators on the supply side of the bulk power
markets, increasing competition, and adding capacity available to
purchasers on behalf of small customers.
While these benefits of distributed generation clearly help the
restructured electricity market directly, society as a whole benefits
from the general energy efficiency gains and environmental emission
reductions that come from creating combined heat and power
applications. Simple-cycle thermal generation efficiency still averages
about 40%--the balance of the energy content of the fuel is lost though
waste heat discharge. Delivery to consumers may take an additional 10%
of the original energy in the form of line losses on transmission and
distribution lines. By contrast, local combined heat and power
applications can usefully extract upwards of 90% of the original fuel
energy--from two to three times the overall energy efficiency. This
energy efficiency helps put downward pressure on fuel market prices.
Equally important to the efficiency gain, combined heat and power
creates air emissions that are one-half to one-third of what they would
be from accomplishing the same purposes with separate fuel consumption.
While some emissions must come from any combustion-powered generator, a
combined heat and power application is one of the lowest-emission
technologies available. These environmental benefits are shared with
everyone, and can help offset the increased emissions that would
otherwise come from continued economic growth.
Economically and environmentally, distributed therefore makes good
sense. The current process of restructuring the electric industry is a
tremendous opportunity for regulators and policy-makers to reduce the
serious barriers that are preventing distributed generation and
combined heat and power from playing their appropriate roles in the
electricity market.
obstacles to achieving the promise of distributed generation.
There are numerous barriers to the implementation of distributed
generation, including but not limited to the following:
Lack of standardization of requirements. Distributed
generation units are manufactured to be standard in their
inputs and outputs, yet there has not been a parallel
standardization of treatment by regulators, environmental
permit authorities, and utilities. Much red tape could be cut
and substantial time saved in getting the needed electricity to
the consumer by adopting standardized regulatory and permitting
requirements on standardized units.
Lack of reasonable interconnection policies. Interconnection
standards in particular often differ from utility to utility,
and can be unduly complex and burdensome. Intentionally or not,
such complexity discourages competition with the utility's own
generation. There are no major technical issues with
interconnection of distributed generation in a manner that is
fully compatible with reliable grid operation. This is done all
over the world.
Rate policies that discriminate against self-generation.
Utility rates are frequently set in a manner that discourages
distributed generation in order to preserve industrial load for
the utilities, under the assumption that other ratepayers would
suffer cost increases if industrial load went to self-
generation. In fact, as noted above, all customers obtain
significant system benefits when distributed generation is
installed, not merely the company installing it.
For example, distributed generators effectively create
additional transmission and distribution capacity by
removing their own load from the total demand and often by
providing excess energy to other users downstream of
transmission bottlenecks. Yet rate policies typically deny
distributed generators any credit for this effect of their
operations. Indeed, rate regimes typically burden
distributed generators by attributing to their new
generation a full share of the cost of transmission and
distribution systems they will not use as a result of the
new generation, as if their new distributed generation were
adding to rather than subtracting from the load on the
system.
Sometimes industrial customers are offered special
discounts in utility rates to encourage them not to install
their own generation. When industrial rates are discounted
to prevent a customer from opting for distributed
generation, all customers may be the losers, because the
other customers rates must offset the discount and all
customers lose the efficiency and environmental benefits.
Frequently distributed generators are charged high rates
for standby and peaking power they may require from the
grid as a disincentive to self-generate. On the contrary,
distributed generators should be credited in their rates
for the contribution their generation makes to system
reliability at the margin and for the diminished
transmission constraints as a result of their self-
generation.
These ratemaking policies are vestiges of an earlier regulatory
environment premised on utility monopoly power and non-market
economics for consumers and generators alike. Utilities are no
longer required to provide non-market price subsidies to
alternative power suppliers, and utilities should not be
permitted to discriminate against them. Customers will only
seek to install distributed generation where it makes economic
sense to them, and do not require utility subsidies to do so,
but should not face artificial economic barriers from outmoded
rate policies.
Ambivalence about the utility role in distributed generation.
Many utilities themselves are aware of and support the need for
distributed generation, yet until their own potential role in
building and operating distributed generation is clarified,
they are often resistant to having other parties construct such
generation on their systems. Solar Turbines believes that
except in states where regulators have forbidden utilities to
own generation, the utilities themselves or their affiliates
should be able to own and operate distributed generation units
to meet the supply needs they continue to serve, such as core
loads. There is no reason that the utilities themselves should
not be able to capture the economic, efficiency, and
environmental benefits of distribute generation. However, the
terms for others to add distributed generation to the utility
grids must be no different or more onerous than the terms the
utilities themselves must meet. In other words, an open market
means open competition!
Defining distributed generators as utilities. Under current
state and federal policies (particularly the Public Utility
Holding Company Act [``PUHCA'']), distributed generators may be
subject to traditional regulation as public utilities in order
to make any off-site sales. In the new electricity industry,
``wires'' companies are the utilities; those who generate and
sell power, especially at wholesale or to bulk power markets
and exchanges, are competitive entities that clearly do not
require regulation. As in other unregulated sectors of the
economy, their fully-enforceable contractual duties,
obligations, and rights eliminate any need for utility-style
regulation.
what the federal government should do
Solar Turbines believes that the electricity industry is inherently
a regional industry, not a state or national industry. There is no
level of government which ideally fits a regional industrial structure
for purposes of regulation and approvals. It is understandable that
State authorities want to continue regulation of industry functions
they have traditionally managed, and this is appropriate for regulation
of distribution rates, interrelationships of suppliers and utilities
with consumers, facility siting, and other inherently local activities.
However, much of the efficiency that can be achieved in electricity
restructuring will come from moving toward larger workable markets for
power, and reducing barriers to those markets. Indeed, markets already
are operating regionally (and indeed internationally in the case of the
region California is part of) and must therefore operate under federal
supervision.
Transmission capacity generally must interconnect and serve the
entire regional market, and therefore should generally also function
under federal supervision. Solar Turbines believes that transmission
regulation should aim to achieve viable electricity commodity markets
which are not bounded at state borders but which are open,
nondiscriminatory, and transparent at the regional and inter-regional
level.
Solar Turbines does not attempt in this testimony to prescribe a
new state-federal division of responsibility for a restructured
industry, merely to indicate that there are critical roles for both
levels of government, and both must cooperate to get the legal
structure right so that the markets can function optimally. Solar
Turbines will be happy to work with Subcommittee members and staff to
refine these ideas and express them in appropriate legislation.
The key issue is timing. Solar Turbines is concerned that after
several additional years of attempting regulation fundamentally at the
state level, Congress will eventually be compelled to step in to assure
the minimum consistency of policy in certain key areas to preserve
functional regional markets. This should happen sooner rather than
later.
Among other things, both the federal and state governments should
work to reduce the barriers to distributed generation mentioned above.
In particular:
Congress should consider actions that will identify uniform
national standards for interconnection of distributed
generation and require all utilities involved in interstate
commerce in electricity to adopt such standards.
Congress should encourage the states to change rate policies
to encourage distributed generation, and combined heat and
power generation, and to eliminate rate policies that penalize
self-generators.
FERC should be empowered to adopt nondiscriminatory rate
policies throughout wholesale and interstate markets that
recognize the system benefits of distributed generation, and
that liberally allow distributed generators to interconnect to
the grid under a common set of interconnection standards.
Utilities that utilize the grid for their own wholesale bulk
power transactions should be expected and required to offer
ready interconnection of distributed generators to the grid for
wholesale transactions.
Where generation ownership by utilities is not prohibited by
state law, utilities and their affiliates should be permitted
to own and operate distributed generation resources on the same
basis and under the same constraints that they own and operate
any other form of generation.
Congress should repeal the provisions of PUHCA that would
require regulation of distributed generators making off-site
sales, and should either clarify or encourage the states to
clarify that distributed generators can sell power without
becoming public utilities subject to regulation under the
provisions that apply to monopoly electric distribution and
transmission companies.
What the federal and state governments should not do is panic in
the face of current difficulties. They should certainly cooperate on
quick actions to ease the economic trauma in this area, and should work
to prevent similar short-term market crunches in other areas by
learning the lessons of this summer in California. Market-driven
electric commodity markets are working in other parts of the country
and the world, and can work in California and throughout the regions of
the United States. The difficulty is structuring them to allow the
proper pricing signals to flow both to the suppliers and consumers, and
reforming the regulatory structure so that both suppliers and consumers
can react to those signals quickly. Transmission and distribution
regulation must support the viability of the commodity markets for
power, and create proper incentives for transmission and distribution
investment, in order to avoid balkanizing and hamstringing the
commodity markets.
conclusion
Distributed generation can offer, as noted above, very important
assistance in reaching many of the public policy goals that electricity
restructuring must not ignore: the need for growing, efficient,
dispersed, and diversified new supply capacity, with a net benefit to
transmission and distribution resources, all at a net benefit to
environmental emissions and general fuel-use efficiency. Because a
large part of the answers to the current dilemmas with electricity
restructuring can and should come from distributed generation, a large
emphasis in electricity restructuring policy should be put on removing
barriers to distributed generation, including those cited here.
It is Solar Turbines' business objective to play a major role in
the development of distributed generation and combined heat and power
projects in support of the goals and objectives of a restructured
utility model. But it is also Solar Turbines' responsibility to its
community to assist with creating an electric market structure that is
efficient, economic, and fair to all consumers in the ways that only an
competitive market can achieve. Thank you again on behalf of Solar
Turbines for the honor of testifying, and I am happy to respond to any
questions you may have.
Mr. Barton. Thank you, Mr. Barr.
We now want to hear from Mr. Terry Winter, who is the
President and CEO of the California Independent System
Operator. We really want to hear from you because you're kind
of right at the heart of the issue, so to speak. So welcome to
the subcommittee, and we'll recognize you for 5 minutes.
STATEMENT OF TERRY WINTER
Mr. Winter. Chairman Barton, Members of Congress, I want to
thank you for inviting me here. I've been a resident of San
Diego for 21 years, and this is kind of like homecoming, but
not exactly the one I would like to have experienced.
I think that here in California, that we have to be very
careful as we look at what has happened to be certain that we
don't throw out markets completely because I think they have a
real role to play.
The California ISO is the one where I guess you would say
the buck stops here, because at each hour of the day, it is my
organization that has to make the decisions of how we keep the
lights on and where we get the power. It was always intended
that we do that in what we call the real time market, which was
designed to allow us to take account for the discrepancies in
forecast, the weather deviations.
That 5 to 6 percent of the requirements that we have needed
has now grown to 25 or 30 percent. And what that means to me is
that starting at 7 o'clock in the morning, I can be as much as
10 to 16,000 megawatts short for the peak hours of that day.
That means I've got to go find that in a matter of 2 or 3
hours, and that is a reliability concern that we greatly are
concerned about.
I think there's been adequate discussion of why that
exists. Clearly, the demand has far outgrown the supply. But it
doesn't stop with just that. It also has to deal with the
transmission facilities that we have and that we can use to
move power back and forth.
I think in the long run, that clearly the markets will
provide the innovation that will send the signals for demand
that are required, and they clearly are a benefit in the final
cost analysis. But we are faced with an interim problem that we
must solve because it is totally unacceptable, in my opinion,
to have prices where they are.
Now, there's lots of ways that people have proposed to
solve that. One of them is price caps. Price caps are a partial
solution that we lowered our caps down to $250, and, in fact,
that did not cause the total energy bill to go down. It merely
capped the peaks that we hit.
I think the other area, as you look at the structure of
what we have developed here, was that we moved very quickly to
a wholesale market on the supply side. We have not built the
transmission to move that supply around, and probably the
biggest shortcoming is we have not implemented the demand side
that we needed for people to be able to turn off.
As you have heard Oracle speak, very clearly, they are
willing to pay a considerable price for reliability. But you
can't transpose that to everyone on the system. And so I
believe that we need to look at the market in almost a two-
piece scenario, still keeping markets in play. Because during
times of sufficient demand, the last 2 years before we hit this
summer, there was considerable doubt as to whether the price we
paid in California would support new generation. This year it
has gone completely the other way and out-of-hand.
So I think we have to look at almost a two-market
structure, one that deals with the peak units that occur at the
very high time of the day when you're only running a unit for
200 hours out of the year, and deal with that as one price, and
that price also ought to be the one that we look at to pay
demand side to get off because it is those peaks that we are
after.
Then I think the more basic or base load type plants need
to compete. And if we put that structure in place, it will give
us the results that we've seen over the last 2 to 3 years.
Having said that, I think actions have been taken to get
new generation licensed. I believe that load-serving entities
have to be given hedging opportunities. People talk about the
market setting the high price, and everyone has to pay that.
The hedging market is a price paid as bid, which you can
then do what most averaging would expect. But people have to be
free to go into that hedging market.
Second, I think we have to commit to the encouraging
commitments of transmission line building. One of the great
advantages of operating the total system in California is the
ability to take advantage--I heard the beeper--take advantage
of the facilities in Northern California to serve the southern
where hydro capacity is. We've had a wet year. It's very
important that we be able to move that power back and forth.
Right now in the regional market, we serve the northwest
every night because they have low water supply and want to
retain that water. It is a regional market, and we are going to
have to deal with it as a regional market. Thank you.
[The prepared statement of Terry Winter follows:]
Prepared Statement of Terry Winter, President and Chief Executive
Officer, California Independent System Operator Corporation
Thank you for inviting me to share with you my perspective on the
health of electric utility restructuring in California. I do so from a
unique vantage point and experience base. Since the spring of 1998, the
California ISO has had operational responsibility for most of
California's electric transmission grid--the network that is critical
to reliability and to competitive commerce.
From that experience I readily confirm the reality that brings this
Committee here today: unquestionably the market is not mature and the
consequences have been serious. But the overriding message that I wish
you to draw from my remarks is one of hope, not because I am an
optimist at heart, but because restructuring of the electric services
industry was and remains correct. Notwithstanding the challenges we
have encountered, the benefits that are yet attainable more than
justify the growing pains and the effort.
It is for this reason that I truly welcome this hearing. It can do
much to put the California experience in perspective for the rest of
the nation. In saying that, I do not presume to suggest that electric
restructuring nationally is or should hinge on what is happening in
California. But the California ``problems'' that now are being
prominently discussed in the national press cannot help but discourage
movement from a regulated to a competitive paradigm elsewhere. That
would be most unfortunate.
For the commodity side of the business, that is for the kilowatt
hours that consumers expect to be available, at fair prices, when they
flick on light switches or power up motors, the competitive model is
the correct one. It can and it will produce the lowest prices. It can
and it will bring innovation in the form of new technologies, new
energy products, and new market participants. It can and it will
provide consumers with choice: of when and when not to consume; of the
level of reliability that makes economic sense considering their
individual requirements.
We are experiencing serious challenges in California, but these
challenges should not be attributed solely to the restructuring
decisions. Reliability is being tested as never before and some
consumers already have experienced rate shock. However, I am here to
tell you that California made the right choice when it set out on the
path of restructuring more than five years ago; to tell you that if
public policy decisionmakers and market participants cooperatively work
together, the enormous benefits that a competitive market is capable of
producing for consumers can yet be attained.
In a moment I will offer my views on the challenges that we face,
and on what corrective action must be taken. It is most important that
we distill the lessons to be learned from the experience that we have
had. If I can make any contribution to your deliberation, let it be
that we not repeat the most basic, and in my view, most costly mistake
that was made when restructuring first began to be debated: we created
a climate of uncertainty and with it discouraged planning and
infrastructure investments. It is precisely because of that uncertainty
that I and my staff must wage a near-daily battle just to keep the
lights on in California; it is because of the consequences of that
uncertainty that more and more consumers face the risk of rate shock.
In my judgment, the single most significant contribution that this
Committee and that State decisionmakers can make to the restoration of
economic order is to put an end to uncertainty: to make clear the
commitment to a competitive commodity market facilitated by a regulated
transmission infrastructure. I am concerned that until that happens,
the investment that is the precondition to a robust competitive market
will not be forthcoming and a painful transition will plague us--and
consumers--for far longer than is necessary.
It is also important that we keep in mind the impetus for
restructuring. It was the failure of the old regulatory paradigm to
bring forth the capacity, fairly priced, and the investment in the
transmission infrastructure necessary for a robust economy. It was
precisely because independent generators were more successful in
developing innovative, more efficient and more economical capacity that
Congress enacted the Public Utilities Regulatory Policy Act. It was
precisely because of the unwillingness of the utilities to open their
transmission highways to the new breed of independent generators, and
to permit those essential facilities to be used for competitive
commerce, that Congress mandated access and that the FERC issued its
groundbreaking orders, 888 and 889. Lest we are tricked into thinking
nostalgically about the ``good old days'', let us first reflect on them
soberly. Restructuring came about because the entrenched industry was
not doing its job and the former regulatory paradigm of ``command and
control'' had failed.
The world of electric power supply is different today because it
has to be. We must not delude ourselves into believing that all will be
right if we simply superimpose the former regulatory model onto today's
industry structure. It will not work.
That does not mean that the market is to be allowed to run free of
oversight. It means that an entirely different type of oversight is
required--demanding far different skills and competencies. The market
will require oversight that has the capability to develop rules
ensuring that competition will thrive to bring forth the consumer and
social benefits that it is uniquely suited to promote; and oversight
that is willing to step back when that is the right course of action.
Those are not attributes of the former regulatory model.
Before addressing today's challenges and tomorrow's solutions, I
think it important that I summarize for you the California model and in
particular the responsibility that has been entrusted to the ISO. In a
word, we are responsible for the ``highway''. Our statutory mandate is
to safeguard reliability. While other States have elected to combine
responsibility for operation of the commodity markets and the
transmission grid, the designers of restructuring in California were of
the view that competitive objectives would be furthered if those
functions were bifurcated. In my judgment, FERC was wise to encourage
restructuring under general guidelines rather than mandating a ``one
size fits all'' approach, for the latter surely would have been met
with resistance.
When restructuring became a reality in California, the ISO was
given operational responsibility for the high voltage transmission
facilities then owned by the State's three investor-owned utility
systems. As such, the ISO manages approximately 80% of the high voltage
facilities in California and is responsible for maintaining the
reliability of that grid and its interconnections with neighboring
systems. A reliable transmission system, providing open, non-
discriminatory access, is an absolute precondition to a competitive
commodity market.
The ISO's objective is to secure needed services that will assure
grid reliability through operation of markets. Toward this end the ISO
operates Ancillary Services markets, established for the competitive
acquisition of reliability services. For example, the operating
reserves that are critical to system reliability are acquired through
these markets. Further, because supply must be kept in balance with
actual consumer demands, the ISO operates a real-time spot market. When
the market structure was designed, the assumption was that this spot
market would be limited to a fine tuning function acquiring energy to
meet perhaps 1-5% of normal control area load. As I will explain
presently, it has become much more. Finally, the ISO manages
congestion. When the available transmission is incapable of reliably
accommodating the requested transactions, the ISO utilizes market
mechanisms to allocate available capacity to those who value it most.
Notwithstanding that concerns remain, the model is a sound one. The
most critical concern perhaps should have been obvious at the outset of
restructuring. Since the mid 1980s the investor-owned utilities have
made virtually no investments in either incremental generation or
transmission. In the aftermath of the large prudence disallowances of
the 1980s and with the expectation of restructuring beginning in the
early 1990s, it was understandable that utilities would be loathe to
commit capital to a highly uncertain future. As a result, it now is the
case that over 60 percent of California's generation stock has been in
service for over 30 years. And of the newer capacity, a significant
portion is nuclear and of questionable economic longevity.
Moreover, electricity is an interstate commodity and California
most definitely is not an island. Indeed, if it were it would not be
self-sufficient. Historically, California has been a net importer of
electricity, importing between 4,000 and 8,000 MW per hour, to meet a
peak load that varies between 27,000 and 48,000 MW.
The supply problem largely was camouflaged when restructuring
commenced. While California was a net importer, the Western region had
ample capacity and load growth was modest. It was not too long ago that
the Western region enjoyed a generation reserve or supply margin of 25
to 30 percent; it is now below 10 percent. As units age and are
stressed, the adequacy of reserves becomes an even more pressing issue.
In truth, during the debate that preceded restructuring California
ignored supply issues choosing instead to focus on market power
concerns and to debate about the generation that investor-owned
utilities would retain while the remainder of the supply inventory was
divested. Further, there has been a lack of specificity as to where
responsibility lay for acquiring the resources necessary to meet load
and an absence of policy and tools to provide entities that serve load
with the capability to do what providers of commodities must do--hedge
against price spikes by forward contracting.
And, to most end-use consumers, restructuring was not visible. As a
consequence, consumers were not prepared for the significant changes
that they would have to confront. Viewed from their vantage point, it
was as if nothing had changed. The legislature imposed retail price
freezes. I do not say that critically. I understand and support fully
the importance of protecting consumers during difficult, untested
transition periods and before they have been given the information and
the tools to enable them to protect themselves. But there were counter-
costs. Consumers were left unprepared. They were not encouraged or
enabled to shop wisely. In retrospect, in the market redesign not
nearly enough consideration was given to the demand side of the
equation. This was not a recipe for an effective competitive market.
Both supply and demand must be prepared and must confront rational
economic incentives.
This underscores the point that I made at the outset--the point
that I view to be absolutely critical. If we are to pass through the
transition successfully we simply must encourage new infrastructure
investment--both on the part of generation and transmission supply and
on the part of demand. But logic and history tell us that investment
will not be forthcoming in a climate of uncertainty with investors
fearful that the rules are in flux. And history also tells us that
absent the ability to induce entry by merchant generators, consumers
may be denied the best bargains attainable in the market. One of the
motivations that led California to go to a market-based environment was
the recognition that, in the regulatory planning process, merchant
generators consistently underbid utility-sponsored projects.
Let me share with you a few more facts so that you can better
appreciate the challenges we confront. The Western region, thankfully,
has shared in our Nation's economic growth. That has translated
directly into increased demand for electricity. But as I already have
noted, supply has not kept pace. Please understand, while the focus
today is on California, this is a regional problem requiring regional
solutions. Commerce in electricity does not and economically should not
respect state geographical boundaries. That is why I have made no
secret of my support for a Regional RTO--so that the states that
inevitably are tied together electrically can plan and act for the
mutual benefit of all consumers. I say this recognizing that each state
can and should retain jurisdiction over retail matters rightfully under
their respective control.
It is premature to determine whether the RTO effort requires
federal legislative initiatives. FERC has gotten it right and should be
supported as it encourages each region to develop the model that is
best adapted for local requirements while still satisfying minimum
prescriptive guidelines.
From the ISO's perspective, the regional effort makes eminent
sense. We depend on the region as we struggle daily to meet ever-
increasing threats to reliability. In all of 1999 the ISO had to
declare a total of four system emergencies and in only one of those
instances was it necessary to curtail service to loads that had agreed
to be interruptible. Thus far in 2000 we have been required to declare
22 system emergencies, and 14 of them required the curtailment of
interruptible load. We are far from being out of the woods. It is not
uncommon for California to experience some of its hottest weather early
in the fall, and our contractual ability to curtail interruptible load
has greatly diminished.
A key to maintaining reliability is having available to the system
operator reserves that it may call upon to meet emergencies--the loss
of a generator or of a transmission facility. In our region the Western
System Coordinating Council is responsible for prescribing minimum
operating requirements and for sanctioning those who fail to comply. In
all of 1999 the ISO was fined just less than $55,000 for operating
reserve inadequacies. Thus far in 2000 the fines imposed by the WSCC
are approximately $700,000.
To some extent this has been the direct result of episodic market
dysfunction. Under the California market design, it was intended that
the principal balancing of supply and demand would take place in
forward markets; for example, those administered by the California
Power Exchange. As I explained, the ISO's energy market was intended
only for the inevitable fine-tuning required in real-time. It has
proven anything but. Over the past few months it has not been unusual
for the ISO to have to scramble in real time for 20 to 30 percent of
the energy supply actually required to meet demand. There are reasons
for this and they are being addressed. But until this over reliance on
real time markets is resolved and until the balancing market is limited
to the fine tuning that was intended, we are concerned that there will
continue to be reliability and price impacts. Reliability will be
compromised as reserves intended to be on call to meet emergencies
continue to be conscripted simply to meet load. And the solutions will
likely be expensive. During real-time operations the ISO will be
required to pay what the market requires--unless I am told to sacrifice
reliability, a solution I would not find palatable.
I have painted a bleak picture because candor requires no less. But
at the outset I told you that I am optimistic, that I am convinced that
the benefits capable of being achieved are worth the efforts that yet
will have to be expended.
There is a silver lining. This summer has been a call to action,
and we are responding. We know what corrective steps need to be taken
and efforts have begun.
The State is taking steps to expedite the licensing of new
generation.
Renewables can and must make a substantial contribution to an
augmented supply portfolio. I fear that we are committing too
much of our inventory to natural gas-fired facilities. If we
have learned anything from history, it should have been the
essentiality of fuel diversity.
Distributed generation must be encouraged--perhaps with tax
incentives that typically have been used to encourage
innovative technologies. It is the one resource that can
satisfy both generation and transmission inadequacies.
The California Public Utilities Commission is providing load-
serving entities with the capability to hedge against price
volatility. The IOUs must be encouraged to utilize that
capacity with the understanding that decisions made in a market
environment cannot be judged in the same manner as decisions
made in a stable, regulatory environment.
Actions are being taken to stabilize rates in the San Diego
area--the first of the IOU service territories to be exposed to
rate shock. It is important that rate stability be provided to
all consumers during the several year transition that we must
yet navigate while simultaneously arming consumers with the
information and capacity to shop intelligently.
We must reaffirm our commitment to energy efficiency and
conservation. We must marshal our resources and redouble
efforts to ensure that we maximize the contribution that each
can and must make to a comprehensive energy strategy.
The ISO is taking action to facilitate greater market
participation by demand. These efforts must be pursued
vigorously and metering technology that will enable consumers
to plan their purchases judiciously must be encouraged.
Commitments must be made to the transmission infrastructure.
To date the ISO has identified and authorized over $800 million
in transmission upgrades. This must continue.
These are necessary first steps, not easily achieved. For example,
from my vantage point a robust transmission network is key. Without it
new generation may be left without an avenue for commerce. The rules of
interconnection must be clear and fair and the network has to be
planned with the needs of the competitive marketplace paramount. I
commit that the ISO will do its part--it will develop interconnection
guidelines; it will work with transmission owners and users to plan for
a robust grid; it will identify the projects that must go forward and
on what schedule.
But that alone will not suffice to get transmission built. There
will have to be appropriate economic incentives and if the IOUs are
still reluctant to move forward, others must have that opportunity. And
there will have to be a rational siting and licensing process. I wish
that I could tell you that all you need do is to pass some legislative
language. It is not that simple. The siting and licensing of
transmission as well as of generation must remain a local prerogative.
But that does not mean that we can tolerate improvident vetoes. I have
asked my staff to give immediate consideration to the issue of how best
to reconcile local imperatives with the absolute need that we move
forward expeditiously with projects that are essential. We will be
offering our recommendations to those responsible for siting decision
making, and I urge others to do the same.
I must conclude by returning to the beginning. That we are facing
many challenges and that they are serious cannot be disputed. My
greatest apprehension is that decision-makers will overreact. That
pressures will lead to short-sighted expediencies or, worse yet, leave
the marketplace confused about our resolve, about our commitment to a
competitive commodity market. I can think of no more counterproductive
message.
Therefore, if I could write your conclusions they would be
straightforward and unmistakable. California made the right decision
when it embarked upon restructuring. It has made mistakes in
implementation and in not moderating expectations, but none of these
mistakes are fatal. With cooperation from all, California's grand
initiative will succeed. Economic development and consumers will be the
beneficiaries.
I pledge to you that the ISO will do its part--and more.
Mr. Barton. Thank you. Thank you, Mr. Winter.
We now want to hear from Mr. George Sladoje, who is the
President and CEO of the California Power Exchange. And again,
along with Mr. Winter of the California ISO, you've kind of
been at the heart of the storm too. So we appreciate you being
here in person and welcome your testimony.
STATEMENT OF GEORGE SLADOJE
Mr. Sladoje. Thank you, Mr. Chairman. It's an honor to be
here.
I would like to supplement my written testimony, which was
submitted last week, and also there's 75 copies here, and I
hope the committee has it all, and has had a chance to take a
look at it.
When California went into the restructuring, went into the
deregulation efforts, they constructed two new enterprises to
implement that, one of them, of course, being the ISO for grid
reliability, the other being the California Power Exchange for
market reliability.
Other major features which we need to keep in mind, were
three IOUs in California were required to divest a portion of
their generation and then required to sell the power from what
generation remained and purchase all of their load out of the
California Power Exchange. In return, they were given a 4-year
transition period to recover stranded costs, and purchases
through the Power Exchange were deemed reasonable. This is a
very important concept. Not subject to second-guess audits,
fines and so on down the road.
And, of course, the concentration of this load and demand
would make for one big liquid marketplace, which would yield a
fair and reasonable market price.
Just to digress for a minute, the mechanics of the Power
Exchange in its day-ahead market is that we run 24 separate
auctions each day so that everybody can see what the wholesale
price of power is throughout the night and the day.
We began on March 31, 1998 with 27 bidders in a day-ahead
market. Since that time, we have gone now to where we have 80
certified participants from three countries, and from offering
one product in March 1998, we now offer nearly 20, a day-ahead
market, a day-up market, block-forward markets, five separate
versions of that, 1-year strips that go out for 5 years, daily
blocks, balance of the month and ancillary service forward
markets.
Our goal is to have our participants utilize these markets
in order to smooth out market effects and peaks. How is this
all working? Well, I think it was working mighty fine until
about May 2000. Prices here for the first 9 months in
California averaged 2.6 cents a kilowatt hour and over the
first year 2.4 cents. For all of 1999, the average price of
power through the Power Exchange day-ahead market was 3.1
cents.
So why are we here? May, the average was 4.7 cents a
kilowatt hour versus 2.4 cents the previous year. June, the
price got up to 12 cents a kilowatt hour versus 2.4 cents in
1999. July, 10.6 cents versus 2.9 cents. August, 16.7 cents
versus 3.2 cents and so on.
Remember, those prices that I just gave you reflect the
day-ahead price. Now let's take a look at what the prices were
for those who hedged in our forward market. And these are peak
hours, 16-hour peak hours.
If you purchased in our forward market, the average price
that you paid for May was 3.4 cents, not the 6 cents that was
the actual result in the spot market or day-ahead market. June,
you would have paid 3.7 cents, not the 17 cents that was
experienced in the day-ahead market.
July, you would have paid 6.8 cents, not the 14 cents that
we saw in the day-ahead market. And in August, you would have
paid 7.5 cents, not the 21 cents.
In my written testimony, I go through the fundamental
reasons for overall price increases that you've seen. But I
want to place particular emphasis on the need to hedge and to
utilize these market opportunities that we present.
And also, besides the forward market, I want to add to the
forward market, those who did buy in our block forward market
saved some $600 million compared to that day-up price. So we
need to have participants go into that forward market in a much
larger quantity.
Second, there is a major flaw, I believe, in the structure
of the marketplace, and that is too much of the power is being
purchased in the ISO real time market. As Mr. Winter said, 25
to 30 percent some hours for something that was designed to
only be 2 percent or so.
It worked fine until about May, and then all of a sudden we
saw a lot of supply go into that market, obviously waiting for
the higher price or waiting to the last minute to gain a higher
price.
So we're working with the ISO to correct that flaw and take
charge and move that supply back into the day-ahead market,
which we think should help stabilize price.
Finally, of course, we need more supply. Very simple. And
then ultimately, we need demand response. In California and
elsewhere, few consumers see wholesale hourly prices, and if
they did, they have no economic incentive to shift demand to
slower demand times.
So in conclusion, Mr. Chairman, the California Power
Exchange, we believe, has developed products that should help
stabilize the market. We're in the middle of the transition
period, and I think we need to transition over to utilizing
those products to a greater extent. We also have several new
products on the drawing boards which we'll be introducing come
the winter months.
California's deregulation can work, and I think it worked
well for 2 years. And after all, when you look back at it, one
of the reasons we're here today is that San Diego Gas and
Electric recovered its stranded cost early. And one of the
reasons they recovered their stranded cost early was because of
the relatively low prices on the California Power Exchange for
the first 2 years. Thank you.
[The prepared statement of George Sladoje follows:]
Prepared Statement of George Sladoje, Chief Executive Officer/
President, California Power Exchange
background
The California Power Exchange (CalPX) is a non-profit, public
benefit corporation created by legislative and regulatory bodies to
provide a marketplace for trading electricity. The CalPX is one of the
institutions that was developed as part of the adopted market design
for California's restructuring of its electric utility industry. The
CalPX, which is regulated by the Federal Regulatory Energy Commission
(FERC), operates a number of markets, the largest of which is the Day-
Ahead Market that establishes an hourly market-clearing price for
wholesale power in California. The CalPX also operates other markets,
including a Block Forward Market to allow participants to manage price
risk through purchases and sales of electricity on a forward basis for
up to five years into the future. California is slightly more than two
years through a four-year transition period that was adopted in order
to allow the features of a competitive electricity market to develop.
The purpose of my testimony is to explain the factors that the CalPX
has identified that contributed to the price disruptions during this
summer and to discuss potential solutions to address this
situation.1
---------------------------------------------------------------------------
\1\ I have attached detailed analysis from the CalPX Compliance
Unit regarding the price movements in California's electricity markets
during May-July, 2000.
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why california prices increased in may-july 2000
This summer, California has experienced dramatic wholesale price
increases. In general, the CalPX has found that certain key fundamental
factors have contributed to these increased prices. These factors
include load growth that has steadily increased in California, but
construction of new large generation has been at a standstill for more
than a decade. In addition, natural gas prices have nearly doubled
since last summer, there was an extraordinary hot weather situation
throughout the Western United States, hydro outflows from the Northwest
are below normal, environmental constraints have a negative effect on
electric supplies, and there has been a significant shift of trading
volume out of the CalPX Day-Ahead Market and into the Real-Time Market
operated by the California Independent System Operator (ISO).
Because electricity is in a situation of tight supply in
California, scarcity premiums are more likely to be charged. By
reducing demand during the tight supply times, consumers in a mature
market provide a mechanism for limiting scarcity rents by suppliers to
their economically efficient level. In the California market, few
consumers today see their wholesale prices and have the choice to buy
less electricity during high price hours. Hence, they cannot provide a
moderating influence on scarcity rents during times of tight supply.
Electricity is instantly perishable, so the market price of power can
quickly rise to very high levels to achieve a supply-demand balance.
Over time, new power plants can be built in response to these high
prices, which in turn will bring back down the price of power. But the
time lag for attracting that additional supply can lead to high short-
term bills for consumers whose costs are tied to the spot wholesale
power market.
During this summer, subregions throughout the Western Systems
Coordinating Council (WSCC) system, especially California and the
Southwest, experienced pronounced declines in reserve margins, much
greater than forecasts predicted. These reserve margin declines were
due in part to an extraordinary weather circumstance where the entire
Western United States was unusually hot at the same time, and this
higher than normal heat pattern persisted. Typically, heat variations
throughout the West allow for reserve margins to be supported in one
area where high temperatures occur by accessing resources from other
regions that are not experiencing high temperatures and associated
reserve margin pressures. During the critical time periods this summer,
all subregions of the WSCC were faced with unusually high temperatures
and consequently the Western system was unable to support individual
subregions.
Another element that exacerbated the price increases this summer is
the NOX market in southern California. Environmental
constraints on critical electric supplies forced generators to either
buy NOx credits at higher than expected prices or to operate within
existing constraints. If generators did operate within existing
constraints, some supply was simply not available because plants could
not run given their environmental limitations. If generators bought
NOX credits at high market prices, it is possible that they
could not actually acquire adequate offsets to allow for full
production. This dynamic contributed to supply uncertainty and
amplified price premiums to assure certainty of supply during a
protracted period of high system stress. The CalPX continues to analyze
this issue to assess the market interactions between environmental
credits, generation availability, and competitive market dynamics.
The CalPX has also observed that there was less supply in the CalPX
Day-Ahead Market during the summer of 2000 as compared to the summer of
1999. Exports from the CalPX Day-Ahead market increased from 1% in 1999
to 4% in 2000, whereas imports continue to be approximately 15% of the
Day-Ahead volume. This export supply is voluntary, which means that it
can sell to any available market, including bilateral markets anywhere
in the West, as well as other markets sequentially downstream from the
Day-Ahead Market. During this summer, prices were more attractive in
markets outside California, notably in the Northwest, as well as the
ISO's Real-Time Market and Ancillary Services Reserve Markets. This
circumstance had the effect of pulling supply out of the Day-Ahead
Market and forcing demand to follow supply into these other markets.
The shift of demand from the Day-Ahead Market to the Real-Time
Market exacerbated price volatility and contributed to the crisis
atmosphere, and it has been the most dominant cause of the significant
supply reduction in the Day-Ahead Market. The situation is particularly
problematic in that it burdens the ISO with procuring significant
amounts of energy along with capacity in the most volatile and time
sensitive period, and it offers an inter-market arbitrage opportunity
that was outside the design intentions of the California market
founders.
potential solutions
A number of recommendations should be explored to ensure that
consumers receive the benefits of a competitive market as California
restructures the electricity industry. These options include a strong
emphasis on ensuring that San Diego Gas & Electric Company, Pacific Gas
and Electric Company, and Southern California Edison utilize the Block
Forward Market in the CalPX to manage price volatility. In addition,
market structure changes should be considered that would limit the
shift of supply from the CalPX Day-Ahead Market into the ISO Real-Time
Market. The CalPX and the ISO have jointly developed a set of concepts
to mitigate this situation. These and other options are discussed
below.
1. Increase forward purchases of power. One way to protect
customers from spot market volatility is through the forward purchasing
of power. This forward purchasing can include 1-5 year contracts for
power, which also provide financial certainty to suppliers to encourage
investment in new power plants. Forward purchasing also includes more
procurement of power in the Day-Ahead rather than the Real-Time Market.
The CalPX currently offers 1-5 year (and shorter) forward contracts.
Another option the CalPX is developing is capacity or call option
contracts. This product would allow generators to recover their fixed
costs through a fixed payment rather than through spot market scarcity
rents. Such an arrangement can reduce the volatility of (and the amount
of load affected by) the spot price. The advantage of such contracts is
that buyers and sellers have more balanced negotiating leverage when
the contract is done before the pressures of a real-time need. Because
the market value of peaking capacity is known, such contracts also make
it easier to monitor whether suppliers are extracting excess scarcity
rents.
2. The ISO Real-Time price that is paid for supply should be capped
at the actual ISO Real-Time price for any supply deviations up to 5%
outside Day-Ahead forecasts. The ISO Real-Time price should be no
higher than the CalPX Day-Ahead price for all other Real-Time supply
procured by the ISO. Conversely, load deviations greater than 5% should
pay the greater of the ISO Real-Time price or the CalPX Day-Ahead
price, and the first 5% will be at the CalPX Day-Ahead price. This
modification would eliminate economic incentives, without undue
penalties, to under-schedule load or withhold supply from the Day-Ahead
Market and avoid the price/time pressure of the Real-Time Market. It
would also allow utilization of the Real-Time Market for its intended
purpose of close-in adjustments due to load/weather changes or loss of
generation capability.
3. Limit the allocation of ISO Out-of-Market costs to participants
who caused Out-of-Market purchases to occur. This ensures price
certainty for participants who scheduled energy in the Forward markets.
4. The CalPX Board will review the market implications of amending
its tariff to provide for publishing the daily supply offered into the
CalPX Day-Ahead Market at various prices or releasing aggregate daily
curves instead of the current three-month lag policy.
5. The CalPX and the ISO will explore the introduction of
electronic tagging from source to zone for all in-state production.
This will provide an audit trail to track the exact routes of
generation from within California.
6. The CalPX will provide daily to local newspapers the hourly PX
prices for the Day-Ahead Market in areas where the rate freeze has
ended. This valuable market information could help trigger potential
demand response opportunities.
7. The CalPX will explore with the ISO the benefit of the ISO
utilizing CalPX markets (Day-Ahead, Day-Of, the daily block products
and potentially a new capacity option market) to reduce out of market
purchases and minimize procurement resource requirements.
role of the federal government
In order to implement several of the potential solutions described
herein, FERC must accept revisions to the tariffs of the CalPX and/or
the ISO. The Commodity Futures Trading Commission (CFTC) may also need
to review and approve the capacity or call option solutions offered by
the CalPX. The federal government, under the auspices of FERC and/or
the CFTC, will therefore actively supervise the implementation of
certain potential solutions through the regulatory approval process.
By an order issued July 26, 2000, FERC initiated an informal
investigation into bulk power markets throughout the United States. By
order issued August 23, 2000, FERC also initiated a formal
investigation under Section 206 of the Federal Power Act into the
California electricity markets (Docket Nos. EL00-95-000 and EL00-98-
000: ``Order Initiating Hearing Proceedings to Investigate Justness and
Reasonableness of Rates of Public Utility Sellers in California ISO and
PX Markets and to Investigate ISO and PX Tariffs, Contracts,
Institutional Structures and Bylaws; and Providing Further Guidance to
California Entities''). By these actions, FERC has chosen to exercise
its plenary jurisdiction to review wholesale markets in California.
need for federal legislation
I do not see a present need for federal legislation. It is possible
that the need for a legislative solution may emerge as an outcome of
the pending FERC investigations.
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Mr. Barton. Thank you, Mr. Sladoje.
We're now going to do our question period. We have five
members here. I'm going to recognize each member one time for
10 minutes instead of trying to do two rounds of 5 minutes each
so you can get into some questions.
But we're just going to do one round. So we'll recognize
myself first and Mr. Bilbray and Mr. Shadegg, Mr. Filner, and
then Mr. Hunter.
So the Chair would recognize himself first for 10 minutes.
And I want to say at the beginning that I understand how
politically sensitive this issue is. It's very easy coming from
Washington or from a State like I come from to come out here
and not be sensitized to what the tripling of your electricity
price means to somebody like Mr. Tyler, somebody like Oracle.
On the other hand, it does give nonCalifornians a certain
ability to be more objective perhaps than those that are right
here in the fight, and I hope that you'll take some of my
questions in that spirit of objectivity.
Mr. Tyler, I want to ask you, as a small business
representative, under the system that was put in place, could
you have at any time chosen a different supplier than the
incumbent utility?
Mr. Tyler. Not to my knowledge, sir.
Mr. Barton. So you were----
Mr. Tyler. Not that would have been effectively different.
Mr. Barton. As I understand the California law, they put a
price cap in place. It was 10 percent below the average price
the year before. So you were, at least in the beginning, as a
retail customer, given a lower price than you had had, but did
you at that time have an option to go to a different supplier
from the incumbent utility who might have this year given you a
lower price. And you're saying, to your knowledge, you didn't
know that you had that option.
Mr. Tyler. No.
Mr. Barton. Okay. Could somebody else, Mr. Jones or Mr.
Winter, the average small businessman or woman, do they have
any real opportunity at any time to go to a different supplier
who might have--could have prevented some of the charges
they've been paid?
Mr. Shames. I can probably help with that, Mr. Chair. UCAN
runs a survey of all the energy service provider options for
consumers in San Diego and have for the last 2 years. What I
can tell you is, most small customers, meaning residential and
small business customers, were offered options that were pegged
to the PX so that customers could receive savings based on how
the PX price went.
There were some small and medium-sized commercial customers
who did have available to them service providers who would
offer a fixed rate, essentially a hedge. There were a couple of
these companies. The problem was, since nobody had any track
record of what rates would do, very few commercial customers
had the sophistication or foresight to say, ``I'll take that
gamble,'' since there was no history. But those are the options
available.
Mr. Barton. But now in the other States that have gone to
competition, they've set a price to be that's a little above
the market, prevented incumbent utility from matching that
price and then tried to create price competition by suppliers
coming in and down-bidding. California did it differently, took
an average price, cut it 10 percent, give everybody the same
price, regardless of who the supplier was.
So there wasn't much incentive for a supplier to come to
Mr. Tyler. Isn't that correct, or am I incorrect in that?
Mr. Shames. I think you're incorrect. I think the State
you're referring to is Pennsylvania, which essentially took
some of the stranded cost that it would obligate it to pay the
utilities, instead gave it to customers in the form of a
shopping credit. That's the only State that I'm familiar with
that took that action.
There's no doubt that the 10 percent artificial rate
reduction that was created through legislation reduced somewhat
the interest of consumers to switch. But truthfully, what we
saw on the market was simply 10 percent savings. The best deal
was 10 percent savings over the PX, which had the 10 percent
artificial reduction not existed, would have been a 20 percent
reduction. Very few small customers were attracted to that
deal.
Mr. Barton. Okay. Mr. Jones, and then I've got a direct
question for the gentleman from Oregon.
Mr. Smutny-Jones. Okay. Yeah. Let me just follow up on
that. I think fundamentally one of the key problems in
California is we do not have meaningful retail choice. It is an
exception, not the rule. There are some exceptions.
A notable exception is my understanding is the University
of California here in San Diego and the State University system
saved somewhere in the vicinity of about $2 million in their
June and July bills. I think this is what Michael was referring
to in terms of a fixed contract in which a different type of
product was being offered.
But that is the exception rather than the rule. And I guess
my take on this is that whatever impediments exist for trying
to get other additional retail suppliers into the marketplace
need to be removed so, in fact, we have meaningful retail
choice so people can get out of the way of high prices.
Mr. Barton. I want to ask the gentleman from Oracle. As a
large user, do you have the ability to directly negotiate with
a power generator and create your own market, so to speak,
bilaterally, or do you have to buy through the Power Exchange
like everybody else?
Mr. Byron. Mr. Chairman, we were entitled to go ahead and
do a direct access agreement with someone else. There was no
incentive to do so in the current market situation.
Mr. Barton. Is there an incentive in today's market
situation?
Mr. Byron. No, sir. As I understand it, even those that
have entered into a direct agreement are still going to be held
responsible for these high prices because----
Mr. Barton. Is that----
Mr. Byron. [continuing] because they're receiving a credit.
They're receiving a credit equal to the amount of these energy
costs.
Mr. Barton. Okay. Now I want Mr. Winter or Mr. Sladoje. Is
that true? If a big user does a direct negotiation, are they
required under California law to pay this PX price, this
market-clearing price? Or if they can negotiate something
that's below the public price, are they allowed to do that?
Mr. Winter. I'm not the expert on retail rates, but let me
tell you how I understand. Yes, they could go directly, but the
reason the incentive isn't there for Oracle, which I believe is
in the San Francisco area, is that PG&E has not recovered its
CTC rate.
So even though they went directly, they would have to still
pay that CTC recovery portion of the bill, and therefore it's
not attractive. Now, in the case of those in San Diego where
they were off of that CTC recovery, then those people--and I
understand Hewlett Packard did that. They went directly to a
supplier, tied down a fixed rate and was delivered that energy
from them.
Mr. Barton. Oracle can't do it because they're in a
different part of the State.
Mr. Winter. Right.
Mr. Barton. And under the California law, their supplier is
not allowed to compete on price yet. Is that----
Mr. Winter. Correct. Because they have----
Mr. Barton. I know barely just enough to barely understand
the answer you just gave me.
Mr. Winter. They are allowed to compete on the energy
price, but they still have to pay the stranded cost recovery.
Mr. Barton. Mr. Jones, under this recently passed
legislation here in California that the Governor just signed
last week or the week before, what percentage of the new power
plants that are under consideration does that legislation
cover?
Mr. Smutny-Jones. My understanding of how it operates,
those that are currently in the licensing process, it does not
effect. It will affect some of those that are not into the
process yet. It potentially has a pretty big impact on some of
the peaking capacity that Mr. Winter's organization, the ISO,
is asking to pull into California and I think Mr. Hunter was
referring to earlier that could be cited.
It would basically reduce the siting time by about half,
depending upon whether or not that plant was subsequently going
to be what's called a combined cycle generator.
So it does have an impact. We think it's an important step,
but obviously we will continue to work with the State and the
Federal Government to try to streamline this even further.
Mr. Barton. I've got about 2 minutes left. These last
questions are directed generally to Mr. Winter and Mr. Sladoje.
I want to try to understand this pricing mechanism and the ISO
and the PX.
As I understand it, the day-before market and the same-day
market, people bid into that. You've got bidders which I would
say would be suppliers, and I think you've got about 80, if I
understood you correctly, that can offer to supply power. But
you kind of get an idea of how much power you're going to need
to supply the demand. You publicized that, and suppliers come
forward and offer so much power at such a price.
If I understand it correctly, once you get all the power
you need for that particular time, the last price that's bid
that tends to be the highest price, the market-clearing price,
everybody who bid in gets that price. Is that correct?
Mr. Sladoje. There is a uniform price in our hourly day-
ahead market, but I wouldn't characterize it exactly that way.
Let me just go through it just very briefly. I was going to go
through it in my remarks, but it would have taken a little bit
of time.
At 7 a.m., all the bids for the following day for each hour
are submitted to the California Power Exchange. And we are
approximately 85 percent of the ISO grid. And these are both
suppliers and purchasers, and they are required for each hour
to submit a minimum of two price and quantity pairs and up to
16 price and quantity pairs.
So in other words, a supplier might say, ``I will sell 100
megawatts if the price is $50. If the price is $60, I'll sell
110. If the price''--so on and so forth, going up, of course,
as the quantity increases.
Mr. Barton. Well, I've only got 14 seconds, so once
everybody has bid in in these pricing pairs, and once you know
that you've got enough power, what is the price that is passed
through to the retail customer? Is it the highest price or is
it an average price or is it the lowest price? I mean, how is
all of that averaged out so that Mr. Tyler here gets charged
this pass-through price.
Mr. Sladoje. It is where the aggregate supply and demand
curve intersect. That is the price, the uniform price for that
hour in California.
And in most of the States, the retail customer doesn't have
any idea what that price is. In San Diego, though, it's
generally passed straight through to them, since they've
recovered their stranded cost.
Mr. Barton. Well, I would really appreciate somebody on
your staff trying to put in layman's language how you price. I
know you use the market to get enough power to keep all the
lights going, and that's a good thing. I understand that.
I'm still not quite sure how you take that and convert it
to the price that Mr. Tyler has to pay as a pass-through
because it really seems to me that Mr. Tyler is ending up
paying a lot higher price than he has to if we had some sort of
an average price scheme in place that not everybody who pays
into the power pool gets the highest price.
Mr. Sladoje. Mr. Chairman, I believe that the argument
would be that the generators are encouraged to bid their
marginal cost so that they are for sure to be picked to supply,
and that while there may be some generators who bid under the
market clearing price, they don't really expect to get that
price, and that if this was a traditional bid-and-ask system--
and believe me, I spent 15 years in Chicago Board of Trade and
5 years in the equity market. I'm very familiar with that.
Mr. Barton. You know more about it than I do.
Mr. Sladoje. Anyway, if, in fact, we had a traditional bid-
and-ask system here, they would then guess at what the market
clearing price should be, and over the long haul, most of the
academics believe that the traditional bid-and-ask system will
end up with higher prices.
Now, we are appointing a blue ribbon committee at the
California Power Exchange to take a look at this this fall.
Because you're right, it's been the subject of some controversy
and some misunderstanding, frankly. And we'll report back to
you.
But I would love to send you and your staff something to go
through some of the details of how this works and----
Mr. Barton. Well, I would appreciate that because I really
want to try to understand it.
Mr. Sladoje. Okay. And then one last thing. We're only one
of 40 some scheduling coordinators, so we send schedules
resulting from our prices and quantities from our participants
up to the power, up to the California ISO, and then Mr. Winter
takes over from there.
Mr. Winter. I think I can answer this real quickly.
Mr. Barton. Do it really quickly.
Mr. Winter. Okay. In the day-ahead market, a price is
established based on a meeting of the load and the supply and a
price. That price is then the price that the generator will get
and the load will pay for it. That's the day ahead.
And if 90 percent of the load is bid in and accepted,
that's the price they pay. What is happening is that either the
load or the generator has such a high price or the load sets a
price that they're not willing to pay above, that the day-ahead
market price shortfall then moves into real time.
But even in real time, if the real time price is $250 and
you've bought in the day-ahead market at $100, you're still
only going to pay the $100. The $250 will only be charged to
those who have not signed up an equal time. And that's why I
get so concerned when I have 16,000 megawatts in the real time
price, because now I'm out shopping at an extremely high price.
But to either have that in the day-ahead or the hedging ties
down the price you will pay.
Mr. Barton. Well, that's a whole other issue, and we need
to get it back to where you're not having 20 to 30 percent of
your load in the real time market. That is absolutely idiotic
to try to run a power grid when the next hour you're just
praying that the Lord will provide you power. I mean, it does
not work over time. That's a whole different question.
Mr. Bilbray.
Mr. Bilbray. Thank you, Mr. Chairman.
George, I was just sort of thinking when you were saying
everything was going fine, we've had no problems, it was a
great cruise, and we just happened to have this quote-unquote,
problem. My daughter's favorite movie is The Titanic, and I can
just imagine the skipper of the Titanic saying, ``It was a
great cruise until we ran into this iceberg. I mean, what are
you complaining about?''
But we're talking about a substantive issue here. The
iceberg seems to be this issue that rather than 2, 3 or 4
percent, we're talking 20 to 30 percent being on the spot
market. So let's try to melt down this iceberg and address the
fact of making it clear for the next cruise that goes through
here that the consumers get.
Why is there so much market going to this spot market? In
fact, one of the things is, why isn't the block forward, the
hedge market, being used more?
Mr. Sladoje. First on the hedge market itself, we began
trading in that hedge market in July 1999. We introduced it in
1999. The Public Utility Commission put severe limits on what
the three IOUs could actually hedge in that market, for their
reasons, which I'm sure were legitimate.
Mr. Bilbray. Let's clarify. That's a State--PUC put limits
on----
Mr. Sladoje. Correct. The State----
Mr. Bilbray. [continuing] what you can----
Mr. Sladoje. [continuing] Public Utility Commission on what
the three investor-owned utilities--how much they could
purchase. Later on, they released and relaxed those
requirements after about 8 or 9 months, still with a meaningful
limit on what they can hedge.
And then on top of that, the hedging that was available to
them, they didn't use completely. You know, you'll have to talk
to the investor-owned utilities as to why they did or did not
or what their strategy was.
Mr. Bilbray. You don't have any idea why they would not
utilize the resources----
Mr. Sladoje. Well, of course, I was told by one of them
that they just thought the block-forward prices were too high,
so they didn't purchase several months in advance. I'm not sure
why those that did stopped it where they did. I think that
they'll say the market was probably thin and that they thought
that they were going to move the market too much higher. But
that is speculation, I think, because you don't know until you
actually put bids in what the response is going to be.
So hedging was not utilized to the extent that it could
have been, and now looking back on it, of course, should have
been. And I don't want to say hedging always results in lower
prices because for about 10 months it didn't. The prices just
kind of fluctuated around the spot market.
But it does provide certainty. It does provide an
opportunity to plan, and it does provide an opportunity to
strategize. So it's still very important, even if you don't
realize the $600 million in savings that we did. So I think
it's a market that's really got to be emphasized.
The other issue on the real time market, we have worked
with the ISO. We are submitting to our market monitoring
committee on Friday, a meeting they're having. An independent
market monitoring committee's suggestion that the price and the
ISO real time market for generators be capped at the Power
Exchange day-ahead market so that nobody could save generation
until the 11th hour and get a premium.
And by the same token, some kind of a penalty for load,
who's also kind of playing that game and going to the real time
market, we want to put some device in place to encourage them
both to put everything in the day-ahead market.
Mr. Bilbray. George, the utilities that are served in the
public care, can they go out and get the best bid they can or
do they have to go through your exchange by State law?
Mr. Sladoje. They are required to go through the California
Power Exchange for all their purchases.
Mr. Bilbray. So you are--you basically are the
clearinghouse.
Mr. Sladoje. That's correct.
Mr. Bilbray. And I'm just saying I know that there is a--
you set prices based on two formulas, first the bids, and then
you've got what people are willing to pay, and those two lines
conflict.
Mr. Sladoje. Correct.
Mr. Bilbray. Why are the utilities, their projected--what
they were willing to pay, why is that inflated so much? Why
would they constantly be increasing that number? Because I saw
that it was a substantial increase, and that by themselves
increases what the consumer is going to get hit with, not just
the producer, but also utility, what they're proposing.
Mr. Sladoje. When we get into these shortage situations or
tight situations, the utilities frankly, just from an economic
standpoint, really have no choice. They've really got to pay
because they've got customers out there that they've got to
provide power for.
Mr. Bilbray. Okay. I think that--and I guess when you get
down to it, it's just like you said. They really have no choice
from two points. One, they have to provide the power. The other
is the State law requires them to go through you and doesn't
allow them to go out and try to shop around for a better price
outside. So they basically are tied to a system that is
regulated--the majority of it. You said 85 percent. What is the
rest of the market doing outside that 85 percent?
Mr. Sladoje. Well, the rest of the market, I guess, just
consists of some of these generators who are not required to
bid into the Power Exchange and----
Mr. Bilbray. Like who?
Mr. Sladoje. Like the new generator owners that bought the
generators that Edison, PG&E, and San Diego divested, like
Dynagy, like Enron, Southern, Williams, Reliant and so on.
They're not required to bid into the Power Exchange.
Mr. Bilbray. Why don't they have to go through the market?
Mr. Sladoje. Just not required by the Public Utility
Commission. Now, they do bid into our market on occasion, most
of them haven't bid that heavily into our market during these 3
or 4 months.
Mr. Bilbray. Okay. Especially if they can go sell it
someplace else.
Mr. Sladoje. I believe that's true.
Mr. Bilbray. Terry, what percentage of the market out there
is going through your process?
Mr. Winter. Well, in the whole State?
Mr. Bilbray. The whole State. Or will when it's all done.
Mr. Winter. Well, it would be 100 percent less----
Mr. Bilbray. A hundred percent.
Mr. Winter. [continuing] less the municipalities. So what--
--
Mr. Bilbray. Less the municipalities. Now, those are Los
Angeles, Alameda and Sacramento?
Mr. Winter. Yes, generally. IID, I think, also.
Mr. Bilbray. Why aren't they going through the process, and
why are they exempt? In San Diego, we're reading articles about
L.A. as selling power out of the State and making these huge
windfall profits and celebrating all these great rates. And
down here in San Diego, we're saying, ``Wait a minute. What's
going on? Why is Los Angeles being given that special carve-
out?''
Mr. Winter. The reason is that Los Angeles is a separate
control area. Now, as the ISO, I schedule all load that goes
through the grid. And that grid is comprised of those utilities
who turn their transmission facilities over to me for the
operation.
So when I say 100 percent goes through the ISO, 100 percent
of the power scheduled goes through the ISO. Hewlett Packard
can schedule a 100-megawatt deal with Dynagy, a generator, and
I will see those schedules, but I will not see the price or
know even what the price is.
So from a control area, I schedule it and keep track of
whose power went where, but from a market standpoint, they do
not then get involved in the real time market because they've
already made their bilateral deal outside the market.
Mr. Bilbray. And so--explain this again. Where Alameda and
Los Angeles--they had a special carve-out in the original
legislation?
Mr. Winter. Yes. It wasn't in the legislation. The
legislation encouraged them to join the ISO and put their
facilities under the control, but they have not done that.
Mr. Barton. They had an opportunity to either opt in or opt
out, and the municipals chose to opt out.
Mr. Winter. Correct.
Mr. Bilbray. Okay. Now, did anybody else have that choice?
Mr. Winter. Not who were in the investor-owned utilities,
no.
Mr. Bilbray. So they were--they didn't have the choice, but
the L.A. utilities had that option.
Mr. Winter. Correct.
Mr. Barton. Isn't it true that the investor-owned utilities
were basically forced to divest because their rate of return
was below market, that they didn't--they weren't required to,
but if they didn't, they were--they got about a 5 percent rate
of return? So in point of fact, like San Diego Gas & Electric
was almost forced to divest its generation?
Mr. Winter. I think you would have to ask San Diego that
question. In the PUC decision, it required Edison and PG&E to
divest one half of their generation. I do not believe San Diego
was put under that requirement.
Now, what that means in the rate return, et cetera, I don't
know.
Mr. Bilbray. George, when Bonneville--the Federal
Government's generation comes into the State and is trying to
get to San Diego consumers through SDG&E, are they required
under the State law to come through you or could SDG&E try to
work out some separate agreement with the Federal Government
like they have with Los Angeles?
Mr. Sladoje. I just want to correct just one thing. Right
now, the Public Utility Commission, just last month, gave three
IOUs the opportunity to do bilateral forward purchases going
out in the future.
Right now--the situation has been if San Diego wanted to
purchase power from Bonneville, Bonneville would sell that
power into the California Power Exchange.
Mr. Bilbray. And so----
Mr. Sladoje. And that's the way that we'd get the power.
Mr. Bilbray. You'd end up paying the higher price anyways
because everything that goes through yours has that set number.
Mr. Sladoje. Yes. If indeed our price was higher, that's
correct.
Mr. Bilbray. Now, in Los Angeles, though, they don't have
to go through--Bonneville doesn't have to go through your
exchange to get to the consumers in Los Angeles?
Mr. Sladoje. That's correct. I believe they've got to go
through the----
Mr. Bilbray. And that is because the State law specifically
gave them that carve-out.
Mr. Sladoje. That's correct.
Mr. Bilbray. Okay.
Mr. Sladoje. I think the muni's were exempt. That's
correct.
Mr. Bilbray. Michael, are you--Michael, I wanted to just
point out something that Mr. Jones--they were talking about
this--just new projects up north, an environmentaler basically
trying to upgrade an old unit, come up with a new one, and that
the sign-off of the EPA sort of holding it up for 4 months or
whatever and causing basically a financial and time problem,
but also not necessarily addressing any new environmental
stuff. Do you agree with that statement?
Mr. Shames. I don't know enough about the facts of the
case. I'm sorry.
Mr. Bilbray. Okay. I just saw you nodding, and I was just--
--
Mr. Shames. We were talking about a response that Mr.
Sladoje had given concerning what would happen in a situation
where SDG&E wanted to buy power from Bonneville, and it would
have to be done through the PX. But if it was a bilateral
forward contract, it would not pay the higher PX price. They
would pay the terms of the bilateral contract and scheduled
through the PX, but they would so--I think Mr. Sladoje, I think
you misstated the facts. Did I----
Mr. Sladoje. Well, I tried to correct it a minute ago when
I said they did get bilateral authority just about a month ago.
That's correct. They got that authority for forward purchases
into the future.
Mr. Barton. But that's only in the last 3 months.
Mr. Sladoje. That's correct.
Mr. Barton. Prior to that time, if SDG&E decided it could
get a bilateral contract from Bonneville, they could do it, but
the price they'd pay would be based on this market-clearing
price at the time the power was delivered.
Mr. Sladoje. Well, they couldn't a few months ago actually
do a contractual arrangement.
Mr. Barton. They couldn't even go out and negotiate.
Mr. Sladoje. No. They'd have to just go through the
California Power Exchange and hope that the price was driven
down.
Mr. Bilbray. Thank you. I appreciate that.
Mr. Chairman, I just think that--and George, I didn't mean
to be hitting on you, but it just looks like, from a layman's
point of view, 100 years ago this country started outlawing
systems where industries got together and cooperated to be able
to set a price that was, you know, congenial to their provider
capabilities. We call them trust--you know, monopolies or
cartels.
And frankly, it almost looks like, from a layman's point of
view, if I can say this sincerely, that it looks like a cartel
has been developed here and that you guys are the ones that are
carrying the mantel of a--you know, basically some kind of
cartel that works it all out so no one gets burned in the long-
run except the consumer.
Now, I know that's just--that's just a layman's perception,
but I think that's what we need to address to make sure that
that isn't what the reality is.
Mr. Sladoje. I understand. And I hope you look at us as
being something comparable to the New York Stock Exchange or
the Chicago Board of Trade where we actually bring the buyers
and sellers together. I mean, that's really what our mission
is.
Mr. Bilbray. Okay. Thank you.
Mr. Barton. Gentleman's time has expired. The gentleman
from Arizona, Mr. Shadegg, is recognized for 10 minutes.
Mr. Shadegg. Thank you, Chairman.
I begin again by saying, Mr. Tyler, I deeply sympathize
with the situation you're in. It seems to me that, as I listen
to your testimony and listen to what happened to your own
utility bill and saw you put it up there, I recognize that my
wife and I, simply in the Shadegg family budget, couldn't
afford to see that kind of an increasing in our energy price,
and it seems stunning that we have created a situation where
this has been allowed to happen.
I also--I think my colleague, Mr. Hunter's testimony about
what is going to happen to the business climate in this
community backs up your assertion that we need a solution and
we need one very, very quickly. And I think Mr. Winter and Mr.
Sladoje are the ones that we're going to have to look to to try
to at least in the short-run provide that.
I have to tell you that I find this rather confusing from
an outsider's perspective because I see some things here that
violate all the principles that we've been talking about in
energy deregulation at the Federal level. And the first
principle that I see violated is the notion of a level playing
field. It looks to me like we have created an unlevel playing
field on at least several different tiers.
First of all, as near as I can tell, the new law
essentially applies to only investor-owned utilities, and as
near as I can tell, it's largely three investor-owned
utilities. Is that correct?
Mr. Winter. That's correct.
Mr. Shadegg. And as a result of the structural law, the
municipals in the State have not been required to participate
in this new process. Can somebody explain a--I understand
there's a technical reason for that. Mr. Winter, I heard from
your testimony, which had to do with them being in a different
distribution area, except it seems to me that other than
perhaps interconnection issues, that should not have been
allowed to cause them to be given a different playing field to
play on.
And I guess one of the questions I have to ask you is, is
that were they given a different playing field or not required
to be on the same playing field as the investor-owned utilities
simply as a matter of politics.
Mr. Winter. Boy, what a question. No. I think it really
related to the FERC jurisdiction. In other words, FERC has
jurisdiction over the investor-owned utilities. FERC does not
have jurisdiction over Government municipal entities.
And so the State found itself in a position where the ISO
operates under the tariffs of FERC, and therefore, that's where
we get our authority to actually schedule and demand people to
provide generation, all the things that we can force people to
do. That could not be applied to the municipality, since they
were not under the FERC rules, and therefore, they could not be
forced to join.
Mr. Barton. Would the gentleman yield?
Mr. Shadegg. Sure.
Mr. Barton. Is it not also true that the municipals in
California have power generation surpluses so they could opt
out simply because they had enough generation capacity to serve
their market? And if they did opt out, they could serve their
market, and they didn't have to let people come into their
market. Is that not correct?
Mr. Winter. Again, I'm not an expert, but that is my
understanding. Now, I want to be careful not to say that all
the municipalities had excess generation. There were many of
them which are, in fact, in the same position and are buying
out of the ISO to meet their needs.
Mr. Barton. But Los Angeles, which is the largest
municipal, does have surplus generation capacity.
Mr. Winter. That's correct.
Mr. Shadegg. Largely through WAPA and hydro-electric
generation. Okay.
The second unlevel playing field that I observed here,
which is some concern to me--and I understand a little bit less
than the first one--is that it appears that of the three major
investor-owned utilities, one of them was in a different
position, and that is San Diego Gas & Electric.
And the structure, as I can read it, is that the other two
IOUs serving other parts of the State have an incentive to
forward contract and did so to a greater degree than San Diego
Gas & Electric. Is that right?
Mr. Winter. That's correct.
Mr. Shadegg. And as a result of having done so, you have
not--they have not experienced or their customers, the Mr.
Tyler living in their district, has not suffered the same kind
of price spikes as has been experienced here in the San Diego
Gas & Electric territory; is that right?
Mr. Winter. The difference that I would say is their
customers have not suffered it, but believe me, those investor-
owned utilities have suffered it because their prices to the
retail market have been frozen at a level. And so what they
have been trying to do over the last 4 years is to recover all
of their stranded cost.
San Diego was fortunate or unfortunate in getting their
stranded cost paid off first, so they went to the free
marketplace first. But the investor-owned utilities of PG&E and
Southern California Edison clearly have been paying prices for
wholesale energy well above what their retail rates would
support. So they are losing money from the standpoint of not
having collected CTC, but also having lost money in total.
And because of that, they have opted to do more forward
contracting to try and hedge against that eventuality.
Mr. Shadegg. Mr. Sladoje, as I understand your testimony,
the restrictions on buying through a bilateral contract and
forward buying have now been--have they been lifted or have
they just been raised to some degree?
Mr. Sladoje. They've just gotten permission in the last
couple of months to do bilateral forward contracts, again, with
limits, the same limits that they had on them as far as what
they could purchase through the Power Exchange. So it's still
not unlimited, ability to do bilateral forward, but they can do
some.
Mr. Shadegg. Have you seen an improvement in rates with
them being able to take advantage of that?
Mr. Sladoje. No. I don't think they've made any long-term
bilateral deals yet. I know Edison just put out an RFI or an
RFP just this week, we haven't seen the result of any of that
yet.
Mr. Shadegg. Are you optimistic that that will have that
effect?
Mr. Sladoje. Hopefully, I am. Or I'm hopeful that they'll
put more bids into our forward markets that go out 5 years.
Because we have seen some offers to sell going out 5 years, but
we haven't seen much activity on the other side.
Mr. Shadegg. I want to follow up on some questions by the
chairman. The materials we've been given lead me to understand
that, in fact, when the bidding process is concluded, everybody
who has bid gets the highest rate bid. And that was the
question that I think Mr. Barton put to you, and it's the
information we've been given as an explanation of--by our staff
of the way the structure works here.
Instead, you and--you and Mr. Winter have indicated it's
where the aggregate supply and demand curve intersect.
Mr. Sladoje. That's correct.
Mr. Shadegg. I guess my question is, if there is a price
below that and somebody has bid below that price, why isn't
that electricity purchased at the lower price?
Mr. Sladoje. There are--I don't know--a dozen power
exchanges in the world. They all use this methodology. And the
belief is that those bidders who bid less than the market
clearing price generally bid that price just to be sure that
they end up selling, and that once we change to a traditional
bid-and-ask system, then they're going to be guessing as to
where the market clearing price should be, and the suppliers
are liable to bid higher. That's the theory behind all of this
anyway.
Mr. Barton. Would the gentleman yield?
Mr. Shadegg. Certainly.
Mr. Barton. Well, why don't we give them a chance, for
God's sake. I mean, you know, if you're ending up with a price
that poor Mr. Tyler and his people have to pay, if somebody
will bid into the market at 10 cents a kilowatt hour, we ought
to take them up on it. And then if they change their behavior,
then you can go back to the system you have today.
Mr. Sladoje. Well, as I mentioned, we do have a blue ribbon
committee going to look at that this fall, going to review the
results of the first 2\1/2\ years and going to make a
recommendation as to whether or not the theory that was
originally espoused holds true.
Certainly it would be easier from our standpoint to run a
bid-and-ask market. But there's several reasons, I think, that
this method was chosen. First of all, it is everywhere. PJM,
everywhere in Europe, everywhere in Australia and New Zealand
and so on, they utilize this method.
Second, you've got to keep in mind that two of the IOUs are
about 70 percent of the demand and still 50 to 60 percent of
the supply. Consequently, I don't need to explain to you that
that looks as though there would be an opportunity to have the
perception that they're controlling too much of the market on
both sides.
Third, this methodology does allow small generators to jump
into the game. Those who have 10 to 20 megawatts to sell, they
can sell at our market, whereas at a bid-and-ask price, when
PG&E and Edison come in and want to buy 2,000, they have no
chance.
So it's not an all black and white issue. And I hate to
quote the academics, but I will quote the academics. Severin
Borenstein from Berekely who told Senator Pease the other day
when he was criticizing this methodology saying, ``You should
go to a bid-and-ask type of system and get lower prices.''
Borenstein said, ``That would hold true if the bidders were
morons.'' And these bidders are not morons.
So as I mentioned, we'll report back to you this fall after
we have a distinguished blue ribbon committee look at it, and
if you have people that you think should participate in that,
I'd be glad to hear from you on it.
Mr. Barton. Well, it just seems to me that you can--and I'm
not an mathematician, and I'm not a power supply marketeer, but
it would seem to me you create a system that the people that
first bid in at a lower rate, the suppliers, if they're first
into the market, they get some incentive later on, some bonus
for selling at a lower price than what turns out to be the
higher price.
I mean, smarter people than me could devise a system that
at least gives the price that's passed through an opportunity
to be a lower price than apparently you're getting today. But
look, it's always easy when we don't have to do it, to question
how it is done.
Mr. Shadegg, I took some of your time, so----
Mr. Shadegg. Some.
Mr. Barton. That's the prerogative of being the chairman,
you know.
Mr. Shadegg. It is the prerogative of being the chairman.
Give me a few more years.
I'll try to conclude fairly quickly, Mr. Chairman. Mr.
Byron, I want to thank you for your testimony. I think it was
very thoughtful. I think several of the suggestions you made,
I'd like to see the Federal Government do, and I'd like to
follow your testimony and work with you in the future on that.
Clearly, your company has been very far-sighted in looking
out on how to deal with this. I found it also fascinating,
since one of the issues we face is the reliability issue, and
having had great difficulty getting through a broad spectrum
deregulation bill in the U.S. Congress, we are now looking at
what can we do in the balance of this section on the issue of
reliability.
And with one of my colleagues on the other side of the
aisle, I am sponsoring a reliability piece of legislation. And
having listened to what your testimony and read what your
testimony says can happen with regard to reliability and, quite
frankly, looking at the whole situation here, I think that's
very useful information, and I'd like to work with you on that.
Mr. Shames, I want to thank you for, I think, contributing
positively to this discussion. Lots of times people in you
position simply point fingers and talk about blame, and I think
that it's been fairly helpful that you are not doing that.
Looking at it in a productive way, I found it interesting
that--and I actually was thinking--suggesting to the chairman
that we hold a hearing in Pennsylvania and look at why it seems
to be working in Pennsylvania. Your comments on what's going on
in the northeast kind of enlighten me on that point and are
somewhat helpful.
Mr. Smutny-Jones, I want to conclude by simply asking you,
the three recommendations you made, the first one had to do
with expediting Federal rules regarding siting here in
California.
Mr. Smutny-Jones. In general, what I have in mind there is
when a request comes in, for example, to the Fish & Wildlife
Service, that that application is processed immediately, that
it doesn't go to the bottom of the stack. It's put on the top
of the stack. And they may say no. I mean, there are places
that power plants don't belong, but--Mr. Shadegg. It's worth a
shot. Have you ever dealt with the Fish & Wildlife Service?
Mr. Smutny-Jones. Yeah. That's why it's on the list.
Mr. Shadegg. One of our colleagues in Northern California
can tell you about some people killed by our inability to
repair a levy where there was an endangered species that
happened to live on the levy. I was, I think, discovered--the
levy was damaged 11 years earlier, and ultimately a flood
killed somebody because we weren't able to fix the levy. But
perhaps just moving it to the top of the pile is worthwhile.
The last one you mentioned was--had to do specifically with
the EPA, and I guess I wanted to get clarification on that.
Mr. Smutny-Jones. Right now, my understanding, it may be
part of the Clean Air Act. My understanding of the way the
appeals process works now is you could come in and build a
power plant. If the local agency says, ``Yes, you've met our
standards,'' California Air Resources Board can say, ``Yes,
you've met our standards,'' and then EPA says, ``Thank you very
much. Yes, you've met the standards as well.''
A one-page letter comes in saying, ``I protest that,'' and
it's automatically stayed, regardless of its merits or not.
Now, we're not suggesting that people should not have the
ability to participate in this process and challenge decisions
of administrative agencies, but the automatic part of that stay
basically means that no matter how silly that appeal may be,
EPA is required to automatically put a stay on that.
And the example I was talking about happened in Sutter
County. They were already moving dirt when that came in. They
basically had construction workers sitting around for 4 months.
Ultimately, EPA said, ``No, the plant is, in fact''--``meets
all the standards that we need, and the plant happily now is
under construction.''
The problem is, whether it's here in June 2001 when we need
it is now being called into question. And so, you know, that--
any other appeals process in a court of law or anywhere else,
you have to show that you're probably going to succeed on the
merits.
Mr. Shadegg. The likelihood of prevail standard.
Mr. Smutny-Jones. Right.
Mr. Shadegg. Thank you very much.
Mr. Barton. Thank you, Congressman.
Maybe we should let the people that asked for the stay pay
the deferred costs that are being delayed. That might be an
incentive to think about before they send those letters in.
We now recognize Mr. Filner for 10 minutes.
Mr. Filner. Thank you, Mr. Chairman. And I appreciate my
colleagues trying to really understand the situation.
Just first briefly, Mr. Tyler, your explanation of the
situation of an earthquake, et cetera, I thought, was very
important for our colleagues from out of San Diego to hear. Do
you have--you said all you equity was gone. Do you see any hope
of getting that back?
Mr. Tyler. Actually, the hope lies that someone at all the
committee levels will find an immediate answer to this.
Eventually, I think it'll go past the point of return.
Mr. Filner. I agree with you, and I understand your support
of Mr. Hunter's ideas, which I also support. But I will tell
you, the only way that the victim, which is you and your
colleagues and the individuals, are going to recover their
equity is if the original folks who gouged us on the prices,
that is, the energy--the energy generators, pay that price.
Right now, they are not paying any price. And I have--after
talking to FERC, I understand that they don't have the
authority to make that happen. I have a bill to make them make
that happen. So I would hope you tell Mr. Hunter and tell Mr.
Bilbray to support HR-5131 because that will give you your
money back immediately. Your equity is protected in this
legislation. They have--they are the criminals here, not you,
and yet the victim is going to pay.
So I'm trying to get the criminal to pay here with my
legislation. And that's something we can do now. And I hope
that you in El Cajon and all others will tell Mr. Hunter and
tell Bilbray and tell Cunningham to support this legislation
because that's the only thing that's going to save you equity.
I guarantee it.
Mr. Hunter. Bob, sign me up. And I need your help in
getting this plant cited at Miramar with all the bird and
turtle people.
Mr. Filner. We've got a coalition here--we've got a
coalition here that's going to take it over to Congress. Thank
you, Mr. Hunter.
Mr. Tyler. And if I may say so, I think the important
thought or perhaps answer in the whole thing lies with what you
just mentioned, that the folks that profited from this mistake
pay in business, on a business level.
Mr. Filner. Thank you. That's what my aim is. By the way--
--
Mr. Tyler. We pay. When we make a mistake, we pay.
Mr. Filner. Right.
Mr. Barton. Would the gentleman yield just for a second?
Mr. Filner. And I'm sure your frustration at hearing that a
blue ribbon committee would set up was just what you were
talking about. You want something now.
Mr. Tyler. We can investigate it, study it, question it and
report it back, but we're all dead by the time you get your
report back.
Mr. Filner. I think we could--I think we can give you that
action in the next 3 or 4 weeks if this committee acts and if
the leadership of the Congress allows that to happen.
Mr. Barton. Would the gentleman yield?
Mr. Filner. Yes, sir.
Mr. Barton. And I'll give you additional time.
The gentleman from California just used the word
``criminal.'' Is there any allegation outside of the political
arena of criminal activity in this?
Mr. Filner. There's investigation.
Mr. Shames. As I understand it, the Attorney General of the
State of California is currently looking into that. There has
been no finding thus far.
Mr. Filner. I appreciate that, Mr. Chairman. I use that
word advisably. In fact, I am thinking of going to the district
attorney, going to the State attorney general and saying that
these guys have attempted murder of small business people. They
have committed grand larceny. We're talking about--we say
they're business practices. I want to get into what the
gentleman said was gaming.
But these are criminal actions, in my view, because they
have--they're robbing you of your equity, they are threatening
you with dying, with death, and our whole economy with death.
I don't think we should be sugar-coating this and saying,
``Well, this is a business practice. This is supply and demand.
This is where those curves intersect.'' We are affecting
people's lives here, and people ought to be--talk in those
areas.
I know Mr. Smutny-Jones, it looks like you're just anxious
to have a whack at me here. Tell me----
Mr. Smutny-Jones. Actually, I'm waiting for you to whack at
me, but----
Mr. Filner. Well, with that invitation. You represent the
Independent Energy Producers Association. Like who are your--
who are the people you represent?
Mr. Smutny-Jones. I represent a large number of the
generators. Here in the San Diego area, it would be Dynagy
energy plant, Carlsbad. I represent Duke, who has a deal with
the port here. I represent PG&E Gen, who has been trying for 7
years to build a power plant at Otay Mesa.
Mr. Filner. These are people who have basically the whole
market of San Diego Gas & Electric, right?
Mr. Smutny-Jones. They have a large portion of the market
here in San Diego.
Mr. Filner. How much profits have they made in the last 3
months?
Mr. Smutny-Jones. I don't have any idea.
Mr. Filner. You don't have any--you've given us--you
spent--I have this whole thing about every little megawatt and
every little kilowatt, and you don't have any idea of the
profits? If you had to go to a shareholders meeting, you
couldn't say to the people what they were making?
Mr. Smutny-Jones. I assume that my individual members can,
in fact, make those statements, given the fact that they are--
--
Mr. Filner. You have no idea?
Mr. Smutny-Jones. I do not have any idea in terms of any
specific----
Mr. Filner. Do you know how much it costs to produce a
kilowatt hour or a megawatt?
Mr. Smutny-Jones. I know the ranges of it, yes.
Mr. Filner. What does it cost?
Mr. Smutny-Jones. Well, right now in California, with gas
prices pushing about $7. It depends on the type of generating
unit. Some of them can operate around $80. Some of them are
peakers, I'm aware of a peaker that's a municipal-owned utility
that's up over $220.
Mr. Filner. Eighty dollars is, what, 8 cents a kilowatt
hour?
Mr. Smutny-Jones. That's about right.
Mr. Filner. And what are being charged, 21 cents and up to
much higher?
Mr. Smutny-Jones. That was my understanding of someone's
testimony, yes.
Mr. Filner. Would you agree there's no relationship here
between the cost and the price?
Mr. Smutny-Jones. I would basically say people have been
bidding into the markets. And let me--Mr. Filner----
Mr. Filner. Wait. You want to talk about everything about
supply----
Mr. Smutny-Jones. Mr. Filner, let me answer.
Mr. Filner. [continuing] and demand. There is sufficient
supply here. We have heard that somebody would supply this at
this price, but they would supply more at a higher price and
more at a higher price. That means the supply is there. They
just want to do what Mr. Hunter said earlier--and I thought
that was a very important metaphor--that when you're 5 minutes
away from the operation and need the oxygen, the guy who
controls that oxygen can say anything he wants about the price.
It's not a question of supply. It's a question of gouging that
person who needs the operation.
We need electricity. It's there. There is no--I would like
to build more plants, and I would like to have alternative
energy sources, but I will tell you, the supply is there. This
is manipulation of the market.
Now, you don't tell--you won't tell me how much profits
your guys made. We're told that the costs that were charged to
San Diego consumers on the last 3-month period over the year
before was approaching $350 million. With no significant things
that I've seen, an increase in cost, that means that's all
profit that was made this year over last year. Now, is that a
wrong way of looking at it?
Mr. Smutny-Jones. Yes.
Mr. Filner. Tell me why.
Mr. Smutny-Jones. Three reasons. Reason No. 1, a
significant amount of the generation that's produced in San
Diego and elsewhere was sold in the forward markets. Okay? As
Mr. Sladoje indicated, those forward markets back in May and
June were selling somewhere between $40 and $50. That power was
available. It came out of these plants. It's in the market. I
don't know who bought it, okay, but it was out there. That's
option----
Mr. Filner. What does that mean?
Mr. Smutny-Jones. That's option one.
What I'm basically saying is is that if San Diego Gas &
Electric, which did not buy any hedging product, had purchased
power in the May/June timeframe--they were allowed to buy up to
400 megawatts--they could have been buying it at between 4 and
5 cents. Okay? That's issue one.
Issue two, since then----
Mr. Filner. Those aren't their plants. They had to divest
their own by somebody else, their own by somebody----
Mr. Smutny-Jones. They're currently owned by someone else.
I am not certain if they were required to divest those plants.
They may have because they went through a merger with Southern
California Gas, which resulted in a company called Sempra being
formed.
So they may have been required to sell that generation
because of that. Prior to that, however, they were not required
to sell their plant. That's issue A.
Issue B, Mr. Filner, is that since then, people have come
forward with a variety of deals. For example, one that was
published here in the newspapers--I believe it was Duke--
offered to sell power at 5 cents for 5 years. Now, there's a
lot of people saying, ``Well, that's too expensive because
we're worried about maybe in year 4 it's going to be 3.5
cents.'' But the point is is that people have stepped forward
offering those products out there.
The third point--because I think it's very important.
You're presuming that where the money going is necessarily to
California generators. This is a western regional market that
includes a large number of public entities, not only municipal
utilities here, but BPA, WAPA, Salt River project and Canada,
okay, all of whom----
Mr. Filner. Whatever it is, they're putting Mr. Tyler out
of business. And the supply is there. There is no reason for
them to be killing him off. Do you know that one of your
clients, Dynagy, bought this plant in Carlsbad, paid off the
cost in 1 year instead of the 20 that they had anticipated?
That, to me, says that they're making 20 times the profit that
they had anticipated.
And he is threatened to be going out of business. I have
seniors making choices between food and air conditioning. I
have small businesses in my district who have--are out of
business. And I will tell you, when they look at this balancing
account that the State legislature has set up, they're going to
look at it--Mr. Tyler is going to look at it. He's going to get
his bill from SDG&E, and I suspect--although I'll ask SDG&E
when they come--it's going to say, ``What you paid this year
under the cap, this month, and what you owe.''
And he's going to look at that, and that's going to grow
with interest, and that's going to be the cost that he's
worried about, not what he's paying now. And I will tell you,
if we don't solve that, we are killing off our economy. He said
it much more eloquently than I. Mr. Hunter said it very
eloquently about the death of our economy. And this is all
going into excess profits. And I have an excess profits bill
I'm going to put in the day I get back.
One last--if I can--1 more minute, Mr. Chairman.
Mr. Barton. I took some of your time.
Mr. Filner. Mr. Sladoje, you used words like ``gaming,''
they played games. You know, this is basically what's going on
here. Whether it's illegal in the criminal sense, in the
official criminal sense or not, what you call gaming, I call
criminal action.
When you say that the pricing pairs are there, that means
the supply is available. When you say they're holding back from
the forward market into the real time market, that's not a
question of supply and demand. That's pure manipulation. If you
say 20 or 30 percent of what we need is not in the--not in the
exchange, but in the real time--or the forward--I'm sorry. I'm
not an expert here. That's games being played with this guy's
life.
That's why I call it criminal. They are playing games. They
are--they are doing what is called congestion gaming. They are
doing what's called market gaming. They are doing what's called
day-ahead energy market gaming.
Do any of your folks--do you think any of your folks, Mr.
Smutny-Jones, have engaged in that?
Mr. Smutny-Jones. Well, I did ask for a study--a report to
be done by the market surveillance committee of the ISO. That
report is available. And I think----
Mr. Filner. And that's exactly what they said has happened
by some of your clients, that they have played the games, they
have held back supply to increase their price, they have used--
they have used congestion gaming to make it appears that the
supply is available. They can't use it, so they increase the
price. On and on and on.
And my seniors and my small business people are being
killed off by your gaming. And I resent it, and I'm going to
have legislation that I hope this Congress will pass and
improve that situation. Thank you.
Mr. Barton. Thank you, Mr.----
Mr. Smutny-Jones. Mr. Barton, if I might.
Mr. Barton. Briefly.
Mr. Smutny-Jones. Very briefly. Actually, what the report
did, in fact, conclude is that there are indeed fundamental
structural changes that need to be made on a retail level in
California, Mr. Filner. So your seniors and the businessmen
here actually have an opportunity to buy competitive products.
Mr. Filner. But they need structural changes because you
guys are playing games with it. That market could work if you
didn't hold back 30 percent of it to get the extra price. That
market would--it's not a question of supply and demand here
that you guys keep talking about. It's a question of, ``What
price can I get at this moment because everybody is going to
get it?''
And the way--so the rules were set up to allow, quote,
gaming. It's--you didn't have to play this game. Your guys did
not have to play this game. And it's a question of holding back
the oxygen from the patient who needs it to get a price. And it
sucked our economy out for 3 months at $350 million, and the
consumers ought to be rising up in rebellion as a result of
that.
Mr. Barton. Well, before I recognize Congressman Hunter, as
the chairman of the subcommittee, I want to make just a couple
of points.
We think it's important in Washington to let States have as
much flexibility as possible. The great State of California did
decide to initiate this voyage on restructuring, and they did
it in a little bit different way.
I don't think any of the State legislatures that passed the
law back in 1996 expected the kind of result that's happened
this summer. I would point out for the first 2 years,
Californians have had what I would say below market prices
compared to the national average.
This summer, because of a series of situations, they're in
San Diego experiencing higher than market prices. But I cannot
let things said in this hearing indicate that unless we have
factual information, that there's a criminal activity underway.
Now, if the Attorney General of California has a criminal
investigation, we ought to see what that says. But in the
meantime, these are arbitrary rules that the California
legislature put in place, and they gave authority to various
State regulatory authorities to set additional regulations.
Obviously, in hindsight, we can second-guess some of those
mechanisms. That doesn't mean there's criminal activity going
on. It is human nature if you have the ability to maximize
whatever it is, whether it's us maximizing votes or private
sector maximizing profits, you're going to tend toward that
maximization unless you change the rules.
And that's what we're here to do today, find out what the
rules are and how either Washington can help change the rules
or we can encourage the State of California to change the
rules. But I can't let people throw around charges of
criminality unless there are facts to back those up.
Mr. Filner. But don't you think those who played by those
rules and made unconscionable profits by it should pay the
price, and not Mr. Tyler and our small business people here in
San Diego?
Mr. Barton. Well, it is not unconstitutional to make a
profit.
Mr. Filner. It's unconscionable and unethical the way the
profits were made for a basic commodity, the way they--again,
Mr. Hunter said it best. The patient needed oxygen, and they
charged a fortune to get it.
Mr. Barton. The State of California can change the oxygen
distribution system if they choose to do so.
Mr. Hunter.
Mr. Hunter. Thank you, Mr. Chairman. And thank you for the
hearing. I want to thank Brian for his work in putting this
thing together. I think this has been a good hearing.
I want to thank Terry Saverson, the CEO of the East County
Chamber of Commerce, for all the work in bringing these bills
forward, along with Roy's literally hundreds of bills that
we've analyzed and tried to--tried to figure out about how long
these folks can last until businesses are extinguished, which
has already happened in some cases over--and the other aspect
is, until the business climate is judged to be so adverse in
San Diego County that good, high-paying businesses which
provide good jobs will not come to the county.
Mr. Sladoje--is it Sladoje?
Mr. Sladoje. Sladoje.
Mr. Hunter. Sladoje. Okay. Let me ask you, because this has
been--this has been--the speaker has been used. At some time
during this--on this real time market where you have, it's been
fairly well established, a captive consumer in people like Mr.
Tyler, the other thousands of small businesses who are totally
passed--who have the total cost passed through to them by their
utility company.
In that real time market, that market has gone up--if you
took 10 cents a kilowatt hour--but the market has gone up to as
much as $9 a kilowatt hour; is that right? It's been sold off
at that cost.
Mr. Sladoje. Oh, I think it's been higher than that.
Mr. Hunter. Been higher than that?
Mr. Sladoje. Yes.
Mr. Hunter. That's a nine--if you took 10 cents a kilowatt
hour as a base, that's a 9,000 percent increase. How high has
it gone?
Mr. Sladoje. At one time when there was a price cap of $750
a megawatt hour or 75 cents a kilowatt hour back in, I guess,
May and June, it hit that level a couple of times. And then the
price caps were then established at $500 and----
Mr. Hunter. Well, now, this--I said $9 a kilowatt hour.
That's 90 times--if you used 10 cents a kilowatt hour as a
base, that's 90 times the base. Is that accurate, that it's
gone that high?
Mr. Sladoje. It's gone--it's gone to--well, not quite nine
times, but almost.
Mr. Hunter. Almost nine times?
Mr. Sladoje. Yeah. Yeah.
Mr. Hunter. That's a 9,000 percent increase.
Mr. Sladoje. That's correct.
Mr. Hunter. Now, is it true, then, that a customer like Mr.
Tyler, who is using electricity--he's got a 24-hour
restaurant--at that peak time is having--whether he's a
volunteer or not, he's having that 9,000 percent increase
passed through to him at that period of time of the day; is
that right?
Mr. Sladoje. That's correct. Unless he's on some kind of a
bill evening program with his utility, that's correct.
Mr. Hunter. Okay. Mr. Sladoje, you said you wanted--that
what we brought to the California power distribution system is
a stock exchange type of a system. I think that's our problem.
I mean, do you agree that it's appropriate to have a commodity
like electricity subject to the volatility of a market that is
like a pork belly futures market where individual consumers can
have passed through to them increases that are 9,000 percent
increases in the cost of something which they have--they have
no ability to resist. They're captive customers. Do you think
that's a working system that you've just described?
Mr. Sladoje. Mr. Hunter, I spent 15 years at the Chicago
Board of Trade, and there was a time when the farmers circled
the Chicago Board of Trade with their tractors because they
thought the prices were too low.
I think that this type of market can and should work in
electricity. I think we've got to remember we're in a
transition period here, and we have to smooth these things out.
I do believe that this type of market can and will work here
ultimately.
Mr. Hunter. What--I'm trying to establish what you think is
fair and reasonable. What do you think is--do you think a 9,000
percent increase in a matter of hours is fair and reasonable?
Mr. Sladoje. No. I'm a consumer also, Mr. Hunter.
Mr. Hunter. What do you think is a reasonable range?
Mr. Sladoje. I don't know what a reasonable range is
because, you know, we're talking to Jan Smutny-Jones here a few
minutes ago about what is the cost of each generator, what is
their cost of production.
Mr. Hunter. Yeah, but wait a second.
Mr. Sladoje. I have heard----
Mr. Hunter. Obviously, if the generators can work, if you
take 10 cents a kilowatt hour as a base price, it may yield a
small yield to a generator or may be right on the margin, and
you'd multiply that by 90, by a 9,000 percent increase. I think
you've covered his costs. Wouldn't you agree with that? If he
can live at--if he can live at 10 cents a kilowatt hour, he's
making some big profit at $9 a kilowatt hour, 9,000 percent
increase.
Mr. Sladoje. Yes, but----
Mr. Hunter. Now, let me just analogize that to a situation
you might--if your mother-in-law needed heart medicine and sent
you down to get a $10 bottle of heart medicine, and you got
there at 2 o'clock in the morning at the all-night pharmacy,
which is when these prices might spike.
The equivalent of what Mr. Tyler and our consumers in San
Diego County and the other businesses are going through is
having you come back to your mother-in-law and say, you know,
``I'm sorry. I know you have to have this medicine. It's a
nonnegotiable. You've got to have it now. Between the hours of
1 in the morning and 2 in the morning, your $10 vial of heart
medicine went to $1,000. Now, I had one of your checks. I'm
just the pass-through. I had to buy it for you. I bought it for
you.''
That's precisely what this system is delivering to our
consumers. So I would offer to you that the system is
absolutely broken, absolutely unworkable.
Our people in San Diego County don't have the financial
legs--some of them have already lost their business. They don't
have the legs for a system to work out in which you think the
volatility is going to disappear.
The volatility has never disappeared from the futures
market or from the stock exchange when you're talking about
real time spot purchases. It's always been highly volatile.
That's why there's always been the possibility of major profits
and major losses.
To give that volatility to a customer who may end up paying
10 times as much 2 hours later that they were paying at 10
o'clock at night is incredible. It's totally nonworkable.
Let me ask the rest of you. Go back to a central program
that we've put together. And that is the only way I think we
can survive this in San Diego County is to have a steady,
predictable supply of electricity that we can offer to our job
suppliers and our consumers.
If we put a site in San Diego County, maybe at Miramar
where--the head of Miramar Air Base, General Bowden, is
interested in siting a plant, a generating plant. If we put
some of the new high-tech generators that you folks have, Mr.
Barr, we put it next to a 36-inch natural gas line that we've
got here, and next to a part of the grid that we can plug into,
do you see any impediment to San Diego County producing
effective, efficient electricity prices in the range of the 2
to 3.5 cents per kilowatt hour that the generators that
Sacramento is now using in their municipal district? Do you see
any impediment to that? Do you think that's doable, and could
you expand on that?
Mr. Barr. Certainly if the political initiative is there,
the political will, that can be done. The engineering part of
generating electricity at those levels of costs is certainly
achievable, with equipment today is that efficient and
environmentally friendly.
Mr. Hunter. So you--and let me ask you this. We've looked
at the prices of the LM-6000. That's the G.E. generator belt
around their aircraft engine, 2 to 3.5 cents per kilowatt hour
based even on today's high prices of natural gas, relatively
high prices. Are you folks that efficient or are you close to
that with your solar system?
Mr. Barr. We're just as efficient.
Mr. Hunter. Have you got--what's your production market
like? Do you have the capability of supplying--if San Diego
should put together a district and site a plant, could you
folks meet a fairly ambitious schedule?
Mr. Barr. The question is always timing. We annually
produce about 400 megawatts of power. That production can be
ramped up. It's a question of when we can begin. Because lead
time equipment will tend to be 4 to 6 months. And it really
depends on having it in place and sold and operating by next
summer.
Typically, it's timed by the permit acquisition part before
you can begin construction. But having a power station running
at Miramar within a year will not be limited by the
availability of equipment.
Mr. Hunter. It wouldn't be limited by availability of
equipment.
Mr. Barr. It wouldn't.
Mr. Hunter. Okay. Mr. Jones, do you have any comment on
that in terms of siting, the time it would take to site a
plant?
Mr. Smutny-Jones. Well, you could probably get peak--or
hopefully, if you knew you were going to install it by next
summer and you were working on that right now, you might be
able to get in by that period of time. You're going to have
significant longer term air quality problems, because San
Diego--I mean, the reason it's taken so long to build Otay Mesa
is there is nothing to offset in San Diego. There's not a lot
of heavy kind of industry that throws a lot of NOX
out there.
Mr. Bilbray. Mobile sources are the only thing.
Mr. Smutny-Jones. Yeah. You have a very big challenge on
the air quality piece of it. I would caution the 2 to 3 cent
range, simply given the fact that where natural gas prices are
right now. That may be the fixed cost recovery, the capital
cost. But I'd be cautious about that number because----
Mr. Hunter. Well, that's a number that--that's a number
that Sacramento is generating at right now with their new
generators. They said 3.5 cents a kilowatt hour. They said it
goes between 2 and 4.
Mr. Smutny-Jones. They may have longer term gas deals that
they can actually operate at that level. What I'm saying is is
that those plants have been there for a while.
Mr. Hunter. They've got four.
Mr. Smutny-Jones. The last thing is is that there are--
there continue to be offers being put out in the market in
terms of longer term contracts at lower prices. So if San Diego
wanted to lock some of that in, you could, in fact, do that in
the current marketplace and continue to go forward and build
power plants if you like.
I mean, I'm in the business of encouraging people to build
power plants, so anything we can do to help you build at
Miramar, happy to help you. But there are other alternatives
out there now. And the question actually is, you know, what is
the price of electricity, you know, 2 or 3 years out.
What we've seen happen--and Mr. Shames has referred
earlier, what happened in PJM, prices are down 70 percent over
last year, largely because of weather and also because 20,000
megawatts of generation showed up.
Mr. Hunter. Well, I think we've established--and Mr.
Chairman, thank you for the time. I think we've established
that this futures market real time spot market or spot prices
that can go up to 9,000 percent increase in a matter of hours
is not a function of supply and demand. It's a function of
opportunity to exploit a market that we put in place with this
deregulation bill.
And Mr. Chairman, I think one thing that I think should
come to the committee very strongly is that the folks that are
affected by this have very limited endurance. Some of them have
already gone broke, and a number of consumers have lost
literally the money they were going to send their kids to
school with, pay their mortgages with. I know a lot of folks--
--
Mr. Bilbray. Pay their Federal taxes.
Mr. Hunter. [continuing] are just not paying their bills.
So I think a roll-back is in order. I think also expediting
these distributive systems or sited systems with a
municipality. And I think that's the only way you can avoid
having to sell back into the energy exchange, which then can be
sold back to you with enormous increase, is the only--the only
game in town at this point. I think a roll-back to save our
consumers and businesses has to occur. These guys need the
oxygen.
Mr. Barton. We thank the gentleman from San Diego.
We're going to excuse this first panel. Unless--Mr. Winter,
we'll give you the last word here before we excuse you.
Mr. Winter. Just one thing. I'm getting into an area I
don't know a lot about, but I know a little bit, and that's
always dangerous. But clearly, the ISO next year--we've already
submitted an RFP for what we call peaking units, which is 3,000
megawatts we're trying to go out and find. That is exactly what
Congressman Hunter is talking about in putting these units in
place.
I have to tell you that I will be very surprised if the
price comes in at 2.5 to 3.2 cents because if you look at an
LM-6000, that's a single pass unit, and I don't remember their
efficiencies, but it's not all that great. And I think if you
were to put those in place and then----
Mr. Hunter. That's Sacramento's record right now. They're
doing 3.5 cents, according to their director.
Mr. Barton. Well, it depends----
Mr. Winter. Well, then we've got to talk about what's all
in that 3.5 cents. Because if you look at paying for the fixed
cost, clearly a combined cycle with efficiencies in 55 to 60
percent, which are the larger power plants, they, if you spread
their costs over time, are going to give you a much more
efficient price.
And the other thing that we haven't talked about is we've
really centered on the hours when it's very expensive, and
rightfully so. But I have to tell you, there are also times in
the real price market when generators are paying me to supply
power.
And so that gets averaged over the total day. So there are
times when you need to look at averages, and there's times when
you need to look at spiked prices and how they're affecting the
total cost of energy. So I would just caution you to keep that
in mind.
Mr. Barton. For the absolute last word before we let this
panel go, Congressman Bilbray.
Mr. Bilbray. Mr. Winters, I'd like--my concern was I've
been working with Solar Turbines for the last 4 years over the
fact that there is institutional barriers to allow people to
get on grid, be able to provide clean, cost-effective power on-
line now.
There is institutional barriers that have existed
historically in this country that still haven't been torn down.
And until we do that homework and build that foundation of
allowing true competition, much like we did with
telecommunication, we're always going to have the problem with
the fact that there's not enough sources out there for the
consumer to be protected in the long term.
So those barriers really--and remember, this is not pork
bellies we're talking about. We're talking about a utility that
is mandated by the government. Local Government will condemn
your home if you don't have it hooked up to some power source.
This is something that Government mandates.
So it does catch the consumer in the Catch-22 when you have
Government mandating you have it and Government actually
creating barriers and stopping people from providing you cost-
effective services. So I think the real challenge is to tear
down a lot of those barriers and not just create a whole new
monopoly.
Mr. Winter. I agree. And one of the other things that we
continue to work on is what we call the gird interconnection
agreement, which goes right to the heart of the subject you're
speaking of.
Mr. Bilbray. That was my responsibility under the Federal--
--
Mr. Barton. You and Congressman Bilbray can agree out in
the hall. We are going to have to suspend this panel so we can
get our second panel.
We appreciate your attendance, and there will be follow-up
written questions for the record. Our first panel is excused,
and we'll ask our second panel to come forward.
While the second panel is coming forward, a few
housekeeping announcements. I have an airplane to catch, so we
won't take any breaks. Let's expedite the exchange of panels.
I believe we have our second panel at least at the witness
desk, so if you all could be seated. If everybody in the
audience could reclaim your seat or step outside.
We want to welcome the second panel. I think we have the
entire Federal Energy Regulatory Commission here in terms of
commissioners that are actually approved by the President and
on duty. We understand you're going to have a similar hearing
tomorrow, and so this is kind of a dry run for you. We
appreciate your testimony.
We're going to start with the Chairman, the distinguished
Chairman of the Federal Energy Regulatory Commission, Mr.
Hoecker, and then we'll go right down the line.
I have a plane that leaves at 1:40, so I'm going to have to
excuse myself around 1 p.m. I hope we can get all the testimony
on the record, and then maybe I can ask some questions and turn
it over to Congressman Bilbray to continue the hearing.
So Chairman Hoecker, welcome, again, before the
subcommittee, normally in Washington and here in the great city
of San Diego. We recognize you for 5 minutes.
STATEMENTS OF HON. JAMES J. HOECKER, CHAIRMAN; HON. LINDA KEY
BREATHITT, COMMISSIONER; HON. CURT L. HEBERT, JR.,
COMMISSIONER; HON. WILLIAM L. MASSEY, COMMISSIONER, FEDERAL
ENERGY REGULATORY COMMISSION; LORETTA M. LYNCH, PRESIDENT,
CALIFORNIA PUBLIC UTILITIES COMMISSION; EDWIN A. GUILES,
CHAIRMAN, SAN DIEGO GAS AND ELECTRIC; JOHN STOUT, VICE
PRESIDENT, SOUTHWEST REGION COMMERCIALIZATION, RELIANT ENERGY;
AND STEVEN J. KEAN, CHIEF OF STAFF, ENRON CORPORATION
Mr. Hoecker. Thank you, Mr. Chairman. It's nice to see you.
I want to commend you personally and members of your
subcommittee for having this hearing in San Diego. It's very
timely, and there is a need for public examination of this
energy crisis.
The Commission, as you mentioned, is having its hearing in
town tomorrow, and we plan on probing deeply into the causes of
San Diego's plight as far as electric prices are concerned.
Your witnesses today have already painted a clear but
pretty disturbing picture. It is a picture of electricity
markets dramatically out of sync with the needs of the digital
economy. It's a picture of an electricity market out of sync
with the expectations of public policymakers, and most
importantly out of sync with the economic well-being of the
average electric consumer in Southern California.
Granted, the causes and proposed solutions to all this are
very complex, but that must not be allowed to obscure what I
think are two basic facts. First, the California electricity
markets were not competitive during periods of peak demand in
the summer. There should be a risk to wholesale generators that
they will lose money if they insist on selling at an
extraordinarily high price. We are finding that during current
supply shortages, sellers can often name their price.
Likewise, at the retail level, if retail competition is
about choice, where were the options for San Diegans in buying
electricity? It appears to me there were none. There were few,
if any, suppliers competing with San Diego Gas & Electric for
the business of energy consumers here. Citizens of this
community had no information, they had no warning, and most of
all, they had no options.
I agree with Supervisor Jacob that San Diegans were
blameless in what is an awful situation. At some point, it's my
belief that when markets don't work, rationing an essential
commodity like electricity by price alone is unacceptable.
The second fact I'd mention is that it ought to be clear
that the efforts of State and Federal Governments, and the
private power companies to anticipate and avoid this crisis
simply proved inadequate. There is plenty of responsibility for
this market's performance and its prices to go around. That's
to be sure. But this ought to be about accountability and not
about blame. And I appreciate you setting that tone.
In that connection, I therefore commit the Commission to
work with you and the policymakers in this State to identify
and address the real problems to the fullest extent of the
Commission's authority.
Now, if that means devising new ways to thwart market
power, we will try to do that. If that means changing market
rules and wholesale market structures, then we will do that. If
it means imposing stricter controls on the ability to collect
market rates at certain times, then we will do that. And if it
means making rates subject to refund during high-risk periods,
at least until we can reasonably be confident that Californians
will be receiving price signals instead of price shocks, then
the Commission will undertake that as well.
We will be assessing the need for these actions tomorrow
and in the future, as we go through our investigation and
hearings on these issues.
Now, I am enormously gratified by the CPUC's actions to
lift restrictions on the ability of wholesale purchasers like
SDG&E to hedge in forward markets and to buy outside the ISO
and PX markets, and the CPUC's order to refund stranded cost
overcollections. And I would also congratulate Governor Davis
and the legislature for their leadership in getting rates back
to normal levels in San Diego and working to expedite the
siting of new generation facilities.
Meanwhile, the FERC has allowed the ISO to reimpose
purchase price caps in the wholesale market. The Commission is
vigorously pursuing its investigation of this summer's price
spikes and reliability problems in California. The report of
the Cal ISO's market surveillance committee, which I just
received, promises to be a great help.
And while Federal law does not allow the Commission to
impose rate remedies retroactively, we are prepared to do all
in our power to get the facts and then fix the problems.
Thank you, Mr. Chairman. Thank you for inviting the
Commission, and we'll be pleased to respond to your questions.
[The prepared statement of Hon. James J. Hoecker follows:]
Prepared Statement of Hon. James J. Hoecker, Chairman, Federal Energy
Regulatory Commission
Mr. Chairman and Members of the Subcommittee: Good morning. I am
James Hoecker, Chairman of the Federal Energy Regulatory Commission
(Commission). Thank you for inviting me and the other members of the
Commission to participate in today's hearing on recent developments in
California's electricity markets. I commend Chairman Barton and the
members of this Subcommittee for responding quickly and constructively
to the plight of southern California ratepayers and I want to assure
the Subcommittee that the Commission is prepared to take appropriate
action based on a factual understanding of what went wrong and to work
hard to ensure that competition brings benefits, not risks, to
consumers in the future.
I want to stress four key points:
1. The Commission is very concerned about high electricity prices in
California and their effect on consumers. The Commission is
actively investigating the causes of high wholesale market
prices, and is committed to taking prompt action to correct
identified problems.
2. Since California's 1996 enactment of landmark legislation
establishing electric retail competition (AB 1890), the
Commission and the State have cooperated in restructuring power
markets in California. California's restructuring legislation
affected matters within the Commission's jurisdiction. However,
the Commission chose at the time to work hard to give deference
to the State's approach to restructuring and to implement the
State's approach to restructuring on an aggressive schedule. It
is still unclear whether this summer's events require
fundamental changes in that approach, but we should be willing
to make them if necessary.
3. Possible causes for the sharp price increases include insufficient
additions of new generating facilities, rising demand for
electricity, lack of hedging by buyers, unusually hot weather
over a large region, inefficient market rules, and, according
to some observers, collusion or other anticompetitive behavior
by generators. While our investigation is not complete, my
preliminary view is that California's markets are being
affected primarily by an imbalance of supply and demand, and
that wholesale market rules and structure may have exacerbated
the resulting price increases.
4. The Commission has responded to these events by approving programs
for eliciting voluntary load reductions from customers on peak
days, rejecting a challenge to the decision of the California
Independent System Operator Corporation (ISO) to lower its
payments to power sellers, and initiating a fact-finding
investigation as well as a formal proceeding with refund
protection. However, the Commission has limited ability to
relieve the immediate customer crisis. Important aspects of
this problem are a State responsibility, such as authorizing
construction of new generation and transmission facilities.
Moreover, plans for competitive bulk power markets in the long-
run would be aided immeasurably by Federal legislation.
i. restructuring in california and the commission's role
AB 1890 radically restructured the electric industry in California.
Prior to enactment of AB 1890, most electricity consumed in California
was supplied by vertically-integrated utilities with franchise service
territories. These utilities owned power plants to generate the
electricity, as well as transmission and distribution facilities to
deliver the power to customers. The utilities were required to serve
the retail customers within their territories, and retail customers
within those territories were required to buy from those utilities.
AB 1890 ``unbundled'' the traditional service of California's three
major investor-owned utilities, creating a new structure and new
institutions to allow competition for retail power sales. Under AB
1890, generators may sell power directly to customers or into the
markets operated by a new entity created under AB 1890, the California
Power Exchange Corporation (PX), except that the three major utilities
were required to buy and sell exclusively through the PX for a period
of time. Operational control of the high-voltage transmission
facilities of the three major utilities was transferred to the
California ISO, another new entity created under AB 1890. The three
utilities divested most of their generation assets in response to State
stranded cost incentives, but they continue to provide distribution
services within their franchise territories.
Under AB 1890, the retail rates of California's three major
utilities were frozen until they finished recovering their stranded
costs, through a Competitive Transition Charge. Last year, San Diego
Gas & Electric finished recovering its stranded costs and its rates
were no longer frozen. The rate shocks occurred when this utility,
after fully recovering its stranded costs, continued to buy all of its
power through the California PX at spot (short-term) prices and
immediately flowed through these high short-term prices to retail
customers.
The Commission's primary role in electricity markets under the
Federal Power Act (FPA) has remained unchanged since the 1930s. FPA
Sections 205 and 206 give the Commission jurisdiction over the rates,
terms and conditions of sales for resale of electric energy and
transmission service in interstate commerce by public utilities. FPA
Section 203 gives the Commission jurisdiction over public utility
transfers of ownership or control of facilities used for these
services. Public utilities regulated under FPA sections 203, 205 and
206 include investor-owned utilities but exclude government-owned
utilities (such as the federal power marketing agencies and municipal
utilities) and most cooperatively-owned utilities.
Developments in the market itself, such as competitive generation
by non-traditional utilities, have made the wholesale market more
competitive, dynamic and commercially important. The unbundling of
services in California expanded the Commission's role in California's
electricity markets. Both the California ISO and the California PX are
public utilities, and their sales for resale and transmission services
are within the Commission's jurisdiction. Additionally, the three major
utilities in California are public utilities, and their sales for
resale and transmission services also are within the Commission's
jurisdiction.
For over four years, the Commission has made a significant
investment of resources in carrying out the fundamental mechanisms of
AB 1890. We issued extensive orders authorizing the initial creation of
the ISO and PX and, since then, have acted on almost 30 filings by the
ISO alone to amend various rules and procedures. Often, the Commission
has been asked to expedite action on these matters in order to address
problems needing quick attention, and we have done so consistently. In
addition, the Commission has deferred to the policy choices made by
state legislators, regulators and stakeholders in the California
restructuring, such as the total separation of the ISO and PX, a
requirement that the three major IOUs buy and sell electricity
exclusively through the PX's short-term markets, a requirement that the
ISO rely exclusively on short-term markets to obtain reliability
services, a governance board for the ISO and PX consisting of
representatives from defined stakeholder groups and a state-appointed
oversight board for these two entities.
We deferred to these choices in part because our own experience
with bulk power competition and institutions like independent system
operators had not advanced to the point where the Commission felt
comfortable being prescriptive. Today, with Order No. 2000 on the books
encouraging the formation of regional transmission organizations
(RTOs), the Commission is in a very different posture with respect to
the structure of wholesale markets under RTOs.
Today, the Commission continues to regulate transmission and sale
for resale activities in California's electricity markets, and the
State continues to regulate retail activities. For example, sales of
electricity to end users are retail sales, a matter left to the States
under the FPA. States likewise have jurisdiction over local
distribution facilities and the siting of generation and transmission
facilities.
Let me emphasize two points. The Commission does not prescribe how
states should open their retail markets. In addition, most states have
been less prescriptive than California in telling the Commission how
their wholesale markets should operate. Despite this, I think it is
still fair to say that California and the Commission share the same
goal--an electric industry that provides reliable and efficient service
to consumers at reasonable prices. The constructive working
relationship developed between California and the Commission in recent
years is particularly important as we seek to serve the public interest
under conditions that stress the power system. The State and the
Commission must continue to work together to ensure that any regulatory
response to current events does not undermine reliability of the
electric system or unduly delay the maturation of competitive wholesale
electricity markets to the detriment of consumers.
It is my belief, and the position of the Commission, that consumers
will benefit from competition in wholesale markets. Competition
requires a sufficient number of competitors and a market structure and
market ``rules'' that do not interfere with efficient market operation.
In properly structured markets, wholesale buyers can choose from a wide
range of sellers, and sellers can reach many more buyers. Effective
competition can allow investment decisions to be driven by the market
forces of supply and demand, not by regulatory decisions. The result is
lower prices for wholesale buyers (and, ultimately, their end-use
customers) than if we continued to rely on cost-based regulation of
these markets.
However, the Commission's encouragement of competition in wholesale
markets is not driven by a blind ideological devotion to deregulation.
Instead, our policies are based on the practical belief that, in
today's wholesale power markets, competition will produce the most
benefits for consumers. Our goal, consistent with the FPA, is to use
our regulatory authority to serve the public interest and ensure
benefits for consumers, whatever approach that may require. In general,
the Commission has adopted policies that involve thorough regulation of
access to, and prices for, essential transmission services; careful
attention to mergers and other corporate consolidations that may
concentrate generation markets; and relatively light-handed regulation
of wholesale rates for sellers that lack market power.
Various parts of the country have different utility operations and
business cultures, different market structures, and different retail
competition policies. But, utilities are tied together commercially and
operationally by a network of transmission that will support an ever-
widening traffic in electrons in the years to come. Large regional
markets can be made to work effectively. For example, in the case of
Pennsylvania, whose utilities operate within the PJM Independent System
Operator and whose retail customers were allowed to choose their power
suppliers several years ago, the results contrast with what has
happened in California. Pennsylvania's Department of Revenue estimates
that, to date, the total benefit of competition over regulation to the
state's gross state product is $770 million. Individuals have saved
$562 million in inflation-adjusted dollars.
ii. rate shocks this summer in california
Wholesale prices in California appear to have increased
significantly this year, at least for the summer peak months. According
to San Diego Gas & Electric Company, for example, prices in June and
July of 1999 rarely exceeded $150/MWh, while prices for the same period
this year exceeded $250/MWh in 167 hours and $500/MWh in 59 hours.
According to Southern California Edison Company, the total cost of
electricity charged to the California market for June 2000 was nearly
half of California's total electricity cost for all of 1999.
In addition to price increases, California's retail consumers have
increasingly been alerted of the risk of brownouts or blackouts. In
mid-June, this risk was realized for thousands of consumers in the San
Francisco area, during a virtually unprecedented heat wave.
These events have prompted a number of actions in recent weeks.
Earlier this summer, for example, the ISO lowered the price at which it
would buy certain types of energy from $750/MWh to $500/MWh, and later
to $250/MWh. In response, a market participant filed a complaint with
the Commission, arguing that the ISO improperly exercised its authority
to reduce the purchase price caps in its markets. The Commission
resolved this case quickly, concluding that it need not evaluate the
ISO's decision to lower the maximum price at which it will buy
imbalance energy and ancillary services.
Recognizing the need for pro-active steps in California as well as
other parts of the country, the Commission in late July directed its
staff to investigate the conditions in bulk power markets in various
parts of the country. Staff was told to determine any technical or
operational factors, regulatory prohibitions or rules (Federal or
State), market or behavioral rules, or other factors affecting the
competitive pricing of electric energy or the reliability of service,
and to report its findings to the Commission by November 1, 2000. In
addition, I have asked staff to accelerate its investigation as it
relates to California and Western markets because the serious events
here warrant special attention to California.
In July of this year, San Diego Gas & Electric Company filed a
complaint with the Commission, seeking immediate imposition of a
seller's price cap of $250/MWh for all public utility sellers in the
California ISO and PX markets. On August 23, the Commission ruled on
this complaint. The Commission instituted formal hearing proceedings
under FPA section 206 to investigate the justness and reasonableness of
the rates of public utility sellers in the California ISO and PX
markets, and also to investigate whether the tariffs, contracts,
institutional structures and bylaws of the ISO and PX are adversely
affecting the efficient operation of competitive wholesale power
markets in California and need to be modified. The Commission was
unable to grant SDG&E's request for a seller's price cap because it had
not provided sufficient evidence to support immediate imposition of
such a cap. However, the Commission left undisturbed the ISO's $250 per
MWh purchase price cap, and explained that this will serve to mitigate
price volatility in both the ISO and PX markets. By establishing the
hearing proceeding in the August 23 order, the Commission will have the
ability under the FPA to order refunds, if appropriate, if it finds
that rates for sales by public utilities to the ISO or the PX are
unjust and unreasonable.
Other important actions were taken to provide more immediate relief
to hard-hit retail ratepayers. For example, in late August, President
Clinton extended $2.6 million in federal emergency loans to low-income
residents in the San Diego area to help pay their electric bills. This
amount doubled the funds that the affected region in Southern
California receives under the LIHEAP program. The California Public
Utilities Commission (CPUC) has authorized SDG&E to refund certain
stranded cost overcollections to its customers, to help offset
increased retail rates. Similarly, Governor Davis has recently signed
legislation adopting a rate stabilization plan for San Diego customers
and expediting the authorization of construction of new generation and
transmission facilities. Finally, the CPUC, the California Electricity
Oversight Board and the California Attorney General have undertaken
investigations of the problems in the State's electric markets. The
Commission welcomes all these measures. Now, we must focus on longer-
term and structured market issues.
iii. possible causes for the problems
As I noted, the Commission is undertaking careful and thorough
investigations to address the recent problems in California this
summer. I cannot prejudge the results of our investigative work. There
are complex questions of fact involved. As a preliminary matter,
however, there appears to be a select list of problem areas that
command our closest scrutiny. Clearly, the problems that may have
otherwise caused aberrant prices in California were exacerbated by the
unusually high temperatures over the West, limiting California's
ability to import power from neighboring states. Market-specific issues
that are of more direct interest to the Commission include:
Most observers agree that additions of new generating
facilities in recent years have not kept pace with rapidly
rising electrical demand in California and neighboring states.
Among other things, this limits California's ability to import
power from other states. The 12 percent estimated increase in
California's electric demand since 1996 is unmatched by
expansion of the infrastructure or means to manage the demand-
side response;
inefficient market design including, for example, flawed rules
for managing transmission congestion;
a lack of long-term contracting strategies for purchasing
electricity;
a lack of demand-side response programs that would allow
buyers to receive and respond to price signals, ensuring that
both the demand and supply side of this market are fully
functioning;
alleged collusion among sellers or other anticompetitive
behavior by market participants;
little competition at the retail level by energy service
providers; and,
transmission congestion that may have restricted imports.
A combination of these or other factors may have contributed to the
problems California faced at various times. My preliminary view is that
the fundamental issue is an overall imbalance of supply and demand.
When demand increases and supply does not, prices can be expected to go
up. The lack of adequate supply may be an inheritance from a pre-
competitive era but it cannot be allowed to endure. Nevertheless,
wholesale market rules and structure may have exacerbated the resulting
price increases.
iv. what can the commission do and what can it not do?
The seriousness with which we view the situation in San Diego is
shown by the Commission's quick resolution of the complaints filed with
the Commission this summer. In the cases presented to us, the
Commission still afforded the industry, market participants, and
members of the public opportunities to comment on the complaints and
how the Commission should address them. Similarly, earlier this summer,
the Commission carefully reviewed and approved the ISO's proposed
demand response programs. These programs allowed the ISO to prearrange
for load reductions from customers when necessary to meet peak demands.
Tomorrow the Commission will be holding a public meeting here in San
Diego to learn more about the problems in California's wholesale
markets and hear what others recommend as appropriate courses of
action.
The Commission is hard at work on completing its fact-finding
investigation into California's wholesale markets. As soon as the staff
provides its report to the Commission, the Commission is prepared to
implement further measures, if appropriate, to address the issues we
are discussing today. If we need to fix market rules or market
structures within our jurisdiction, we will do so. If market power is
being exercised as some have alleged, we will respond accordingly, by
revoking market-based rates or otherwise. We may order refunds to the
extent allowed by the FPA, if refunds are justified by record evidence.
We also intend to act promptly on the recently-filed cases addressing
these issues, and on any other filings that we may receive in the
coming weeks.
However, the FPA defines the boundaries of the Commission's
authority, and prevents us from taking certain actions that have been
suggested. For example, we cannot change the rates, terms and
conditions of services until we have a record supporting such action.
Also, the statutes we implement do not permit us to order retroactive
refunds of amounts charged this summer to San Diego Gas & Electric
Company. And, we cannot unilaterally change the status of municipal
utilities.
v. what can others do?
Others also have a role to play. For example, the State of
California should continue working to remove any unreasonable
impediments to the siting of new generation and transmission
facilities. The State also should ensure that State-regulated wholesale
buyers can choose prudently among the full range of possible buying
options, including entering into long-term contracts or into hedging
arrangements. The State also should take further actions to facilitate
demand response to prices through such measures as real-time metering,
and encourage entry by retail competitors so that retail customers may
be offered a broader array of pricing options.
Congress, too, has a role to play. In this industry, as elsewhere,
uncertainty can deter new investments. I believe the uncertainty about
Federal restructuring legislation is among the factors chilling
investment in new generating and transmission facilities. As I have
testified previously before this Subcommittee, I believe Congress
should enact legislation that includes four main elements:
(1) placing all electric transmission in the continental United States
under the same rules for non-discriminatory open access and
comparable service;
(2) reinforcing the Commission's authority to foster regional
transmission organizations;
(3) establishing mandatory reliability rules to protect the integrity
of transmission service, relying on a self-regulating
organization with appropriate Federal oversight of rule
development and enforcement; and,
(4) providing the Commission with appropriate authority to remedy
market power.
The other components of balanced restructuring legislation for the
bulk power market are reform or repeal of the Public Utility Holding
Company Act and clarification of Federal/State jurisdiction.
While each of these legislative reforms is important, the issues we
are discussing today emphasize the Commission's need for effective
tools to address market power. Currently, the Commission has only
limited remedies available to address market power problems. The
Commission can prevent enhancement of market power when utility mergers
or other corporate transactions require authorization under FPA section
203. This remedy does not address market power that is already built
into current commercial and operational arrangements, however. The
Commission also can deny or revoke authorization for market-based
wholesale rates. But, when this approach is employed to reimpose cost-
based rates, the Commission does little or nothing to promote
efficiency or competition. And, in California where generation plants
have recently been sold at well above book value, cost-based rates may
not represent a real reduction.
Reforms to the Federal statutory scheme are appropriate to permit
regulators to keep up with the challenges posed by market power in
evolving markets. Without such reforms, and without adequate remedial
authority, market power could be used to impair competition and the
related benefits to consumers. For example, the Administration's bill
would even allow the Commission to address market power in retail
markets, if asked to do so by a state lacking adequate authority to
address the problem. The Administration's bill would also give the
Commission explicit authority to address market power in wholesale
markets by requiring a public utility to file and implement a market
power mitigation plan. I believe it would be helpful to close these
gaps in the Commission's remedial authorities, and to provide future
protections in circumstances like those in California.
vi. conclusion
Recent events cast doubt on anyone's ability to predict or prevent
aberrant prices in complex electricity markets. Price spikes are a
timely reminder that, while we are involved in the intoxicating work of
re-inventing a major industry, we must look diligently after consumer
needs throughout this difficult transition. We must do so because
electricity is so essential to people that it cannot always be rationed
purely by price. We must also do so to ensure that competitive market
initiatives are not summarily reversed before their benefits to the
public become real and apparent.
In conclusion, the Commission remains committed to effective
competition in wholesale power markets, as the best means to ensure
reasonable rates for electricity. If competition is not working well,
our current investigations will allow us to identify the problems and
take appropriate remedial action.
Thank you.
Mr. Barton. Thank you, Chairman Hoecker. We'd now like to
hear from distinguished member of the Commission, Commissioner
Linda Breathitt.
STATEMENT OF HON. LINDA KEY BREATHITT
Ms. Breathitt. Thank you, Mr. Chairman. Good morning to you
and to other Members of Congress. Thank you for inviting me to
appear before you to discuss the price spikes and volatile
electricity markets confronted by California consumers this
summer. And you also asked us to comment on the continuing need
for Federal electric utility restructuring legislation, and I
have done so in my testimony.
This is an urgent matter deserving careful attention by
Congress, the administration, the FERC and California
regulators, legislators and market institutions. I can assure
you that my colleagues and I share your concerns and are just
as anxious to understand this difficult situation.
My experience as a regulator at the Federal level has
taught me a lot about how wholesale markets work, but my
experience as a State regulator in Kentucky taught me a lot
about retail customers' concerns and problems.
This is an important session for me to hear firsthand the
plight and concerns of California consumers, and I have begun
to do that with the excellent panel you put together this
morning.
The price volatility experience by California consumers
this summer are complex, as we have heard, and many have
speculated as to the causes of these problems. I list nine
causes that I have heard about, and I'm not going to list them
all because they're in my testimony, but several of them are
higher than expected loads, a lack of demand side response,
impediments for utilities to hedge in forward markets, et
cetera.
But when combined, all of these and other conditions have
led to higher market prices and higher bills for consumers, and
it is crucial that we continue to examine this situation and
look for other factors, if there are any, for this price
volatility.
And once we have this information, we will be better able
to decide on the appropriate steps that will be necessary to
correct the problems. But our fact-finding has already begun,
as the chairman stated. We are holding our meeting tomorrow.
Second, we have directed our staff to initiate a thorough
fact-finding investigation of factors affecting competition and
market fluctuations, and we have directed staff to identify any
technical, operational or behavioral factors affecting
competitive pricing. They're to report to us on November 1 for
that market investigation.
Third, in response to a complaint filed by San Diego Gas &
Electric, we instituted hearing proceedings pursuant to Section
206 of the power act. And there, we will investigate the
justness and reasonableness of the rates charged by public
utilities that sell energy and ancillary services to and
through the ISO and the PX.
A Section 206 investigation provides a mechanism for the
Commission to exercise its remedial powers to change the rates,
terms and conditions of jurisdictional services that are found
to be unjust and unreasonable, and if appropriate, to order
refunds.
So our goal of these investigations is to detect, and to
the extent within our jurisdiction, to resolve as expeditiously
as possible any defects in the bulk power markets in California
and elsewhere.
Because regulation of the California market is shared
between FERC and various State regulators, it will be
imperative that we work closely together in order to arrive at
a reasonable and timely resolution of these problems. I am
committed to such a partnership with my State colleagues.
Since the enactment of AB-1890 by the legislature in 1996,
the State legislature, which dramatically restructured the
utility industry and implemented retail access, FERC has
devoted significant resources to processing tariffs and
agreements proposed by the ISO and PX.
And in fulfilling our jurisdictional responsibilities with
regards to these markets institutions, we've had to make some
tough decisions regarding the formation of the competitive
markets in California.
And I believe we've been mindful of the ambitious goals of
the PUC and the legislature. However, there are flaws in the
existing market that must be repaired, and the solutions must
result in a lasting solution. We must find ways to encourage
supply into the market, which includes generation and
transmission.
So the opportunity to benefit consumers through the
creation of competitive markets is too important to squander,
and I urge all of us to work together to achieve these benefits
that consumers are entitled to have. Thank you.
[The prepared statement of Hon. Linda Key Breathitt
follows:]
Prepared Statement of Hon. Linda Key Breathitt, Commissioner, Federal
Energy Regulatory Commission
Mr. Chairman and Members of the Subcommittee: Thank you for
inviting me to appear before you this morning in San Diego to discuss
the price spikes and volatile electricity markets confronted by
California consumers this summer and the continuing need for Federal
electric utility restructuring legislation. Let me begin by commending
you, Mr. Chairman, Congressman Boucher, and other Members of the
Subcommittee for sensing the urgency of the situation in southern
California and convening this important congressional hearing in San
Diego. This is a matter deserving careful attention by Congress, the
Administration, the Federal Energy Regulatory Commission, and
California regulators, legislators, and market institutions. I can
assure you that my colleagues and I share your concerns and are just as
anxious to understand fully this difficult situation. I have no doubt
that today's hearing, as well as recent actions taken by FERC, which I
discuss below, will result in significant findings that will lead us to
real and long-lasting solutions to the problems affecting the energy
markets in this region.
The electricity market abnormalities experienced by California
consumers this summer are complex and multi-faceted. Although many in
the energy industry and media have speculated as to the causes of these
problems, the exact origin is not known. What is known, however, is
that the result of these market flaws has been alarming for consumers
and policy makers alike. For instance, we have learned that prices for
electricity in the San Diego area have more than doubled this summer,
with the average monthly residential bill rising from around $50 to
more than $100. Some accounts even estimate that, during the second
week of June, purchasers of California power paid 300 percent more than
they paid during the same period in 1999. These are troubling estimates
that have caught the attention of the entire Nation.
Several causes of this price volatility have been proffered by
various industry analysts. These include: (1) a lack of new generation
resources being sited and constructed in California, leading to tight
regional demand/supply conditions; (2) a lack of new transmission
facilities leading to reduced availability of imports into California;
(3) higher-than-expected loads (i.e., a 15 percent increase in average
daily peak since 1999); (4) a lack of demand-side programs that allow
consumers and businesses to receive and respond to price signals; (5)
impediments for utilities to hedge in forward markets, resulting in an
over-reliance on the spot market; (6) flawed market structures, such as
congestion management and ancillary services markets; (7)
underscheduling of loads and generation in the Day Ahead market; (8)
possible exercise of market power by both in-state and import
suppliers; and (9) unusually high temperatures in southern California.
When combined, these and other conditions would likely lead to higher
market prices and ultimately, to higher electric bills for consumers.
However, since we cannot identify the exact underlying causes, it is
crucial that we delve deeply into this situation in order to ascertain
whether these or other factors are to blame for the price volatility.
Once we have this information, we will be better able to decide on the
appropriate steps that will be necessary to correct the problems. This
important fact-finding process has already begun.
Earlier this summer, FERC undertook definitive actions to address
market abnormalities in California. First, and most recently, on
September 1, 2000, we announced that we will convene a public meeting
here in San Diego to allow interested persons to give us their views on
recent events in California's wholesale markets. This public meeting
will be held tomorrow, September 12, 2000, beginning at 9:00 a.m. at
the San Diego Concourse. This public meeting will be an important forum
for FERC to obtain first-hand information regarding the concerns of
consumers that were affected by these price spikes and to hear from
policy makers on recommendations they may have to address this
situation.
Second, on July 26, 2000, we directed our Staff to initiate a
thorough fact-finding investigation of factors affecting competition
and market price fluctuations in electric bulk power markets in various
regions of the country, including California and the Western region. We
directed Staff to determine any technical or operational factors,
regulatory prohibitions or rules (Federal or State), market or
behavioral rules, or other factors affecting the competitive pricing of
electric energy or the reliability of service. Staff is to report its
findings to us by November 1, 2000. Since the issuance of that order,
Staff has been directed to concentrate its initial efforts on the
California market and to report to us on that portion of the
investigation as soon as possible.
Third, on August 23, 2000, in response to a complaint filed by San
Diego Gas & Electric Company (SDG&E), FERC instituted hearing
proceedings pursuant to Section 206 of the Federal Power Act. As part
of these proceedings, we will investigate the justness and
reasonableness of the rates charged by public utilities that sell
energy and ancillary services to or through the California Independent
System Operator (ISO) and Power Exchange (PX). We will also investigate
whether the tariffs and institutional structures and bylaws of the
California ISO and PX are adversely affecting the efficient operation
of competitive wholesale electric power markets in California and need
to be modified. As our order explains, a Section 206 investigation
initiates a formal evidentiary process where all interested parties are
assured an opportunity to present evidence and arguments on the record
before the Commission. In addition, it provides a mechanism for the
Commission to exercise its remedial powers to change the rates, terms
and conditions of jurisdictional services that are found to be unjust,
unreasonable, unduly discriminatory or preferential and, if
appropriate, to order refunds.
Our overarching goal in these investigations and hearings is to
detect and, to the extent within our jurisdiction, to resolve as
expeditiously as possible, any defects in the operation of competitive
bulk power markets in California and elsewhere. It is important to
understand that, while FERC has jurisdiction over certain aspects of
the California market, such as wholesale electric prices and the market
design and rules of the ISO and PX, certain other factors fall within
the jurisdiction of state regulatory authorities in California. In
particular, these include the siting of new generation and transmission
facilities, the removal of constraints on hedging in forward markets,
and the implementation of consumer demand-side programs. These are
important functions that must receive serious consideration by the
California regulators.
Because regulation of the California electric market is shared
between FERC and various State regulators, it will be imperative that
we work closely together in order to arrive at a reasonable and timely
resolution of these problems. I am committed to such a partnership with
my State colleagues.
Although FERC has undertaken important activities over the past few
months to address the current situation in southern California, our
involvement in the California energy markets has not been limited to
this summer. Since the enactment of A.B. 1890 by the California
Legislature in 1996, which dramatically restructured the California
electric utility industry and implemented retail access, FERC has
devoted significant resources to analyzing and processing the myriad
tariffs and agreements proposed by the ISO and PX. In fulfilling our
jurisdictional responsibilities and duties with regard to these market
institutions, I believe FERC has been especially diligent over the past
four years in addressing the interests and concerns of California
regulators, legislators and industry stakeholders. We have had to make
some tough decisions regarding the formation of competitive bulk power
markets in California, but I believe we've been mindful of the
ambitious goals of the California PUC and Legislature to create
competitive markets in that State.
However, there are flaws in the existing market structure that must
be repaired and the repairs must result in a lasting solution. That is
why I supported our decision on August 23, 2000, to deny SDG&E's
request for an immediate cap of $250 per MWh on seller's prices in
California. In my opinion, approving the seller's price cap at this
time would have been an inappropriate and rash action that would have
sent the wrong signal to the market. I am concerned that such a cap
would only exacerbate the current scarcity of supply by discouraging
generators from serving California markets. We must find ways to
encourage supply into the market and to ensure a sufficient generation
and transmission infrastructure.
I continue to believe that robust competitive wholesale bulk power
markets are attainable. Moving forward, not retreating, is the right
thing to do. In order to accomplish this challenging work we will need
the assistance and commitment of Congress. As I testified before this
Committee last October and before the Senate Committee on Energy and
Natural Resources in April, I continue to believe that Federal
electricity restructuring legislation is needed. I urge Congress to
pass comprehensive restructuring legislation as soon as possible. Such
legislation, I believe, is necessary to address important and
unresolved issues in the Nation's electric industry, such as
reliability, jurisdiction, and transmission access. Legislation is
needed to enable FERC to achieve its goals of creating fair, open, and
competitive bulk power markets. The opportunity to benefit consumers
through the creation of truly competitive and efficient wholesale bulk
power markets is too important to squander. Therefore, I ask Congress
to become a partner with FERC and California officials in our attempt
to ensure that competitive markets are achieved and that consumers
enjoy the intended benefits.
In conclusion, let me reiterate that FERC is on a fast track to
understand the causes of the abnormalities that currently exist in the
California electricity market and to decide on the appropriate
remedies. Our Staff will complete its preliminary investigation of bulk
power markets by November 1, 2000. The California and Western regional
portion of that investigation should be completed in advance of that
date. Our investigation will identify those areas of the market that
are in need of repair. FERC is committed to doing all that it can to
make those repairs that are within our jurisdiction in a timely and
resolute manner.
Mr. Barton. Thank you, Commissioner. We appreciate your
testimony.
We now welcome a very tanned and California-looking
commissioner, the Honorable Curt Hebert, for your testimony.
STATEMENT OF HON. CURT L. HEBERT, JR.
Mr. Hebert. Thank you, Mr. Chairman. I have been working
with the Naval Academy on the--some boats, so they have
contributed to my tan.
But it's good to be here. I want to thank you for your
leadership and for the legislation that you've been working so
hard to push through the U.S. Congress. I also want to thank
Congressman Bray (sic), who I understand has stepped out, but
if you would thank him for his leadership as well and tell him
I appreciate him bringing us here. And Congressman Shadegg and
Hunter and Congressman Filner as well. Always good to be here
and be before you.
The recent rise in electricity prices in Southern
California is sadly not simply a California problem, nor is it
simply an aberrant one-time summer of 2000 problem. Rather, it
represents a manifestation of a larger problem, that if left
unchecked surely will re-emerge, perhaps with equal or greater
severity in other parts of the country, during future months
and future years.
The problem is a failure of the current administration in
the Federal Government, including the Federal Energy Regulatory
Commission, to commit itself to promoting the adequacy of
energy supply and energy delivery.
Competition in energy markets, which I vigorously support,
cannot be successful if regulatory policies fail to ensure that
supply will be available to meet surging demand. Without this
equilibrium, breakdowns in energy markets inevitably will
occur, Mr. Chairman. California is merely one of the first.
What is needed and is currently lacking is a comprehensive
plan that understands that all forms of energy production are
vital to maintain this country's energy needs. Regulatory
policies that inhibit the construction of generation plants,
transmission lines, natural gas pipelines and hydro-electric
facilities are counter-productive. So too are regulatory
policies that fail to commit to competition in emerging markets
for energy products.
Price controls which have been approved by California by
the majority here at FERC and supported by the administration
do not work, Mr. Chairman. This is not a political statement.
It's not partisan at all.
I've always felt and always thought that if the truth kills
granny, let her die, but the truth has to be told here. Price
controls didn't work in the Nixon era. They didn't work in the
Carter era.
Mr. Barton. If the truth does what?
Mr. Hebert. If you'll not take away from my time. If the
truth kills granny, let her die.
Mr. Barton. Let her die. Well, I didn't say that. I want to
save granny.
Mr. Hebert. And my grandmother hates that statement, by the
way. She fears I'll tell the truth at some interval.
Mr. Filner. You haven't killed her yet?
Mr. Barton. The truth is not always pretty, but the truth
is the truth.
Mr. Hebert. Well, that's correct.
Mr. Barton. It's a little more polite way to say that.
Mr. Hebert. It's probably more polite. I'm not always
polite, Mr. Chairman, even though I am from Mississippi and I
should be.
But this is important, and it's not partisan or political.
As I said, it didn't work in the Nixon administration with
price controls, it didn't work in the Carter administration,
and it's not working in the Clinton-Gore administration. And
we've got to move forward.
Price caps are not the solution. Recent events have
demonstrated that they mask and significantly exacerbate the
problem. Since price caps in California were lowered in July,
the average market price seen in the California ISO market has
increased. This is no coincidence.
The causal effect is that price caps have dampened the need
of wholesale buyers to hedge their position and suppliers to
build or sell in the California markets. It's caused sellers to
turn their generation elsewhere and also slow the emergence of
an active and liquid hedge market for both buyers and sellers
that is needed in order for competitive markets to thrive. In
short, price caps have impeded the very market responses that
the public clamors for.
In addition, it has been reported by market surveillance
committee of the Cal ISO that utility distribution companies
called UDCs that are able simply to pass through their
wholesale cost of power to retail customers without fear of
retail competition have insufficient incentive to hedge, given
the little risk of customer departures that they face.
The California Public Utility Commission further has placed
restrictions on the quantity of forward financial contracts
that UDCs are able to enter into. Rather than impose price caps
that decrease the liquidity of the market and eliminate price
signals that would otherwise encourage trading activity and
investment in new generation that you speak of, Congressman
Hunter, FERC and the CPUC should work together to modify the
market's rules that are currently constraining the market.
Limitations on UDC's ability to hedge in the forward market
should be lifted. Delays in the siting and permitting process
for new generation and transmission line construction should be
eliminated. Parties should be permitted to enter into bilateral
purchase and sell agreements as they deem prudent.
If we look at two areas, Mr. Chairman and committee
members, that have done well, we can look at the Midwest price
fights of 1998 where several people were urging this commission
to put up price fights. We didn't--price caps. I apologize. We
didn't do that, and they were covered, and they built
generation, and they've got adequate supply.
On the other hand, there's only one State that has an ISO
that doesn't have price caps. It's the State of Texas, Mr.
Chairman. Ercot does not have those price controls, and they
appear to be doing very well.
The evidence would suggest that price caps are part of the
problem. And I understand Supervisor Jacob and what she's
trying to do, and I think she's well-intentioned, but I would
say that when you talk about supply and that none is likely to
come on the scene soon, you have to look at what's happening
here. It could come on line soon.
Take a lesson from what they did in Shelby, Illinois. They
actually had it permitted, and in 6 months time turned dirt and
had to switch on. Six months time. Twelve months time from
permit to turning the switch on. It can be done, but you've got
to change the way you're thinking. You've got to change the way
you're acting.
There are only two thoughts here and two ways you can go.
You can either have adequate supply or you can understand
forecasting and forward markets and bilateral contracts.
Hopefully, you'll understand both of those. But if you're like
California is and you've got the low supply so you've got to
depend on the other, you better work hard to understand the
forecasting.
And I'll close with this. Congressman Bray said--and I
think it's a great example--that as a lifeguard, he had to
always look at how you changed it, how you went in and re-
evaluated it and made sure the same thing didn't happen again.
Well, while California rate payors are now swimming in high
energy costs, regulators and policymakers continue to flounder
in the past. We've got to look forward. We've got to change the
conduct.
If you want to know what we can do short-term--we don't
have jurisdiction over San Diego. That's right. But we do have
jurisdiction over the ISO and the PX, and we can get in and
assist that, and we can make changes. We can do that at FERC,
and we're going to have to do it. The consumers deserve it.
Thank you for your time.
[The prepared statement of Hon. Curt L. Hebert follows:]
Prepared Statement of Hon. Curt L. Hebert, Jr., Commissioner, Federal
Energy Regulatory Commission
overview
I thank the Committee for the honor of testifying here this
morning. What brings us all here this morning, specifically, is the
topic of recent price increases for the supply of electricity in
Southern California. I applaud the Committee for listening to testimony
on this topic, as it has extreme significance to the future of
competition in electricity markets, wholesale and retail, in Southern
California and in the rest of the United States.
I am greatly disturbed by recent events in California energy
markets. It is truly a disgrace that San Diego ratepayers now face
electricity bills that are double or triple those that they paid last
summer. No one should have to face the decision whether to pay for
electricity service, on the one hand, and groceries or prescription
drugs, on the other. Something is clearly wrong. I take second place to
no one in extolling the virtues of competition and choice. However,
those virtues need not come at the expense of the low price and high
degree of reliability of electric service that all Americans have come
to enjoy and expect.
Nevertheless, I caution against labeling the current situation as
simply a ``California problem.'' Nor is the problem one that is
fleeting; it is not simply a ``summer of 2000 problem.'' Rather, the
problems that are now confronting Southern California represent a
manifestation of larger, deeper problems that may confront other
portions of the country in later months and years.
There is, unfortunately, no easy fix. Rebates, refunds, and
emergency releases may offer some relief right now. However, these
short-term bandages do nothing to mask the larger problem that surely
will reemerge next summer and future summers until something is done to
address the true, underlying nature of the problem. At bottom, the
situation in Southern California demonstrates that the Federal
Government--in particular, the Federal Energy Regulatory Commission, of
which I am a Member--can and should do much more to promote energy
supply, energy delivery, and utility innovation.
Regrettably, the Federal Government and the FERC have done little
to address the issues of supply, delivery and innovation. There is no
comprehensive energy strategy. Decisions are made on an expedient, ad
hoc basis, with little regard for long-term impacts. And policies made
in one energy sector (electricity, natural gas, oil, etc.) fail to take
into account their impact on other sectors.
What is needed is a new form of thinking. Most regulators claim to
support competition, but their decisions belie their stated intentions.
What regulators need to do is to demonstrate the courage of their
convictions by allowing competition actually to operate--by trusting
that markets will make appropriate allocative decisions. Regulatory
policies that claim to help consumers by inhibiting the operation of
market forces--such as through price controls--actually work to their
detriment. Consumers will never truly enjoy the benefit of lower
prices, enhanced service options, and unimpaired reliability until
regulators make decisions that promote entry into competitive markets
and capital investment in generating plants and delivery lines.
I now discuss my understanding of the problem as it applies to the
United States as a whole and California in particular. I offer
suggestions as to what the FERC can do to promote energy supply and
deliverability and, thus, lower prices. While I appreciate and applaud
the initiative of the Committee, I believe that the FERC already
possesses considerable authority, without the need for additional
legislative authority, to redress the problem at hand. What is needed
most is political resolve, rather than political posturing, to do what
is best for the American people.
a nation-wide problem
Today's headlines, unfortunately, announce one type of energy
crisis after another. Last winter, residents in New England experienced
sharp increases in the price of home heating oil. Earlier this summer,
automobile owners--especially those in the upper Midwest--faced
gasoline prices in excess of $2.00/gallon. Natural gas inventories are
down steeply and experts expect sharply higher natural gas prices this
winter. There remains no political will to solve the issue of nuclear
waste disposal.
To complicate matters, the FERC has demonstrated its reluctance to
authorize, in a timely manner, the construction of natural gas
pipelines to those portions of the country that are particularly
starved for gas supply. See Independence Pipeline Company, et al., 91
FERC para. 61,102 at 61,366-67 (2000) (Hebert, Comm'nr, dissenting).
Moreover, the FERC is pursuing a hydroelectric dam decommissioning
policy, of dubious legality, when it is not debatable that the Federal
Power Act contains no such express authority. That policy threatens to
tear down existing dams and complicate the already glacial process of
dam relicensing. See State of Maine, 91 FERC para. 61,213 at 61,773-76
(2000) (Hebert, Comm'nr, dissenting).
The energy crisis of the moment concerns the price and reliability
of electric service. Geographic pockets of the country are starting to
experience disruptions in the price and delivery of electricity, just
as competition is starting to open up markets and induce the
participation of non-traditional utilities. Two summers ago, the
Midwest experienced dramatic spikes upward (more than 100-fold) in the
price of wholesale power. Last summer, several major metropolitan
centers (New York, Chicago, San Francisco) experienced temporary
blackouts when local delivery systems failed. This summer, southern
California and, to a lesser extent, New York are experiencing price
spikes of their own.
The underlying causes of these disruptions in electricity supply
are many and are vigorously debated. What is certain is that reserve
margins are shrinking, as a growing, computerized economy increasingly
demands more power, and as electricity supply fails to keep pace. In
addition to supply and demand disharmony, the nation's electricity
delivery system--millions of miles of transmission and distribution
lines--increasingly is being stressed by competitively-driven
transactions for which they were never intended.
In my three years of service as a FERC Commissioner, and for six
years before that as Chairman and Commissioner of the Mississippi
Public Service Commission, I have advocated a balanced approach. It is
perfectly appropriate for federal and state governments to factor
environmental considerations and landowner objections into their siting
and certification decisions. Every form of energy production--whether
based on fossil fuels or renewable fuels--has its attendant advantages
and disadvantages. What is not appropriate is for regulators to
summarily dismiss a form of energy production, through outright
rejection or overly laborious procedures, without considering what
alternatives will be available to meet demand. When a state blocks the
siting and construction of generating plants or transmission lines, it
needs to figure out how the energy demands of its consumers (and those
of neighboring states) will be met. When the FERC blocks the
construction of a natural gas pipeline or the development of a
hydroelectric project, energy customers are all the more susceptible to
the rigors of a fluctuating market.
(I discuss in a later section of my testimony what more the federal
government can do to promote market entry, induce supply, and enhance
deliverability.)
a california problem
At this juncture, I can only speculate as to the principal causes
of the sharp rise in electricity prices in Southern California. The
FERC recently has initiated investigations into wholesale electricity
markets and practices, both on a nation-wide basis and on a California-
specific basis. When presented with the reports of its investigative
staff, the FERC can then determine what policies to pursue that can
alleviate immediate pressures and can act, hopefully, to ensure that
California and other regions do not experience similar crises on a
regular or periodic basis.
At this time, however, I have four prime suspects: (1) California
utilities; (2) the California Independent System Operator; (3) the
California Public Utilities Commission; and (4) the FERC. We are
certainly not without blame in Washington, D.C. This Administration has
done little to promote, and nothing to develop, a positive energy
policy, with adequate supplies and necessary investments, to give
consumers choices of fuels and reasonable prices.
Electric utilities are starting to grapple with competitive choices
and are developing a number of different corporate strategies. Some are
proving more successful than others. While strategies may differ, all
load-serving utilities should be expected to hedge their risks in
certain respects. Utilities such as San Diego Gas & Electric Company
that sell off their generating units are susceptible to market forces.
Those that rely on the spot market, rather than entering into long-term
power supply arrangements or capacity buy-backs, or purchasing
financial instruments, are particularly susceptible. While my
information is imperfect, it appears that SDG&E, for whatever reasons,
may have exposed its ratepayers to considerable market risk by failing
to employ adequate risk management techniques. If so, it would hardly
be alone in failing to shield its ratepayers from the whims of market
forces. See New York Independent System Operator, Inc.; New York State
Electric & Gas Corp. v. New York ISO, 92 FERC para. 61,073 at 61,315-18
(2000) (Hebert, Comm'nr, dissenting).
Though it employs capable people, the California ISO, as an
institution, lacks the incentives and accountability to make difficult
decisions necessary for the transition to competition. Most recently,
we have seen the ISO compromise its independence. Bowing to pressure,
it met over and over again until, against its own professional
judgment, it adopted price caps that the ISO itself acknowledged will
cause harm in the short and long term. Lowering price caps may look
good but does not work. In fact, evidence not yet presented to the
Commission may demonstrate that price caps during peak hours have the
effect of raising rates during off-peak hours and, possibly, on an
annualized basis. This is because suppliers that cannot recover their
costs during peak hours must raise their bids during remaining off-peak
hours. Thus, the decision by the ISO to adopt and lower price caps only
makes matters worse and electricity more expensive for California
ratepayers.
(This is not mere speculation. 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. Specifically, it
notes that monthly average energy prices in California during June of
this year, when the price cap was $750/MWh, were lower than monthly
average energy prices during August of this year, when the price cap
was $250/MWh--even though energy consumption was virtually the same in
both months.)
The problem of the ISO, however, goes back further. Over the years
it has reached many decisions that make sense as politics, but not
economics. FERC orders have found, among other things, that the ISO
restricted imports without reason, encouraged suppliers to bid when
prices would be the highest, and failed to penalize customers who
understated their demand or generators that failed to deliver what they
promised. In addition, the ISO mishandled congestion management by
creating price zones that obscured the cost of locating in the wrong
place. Like a political institution, it sought to spread the pain, and
have other customers subsidize the high costs in congested areas. Most
ISO filings state, not that it has adopted the right solution, but that
it has reached a compromise that pleases all parties.
The California PUC deserves some attention for policies that fail
to allow for the timely siting and construction of badly-needed
generation. There is nothing wrong, of course, with the CPUC
considering seriously the environmental consequences of new
construction. It should. That intense consideration, however, comes at
a cost. Suppliers are much less likely to enter California markets when
the review process is uncertain and requires many difficult years of
prior review and public input.
Moreover, the California PUC needs to reconsider regulatory
policies that, in practice, fail to motivate its utilities to respond
to the needs of their ratepayers. If SDG&E has no incentive to keep its
wholesale costs down, and if it can act merely as a conduit by passing
those costs on to its retail customers, without limitation, the utility
has less of an incentive to engage in responsible risk management. The
California PUC may wish to consider performance-based measures of
regulation similar to those I helped implement in Mississippi. Under
policies adopted by the Mississippi Public Service Commission, utility
earnings depend on the number and duration of interruptions, customer
satisfaction (using actual complaints), and price. In response,
Mississippi utilities have figured out how to set and meet reserve
margins, safety standards, and capacity goals. In this manner, state
regulators can better align private economic interest with the public
interest.
Finally, much of the finger-pointing deserves to be directed at my
agency. The FERC has been sending inconsistent signals to energy
suppliers. On the one hand, it offers negotiated, market-determined
rates to all suppliers who can demonstrate that they cannot exercise
market power. On the other hand, it has signaled that it is willing to
impose price controls and readjust bids if prices threaten to rise
higher than anticipated. As a result, suppliers are wary of entering
into markets that are not truly competitive--such as California--and if
they cannot be confident of recovering a reasonable profit. The
operators of peaking units--which are expensive and are intended to run
only in periods of peak demand--are particularly disenchanted with
pricing policies that may hinder their ability to recover the costs of
operation.
Moreover, the FERC has been much too deferential to the operation
of the California ISO that, as explained above, has hindered the
operation of the competitive market. I have been willing to give ISOs,
such as the California ISO, some time to commence operations and
develop familiarity with competitive energy markets. Unfortunately,
with experience, ISOs have turned out to be flawed institutions that
have proved successful only in perpetuating and expanding their
bureaucratic reach.
In contrast, I believe that independent transmission companies
(transcos) offer a vastly superior alternative. Because they are
independent of other market participants, and have no incentive to
favor any one particular source of supply, transcos offer truly non-
discriminatory transmission service to market participants. Moreover,
because they have a profit incentive to maximize transmission and
throughput over their lines, transcos (unlike ISOs) have an incentive
to operate their facilities efficiently and to expand their network
when necessary to meet increased demand.
California needs new capacity, to feed a growing population and to
meet the new demands of prosperity. It no longer needs a government
institution--the ISO--that performs merely as a debating society,
catering to all affected stakeholders. After three years of oversight
under the ISO, which has focused short-sightedly on getting through the
upcoming summer, rather than adding transmission and generating
capacity, it is now time for California to turn to a different model. A
transco, to be sure, just like any other business, operates to make
money. But such a business model--rather than a governmental model--is
what is needed to satisfy customer needs cheaply and quickly.
what the federal government can do to address the problem
As I already said, the FERC has done little to avoid the type of
pricing and reliability problem we now see in California. If inclined
to act decisively on electricity pricing and reliability, there is much
the FERC can do right now--without a single drop of additional
legislative authority.
For starters, 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. By facilitating efforts to minimize short-term
price disruptions, and placing regulatory shackles on what should be
competitive markets, the FERC is inhibiting precisely the type of
investment in the grid that it should be supporting--and that is
crucial to assuring true electrical reliability.
Another important means of enhancing reliability and promoting
customer accountability is to give energy providers an incentive to
provide reliable, efficient service. Conventional pricing methods
provide no such incentive. It is my strong preference to afford
utilities some type of performance-based measure of accountability to
their customers and their regulators. Consistent with its existing
authority, the FERC could--and should--tie earnings and profits to
reliability-based and performance-based criteria.
Despite my urgings, the FERC has refused to adopt performance-based
pricing measures of the type previously adopted in Mississippi. I was
tremendously gratified when the FERC made its first tentative moves in
this direction last winter, when it adopted its Order No. 2000
rulemaking on the development of regional transmission organizations.
As the FERC explained, a RTO that meets the enumerated characteristics
and functions-- and that has demonstrated a commitment to promote grid
reliability and efficiency--will be eligible for a number of
incentives. These incentives include performance-based rates,
accelerated depreciation, and return on equity enhancements (formula
and risk-based).
While I appreciate the FERC's baby steps on performance-based
pricing, it will take awhile for RTOs to develop, win the FERC's
approval, and qualify for innovative pricing. If it were up to me, I
would adopt pricing measures now that would give both regional and
individual electricity providers an incentive to minimize or eliminate
service disruptions and to keep prices down, this summer and future
summers.
I can think of numerous other measures the FERC can adopt to
promote reliability and price stability, without delay and without
additional authority conferred by Congress. The FERC could afford
transcos an additional incentive to build transmission facilities by
providing a higher rate of return on transmission assets. The FERC
could articulate greater receptivity to proposals to build and invest
in merchant transmission facilities. The FERC could pique additional
interest in investment and corporate restructuring by allowing
acquisition adjustments on the sale of transmission assets that confers
benefits on ratepayers.
In addition, the FERC could greatly advance the cause of
reliability by indicating its support for stand-alone transmission
companies. As I have explained, a transco--much more so than any other
type of regional institution or model--has a strong economic incentive
to provide reliable, efficient and low-cost service. I wish the FERC
would give a transmission company the chance to operate--and give an
unequivocal green light to other utilities that might be considering
participation in similar for-profit ventures.
And the FERC--if truly committed to providing supply alternatives--
could do much more to promote the development of hydroelectric
facilities and the construction of natural gas transmission facilities.
The answer to our nation's energy reliability needs lies not in the
development of additional regulatory bodies and responsibilities--as
the Administration, with the acquiescence of a majority of the FERC,
now argues. Rather, the answer lies in promoting policies that
encourage capital investment in all types of energy technologies and
that allow competitive markets to operate as they should.
What the FERC should not do is now embrace calls for a return to
cost-based regulation. Nor should the FERC encourage hybrid forms of
rate regulation that graft cost-based ceilings on top of otherwise
negotiated rates. In either event, suppliers would turn their back on
California and investment would dry up. California increasingly would
operate as an island amidst a sea of competition, and no longer would
be able to turn outside the state for supply during times of peak
demand. In addition, customers would lose a signal to conserve during
periods of peak demand, and entrepreneurs would lose an incentive to
develop and bring to market innovative, technological solutions (such
as fuel cells, electricity storage, and other forms of distributed
generation) to relieve capacity bottlenecks.
Rather, the FERC should follow its own example, when it refrained
from adopting ``retro'' measures in response to the upward spike in
Midwestern wholesale electric prices during the summer of 1998.
Numerous market participants and observers implored the federal
government to do something, and to do something quick, to ensure that
prices never rise to extreme levels again. Keeping a cool head, the
FERC (as well as state commissions) instead focused its attention on
determining whether any market manipulation or anticompetitive behavior
had led to the price spikes. Finding none, the FERC decided to allow
high prices to signal to suppliers that there is strong Midwestern
demand for additional capacity. This is exactly what happened. Two
years later, the Midwest has ample new supply of electricity and is now
an exporter of power to other capacity-starved regions. Prices have
stabilized, and reliability has remained unimpaired.
I encourage all regulators of California energy markets to adopt
the same cautious, courageous, long-term approach.
what the congress can do to address the problem
In the past year, I have had the privilege of testifying twice
before Congress on the subject of electricity restructuring. On October
5, 1999, I testified before the House Commerce Subcommittee on Energy
and Power on the subject of H.R. 2944, the ``Electricity Competition
and Reliability Act of 1999'' (the Barton Bill). On April 27, 2000, I
testified before the Senate Committee on Energy and Natural Resources
on eight pending electricity restructuring bills.
Despite the events of the past summer, in California and elsewhere,
my opinion has not changed on the subject of additional federal
legislation. I continue to believe strongly that any new legislation
should remove--not add--obstacles to the natural evolution of the
industry in the direction of competitive markets. As I have explained,
what the FERC does need to do is to take decisive action under its
existing authorization to promote capital investment in all forms of
energy supply and delivery, and to enhance operational efficiencies.
Such action would benefit ratepayers in California and throughout
the rest of the United States. There is no need for a California-
specific congressional solution.
For this reason, I continue to believe that legislation is needed
merely to repeal outdated laws of general applicability. Both the
Public Utility Holding Company Act (PUHCA), dating from the Depression,
and the Public Utility Regulatory Policies Act, dating from the Clinton
Administration, act as serious brakes on utility restructuring. They
stifle, rather than promote, competition. Similarly, there is no reason
for the FERC to be in the business of reviewing electric utility
mergers and to duplicate the efforts of the Antitrust Division of the
Department of Justice and the Federal Trade Commission. FERC merger
review, under section 203 of the Federal Power Act, brakes utility
efforts to restructure themselves as they deem best to respond to and
take advantage of competitive opportunities and challenges. More
troubling, FERC uses mergers to further policy goals that it has no
authority to order directly.
Beyond that, I do not see the need for additional legislative
action. In particular, I do not see the need for the FERC to assume
additional reliability authority. I favor business over government
solutions to the issue of maintaining electric reliability in a
restructured market. A quasi-governmental reliability organization,
under FERC oversight, and with FERC having last-resort authority to
impose mandatory reliability standards on the industry, will operate no
more effectively than any other quasi-governmental organization--such
as the California ISO.
Instead, I prefer to advance market-oriented policies that offer
incentives for badly needed investment. I favor injecting reliability
standards in the performance-based rate plans I advocate for utilities.
Specifically, I favor tying profits to performance. Each plan for each
RTO would contain a target for reliable performance. An RTO's earnings
would rise or fall on how well it meets its business plans (safe,
reliable and low-cost service; maximizing transactions) and serves its
customers.
Similarly, I do not see any need for additional FERC authority over
``market power.'' Unlike some observers, I am not quick to assume an
exercise of market power whenever price rises above marginal
(operating) cost. FERC staff already possesses sufficient authority to
investigate whether actual manipulation or collusion has led to high
prices that are not justified by market conditions. (Indeed, this is
what FERC staff is doing right now, in responses to unconfirmed
accounts that market mis-behavior has led to high prices in California
and elsewhere.) Should FERC staff detect improper or illegal behavior,
the FERC (or, if appropriate, the Antitrust Division or the Federal
Trade Commission) can craft an appropriate response.
Finally, I see no need to legislate rules governing the connection
of generators to the grid. An RTO, especially a for-profit, stand-alone
transmission company, has no reason to favor any particular source of
generation. To the contrary, a transco, with an economic incentive to
push power over the grid, would welcome interconnection from as many
generators as possible.
Mr. Barton. Thank you, Commissioner Hebert.
We'd now like to hear from Commissioner Massey. Last, but
certainly not least, we welcome your testimony to the
subcommittee.
STATEMENT OF HON. WILLIAM L. MASSEY
Mr. Massey. Thank you. Is this on, Mr. Chairman?
Mr. Barton. The bigger mic is a little bit better
microphone.
Mr. Massey. Mr. Chairman and Members of Congress, thank you
for inviting me to testify at this hearing.
There is indeed a crisis in California electricity markets
caused by skyrocketing prices. Consumers are suffering. This
demands our urgent attention. Existing prices are not just and
reasonable. We must take the actions necessary to ensure that
jurisdictional markets produce consumer benefits and just and
reasonable rates.
A FERC staff investigation is underway, and we do not yet
have their findings. There have, however, been a number of
reports by market monitors and economists outlining the serious
flaws in the California markets, many of which have been
mentioned today.
But let me offer my preliminary observations. First, a
shortage of generation as well as constraints in the
transmission network are fundamental problems in the California
market.
A shortage of generation creates an imbalance between
supply and demand, and it causes high prices. And transmission
constraints prohibit cheaper generation from reaching the
California market. Siting rules must be streamlined consistent
with sound environmental policy, and generation interconnection
rules must be standardized.
Second, it appears to me that the market rules and market
conditions allow market power to be exercised to drive up
prices, particularly during high-demand conditions when most or
all generators know that they are likely to be dispatched,
regardless of how high they bid. This serious problem must be
addressed.
Third, there is virtually no demand side response to a high
price. In other commodity markets besides electricity,
consumers purchase less when the price is too high, and this
consumer response has a substantial price dampening effect on
the market.
But without a demand side response to prices, there is
virtually no limit to the price that suppliers can charge
during shortage conditions. This must be remedied quickly.
Fourth, there has been too much reliance on volatile spot
markets and too little use of hedging tools, such as forward
contracts. The use of these tools can levalize prices and
substantially dampen the exercise of market power in the more
volatile spot markets operated by the ISO and the PX. This must
be accomplished.
Fifth, the underscheduling of both generation and load in
both the day-ahead and day-of hourly markets puts pressure on
the ISO to purchase substantial generation in real time in
order to keep the lights on. The generation purchased in real
time is considerably more expensive. Underscheduling has
contributed to high prices and raised reliability concerns.
This must be urgently remedied.
We must form a partnership with appropriate State
authorities to solve these and any other problems that are
identified. Neither the State of California nor the FERC acting
in isolation can solve these problems alone. The FERC can
promote competitive wholesale markets, but we cannot site the
facilities necessary for wholesale markets to thrive. That is a
State responsibility under existing law.
The State must also play a key role in encouraging the use
of hedging tools by power purchasers and in facilitating a
demand-side response. By the same token, the State of
California cannot police market power in interstate wholesale
markets. That is a Federal responsibility, as is the regulation
of the high-voltage grid. We must work together to solve these
problems at hand. And as I have said, we must proceed with all
speed.
Now, turning to the issue of Federal legislation, it is my
view that many of the market design flaws in California can be
addressed under existing authorities. Nevertheless, this
summer's events demonstrate, among other things, that
electricity markets are inherently interstate in nature.
Prices throughout the western U.S. rose and fell with
events in California. Thus, I continue to believe that
legislation should facilitate a reliable and efficiently
organized grid platform upon which vibrant wholesale markets
can be built.
I respectfully suggest that jurisdictional uncertainties
and anomalies should be eliminated. The development of regional
transmission organizations should be ensured. Reliability of
bulk power markets should be subject to mandatory rules.
The FERC should have direct authority to mitigate market
power in wholesale markets, and the authority to site
interstate transmission facilities necessary for interstate
commerce should be transferred to an interstate authority as it
is for natural gas pipelines.
I stand ready to work with this subcommittee to accomplish
these goals. I continue to believe that well-structured
wholesale markets will produce consumer benefits, but the
California markets are severely flawed. Consumers are bearing
the brunt. This is not reasonable. We must attack these
problems. Thank you.
[The prepared statement of Hon. William L. Massey follows:]
Prepared Statement of Hon. William L. Massey, Commissioner, Federal
Energy Regulatory Commission
Mr. Chairman and Members of the Subcommittee on Energy and Power:
Thank you for the opportunity to testify on the subject of the recent
events in the California electricity market. The Federal Energy
Regulatory Commission has been moving the electricity industry to a
structure that relies on well-functioning wholesale markets to produce
an economic and reliable supply of electricity for the nation. In
supporting that policy, my expectation continues to be that markets
will produce consumer benefits and lower prices compared to cost of
service regulation.
Thus, I am very concerned about the behavior of California's
electricity market this summer and its effects on consumers. I am
concerned that this summer's events are causing a crisis of confidence
in California wholesale electricity markets that threatens to erode the
political consensus necessary to sustain a market-based approach to
regulation, not just in California but across the country. The
Commission must act forcefully and decisively to reassure market
participants, policymakers and consumers that jurisdictional wholesale
markets will produce consumer benefits and just and reasonable rates.
California's Experience This Summer
Based on the records of proceedings at the Commission this summer,
I believe that there are sufficient indications that California
wholesale markets are not producing prices that are just and
reasonable. For example, California wholesale electricity costs for
June 29 of this year were seven times what they were for the same date
in 1999 ($340 million vs. $45 million) even though energy usage was
only about 3% more.1 During the month of June, 2000, the
total cost of electricity (energy and ancillary services combined)
charged to the California market was nearly half of California's total
electricity cost for all of 1999. In two separate five-day periods in
June, 2000 (when demand was at least 3,000 MW to 5,000 MW below the
projected annual peak) California's total cost of electricity exceeded
$1 billion, with one of those five day periods reaching $1.3
billion.2 During June and July of 1999, prices in the Power
Exchange rarely exceeded $150/MWh even during the highest load levels.
But during the same period this year, prices have multiplied to three
and four times the levels reached last year whenever load levels exceed
33,000 MW.3 I would also note that the California Public
Utilities Commission states that every analysis of the California
markets since their opening has found substantial exercises of market
power.4 I believe that there are serious flaws in the
California wholesale markets.
---------------------------------------------------------------------------
\1\ See Attachment B to Notice of Intervention of the Public
Utilities Commission of the State of California in Docket No. EL00-95.
\2\ Motion to Intervene and Response of Southern California Edison
Company in Docket No. EL00-95.
\3\ Complaint of San Diego Gas & Electric Company in Docket No.
EL00-95.
\4\ Notice of Intervention of the Public Utilities Commission of
the State of California in Docket No. EL00-95, at 8.
---------------------------------------------------------------------------
Ensuring Well-functioning Electricity Markets
The events in California this summer provide an opportunity for the
Commission and all policy makers to gain a better understanding of what
elements are needed for well-functioning electricity markets and to act
decisively to ensure that such elements are in place. Taking a laissez-
faire approach, letting the markets police themselves, is not an
acceptable answer in my view. We must ensure that the road to market-
based solutions and customer benefits is well paved, and we must
proceed with a real sense of urgency.
A few weeks ago, the Commission directed its staff to conduct a
thorough investigation of bulk power markets. That investigation is now
focused primarily on California, and I am confident that staff's report
will shed much needed light on the problem. However, I believe that
there are a number of shortcomings in the California market that have
become fairly evident, and that these should be regarded as lessons
that can be applied to all electricity markets.
First, policy makers must ensure that there are no impediments to
expanding the supply of generation and transmission facilities. This is
critical. Markets will not work if supply cannot enter easily in
response to demand. There seems to be widespread agreement that a
shortage of generation as well as constraints in the transmission
network are fundamental problems in California. I recognize that some
of these shortages were the result of unforeseen events, exceptionally
hot weather or sustained demand growth due to the economy's continued
strong performance. Nonetheless, necessary facilities must be sited and
built for competitive markets to produce benefits. State siting
authorities must respect this fundamental truth, and ensure that
reasonable and time limited siting rules are in place, balancing the
need for new generation capacity with a responsible environmental
policy. It is my hope that California authorities will accomplish this
goal.
Streamlined, standardized interconnection procedures and agreements
are also needed to facilitate generation entry. I have been pushing for
such a policy at the Commission. Interconnection legerdemain is
anticompetitive and anti-consumer. But not all interconnection
authority resides at the federal level. The interconnection of many
generators, including many applications of distributed generation, is
at the state level. We still have a lot of work to do in streamlining
and standardizing interconnection procedures and agreements.
Transmission capacity must be adequate to support competitive
markets. There are two aspects to this piece of the puzzle. One is to
provide adequate financial incentives to encourage grid expansion. The
Commission recently demonstrated its willingness to allow higher rates
of return on transmission facilities in a case involving Southern
California Edison. And I believe that performance-based rates and other
financial incentives for members of Regional Transmission
Organizations, or RTOs, will help to spur transmission investments.
The other part of the transmission issue is siting. This, too, is
in the hands of the individual states. Just as with generation,
California authorities must develop time limited processes for siting
new transmission facilities. I would point out, however, that
electricity markets are interstate in nature. Transmission lines
provide the highway for interstate electricity commerce. California and
other states depend on regional trade. I am not confident that the
current state-by-state approach to siting interstate transmission
facilities will get the job done. I believe that the siting of
interstate facilities should be carried out by an interstate authority.
I continue to strongly recommend federal siting authority with the
power of eminent domain.
A second broad area that must be addressed is market design.
California's experience this summer has demonstrated that market power
can be exercised during extreme demand conditions with very dramatic
price impacts. During high demand periods, it was impossible to meet
all demand without relying on all or almost all of the available
generation resources. The relatively high-cost generator operators--
those on the upper end of the supply curve--know when these conditions
are likely and can bid very high prices with a fair degree of
confidence that they will be dispatched. Moreover, the market rule in
California is that the generator that clears the market sets the price
for the entire market. This means that all generators benefit from that
exercise of market power and consumers suffer. Thus, market prices can
be manipulated by one or very few sellers. The Commission must examine
whether the so-called single price auction for generation is
appropriate in these circumstances. The Commission should also consider
whether there may be a need to place some limits on wholesale price
levels in these conditions until all the pieces of a well-functioning
competitive market are in place. Generation entry is spurred by the
price signal that results from a well-functioning market. But if a high
market clearing price is pegged by market power, such an extreme price
does not serve a legitimate market function.
A third factor contributing to high prices in California is
underscheduling of both load and generation. Scheduling imprecision is
to be expected to some degree, but my understanding is that deliberate
underscheduling is done in the California PX day ahead markets by both
load serving entities and generators in order to affect market prices.
Substantial underscheduling then forces the ISO to go into the real
time markets to make up the difference between what has been scheduled
and what is needed to keep the system in balance. Under such
conditions, the ISO is vulnerable to paying very high prices. Perhaps
even more important, last minute resource imbalances pose reliability
concerns. I understand that the California ISO is attempting to improve
the incentives for market participants to schedule as accurately as
possible. The Commission should examine such rules during our
investigation.
A fourth critical issue is demand responsiveness to price. This is
a standard means of moderating prices in well-functioning markets, but
it is all but absent from California's and other electricity markets.
When prices for other commodities get high, consumers can usually
respond by buying less, thereby acting as a brake on price run-ups.
Without the ability of end use electricity consumers to respond to
prices, there is virtually no limit on the price that suppliers can
fetch in shortage conditions.
We must urgently seek ways to increase demand responsiveness. There
are two aspects to this. One is showing an accurate price signal to the
consumer before consumption decisions are made. The second is the
ability of the consumer to react to the price signal. The first may be
addressed by appropriate metering and communications, and that is the
easiest part of the equation. However, residential customers cannot
easily respond to price signals. I do not believe any of us want to sit
at home watching the hourly price signal so we know whether we should
postpone dinner or adjust the thermostat. The capability for
residential and even commercial customers to adjust consumption lies in
so called ``smart houses'' or ``smart buildings'' that allow computers
to adjust the operation of certain equipment in response to market
prices and ``strike price'' instructions.
Until such ``smart'' technology has penetrated a large part of the
market, I think electricity providers should concentrate on
arrangements that compensate large industrial and large commercial
customers for reducing consumption. That will provide the biggest bang
for the buck and may even capture enough of the demand curve to help
discipline price run-ups. I understand that the California ISO is
aggressively pursuing such demand side programs to be in place by next
summer.
It has also been suggested that RTOs operate demand-side markets
where demand aggregators bid negawatts. The Commission could consider
this as part of our RTO policy. All options for improving demand
responsiveness to prices should be considered. All reports and analyses
I have seen have emphasized this lack of demand responsiveness as a
critical problem. We must attempt to solve it.
A fifth area that needs attention is risk management. The
California market design places entirely too much reliance on the spot
market. Spot markets are almost by nature volatile. While the spot
market is the appropriate venue to secure limited portions of needed
supply, it should not be relied upon for most or all of the supply
portfolio. Yet that is the case in California. The painful results are
almost predictable.
My understanding is that there were state regulatory restrictions
placed on the degree to which load serving utilities in California may
forward contract. This policy should be changed. Regulators must ensure
that everyone on the demand side of the market is given appropriate
incentives and are well informed regarding hedging. Surely a balanced
portfolio of long-term and short-term supply must be an ingredient of
well-functioning markets.
It is clear that we should move forward by ensuring well-
functioning markets. This is surely a long-term effort, at least in
some respects, but market problems in California and in other regions
are here and now and we must deal with them. What should we do in the
meantime, before we have all the elements of efficient markets in
place?
Some form of price caps or bid caps may be needed as temporary
stopgap measures. The California ISO currently has adopted a $250/MWh
purchase price cap. Such a cap on the market does serve to keep down
the exceptionally high price spikes that dramatically increased bills
in California earlier this summer. To that extent, it is valuable. But
price or bid caps, especially market wide caps, are not the long-term
answer. Such caps water down the price signals we need for bringing
about new supply and for hedging. In addition, while the price spikes
are avoided, existing market imperfections can still keep prices well
above competitive levels yet remain below the $250 cap. We must explore
more precisely targeted mitigation measures.
Going forward, California authorities and the FERC must form a
partnership for ensuring well-functioning markets. Neither the FERC nor
state policymakers, acting in isolation from each other, can solve all
market flaws because our respective jurisdictions are sharply
delineated under existing law. State policymakers cannot effectively
define or police market power in interstate wholesale markets. They
cannot require a wholesale market structure, based upon an efficiently
operating interstate transmission grid, that will produce just and
reasonable rates. These are federal responsibilities. By the same
token, under existing law the FERC cannot site the generation and
transmission facilities that are necessary to bring supply and demand
into equilibrium, and it has no direct authority to require purchasers
of power to hedge price volatility risk in forward or financial
markets. These are state responsibilities. Both federal and state
policymakers have a role in pursuing policies that will facilitate an
effective and price-dampening demand side response. We must work
together to solve the problems at hand.
The Need for Federal Legislation
I strongly believe that there is a need for federal legislation to
ensure that the nation reaps the benefits of well-functioning
electricity markets. I would not advocate a legislative solution for
all of the problems experienced in the California market this summer.
Many market design flaws, hedging, and the lack of demand side
responsiveness can be addressed under existing authorities. But I do
believe that this summer's experience has demonstrated that electricity
markets are inherently interstate in nature. Prices throughout the
western United States rose and fell with events in California. In order
to thrive, such markets must have an open, non-discriminatory, well
managed, and efficiently priced interstate transmission network that
links buyers and sellers of power. The existing patchwork of
inconsistent and outdated jurisdictional rules for this essential
interstate delivery system, coupled with splintered network management,
create obstacles and uncertainties that undercut the market. If buyers
and sellers lack confidence that electric power will be delivered
reliably and on reasonable terms and conditions, they will not commit
resources to those markets.
Legislation should facilitate the development of a reliable and
efficiently organized grid platform upon which vibrant wholesale
markets can be built. Jurisdictional uncertainties or anomalies should
be eliminated, the development of Regional Transmission Organizations
should be ensured, and the authority to site interstate transmission
facilities should reside with an interstate authority.
My recommendations for federal legislation fall into five broad
areas.
First, Congress should place all interstate transmission under one
set of open access rules. That means subjecting the transmission
facilities of municipal electric agencies, rural cooperatives, the
Tennessee Valley Authority, and the Power Marketing Administrations to
the Commission's open access rules.
Moreover, the majority of transmission--that is, the transmission
that underlies bundled retail sales--is arguably now subject to state
control under existing law. This has a balkanizing effect on what is
essentially an interstate delivery system. State rules may discriminate
against interstate transactions. The solution is to subject all
transmission, whether it underlies an unbundled wholesale, unbundled
retail, or bundled retail transaction, to one set of fair and non-
discriminatory interstate rules administered by the Commission. This
will give market participants confidence in the integrity and fairness
of the interstate delivery system, and will facilitate robust trade.
All transmission should be subject to one set of rules, while local
distribution wires are governed by state regulations.
Second, I continue to strongly believe that the development of well
structured Regional Transmission Organizations is a necessary platform
on which to build efficient electricity markets. Having said that, I
realize RTOs are not a panacea. Indeed, California already has an ISO
that operates its transmission grid. However, the causes of the
problems plaguing California are related to market design, an inability
to site new facilities, and the restricted scope of the ISO. The
problems were not due to transmission grid operation.
The widespread development of RTOs is needed to ensure open access
to an efficiently organized transmission grid. Discrimination in access
is still a problem, and the current utility-by-utility approach to grid
management is inefficient. RTOs that meet the requirements of Order No.
2000 will help ensure access to large power markets, better
transmission pricing, improved regional planning, improved congestion
management, and consistent market rules within a trading region. We
know for a fact that resources will trade into the market that is most
favorable to them. Trade should be based on true economics, not the
idiosyncracies of differing market rules.
Grid reliability is one of the unsung benefits of the RTO
institution. Existing grid management is scattered among more than one
hundred operators. Consolidating grid operations through RTOs (in the
form of ISOs, transcos or hybrid entities) will eliminate seams and
facilitate institutions that are more congruent with reliability
management regions and evolving markets. A large RTO can manage
congestion and plan for loop flow efficiently. An RTO can also
facilitate regional consensus among market participants, transmission
owners and state siting authorities about the need for new transmission
siting and construction. A large RTO also provides the appropriate
scope and forum for transmission pricing reform. As such, an RTO can,
by adopting performance-based rates, provide the incentives for needed
new transmission facilities. These features of the RTO can provide a
reliable platform for emerging markets.
The full benefits of RTOs to the marketplace will not be realized,
however, if they do not form in a timely manner, if they are not truly
independent of merchant interests, or if they are not shaped to capture
market efficiencies and reliability benefits. While the Commission may
have more authority regarding RTOs than it has exercised thus far, I
nevertheless recommend that the Congress clarify existing law to
authorize the Commission to require the formation of RTOs and to shape
their configuration.
The current tax codes may be an obstacle to participation in RTOs.
Public utility transmission owners cite unfavorable tax consequences of
spinning off or selling their transmission facilities to RTOs, and
public power entities cite difficulties staying within the bounds of
private use restrictions on their transmission facilities if such
entities join RTOs. Legislation has been introduced (H.R. 4971) that
addresses these problems. For public utilities, this legislation would
defer taxes on the sale, and eliminate taxes on the spin off, of
transmission facilities to independent entities in Commission approved
RTOs. The bill also would modify the private use restrictions to enable
public power entities to provide open access service and participate in
RTOs without losing their tax-exempt bonds. This legislation appears to
be a reasonable compromise and could be important in attracting RTO
participation by public utilities and public power entities. I commend
this legislation to the Subcommittee.
Third, we need mandatory reliability standards. Vibrant markets
must be based upon a reliable trading platform. Yet, under existing law
there are no legally enforceable reliability standards. The North
American Electric Reliability Council (NERC) does an excellent job
preserving reliability, but compliance with its rules is voluntary. A
voluntary system is likely to break down in a competitive electricity
industry.
I strongly recommend federal legislation that would lead to the
promulgation of mandatory reliability standards. A private standards
organization (perhaps a restructured NERC) with an independent board of
directors would promulgate mandatory reliability standards applicable
to all market participants. These rules would be reviewed by the
Commission to ensure that they are not unduly discriminatory. The
mandatory rules would then be applied by RTOs, the entities that will
be responsible for maintaining short-term reliability in the
marketplace. Mandatory reliability rules are critical to evolving
competitive markets, and I urge Congress to enact legislation to
accomplish this objective.
Fourth, the FERC needs the authority to site new transmission
facilities. The transmission grid is the critical superhighway for
electricity commerce. But it is becoming congested due to the increased
demands of a strong economy and to new uses for which it was not
designed. Transmission expansion has not kept pace with these changes
in the interstate electricity marketplace. Under current law, however,
the Commission does not have the authority to get the job done alone.
The Commission has no authority to site electric transmission
facilities that are necessary for interstate commerce. Existing law
leaves siting to state authorities. This contrasts sharply with section
7 of the Natural Gas Act, which authorizes the Commission to site and
grant eminent domain for the construction of interstate gas pipeline
facilities. Exercising that authority, the Commission balances local
concerns with the need for new pipeline capacity to support evolving
markets. We have certificated thousands of miles of new pipeline
capacity over the last few years.
I strongly recommend legislation that would transfer siting
authority to the Commission. Such authority would make it more likely
that transmission facilities necessary to reliably support emerging
regional interstate markets would be sited and constructed.
Finally, I recommend legislation that would give the Commission the
direct authority to mitigate market power in electricity markets. It
should be clear by now that, despite our best efforts, market power
still exists in the electricity industry. The FERC, with its broad
interstate view, must have adequate authority to ensure that market
power does not squelch the very competition we are attempting to
facilitate. However, the Commission now has only indirect conditioning
authority to remedy market power. This is clearly inadequate.
Therefore, I recommend legislation that would give the Commission the
direct authority to remedy market power in wholesale markets, and also
to do so in retail markets if asked by a state commission that lacks
adequate authority.
Conclusion
I stand ready to assist the Subcommittee in any way, and I thank
the you for this opportunity to testify.
Mr. Barton. Thank you, Commissioner Massey.
We now want to welcome the president of the California
Public Utilities Commission, Loretta Lynch. She's accompanied
by Commissioner Wood. Mr. Wood does not have a statement, but
he's available to take questions when we get to the question
period.
We just got your statement, or at least I just got your
statement, so I'm going to kind of glance through it as you
give it. You're recognized for 5 minutes, and welcome to the
committee.
STATEMENT OF LORETTA M. LYNCH
Ms. Lynch. Thank you. Thank you for inviting the California
Public Utilities Commission to your hearing today.
As a result of California's experiment in restructuring its
electricity market, wholesale electric energy prices in
California have risen significantly.
As Michael Kahn, the Chairman of the Electricity Oversight
Board, and I found in a report we prepared for Governor Gray
Davis in August, prices for electricity in June 2000 were seven
times higher than comparable prices California paid in June
1999.
Analyzing this monthly data, wholesale energy prices have
risen significantly in just the last year, reaching an average
monthly price of 17 cents a kilowatt hour in June, 12 cents in
July and 18 cents in August.
The total bill for energy purchased for those same 3 months
in California was over $10 billion. California experienced
historic billion-dollar weeks in paying over $1 billion for
electricity purchases from the Power Exchange and the ISO
ancillary services markets.
The August electricity prices are especially troubling as
California experienced the coolest August on record with
concomitant lower levels of electricity use. The substantial
cost to California from higher energy prices caused real harm
to California families and businesses, as you heard this
morning.
Families and businesses have seen their electricity bills
double and in some cases triple over what they paid just last
year, in most cases for basically the same amount of
electricity consumed.
For instance, San Diego schools must now divert funds
previously committed to improve their classrooms and their
playgrounds to pay for their higher energy bills. The
additional funds that Governor Davis and the California State
Legislature provided to San Diego schools are now being paid
just to keep the lights on and the computers working and are
not available to improve our children's education.
Governor Davis and the California Public Utilities
Commission have now both done what we can to minimize the
effects of these wholesale energy prices. My testimony
indicates some of those actions. But California's efforts
represent only part of the solution. Under California's past
electric restructuring experiment, we ceded to the Federal
Government, specifically to the FERC, the ability to control a
significant portion of the energy costs paid by California
consumers.
Almost all of the energy consumed by customers at
California's investor-owned utilities is now regulated by the
FERC, not the PUC. It is the FERC, not our PUC, which regulates
both the ISO and the Power Exchange, as you read this morning.
So while California can work at the retail level to
mitigate these price problems we face, it is now in the hands
of the Federal Government and the FERC to solve the problem at
the wholesale level.
Several factors have been ascribed to the run-up in these
prices, and we'll have robust debate on that. But certainly
increased costs for some of the components of producing
electricity cannot explain away a significant portion of the
price increases experienced in California.
As numerous reports already document, as Commissioner
Massey detailed, a major reason for the run-up in energy prices
appears to be the problem of market power where a few
generators on the margin can set the price for energy,
particularly on peak demand days when all generating units are
needed.
Data from May and June 2000 show that wholesale energy
prices were 37 percent higher than could possibly be expected
and 186 percent higher in June than should have been expected
in a competitive market, according to Professor Frank Wollock,
professor at Stanford and a member of the ISO's market
surveillance committee.
Some preliminary estimates peg the amount at which actual
prices diverge from even the highest prices that could have
been expected in a competitive market at close to $2 billion.
This $2 billion price signal that California has already paid
this summer simply cannot be justified. Had we just directly
invested $2 billion into California's electricity
infrastructure, we could have built 4,000 megawatts at new
power plants or made untold but vast improvements in energy
efficiency.
Equally troubling are the higher off-peak energy prices
that we have seen, particularly for the month of August. While
high on-peak prices might be justified theoretically, the high
off-peak prices that California is experiencing for virtually
every hour of the day are difficult to justify, absent the
existence of market power.
And market power is particularly pernicious in the
electricity arena, as electricity constitutes a fundamental
necessity that has no effective substitutes. California cannot
run its information-age economy on candles.
The electricity market is unique, and the theories that
work in other markets, for instance, like ones for applies and
oranges, do not apply to the workings of electricity. In this
market, electricity cannot be stored. Thus, buyers, the
utilities, must always purchase a continuous real time supply
for every hour of every day. Supply must always balance with
demand to maintain system reliability.
Given the realities of how the electricity market works in
California and nationwide, the calculation of prices on an
hourly basis provides a strong incentive for sellers to engage
in strategic bidding to increase prices. I believe that
Representative Hunter called that his oxygen analogy. At some
point, you'll pay for it at any price.
As the high energy prices we have seen clearly show, the
wholesale market in California is not working properly and is
not workably competitive. While we remain hopeful that a truly
competitive wholesale market can be achieved in the long term,
we believe that the FERC must address the market power and
market structure problems immediately.
We hope that Federal regulators and California will work
closely together to bring down these unconscionable prices.
Both Congress and the Federal Government should give California
the maximum flexibility to craft solutions to our problem and
to recognize our individual needs to address and solve this
problem before this problem causes further harm both to
California citizens and California's entire economy. Thank you.
[The prepared statement of Loretta M. Lynch follows:]
Prepared Statement of Loretta M. Lynch, President, California Public
Utilities Commission
The reason we are here today is to address the extraordinary rise
in electric energy prices in California and to identify how to mutually
work together to solve this problem.
As a result of California's experiment in restructuring its
electricity market, embarked upon in the Wilson Administration,
wholesale electric energy prices in California have risen
significantly. As Michael Kahn and I found in a report we prepared for
Governor Gray Davis in August, prices for electricity on selected days
in June 2000 were seven times higher than comparable prices California
paid in June, 1999.
Analyzing a monthly data, wholesale energy prices have risen
significantly in the last year, reaching an average monthly price of 17
cents a kilowatt hour in June, 12 cents in July, and 18 cents in
August. The total bill for energy purchased for those same three months
was over $10 billion. California experienced historic ``billion dollar
weeks'' in paying over $1 billion for electricity purchases from the
Power Exchange and ISO ancillary services markets. The August
electricity prices are especially troubling, as California experienced
the coolest August on record, with concomitant lower levels of
electricity use.
The Substantial costs to California from higher energy prices cause
real harm to California families and businesses. Families and
businesses have seen their electricity bills double and in some cases
triple over what they paid last year--in most cases for the same amount
of electricity consumed. San Diego schools must divert funds previously
committed to improve their classrooms and playgrounds to pay for higher
energy bills. The additional funds Governor Davis provided to San Diego
schools are now being paid to keep the lights on and the computers
working--and are not available to improve our children's education.
Residents and businesses in the service territories of Pacific Gas
& Electric and Southern California Edison have yet to be directly
affected by the run-up in wholesale energy prices as they are still
covered by a state legislatively mandated rate freeze. Once the rate
freeze ends, however, and it will statutorily expire no later than
March, 2002, these California customers will also face significantly
higher prices for electricity unless appropriate action is taken. In
the meantime, higher wholesale energy prices have cut into the ability
of California's other utilities to provide electricity to their
customers and to stay in business.
Governor Gray Davis, and the California Public Utilities
Commission, have both done what we can to minimize the effects of these
high wholesale energy prices.
California has:
Adopted a ceiling on energy commodity costs for all families
and for most businesses in the San Diego area, especially
safeguarding schools and hospitals, of 6\1/2\ cents/kilowatt
hour pursuant to Governor Davis signing AB 265, an urgency bill
authored by state Assemblywoman Susan Davis;
Freed up electricity used by state buildings to put it back on
the grid and available to others during periods of short
supply;
Reinvigorated California's commitment to energy efficiency
including reallocating $72 million in uncommitted funds toward
programs designed to reduce peak demand for the Summer of 2001;
Streamlined, where possible, the siting of new power plants,
and
Removed constraints to upgrading the state's transmission and
distribution systems.
California's efforts represent only one part of the solution,
however. Under California's electric restructuring experiment during
the Wilson Administration, California ceded to the federal government,
specifically to the Federal Energy Regulatory Commission (FERC), the
ability to control a significant portion of the energy costs paid by
California consumers. Almost all of the energy consumed by customers of
California's investor-owned utilities is now regulated by FERC, not the
Public Utilities Commission. It is FERC, not our Commission, which
regulates both the ISO and the Power Exchange. While California can
work at the retail level to mitigate the retail pricing problems we
face, it is now in the hands of federal regulators at the FERC to solve
the problem at the wholesale level.
Several factors have been ascribed to the run-up in these prices.
Among the listed causes are higher natural gas prices, higher prices
for air pollution emission credits in the Southern California area, and
increased demand for electric energy as the result of a robust economy.
Our Commission held a hearing to examine these issues last Friday in
San Diego. My personal conclusion is that these factors pale as causes
for any of the run-ups, contributing at most what amounts to pennies
while electric bills have skyrocketed. Increased costs for some of the
components of producing electricity cannot explain away a significant
portion of the price increases experienced in California.
As numerous reports document, a major reason for the run-up in
energy prices appears to be the problem of market power, where a few
generators on the margin can set the price for energy, particularly on
peak demand days when all generating units are needed.
Last week, Professor Frank Wolak, Professor of Economics at
Stanford and member of the ISO's Market Surveillance Committee,
presented the results of a study comparing estimates of the marginal
cost of generation compared to actual prices seen in California's
energy markets. In a competitive market place, energy prices should be
close to marginal costs, except at times of scarcity when prices may be
higher.
Data for May and June of 2000, the last two months for which data
is available, show that wholesale energy prices were 37% higher than
could possibly be expected in May 2000 and 186% higher in June. Some
preliminary estimates peg the amount at which actual prices diverged
from even the highest prices that could be expected in a competitive
market at close to $2 billion.
The $2 billion ``price signal'' that California has already paid
this summer cannot be justified. Had we just directly invested this $2
billion into California's electric infrastructure, we could have built
4,000 megawatts of new power plants or made untold but vast
improvements in energy efficiency.\1\
---------------------------------------------------------------------------
\1\ Assumes $500 per megawatt of installed capacity.
---------------------------------------------------------------------------
Equally troubling are the higher off-peak energy prices that we
have seen, particularly for the month of August. While high on-peak
prices might be justified theoretically during periods of high-demand,
the high off-peak prices (at times as high as 12 cents/kilowatt hour)
that California is experiencing for virtually every hour of the day are
difficult to justify absent the existence of market power.
Market power is particularly pernicious in the electricity arena,
as electricity constitutes a fundamental necessity that has no
effective substitutes. California cannot run its information age
economy on candles. The electricity market is unique and theories that
work--in other markets--like ones for apples or oranges--or even phone
service--do not apply to the workings of this market. In this market,
electricity cannot be stored. Thus, buyers must always purchase a
continuous real-time supply for every hour of every day. Supply must
always balance with demand to maintain system reliability. Given the
realities of the electricity market, the calculation of prices on an
hourly basis provides a strong incentive for sellers to engage in
strategic bidding to increase prices.
As the high energy prices we have seen clearly show, the wholesale
market is not working properly and is not ``workably competitive.''
While we remain hopeful that a truly competitive wholesale market can
be achieved in the long-term, FERC must address the market power and
market structure problems immediately.
FERC must also work closely with California to bring down these
unconscionable prices. Both Congress and the federal government should
give California the maximum flexibility to craft solutions to our
problems and to recognize the need for California to address, and solve
this problem, before it causes further harm both to California's
citizens and to California's entire economy.
Thank you.
Mr. Barton. Thank you, Madam President. As indicated,
Commissioner Wood is also here, and we'll ask him some
questions.
Mr. Wood. Mr. Chairman, may I make a few remarks?
Mr. Barton. Actually, you may not.
We'd now like to hear from Mr. Edwin Guiles, who is the
chairman of San Diego Gas & Electric and who has been at the
center of this storm for several months.
STATEMENT OF EDWIN A. GUILES
Mr. Guiles. Thank you, Mr. Chairman. Good afternoon. I'm Ed
Guiles, Chairman of San Diego Gas & Electric. Chairman Barton
and Members of Congress----
Mr. Bilbray. Ed, would you mind pulling that mic up? I'm
sure everybody is dying to hear every word that you say.
Mr. Guiles. All right. Anyway, good afternoon. I'm glad to
be here. Chairman Barton, I want to thank you for working to
enact Federal electric restructuring to mitigate the problems
we're experiencing nationwide. And Congressman Bilbray, I want
to thank you for bringing this issue to the forefront here in
San Diego.
SDG&E and its customers are in a difficult and agonizing
position as a result of the electric restructuring legislation
that was enacted in 1996. Our customers are the first utility
customers in the Nation truly subject to the market price of
electric commodity. And as has been stated throughout the day,
this has been a situation resulting in extremely high prices,
far-reaching ramifications. They have been talked about, but I
want to repeat them a little bit.
And Chairman Barton, I've got copies of some letters from
customers that I'd like to submit to you, if I might, please.
Mr. Barton. Without objection.
Mr. Guiles. When you think about the impact on our
customers, which we have felt, we've got elderly citizens,
we've got working families on fixed incomes. I've seen our
bills go from $55 to $130 a month. We've got medium-sized
commercial customers, large customers who are having difficulty
paying bills, canceling expansion plans, talking about moving
out of San Diego and other manufacturers considering moving
here who are now not intending to move here until this crisis
gets resolved.
Legislation was recently passed by the State Legislature to
stabilize rates on an emergency basis for our smaller
customers. And certainly, this bill has been well-intentioned,
but we think it is really merely a short-term Band Aid that
will help soften the immediate impact on our customers, but
does nothing to address the long-term structural impacts that
have been talked about by others here today.
By requiring the utility to continue to buy electricity at
the inflated market prices that we have seen, but to deliver it
to our customers at a much lower fixed price, for all practical
purposes, this creates an effective balloon payment that will
come due in a few years.
Deregulation was supposed to result in greater choices,
more competition and competitive prices. It hasn't worked out
that way. Instead, the tremendous population growth, lack of
construction and new capacity and awkward--and I'll use the
word ``awkward''--wholesale market purchasing structure has
given rise to a dysfunctional market that requires immediate
Federal action and attention.
Some argue that extreme fluctuation in electric prices are
simply supply and demand, but I'd like to show you a quick
chart. And I tried to choose these charts carefully. This chart
is a diagram of the daily power exchange price comparison for
1999 and 2000.
Mr. Bilbray. Excuse me, Mr. Chairman. You're going to have
to hold that higher because--thank you.
Mr. Guiles. Do you see that all right now, Brian?
Mr. Bilbray. Yeah.
Mr. Guiles. It's a price comparison for 1999 and 2000. On
the left-hand side is the average daily power exchange price in
dollars for megawatt hour, and on the bottom, the actual
scheduled megawatts of average PX daily load.
And the point I want to make here, the blue on the bottom
is the prices for 1999, and on the red or pink, if you will,
magenta, is prices for 2000. And if you take a look at that, I
mean, the prices for 2000 are far above the level necessarily,
we think, to achieve a reasonable return, attract new
generation, and it's compelling evidence, in our judgment, that
the market is broken, if you look at the prices that have been
charged in 2000, the summer of 2000 versus 1999.
If you look at some of these rates, we saw 4 cents a
kilowatt hour in the summer of 1999. We've seen rates in the
18, 20-cent and above range for the year 2000, a fivefold
increase in prices.
And increased generation in the region has been talked
about today, as frequent threats of service interruption.
California this summer has made clear, in California, supply
has not kept pace with demand. To compound matters, the
approval process for siting has historically been cumbersome.
And I include both generation and transmission of that.
We're hopeful that recently passed State legislation which
was signed by the Governor will help bring on line new plants
and increase the availability of supply, both generation and
transmission.
But as the chart we put up here suggests, supply is not the
only factor in creating or mitigating the current crisis. We
have a market that's broken. And that market has exacted a
heavy toll on energy consumers in San Diego.
It would be a major understatement to say that we've been
hearing from our customers. They're angry about the extreme and
sudden increase in their bills, and they have every right to be
angry.
Unfortunately, SDG&E and its 3200 employees have been the
focal point for the community's anger and frustration about
deregulation. That's understandable. We realize we share in the
responsibility for this crisis. We supported deregulation, as
did many other business community and consumer interest groups.
We've also been the only energy supplier that most San
Diegans have ever known, because electric costs are carried on
SDG&E's bills, even though California's electric restructuring
law requires SDG&E to pass on to its customers the wholesale
price of electricity without markup. It's not clear to
customers that the problem is beyond our ability to fix.
No one anticipated the increase in the price of electricity
of the magnitude we witnessed this summer. All of us have been
the unfortunate trailblazers in the deregulation of
California's electric marketplace.
Along the way, we've encountered spiraling electric prices,
limited supplies----
Mr. Barton. If you could wrap it up. I hate to cut you off,
but we've still got two more witnesses.
Mr. Guiles. Okay. Mr. Chairman, California's energy market
structure has blurred the roles and responsibilities between
the market and the regulators, which has resulted in a system
with conflicting rules and regulations. There's been much
discussion, and we can talk more about the arrangement of the
California Power Exchange and the California ISO.
It's the only State that has this division of roles and
responsibilities, and we believe this split is a direct
contributor to the inflated wholesale prices. That's why we've
turned to the Federal Energy Regulatory Commission to devise a
solution.
Tomorrow we'll testify before the FERC and highlight what
we believe the Commission needs to do to fix the dysfunctional
market in the western region. While the FERC works to help fix
our market, our customers must be protected. So we also believe
the FERC must act during the transition to limit prices in the
region's wholesale market.
If the FERC's current investigation, which we strongly
support, finds that a workably competitive wholesale market
does not exist, we believe the Commission must act immediately
to intervene in the market to assure that wholesale prices
charged by jurisdictional sellers are just and reasonable. Our
customers deserve no less.
Congress must----
Mr. Barton. Mr. Guiles, you really do need to----
Mr. Guiles. All right.
Mr. Barton. I've given you about 3 extra minutes, and I
apologize, but we just have a lot we still have to get through.
Mr. Guiles. Thank you, Mr. Chairman. Let me just wrap up.
Hard decisions need to be made. We urge you to support the
FERC to make sure that they have the tools necessary in fixing
the market in the western region of the U.S. Thank you, Mr.
Chairman.
[The prepared statement of Edwin A. Guiles follows:]
Prepared Statement of Edwin A. Guiles, Group President Sempra Energy
Regulated Operations
overview
Good morning. I am Ed Guiles, Chairman of San Diego Gas & Electric
(SDG&E) and Chairman and President of Southern California Gas Company
(SoCalGas), both subsidiaries of Sempra Energy.
Sempra Energy is a Fortune 500 energy services holding company
whose subsidiaries provide electricity and natural gas services. We
believe it is important to work closely with federal and state
regulators to provide safe, reliable and low cost service to our
customers and a fair rate of return to our shareholders.
I appreciate the invitation to appear before you today to help in
your examination of the energy market in San Diego, and to propose
options that we believe will address the high-energy prices plaguing
our customers. In particular, I applaud Congressman Bilbray for
focusing attention on this critical problem, which is an issue of
national importance.
I do not use the term ``national importance'' lightly. For more
than a decade, the electric industry has faced uncertainty regarding
its future, as various proposals for restructuring have been debated
and implemented in a piecemeal fashion. One result of the long period
of uncertainty has been a steady and rapid erosion of our national
power supply reliability. As new investment in generation slowed, our
population and economic growth have continued, sometimes at near record
pace. The result has been that our reserve capacity margin has shrunken
to the point that in some regions, like ours, a hot day sets off a
scramble so that some customers have to be asked to curtail use just to
keep the state from suffering rolling blackouts.
The restructuring of the electric industry was intended, in some
part, to accelerate investment in new generation. There are signs it is
having that effect. Roughly $10 billion in investments in new power
plants to serve California have been proposed since restructuring was
enacted.
But now we are facing an economic crisis caused by large increases
in the generation price of electricity. The pricing markets in
California are broken, and the delivered cost of electricity in
California is so high that public confidence in restructuring itself
has eroded. This is a problem beyond the ability of a single state to
solve. Consequently, we have asked the Federal Energy Regulatory
Commission (FERC) to step in and fix what we believe is a problem in
the transition to the new system. We're pleased that the FERC has
responded, and will hold a hearing in San Diego tomorrow to hear from
all parties impacted by recent events in California's wholesale market.
We recognize that a critical part of the operation of a competitive
market is the price signal. The price signals we are seeing clearly
demonstrate that supply and demand are out of balance. What we are
seeing now are prices that are vastly inflated, in large part because
the market structure in California is dysfunctional. The current prices
are the result of immature and poorly functioning markets. This is a
transitional problem, but one that comes with a very human cost to our
customers, one that cannot be ignored.
I stress this to you because failure to respond quickly to this
pricing crisis may create a political climate in which the solutions
will be worse than the problems. Some of the solutions currently being
considered will add whole new levels to the uncertainty within the
electric system. That uncertainty, and its historically demonstrated
effect on investment, threatens to slow or halt the development of new
supply that our nation so desperately needs. A failure to act on this
pricing crisis would be a step toward greater risk, more uncertainty
and less reliability. These are the stakes if Congress and FERC fail to
send the signal that the path has been set and that they will not allow
the abuse of temporary market imperfections to undermine the commitment
to restructuring.
At the same time, I would be remiss if I did not mention the
projected increase in natural gas prices and the expected impact that
increase will have on our customers and on other Californians. At some
point, customers are no longer able or willing to shoulder the burden
of high energy costs.
I should also note that in addition to the impact of high prices on
residential customers, large industrial manufacturers--the companies
that are the backbone of employment for our region--are not immune to
the rising energy costs. In fact, some manufacturers have already moved
operations to other regions where electric costs are significantly
lower. Large employers planning to move to San Diego have put their
plans on hold until the energy issues are addressed. And, many small
businesses have already closed, and hundreds more are expected to close
if change does not occur soon.
Additionally, there is a misperception that the market offers a
solution to commercial and industrial customers. Even though larger
customers were able to negotiate energy savings by obtaining commodity
and value-added services from Energy Service Providers (ESPs), many
businesses that negotiated deals with ESPs have had their contracts
terminated or have not had their contracts renewed because it did not
make economic sense, in light of skyrocketing electric prices, for the
ESP to continue to provide services at the negotiated rates.
That's why Sempra Energy has advocated before your committee and
Senate committees that Congressional action is needed to successfully
restructure the electric market. In retrospect, it was unreasonable to
expect that the drafters of AB 1890 would be able to anticipate all of
the intricate interstate manipulations that could occur in electric
restructuring, which I believe are largely at the core of the problem
we face here in San Diego. Unless Congress and the FERC are willing to
address the interstate issues that are beyond the jurisdiction of state
legislators and regulators, I predict that our experience in San Diego
is indicative of what others will encounter in trying to create a
competitive electricity market.
In simplest terms, the goal of any system of electric restructuring
must be to ensure the availability of and access to reliable and
affordable power. However, in San Diego that clearly has not been the
result of the current market structure.
energy affordability
One reason that your committee has chosen to hold a hearing here is
that the whole concept of electric restructuring is being called into
question by the impact of AB 1890 on rates in San Diego. Our customers
are the only utility customers in the nation truly subject to market
prices for the electric commodity price. SDG&E customers have seen
their electric bills double in recent months, as demand for electricity
has increased during the hot summer weather. Senior citizens and
working families have seen their monthly bills for the average
residential customer increase from $55 to almost $130. Many small
businesses have seen increases of more than $1000 per month.
Some of you may want to know why this electric price crisis has not
yet spread statewide. When AB 1890, the state's electric restructuring
legislation was passed in 1996, there were concerns about potential
market power abuses by the incumbent utilities. Consequently, in
implementing AB 1890, the California Public Utilities Commission (CPUC)
required utilities to sell their electric generating plants. The
legislation also allowed utilities to pay off the debt on stranded
assets and move to a competitive environment in which the cost of power
obtained from the wholesale market would be passed on to customers
without a mark-up. Under the state law, each utility had a rate cap
until either it recovered its stranded costs or the opportunity to
collect the costs sunset in March 2002. Once either condition was met,
the utility became exclusively an energy delivery company, and the
price of electricity would be set by the market. Because SDG&E sold all
of its fossil fuel power plants and paid off the debt on its stranded
assets ahead of schedule (in fact far ahead of the state's other two
investor owned utilities), it became the first utility in California
whose customers pay market rates for electricity.
I suspect that representatives of the state's other investor owned
utilities will tell you that if the high commodity costs are not fixed
when their stranded assets are paid off in 2002, there will be a state
wide energy crisis because their customers will also face exorbitant
energy prices. Right now these exorbitant energy prices are being
charged to the state's other utilities, but their customers are not
seeing the impact yet because of the AB 1890-imposed rate cap.
The extraordinarily high prices San Diegans have faced this summer
suggest that supply bids into the day ahead market are being withheld
and then later bid into the ``same day'' market where everyone pays the
highest price bid, when power is desperately needed. Since the
beginning of June, wholesale electricity prices in California have
increased to levels that often exceed prices seen at comparable levels
in prior years. The increase in prices has significantly outpaced the
increase in fuel prices and greatly exceeds the cost of producing
electricity. The attached chart provides an example of this unusual
phenomenon.
Ironically, it is the entities who purchased the generating plants
owned by utilities prior to restructuring--companies beyond the control
of state regulators--who were intended to be the ``fix'' for incumbent
utility market power who are now charging the exorbitantly high
wholesale electricity rates we face today. Although market power was
one of the problems AB 1890 sought to address, in retrospect the
legislation could not anticipate the ability of market participants to
extract remarkable profits from the auction rules in the California
market.
The FERC, CPUC and the state Attorney General are conducting
investigations into market manipulation. Whatever the outcome of these
investigations, it is important to note that it is still possible to
exercise market power and increase prices excessively if the market
structure is itself dysfunctional, which we believe is the situation in
California.
The political backlash in California has been swift. Elected
officials are trying to mitigate the prices for the people of San
Diego. The proposals have ranged from spreading payments out over time,
to trying to undo the whole law. But the ability of the state to act
alone is limited, and the continuing crisis is adding a whole new level
of uncertainty to the whole system.
the state Legislature passed AB 265, a bill that would cap
SDG&E's customers' bills. While the legislation was well
intentioned, we believe that the bill is seriously flawed and
are disappointed that the Governor has signed it. We believe
that the bill postpones a huge customer bill that could grow to
$840 million and come due in 2004.
Passage of another bill, AB 970, that is designed to
streamline the permitting process to less than six months for
projects that meet stringent environmental standards. We
support AB 970.
energy reliability
In addition to suspicious pricing practices, California's energy
crisis is a result of the convergence of two key factors. First, the
region has experienced unprecedented growth, and as a consequence,
electric usage has increased exponentially. In just the past five
years, more than five million new residents have moved to the region.
In addition, the heightened demand due to the state's economic
expansion, especially due to heavy energy users like the growing
internet industries, have created significant demand growth. Current
demand growth levels are about equal to an increase in peak demand of
1,000 MW per year.
To keep pace with demand growth requires two 500 MW merchant power
plants to come on line each year. Yet, according to estimates from the
ISO, it will not be until the summer of 2003, at current rates of
development, that the generation coming on line is equal to the demand
growth (assuming that all of the power plants in the permitting queue
are constructed on schedule). Thus, until that time, the gap between
demand and supply in California will continue to worsen. In hindsight,
California should not have unleashed its full force of deregulation on
the consumer until it was more assured of additional generation.
Secondly, despite the growth in population and the resultant
increase in electricity demand, no new generating plants have been
built in California during the past ten years as industry uncertainty
has persisted. Not only does this mean a worsening gap between supply
and demand, but the existing fleet of power plants serving California
is an older one, with 60 percent of the plants 30 to 40 years old
(increasing likelihood of break-downs). Efforts to re-power these
plants and make them more efficient have been met with many regulatory
challenges.
Legislative discussions about deregulation in California
incorrectly assumed that there would be new electric generation
capacity built before peak demand would reach current levels. While
deregulation has led to a greater willingness by business to invest in
power plants, the long lag time in development of the plants means that
there is a three to five year period of tight supplies facing the
region.
Specifically, the approval process for building new generating
plants is a time consuming process, one that can take as long as twelve
to eighteen months just for regulatory reviews. In the past, the
process has been greatly complicated by environmental concerns that
want to slow growth and promote conservation, and local governments
that practice ``Not in My Backyard'' (NIMBY) politics. We are heartened
by the passage of AB 970 and the Governor's support of it, and
anticipate that the bill will help to respond to the current energy
crisis by expediting the permitting and construction of plants already
``in the pipe.''
potential remedies
The unintended consequences that have occurred during the
transition to a restructured market threaten the continued economic
success of our region. California is facing a crisis. This is a crisis
that threatens brownouts and blackouts, which we have come perilously
close to experiencing this summer. And California is facing a crisis in
the cost of energy. The exorbitant prices for electricity in San Diego
are causing widespread hardships, and cannot be allowed to go
unchecked. Given California's impact on the nation's economy and as a
global economic force on its own, federal action must be taken to
prevent the continuation or the spread of this statewide crisis.
While we believe that the benefits of deregulation--lower prices
and customer choice--are attainable over time, the system must be fixed
to address the unintended consequences that the piecemeal approach has
created.
I would like to propose near and long term actions that, if
undertaken, we believe will enable Congress and the FERC to
successfully navigate through the legislative and regulatory actions
taken to date by different states to create a restructured electric
market bound by national rules and regulations.
sdg&e actions
Before I address what we see as the federal government's role in
helping to manage the energy crisis San Diegans face, I want to tell
you about actions SDG&E has taken to address the problem:
This summer we provided rebates to customers totaling nearly
$500 million that could be used to offset high bills.
We are trying to smooth out the impact of high price spikes by
offering a level pay plan to all customers. Under this payment
option, customers pay the same amount every month, regardless
of actual electric usage, with a quarterly ``true-up.'' The
monthly amount is based on an average historical or regional
usage (if historical data is unavailable).
We worked with the Department of Energy and the White House to
secure almost $3 million in Low Income Home Energy Assistance
Program (LIHEAP) emergency funds for low-income households in
southern California. The funds are double the amount that the
affected region currently receives under the federal LIHEAP
program. We also encouraged the Administration to direct the
Small Business Administration to help San Diego businesses
survive this crisis.
We appealed to FERC to remedy the wholesale electric pricing
system throughout the Western region of the United States.
While FERC rejected our requested remedies until it performed
further fact-finding, it did accelerate its investigation of
the California market and is holding a hearing in San Diego
tomorrow to better understand the crisis we face.
We have appealed to Governor Davis and the state Legislature
to streamline the permitting process for generating plants and
transmission lines, which we believe can be reduced from the
present 12 to 18 months to six months, without compromising
existing environmental laws. AB 970 is evidence of our success.
needed federal actions
While our efforts and state actions have yielded some relief, until
the supply of electricity is increased, the only option available to
provide meaningful relief to our customers is fixing the flawed
wholesale electricity market structure for the Western region of the
U.S. This is action that can only be undertaken by FERC.
Briefly, the structure of the California market has blurred the
roles and responsibilities between the market regulators, and resulted
in a system with conflicting rules and regulations. For example, the
Power Exchange (PX) is responsible for hourly, day-ahead markets. The
ISO is responsible for transmission and real time energy markets and
ancillary services markets. The ISO was never intended to play the
strong role it does on price setting. Its mandate is reliability. The
fact that the current market has forced the ISO into this role is a
significant contributor to the problem. And, the legislatively-inspired
retail rate caps in the rest of the state, while shielding customers
from the high prices the generators are charging, have inhibited end
users from responding to real time energy prices because there is no
price volatility seen by consumers. This only makes the problem worse
over time.
The serious structural difficulties that face the California market
are far beyond the scope of the state's ISO. In fact, recent attempts
by the ISO to address the problem--lowering the maximum price it will
pay for imbalance energy and ancillary services to $250 per MWh but
excluding the larger PX markets--indicate that the panel has neither
the tools nor the standing to address this challenge. Importantly, the
ISO has yet to comply with FERC mandates to reform its pricing
methodologies.
We believe that the FERC should not hesitate to impose a solution,
given the apparent inability of the current ISO structure to reform
itself. If findings indicate that a workably competitive wholesale
market does not exist, FERC must immediately intervene in this market
to assure that the wholesale prices charged by jurisdictional sellers
are just and reasonable. Regardless of those findings, FERC needs to
focus on the structural problems with our pricing market and make the
changes needed to ensure that consumers will be protected within a
restructured electric market.
Importantly, we urge Congress to monitor FERC's examination of
California's market structure, and to ensure that needed reforms are
undertaken. While our intention is not to tie FERC's hands or to
reregulate the electric industry, some hard decisions will need to be
made to create a market that provides lower cost energy and options for
consumers as we make the transition to a restructured marketplace. We
need Congress to support FERC and hold it accountable for fixing the
market in the Western region of the U.S., and for ensuring that the
rules that govern the electric industry make sense for every region and
do not disadvantage one region at the expense of another. We commend
Chairman Barton for his leadership in advancing important legislation
that provides many pieces of the solution to the problems our nation's
electricity delivery system faces.
Nonetheless, as a response to the serious issues facing our
company, we submitted to FERC, and the Commission initially denied, a
proposal that would have limited what sellers across the region can
bid. As we will testify at FERC's hearing tomorrow, we believe that the
FERC should adopt a bid cap approach for those generators that possess
potential market power. We look forward to the results of FERC's
review.
In the long term, other solutions to this problem may need to be
considered to ensure that comprehensive restructuring is undertaken.
Some of the possible long-term legislative solutions to be considered
include:
coordinating action by federal agencies to reduce the time and
streamline the process to get new generation and transmission
lines sited to provide needed generation;
helping to implement Executive Order 13123 (in turn
implementing the program created by Congress in the Energy
Policy Act of 1992) to encourage energy efficiency at federal
facilities, and
examining the scope of FERC's responsibilities to determine
that the Commission has adequate authority to manage the
nation's energy system.
conclusion
Thank you again for the opportunity to offer my views. I have
focused primarily on actions that impact the San Diego region, actions
to which you can lend your support to FERC to ensure that the
deregulated electric market that is ultimately created provides low
cost, safe and reliable service. I would be pleased to provide comments
in the future if it would be helpful to the Committee, and am pleased
to answer any questions you may have for me today.
Mr. Barton. I want to apologize to Commissioner Wood. I'm
not trying to be personally impolite, but we've had several
other people that came in today that wanted to testify, and
we've got your president of the Commission testifying, and it
just wouldn't be fair to these other people to let you say
something. We will ask you questions, I promise you, when we
get to the question period.
We'd now recognize Mr. Stout, who is Vice President for the
southwest region of Reliant Energy for 5 minutes.
STATEMENT OF JOHN STOUT
Mr. Stout. Thank you, Mr. Chairman.
My company has invested about $3 billion in the wholesale
marketplace throughout the country, and about 4,000 megawatts
of that investment is located in California. In fact, we just
opened up a brand new 500-megawatt power plant just in time for
this summer's peak to help serve the California marketplace.
We are one of about six new generation owners who are
participating in the California market, and we own about 9
percent market share. Beginning last summer, we began having
people approach us indicating that they were interested in
trying to lock in power prices for the summer of 2000.
They saw some of the handwriting on the wall that perhaps
the summer of 2000 was going to be a very tough summer in terms
of power prices. They wanted to make sure they had reliable
supply, and they wanted to lock in the price. So we began
selling portions of our 4,000-megawatt portfolio to them.
Over the course of perhaps 6 to 9 months, we sold over half
of our portfolio in what we call the forward market. Those
people locked in price certainty, and they were protected from
the price spikes that occurred this summer.
As it turns out, that 5 percent market share that we sold
to other participants actually went to about a dozen or more
other market participants who are now bidding that power in
various markets in the west, not necessarily the California
market, but wherever they choose to bid it.
I point that out to highlight the fact that it's not just
six generation owners who are supplying this market. There are
literally dozens of parties who have bought into the supply in
this market and are serving the needs of California.
For next year, we are already being approached by numerous
parties wanting to lock in price for next summer. In fact, in
the last month we sold an additional 700 megawatts from two
people who were interested in locking in those prices. Next
summer's supply is going away rapidly as well.
Interestingly, nearly all the power that we sold in the
summer of 2000 was at prices less than half of what the market
ended up being. Those people got real bargains. Who knows what
the summer of 2001 will bring. That's speculation to say
whether it's going to be more expensive or less expensive. But
the point is, you have to hedge in this type of market in order
to protect your customers, in order to give price certainty to
those customers.
None of the power that we sold last year, and so far none
of it that we have sold for the year of 2001 has been sold to
an IOU in California. It's all alternative buyers. We want to
be part of the solution. We're trying to make offers and
propose ideas that will help the consumers of California.
Just a week and a half ago, we made a proposal to sell
energy to San Diego Gas & Electric for 24 months at a fixed
price of 5.6 cents per kilowatt hour. To date, we're told that
there is no response yet. And, in fact, we're told it'll
probably be September 21 before we hear any response to that
offer.
But that is an offer that's intended to try and help to
stabilize the rates for San Diego and to help the customers of
San Diego before they get hit with the same sort of price
volatility next year.
I had a number of written remarks prepared, but I think I'm
going to diverge from those just a minute and talk a little bit
about some of the comments that I've heard earlier today.
It is very important that investigations like this get to
the truth, get the facts all out on the table. Because I think
when you get the facts out on the table, you'll find that some
of the accusations which are being made and fingers that are
being pointed perhaps are being pointed unfairly.
A good example is the allegations that we heard just a
moment ago of generators withholding capacity from the market.
They're supposedly doing so just to drive price up. In fact,
there's at least three reasons why withholding occurs in the
market for clear business reasons.
First of all, as I said just a moment ago, we have sold
over half of our capacity already. We can't possibly bid that
in the market. It's already been sold to someone else. In fact,
statistics from the PX clearly show that about 6,000 megawatts
of supply in California has already been sold in the bilateral
market.
Second, we have a lot of units that are constrained in how
much they can operate due to air emission constraints. They can
only run a certain number of hours per year. If we just bid
those in at marginal cost, they will all be used up long before
the summer peak gets here.
And then Terry Winter at the ISO, when he looks to get the
300 or 400 megawatts of capacity from those peaking units that
have air emissions constraints, he'll be told, ``I'm sorry.
It's against the law for us to run those units any longer.'' We
have to hold those types of units back in order to make sure
they're available to serve peak needs in order to keep from
having blackouts in California.
And third, there's considerable financial risk associated
with bidding every last megawatt you have into the day-ahead
market. That is what we call a financially firm market. And if
we were to do that and one of our power plants were to have an
operating problem and trip off line, we would be accountable
for the financial damages associated with purchasing
replacement power.
Those are simple explanations of why withholding apparently
occurs, and I illustrate that just to point to how important it
is to get to the facts before drawing conclusions as to blame.
Once again, we want to be part of the solution. We continue
to work with all the interested parties in California to try
and develop solutions to the problem that we currently face.
And I think you've heard a number of excellent recommendations,
most of which we endorse, regarding opening the door for more
hedging, not requiring everyone to purchase everything through
the PX, and putting proper incentives on retail providers and
building a strong retail marketplace in California. Thank you
very much.
[The prepared statement of John Stout follows:]
Prepared Statement of John Stout, Reliant Energy
Good morning. My name is John Stout. I have worked in the electric
power industry for 28 years and currently serve as Vice President of
Asset Commercialization for Reliant Energy. Our company owns
approximately 4,000 megawatts of merchant generation, used to serve
wholesale markets in California and the southwest United States.
[GRAPHIC] [TIFF OMITTED] T7633.021
As you can see from the slide, our ownership share in the
CAISO market is about 9% of the total load requirement. Because
of prior supply commitments we have made through forward
1 markets, we currently have less than 4% market
share remaining for participation in the spot 2
markets in California.
---------------------------------------------------------------------------
\1\ The term ``forward markets'' refers to transactions made well
in advance of the physical delivery, i.e. a sale for August 2000 power
which is agreed to in December 1999
\2\ The term ``spot markets'' refers to daily and hourly
transactions made just prior to physical delivery, i.e. the PX day
ahead and ISO real time energy markets
---------------------------------------------------------------------------
I agree with the comments you will hear from many speakers
today that the market in California is flawed on both the
wholesale and the retail side. My comments are intended to
build consensus on the root causes, not to cast blame or to
chase symptoms. But let me say up front that the events that
have unfolded this summer in San Diego are not the creation of
Congress of FERC. The solution to this situation does not
require FERC or Congressional intervention, although those of
you here today should be applauded for your willingness to
examine this issue and to get the facts on the table.
As this hearing no doubt will disclose, the problems with
the California market must be fixed at the state level. In
fact, in recognition of this, the CPUC, the Legislature, and
the Governor have, in recent weeks, taken positive steps to
begin implementing corrections to these deficienciesOn the
wholesale side, this market has failed because of too much
reliance on spot market energy. Spot markets are inherently
more volatile than forward markets and market participants who
rely on spot market prices are exposed to dangerous financial
risk. Other markets, such as PJM, purchase only about 15% of
their energy from the spot market. California purchases nearly
100%. At least three different reasons explain this dependence.
First, limits were imposed as to where the incumbent utilities
could shop for power. As a result, SDG&E could not purchase
NYMEX futures or enter into forward bilateral transactions.
Second, limits were imposed on how much power could be bought
on an advance basis. That limit was set at too low a level,
only 400Mw for SDG&E. Third, a business decision by SDG&E to
forgo opportunities to lock in forward prices, on hindsight,
turned out to be the wrong decision. SDG&E could have locked in
prices at one fourth of subsequent spot market prices.
[GRAPHIC] [TIFF OMITTED] T7633.022
This slide illustrates the impact that less reliance on
spot market purchases could have had, based on a estimate that
San Diego procured about 25% of its June 2000 energy from
resources under its control and the remaining 75% of its energy
from the spot market. Assuming spot market prices which reflect
the average day ahead energy market price in June 2000 and
forward energy prices which reflect the prices which could have
been locked in earlier this year, you can see that someone who
depends 75% on spot market purchases would have an average
energy price of nearly 14 cents a kilowatt hour. On the other
hand, purchasing only 15% of energy from the spot market, as is
the case in PJM, would have resulted in a blended energy price
of less than 6 cents a kilowatt hour.
Why is the California spot market experiencing high price
volatility? This is the result of a subtle, yet significant
change in the way the California market now operates. Under the
original ``regulated'' market, the cost of peaking capacity was
recovered gradually across the whole year through monthly
demand charges or slightly increased energy charges. Most
unregulated markets have a similar recovery mechanism, such as
the capacity market in PJM. The California market does not to
have such a mechanism. As a result, a merchant generator who
supplies summer peak energy in California must somehow recover
an entire year's cost during a few hours of actual operation.
During 1999, the last 10% of the peak load, approximately
4500Mw, used summer peak generation for only 33 hours. This
load shape, coupled with a market design that does not provide
other mechanisms for fixed cost recovery, inevitably results in
large price spikes. Ironically, summer peaking related costs
have always been there, but they were camouflaged by levelized
cost recovery.
If those kinds of prices have always been there, why are
bills in SDG&E so much higher than ever before? The reason lies
with the market rule that all of the base load generation still
owned or contracted by the incumbent utilities be sold into,
then repurchased from, the spot market. Forcing base load
energy to be purchased in a market with high volatility has
inflated costs for base load generation such as nuclear, QF,
hydro, and coal generation. California consumers are purchasing
half a billion KWh per day of base load generation at spot
market prices. Other markets purchase most base load capacity
through long term forward markets. Simply stated, California
residents should not be forced to buy over 40,000 megawatts
from a market that exhibits peaking volatility.
On the retail side, a large number of the problems in San
Diego are created by a ``change in perspective'' of the
incumbent utility provider. SDG&E has clearly indicated the
belief that they no longer have responsibility to manage the
energy costs that are passed on to their retail customers. It
is not hard to understand how such a perception originated with
the current market structure. More importantly, if not fixed,
other incumbent utility suppliers may repeat this perception.
Once again, this attitude is the result of a flaw in the
policies that established the deregulated market in California.
Those policies placed no economic incentives on the default
utility providers to look out for the costs that are ultimately
passed on to their consumers. Such is not the case in other
states which typically have a ``price-to-beat.'' A price-to-
beat structure provides a natural incentive for the incumbent
provider to manage purchased power costs in a reasonable and
prudent fashion.
Another underlying issue with regard to the retail equation
is the fact the California has established policy which
inhibits the development of a retail marketplace with a healthy
portfolio of retail suppliers. This has occurred because of a
flawed perception on how to set the price passed on to retail
customers. In an effort to produce instant savings, California
has set the price expectation so unrealistically low, it
virtually eliminates the ability of any third party provider to
come in and provide retail service to residential and
commercial customers. The prices in the market for the last
three years are actually prices set in 1996 and discounted by
10%, arguably equivalent to early 1990 level prices.
Furthermore, these prices reflected an artificially depressed
rate base that did not reflect proper investment in new
generation. Just over one week ago, the California legislature
capped rates for San Diego customers at 6.5 cents per kilowatt
hour for the next two years.
[GRAPHIC] [TIFF OMITTED] T7633.023
This slide reflects the current energy market summer prices
for the trading hub at Palo Verde, an index commonly used to
reflect western markets. One can see how unlikely it will be
for a third party retail provider to purchase energy for the
next two years at a price at or below the rate cap charged by
SDG&E. SDG&E will get special ``balancing account'' treatment
for this below market pricing. Upstart retail providers get
nothing. This creates a roadblock for any retail service
provider trying to get a foothold in this market.
The retail and wholesale problems which have hurt San Diego
ratepayers have nearly every participant pointing fingers at
someone else. Accusations of withholding, megawatt laundering,
price gouging, and profiteering have been made against Reliant
Energy. I would like to respond to each of these charges. I
cannot speak for all market participants. My responses apply to
Reliant Energy. However, upon completion of your
investigations, I believe that you may find them applicable to
all market suppliers.
With respect to charges of withholding capacity in order to
drive up energy prices, you will find that those charges are
untrue. Instead, you will find sound business explanations for
why capacity is routinely not bid in the day ahead market.
First, our company has sold over half of its capacity to buyers
in the forward market. We do so to hedge our risk of having a
mild summer with low power prices, as we did in 1999. This
capacity is ``withheld'' from the market simply because it has
already been sold and is no longer available for the spot
market. Second, one of our units has run out of operating hours
because of air emission limitations of only 200 hours of
operation per year. It is being ``withheld'' because it is
against the law to run it any more this year. Several other
units are being ``withheld'' during off peak periods to keep
them available for peak periods when unavailability could
contribute to a blackout. And finally, we don't bid every
remaining megawatt into the day ahead energy market. If we do,
and a unit breaks and cannot supply its day ahead schedule, we
are exposed to significant financial penalties, often the 3 to
4 times the original revenue of the unit. To protect against
this financial risk, we routinely carry an ``operating
reserve'' to cover the loss of our largest on-line unit. We
don't do such to drive up prices, we do so to prudently manage
our risk. Those reserved megawatts ultimately are sold in the
CAISO real time market, because there is no financial penalty
for unit contingencies in that market.
Megawatt laundering is a relatively new accusation, caused
by the below market price caps imposed by the CAISO. Allegedly,
an in-state generator sells to a partner out of state in order
to resell back to the ISO during emergencies at prices above
the price cap. The theory is that the ISO will be willing to
pay over the price cap if the supplier is out of state. Truth
is, the ISO has rarely, if ever, paid in excess of the price
cap, even for out of state emergency purchases. Second, the
laws of physics don't allow the exported generation to simply
be stored on a shelf until the ISO needs it back. It has to be
used to serve load somewhere. Thus, in order to sell the
``laundered megawatts'' back, someone has to produce a new
megawatt of energy for every megawatt the ISO buys back. This
makes for a classic chicken and egg question as to whether or
not the sale back into California is coming from the original
in-state generation, or from the new source of replacement
energy. Reliant Energy does not engage in this type of practice
in order to get paid more than the price caps. However, we can
recall an occasion when the ISO contacted Reliant Energy during
one of this summer's many emergencies, asking if we could do
anything to get them some extra energy. We called one of the
parties to whom we had previously sold power and asked if we
could buy it back. They agreed but only at a price higher that
the cap. We agreed to pay the price and buy it back, and when
we called the ISO, they said they didn't need it anymore. We
didn't launder megawatts, we simply tried to help and ended up
losing money. If megawatt laundering conduct is suspected,
let's get the when and who so we can get to the truth.
Price gouging is used by some critics to explain why the
prices this year appear to jump every time the demand
approaches about 40,000Mw. Truth is, the bid curves that have
been made public show basically the same supply curve being bid
day after day, hour after hour. The last few megawatts are
always bid at high prices. That's not just in California, its
true in most other markets in the country. What's causing the
apparent ``gouging'' is simply the fact that the market is
actually running out of supply and those last few megawatts are
being purchased. It is running out of supply because California
is clearly out of supply. To make matters worse, California
buyers keep waiting to the last minute, the real time market,
after the rest of the western market has locked up all the
moderately priced power, to make their last 10,000 to 15,000
megawatts of purchases. As a result, they are left with the
tail end of the supply curve. They know what prices to expect,
and yet the market rules and their bidding strategies
consistently put them last in line. Its true that sellers can
sometimes name their price in such a situation, but only
because imprudent buying practices give them that ability.
With respect to charges of profiteering, Reliant Energy has
seen substantial profit increases during the summer of 2000.
Some of that is due to the doubling of our portfolio with over
4000Mw of additional generation, normal weather compared to the
milder summer of 1999, and some is due to the higher market
prices in the California market. However, as mentioned earlier,
we have forward sold over half of our portfolio for this
summer. That means that we didn't get the benefit of this
summer's higher spot prices for the portion we sold.
Furthermore, we would have made the same profits even if the
spot prices had been below normal. What profits we did make, we
made according to the rules. We are in business to make a
profit but accept the risk that we may not always make one.
Making a profit is not improper or unjust. It is the economic
signal for us to do everything we can to keep our plants
running and to keep the lights on in California. Those profits
are also the fundamental mechanism for attracting much needed
new generation to the state.
While there is a strong preference to simply point fingers
at ``out-of-state suppliers'' for causing prices to be greater
this year than last, we welcome your investigation because we
believe when the truth is known, you will find that higher
prices are really the market telling you something. California
is short supply, and the market has flaws that are magnifying
the consumer impact of these market signals. Reliant Energy is
committed to work with your investigation and looks forward to
the opportunity to be part of the solution.
Mr. Barton. Thank you, Mr. Stout.
Last, but not least, we want to hear from Steve Kean, who
is chief of staff for Enron Corporation, who is a supplier in
the California market.
STATEMENT OF STEVEN J. KEAN
Mr. Kean. Last guy, last panel. I'll try to be fast. I want
to thank you for inviting me to speak here.
I think you've heard a lot about the problems today and a
lot about the real-life consequences, and I'm going to focus my
testimony on the solutions.
First I want you to understand our perspective. Enron is
not a generator nor a consumer of power in the State. We buy
and sell power. We buy and sell power to serve both our
producers as well as consumers, as well as customers.
Mr. Barton. You have no generating capacity in California?
Mr. Kean. We have some wind-generating facilities in the
south part of the State, but I believe they're all contracted.
And we are looking at developing some generation as well. But
the point is this. What matters to us is that this market works
well. If it doesn't work well, then it doesn't work well for
the producers who sell to us or for the customers we serve.
The solutions, one by one. California must expedite its
siting process. This is a State and local matter. We have to
open up the market to allow new plants to get sited. There's
about twice as much capacity waiting to get sited as there is
growth and peak demand in California. We need to open it up and
let those facilities get sited.
There's a lot of people anxious to blame generators. I
think the fastest thing you can do to undermine generator
market power is to give them competition. Open it up, let more
facilities get sited.
Federal regulators have to expedite the interconnection of
these facilities to the grid. It's a Federal matter. We need
clear deadlines, we need clear standards so that the facilities
that people are willing to build can get interconnected.
State and Federal regulators should remove the restrictions
which prevent utilities from purchasing outside the exchange.
Last winter, if you wanted to buy power for this summer, you
could have bought it for 50 bucks, and you would have had a lot
of producers who would have been tickled pink to sell it to you
for that.
It's ridiculous that every last megawatt that a utility
purchases is forced to go through an exchange, forced to go
through a single market when there are competitive venues
available.
Federal regulators must ensure that all transmission into,
out of and inside the State is available on a nondiscriminatory
basis. This is particularly important at the seams. There are
some issues which make it more difficult to move ancillary
services in particular from the northwest United States into
California. We need to examine the seams, and we need to open
up the system so that transmission is available so we can get
power from where it is to where it's needed.
The information that's available to the ISO and the Power
Exchange must be made available to everybody. If market
participants know how the system is loaded, we know where the
constraints are and we know what temperatures are and what
loads look like, we can help find solutions to problems. We can
have 50 hands and 50 heads searching for solutions rather than
one or two.
And customers should be encouraged to choose. Many are.
Those customers who chose us are doing fine. They've got fixed
price power. We went out and hedged our position in the
marketplace by buying from producers, and our customers and
shareholders are fine. Customers should choose and should be
encouraged to choose.
I want to extend this a little bit to the national arena. I
think California is just the first and probably not the last of
disruptions we are going to see. And a lot of the solutions
that we need are the same. We need the Federal Energy
Regulatory Commission to finish the job of opening up
transmission access on a nondiscriminatory basis so we can get
power from where it is to where it's needed.
We need interconnection standards which are clear and
straightforward and allow generators to overcome sometimes--not
in all cases, but sometimes--utility incumbent foot-dragging
when we're trying to get new supply on the ground.
FERC must also require the Nation's transmission on the
utilities to join the regional transmission organization so
that we can make sure the transmission is provided on an
ongoing nondiscriminatory basis.
The problems that we're observing in California and that
we're going to observe, I think, with increasing frequency in
the rest of the country are not going to be solved overnight.
We need policymakers both at the State and Federal level to act
quickly so that we can put these solutions in place. Thank you.
[The prepared statement of Steven J. Kean follows:]
Prepared Statement of Steven J. Kean, Enron Corp.
description of enron
Enron develops and operates networks primarily in energy and
communications. We combine physical assets and contracts to make
markets in energy and related commodities as well as bandwidth.
Enron is the largest buyer and seller of electric power in North
America and participates in power markets throughout the world.
Our perspective on the current issues is a uniquely objective one:
we buy and sell power so we are neither a net generator nor a net
consumer. We make markets in power to allow us to serve both producers
and customers. We sell protection from price volatility to both
producers and customers. Consequently, our interest in California's
power market (and the rest of the power markets we participate in) is
to ensure that markets work effectively. That's what enables us to do
business.
Enron believes that it is time to fix the problems in electric
markets, not time to fix blame.
My testimony will address the California situation as well as the
national situation. California is just the latest problem area in U.S.
power markets and, unless policy makers act quickly, it will not be the
last.
I will identify what happened, what the problems are, what the
solutions are, and finally what state and federal policy makers can do
to reduce the barriers to those solutions.
california
The problems in California this summer (spiking prices and threats
to reliability) have straightforward causes. Let's look at the facts:
A booming economy has increased power demand in California and
throughout the West.
It is very difficult to site new power generation facilities
in California, so supply has not kept pace with demand (even
though suppliers have proposed to build about twice as much new
capacity as needed to meet peak demand growth).
Hydro capacity from the Northwest has been lower than in
recent years, thus sharpening the problem this summer.
There is still very little demand response to rising prices.
In a typical market, price increases will be met with a demand
response. Electricity is no different. There are customers,
particularly certain larger commercial, institutional and
industrial customers, who have flexibility in how much and when
they consume. Their flexibility to reduce demand at critical
times brings overall market prices down. Inflexible tariff and
contract structures prevent much of that demand response from
materializing because too many customers with flexibility do
not get price signals that trigger conservation.
In summary, growing overall demand, inability to add supply, and an
absence of a demand response as prices rise, create price spikes and
shortages.
An added fact compounded the California situation: utilities, who
still control most of the residential load in the state, were
restricted in their ability to hedge. Just as suppliers are begging to
site new generation to meet demand, many suppliers offered San Diego
Gas & Electric Co. the opportunity to purchase power at fixed,
predictable rates for 4-5 years at costs below this summer's prices.
Unfortunately, SDG&E's ability to consider those offers is restricted.
So, customers in San Diego not only see the effects of higher prices,
they are also left exposed to price volatility--the unpredictable rise
and fall of prices.1
---------------------------------------------------------------------------
\1\ San Diego customers are exposed to this volatility because rate
caps which were part of California's legislation expire once stranded
costs are fully recovered. San Diego's stranded costs have been fully
recovered, so wholesale market prices were passed through directly to
customers.
---------------------------------------------------------------------------
The solutions in California are similarly straightforward:
New power plants must be built and interconnected
Customers must be permitted to ``hedge'' to eliminate their price risk.
Customers should choose competitive providers (and more are because of
this summer's events). Competitive providers do a better job of
managing demand as well as supply and protecting customers from
price volatility.
The state and federal actions required to let these solutions
through include:
California must expedite its siting process.
Federal regulators must expedite the interconnection of these
facilities to the grid.
State and federal regulators should remove the restrictions which
prevent utilities from purchasing outside of the Power
Exchange.
FERC must ensure that all transmission into, out of, and inside the
state is available on a nondiscriminatory basis.
Information available to the ISO and Power Exchange must be made
available to market participants so that they can search for
and implement solutions.
national
California is just the latest of several disruptions in U.S. power
markets and, unless we act quickly, it will not be the last.
Reliability problems and price spikes have occurred with increasing
frequency across the country. Some of the underlying causes are the
same (e.g. higher demand spurred by economic expansion throughout the
country).
To prevent reliability and pricing of power from becoming a problem
throughout the nation, policymakers must act now. Power plants are not
built in a day.
The solutions which will prevent local emergencies from becoming a
national disaster are straightforward:
New generation must be built and interconnected.
The interstate transmission system must be opened to enable power to
move from where it is to where it is needed.
Customers need to be free to choose. Choices mean not only lower prices
but greater innovation in products and services which can
reduce demand at critical times.
Policymakers need to remove the barriers which inhibit these
solutions. Federal lawmakers should enact comprehensive legislation to
enable all Americans to choose their power provider and to provide them
with access to the nation's interstate grid. In the meantime, the
Federal Energy Regulatory Commission must act. It must fully unbundle
transmission service and provide for nondiscriminatory access to that
service. It must ensure open access transmission through the ``seams''
(the administrative borders separating parts of the grid). It must also
expedite the interconnection of new generation with clear rules and
deadlines to prevent footdragging by utilities who don't want to
connect with competitors' generation. FERC must also require the
nation's transmission owning utilities to join Regional Transmission
Organizations which will ensure that this access and interconnection
continue to occur on a nondiscriminatory basis.
The problems we are observing in California and other markets will
not be solved overnight. Policymakers need to act now so that market
participants can begin putting the needed solutions in place.
Mr. Barton. Thank you, Mr. Kean.
The Chair will now recognize himself for 10 minutes. Before
I do that, after my question period, I'm going to leave to go
to the airport. I'm going to turn it over to Congressman
Bilbray to chair the rest of the hearing this afternoon.
My first question is--I'm going to direct it to the
chairman of the FERC, but the other three commissioners, if you
want to answer, can also. We've heard quite a bit of talk about
hedging and long-term pricing and energy markets. What's the
FERC's estimate what the natural gas well head prices are going
to be next July? They were between $1 and $2 last year. They're
around $4 this year. I want to go on record as what they're
going to be next summer when all these peaking demand units are
using natural gas to clean burning fuel is.
Mr. Hoecker. Well, this isn't an official commission
estimate, but the futures for December this year are already
five dollars plus, and I expect that there will not be a price
response to increased drilling and supply for several months.
So I would imagine the price is still going to be fairly
expensive next summer.
Mr. Barton. The rest of the commissioners--I tend to agree.
Ms. Breathitt. I agree with the chairman's response.
Mr. Barton. But no one would want to stake your life
savings on specifically estimating what the price is going to
be within 10 cents in MCF next summer, would you? Anybody here
want to--Mr. Hebert, you're willing to do that?
Mr. Hebert. No, sir. Not my life. And it goes to the
point--and I know the point you're trying to make is that we
have changed really the direction of fuels and what we're doing
especially with natural gas, and we've got to have adequate EMP
and infrastructure to make sure that we've got opportunities in
natural gas.
It's no longer a market that shoulders seasons because
we're converting it into electricity. So the shoulder seasons
when we inject are no longer with us, so fuel prices, I think,
are going to get worse, not better. That's my forecast.
But also, while I've got the moment, I grew up with a Bill
Bray, and every time I see Congressman Bilbray, I want to call
him Congressman Bray, so I apologize. I caught myself last time
I said that.
Mr. Barton. We thought that's the way Mississippians talked
to Californians.
Mr. Bilbray. That's okay. My father was named Hubert, and
he went by Bill just to avoid it, so----
Mr. Hebert. There you go.
Mr. Barton. Well, my first point is, you know, it is
obvious it's a good thing to let the market here in California
begin to hedge and buy in the foreign market. But that's no
guarantee of lower prices next summer, because we don't know
where the energy market is going to be. Oil prices right now
are about $36 a barrel. Natural gas prices have doubled at the
wellhead in the last 6 months. Hopefully, it'll go back down,
but they could go higher.
Mr. Hebert. But Mr. Chairman, that's only part of the
question because the entire question is the difference in the
spot market and the forward market itself. And if you look at
what the spot market was on the given day that they could have
hedged and what they----
Mr. Barton. I understand that.
Mr. Hebert. [continuing] ended up paying, there's a huge
difference in the two. So your expertise has to be in the
forecasting of those forward markets. And if you guess wrong,
which has happened here and has happened in other markets, your
rate payor is going to pay for it, and that's what happens. So
it is a part of the equation.
Mr. Barton. It is part of it. And I'm on record in saying I
think we ought to allow more hedging and more forward pricing
and you know, forward purchasing and all that, because until
recently here in California, they weren't allowed to do that.
So it's a step in the right direction.
Mr. Hebert. Absolutely.
Mr. Massey. Mr. Chairman, if I might comment. It seems to
me that a power purchaser wants the flexibility to have a
balanced portfolio of short-term and long-term supply. And
regulatory policies ought to promote that mutual fund type of
approach.
Here in California thus far, there's been too much reliance
on a volatile market of last resort, the spot market, so all of
us want to encourage purchasers to hedge, and yet I think what
we're looking for is a more balanced approach of long-term and
short-term supply.
Mr. Barton. Now, I want to ask Commissioner Lynch or Mr.
Wood. Your testimony, you talk about an average monthly price
of 17 cents a kilowatt hour in June, 12 cents in July, 18 cents
in August. Are those retail prices here in San Diego?
Ms. Lynch. Yes. They're actually prices statewide for
energy, just the energy component of that.
Mr. Barton. Statewide.
Ms. Lynch. That's right. But the only people who are
actually paying it are the San Diego folks, because the rest of
the State is under a legislatively mandated rate freeze.
Mr. Barton. Then let me ask Mr. Guiles.
Mr. Guiles. Yes, sir.
Mr. Barton. Mr. Guiles. Excuse me. What are the prices that
the San Diego homeowner or small businessmen have paid in June,
July and August? Do they pay 17 cents a kilowatt hour in June
and 12 cents in July and 18 cents in August or do they pay some
percentage of that?
Mr. Guiles. Mr. Chairman, they have been seeing bills that
passed through the full commodity price for the energy, plus we
have a base rate that's slightly declined, but that's a base
rate for the distribution facilities. So the rates have been in
total much above 20 cents a kilowatt hour.
Mr. Barton. So they've been higher than that.
Mr. Guiles. Absolutely.
Mr. Barton. San Diego, since you're at the center of the
fire storm, you're not a generating utility, are you?
Mr. Guiles. That's correct, sir.
Mr. Barton. Do you have any generation at all?
Mr. Guiles. We have some contracts, if you will, that are
generation-related contracts, but we no longer own any
generation. SDG&E does not.
Mr. Barton. Okay. So you're a distribution utility.
Mr. Guiles. We are----
Mr. Barton. You buy through this Power Exchange or the ISO,
and then you sell whatever you buy, but you have to pass
through the commodity cost.
Mr. Guiles. Right.
Mr. Barton. Now, I've gotten a different answer to this
question. I'm still told today that--some of the folks from the
first panel said your utility now has the right to go into the
futures market, and you also have the right to enter into
bilateral contracts. And I've had somebody else at the staff
level say that's not true.
To the best of your knowledge, what can your company do
today in terms of bilateral contracting and hedging in the
futures markets?
Mr. Guiles. Well, let me real quickly go back. We are not
allowed any bilateral contracts. We have asked for the
authority to enter into bilateral contracts. So presently
today, we buy 100 percent from the California Power Exchange.
We have had the ability since last summer to buy forward for
about 400 megawatts, which is about 10 percent of our supply on
peak in the summer, and then we have had the ability since
August 3 to increase that amount up to 1900 megawatts, but
that's in the block forward market that's administered by the
California Power Exchange.
Mr. Bilbray. That's what you asked for, though.
Mr. Guiles. Pardon?
Mr. Bilbray. But that's what you asked for, the authority
to do that. Now, why did you----
Mr. Guiles. We've asked----
Mr. Bilbray. [continuing] only ask for that percentage?
Mr. Guiles. For 1900 megawatts? Well, that's essentially
about half of our load on peak. And so we felt that that was a
substantial amount. Looking forward, the amount to hedge
forward.
Mr. Barton. But now, this bilateral contracting authority,
you have a request to the California PUC; is that correct?
Mr. Guiles. Yes. Yes, sir.
Mr. Barton. It doesn't have to go to the FERC.
Mr. Guiles. That's correct. We have a request for
authority. And perhaps President Lynch would like to comment.
Mr. Barton. When do you expect to make--I can't ask you
what your decision is going to be, but what's your time table
for making that decision on this pending request?
Ms. Lynch. Our time table is as soon as possible, as San
Diego Gas & Electric just applied for that authority, unlike
the other utilities which applied several months ago.
Mr. Barton. Okay. So you have a feeling in the next month
that you can make a decision, the next week?
Ms. Lynch. It's my understanding that we'll be taking up
this matter at our next meeting on September 21.
Mr. Barton. Okay. See, that's why it's good to have all you
all folks here. We have the feds and the State and the
petitioner. Sometimes we can just kind of expedite things by
getting all our friends together here. It's a good thing.
I want to ask Chairman Hoecker, San Diego has basically
asked the FERC to come in and take over. Now, I'm putting words
in San Diego Gas & Electric's mouth, but that's kind of a
layman's interpretation. Do you really think the FERC ought to
come in and supersede California law that was passed by the
California legislature?
Mr. Hoecker. Well, you raise a very interesting question. I
know that SDG&E asked us to impose a cap on bids. We
effectively have imposed a cap on the market, but if you go
down the list of issues that have been raised this morning
about what potential causes are in the market, the Commission's
responsibility relates to some of them, the CPUC's
responsibility relates to some.
But to make structural changes in the market--for example,
the remark that was just made about the PX and the ISO being
separate, for us to look at that and make a judgment that the
market would be more efficient and more in the public interest
to combine those two institutions, I think would require us to
preempt AB-1890 and the provisions of the California statute.
There may be instances where we might be willing to do
that, and I think we have to follow the trail of facts in our
investigation and see what makes the most sense in terms of
market structure and to act on that in the interest of
California rate payers, but also rate payers in the last----
Mr. Barton. That's a real long answer. Now, you do think
you ought to supersede California law or you don't think you
ought to supersede----
Mr. Hoecker. I don't come to the table with that as a
position, but I think we need to make the most reasonable
decisions, and if we find that the California legislature has
structured the market in a way that doesn't work and that those
features are FERC jurisdictional, then I think we have----
Mr. Barton. Let me ask you a straight, point-blank
question. Do you think the FERC has the authority under Federal
law today to change the way the Power Exchange in California
does its bid system?
Mr. Hoecker. Yes.
Mr. Barton. Okay. Do the other Commissioners agree with
that?
Mr. Hebert. Absolutely. Yes.
Mr. Barton. Okay. My time has expired, but I've got two
more questions. I want to ask President Lynch to define market
power for me. Because in your testimony, you say the problem is
market power being exercised by these unknown generators, so
define market power for me.
Ms. Lynch. I'm just going to give you a common definition.
The economists and all sorts of other folks have various
structural definitions for that. But to me, it's when a
generator or a collection of generators can set the price on
the margin for energy at any particular time.
And given the way that the PX pricing works, I just want to
clarify what some of the speakers this morning said. The last
highest bid is paid to all. No matter what those folks bid at,
everybody gets the highest bid. So given the way that market
structure works----
Mr. Barton. You can change that. That is set by the
California law. That's not set by the generators.
Ms. Lynch. I appreciate that, but because the California
market works in that way, the person who is able to control
that last bid gets to control the price for all.
Mr. Barton. So that one person, some little bitty
generator, Barton Generation, who has 100 megawatts has got--I
am the market power demon if I'm the last one to bid into that
market?
Ms. Lynch. I don't think necessarily you're the demon,
although sometimes it can be a small amount of generation that
can control that price. But in general, you've got generators
who have several plants, and by determining which of those
plants are going to run when and how much they're going to bid
in at various prices, they've got the ability to make that
price go higher.
Mr. Barton. Now, let me ask as my final question Mr. Stout
and Mr. Kean, according to President Lynch, your group has got
this tremendous market power. Now, how often do you all collude
with each other to set these extremely high above-market rates
so that everybody else in the bid curve gets them? Is that a
daily conference call or is that a----
Mr. Stout. I can't speak for Enron, but Reliant does not
participate in that activity.
Mr. Barton. You don't. Do you----
Mr. Kean. We didn't even collude on the answer. My answer
is never too.
Mr. Barton. Explain, because obviously President Lynch puts
this in writing, so she's fairly serious about that there is
market power, even though California went to great lengths, it
required divestiture of the incumbent utilities to divest their
generation capacity. By your own testimony, most of the
independent generators are not selling into the Power Exchange.
They're in bilateral contracts. It seems to be a very diverse
market, but it also--the way the bid system works, it appears
to be very imperfect.
How--as either Mr. Kean or Mr. Stout, whichever--probably
Mr. Stout, since you're on the operational side, and I don't
think Mr. Kean is in the operational side of Enron. You have a
fixed amount of assets. You try to maximize your return on
those assets. You want those assets being used rather than
unused to maximize returns. So how do you determine generally
what to bid into the Power Exchange if you were to do that?
Mr. Stout. As a general rule, we do bid our marginal cost
into the Power Exchange in order to optimize the volume that we
placed in the Power Exchange. But in the California market, as
is in the case in virtually every market in the country, the
bids that go in on the supply side of the equation tend to tail
up for the last few hundred megawatts or thousand megawatts.
That's the market trying to establish the value of supply in
the market.
As was discussed earlier, the intersection point between
the demand bid and supply bid sets the price in the market. We
expect that the supply, if it does not want to purchase power
at those higher prices, will actually bid a lower price curve
that intersects at a lower price.
So that's simply a test of the market to see what the value
of the energy in the market at that particular point in time
is.
Mr. Barton. But have you ever participated in a dialog or a
conference within your company where the decision was made to
withhold power from the market intentionally to get a higher
price the next hour?
Mr. Stout. Absolutely not.
Mr. Massey. Mr. Chairman, may I comment on this----
Mr. Barton. Sure.
Mr. Massey. [continuing] point?
I think the problem is, in times of scarcity, there is very
little risk of nondispatch if the bid is high, because
virtually every generator will be dispatched. And I believe
that all market participants know that, and I think it affects
bidding behavior, and I do believe that this amounts to market
power.
Mr. Guiles. Mr. Chairman, may I make a comment on behalf of
SDG&E on this?
Mr. Barton. Sure.
Mr. Guiles. Well, we brought the proceeding to the Federal
Energy Regulatory Commission, you know, from our point of view
saying that the market, in our judgment, is not workably
competitive. And I'd like you to just keep in mind before you
leave this graph. This is a scatter diagram that shows over the
load range.
I ran plants for about 15 years, and what that chart is
telling you, if you look at 1999 prices and you look at 2000
prices, throughout that load range, even with low loads--I'll
give you an example. On August 23, 1999, the demand in the
State was 41,000 megawatts. The price early morning, midday and
evening was in the 2.1 to 4-cent per kilowatt hour range.
This summer on that same day, with a load of 38,000
megawatts, the price in the morning was 10 to 19.5 cents, 22 to
25 cents or 13 to 25 cents in the evening. This is not a
rational market. It's not working. It needs to be changed.
Mr. Barton. Well, unfortunately, I have an airplane to
catch. I'm going to turn it over to Congressman Bilbray to
chair the rest of the hearing.
I just want to say before I leave, we really are trying to
find what the facts are here. We do not want the situation in
California that exists in San Diego County to be the norm. I
mean, it's obvious that something has happened out here that's
different, and it's caused tremendous price fights that flow
through the retail consumer, and that's simply not sustainable.
So we want to at least understand what the facts are before
we can determine what, if anything, we can do at the
legislative level in Washington, DC. And I think the FERC's
hearing tomorrow is going to be very important to try to help
establish the facts out here.
And I also happen to think that the State PUC--the country
is going to be watching what you all do the next couple months
out here. So, you know, I intend to be in the Congress next
year, I intend to be Chairman of the Energy and Power
Subcommittee, and I intend to move Federal legislation at the
Federal level for comprehensive restructuring.
So I'm going to be very interested in the California
experience. And any of you come to Washington, I'd love to sit
down privately and talk to you. And we'll probably do a public
hearing on this as a follow-up in Washington also.
With that, I'm going to turn it over to Congressman Bilbray
for the rest of the hearing and recognize Mr. Shadegg.
Mr. Hunter. Before you go, thank you for coming out here
and taking this time. We appreciate it.
Mr. Barton. This is just a first step.
Mr. Filner. Thank you for allowing Mr. Hunter and I, who
don't serve on this committee, the opportunity to join.
Mr. Barton. It's important to develop the facts.
Mr. Bilbray. Mr. Chairman, it was important that you found
the time to come out and actually see what--and putting
together this panel. And I'm not going to discount the previous
panel, but I think that anybody who is listening to this
testimony realized the way the hot potato is being--bouncing
back and forth, and that the California or San Diego consumer
is saying, you know, ``We have people in front of us who
probably can address this issue in the short--maybe not the
long term, but at least in the interim.''
And your coming out here from the east and helping us out
here was essential, and I appreciate the fact that you've been
involved with it.
Mr. Barton. If you'll come forward and continue the
hearing.
Mr. Bilbray [presiding]. Okay. Let me sort of jump into
this, and we'll try to dialog. I guess I'll start off with Mr.
Hebert. Hebert. My wife is from Picayune, Mississippi, so I
wish she was here so she could translate for me every time you
give a presentation.
But you were--I was interested in the--and I apologize to
the FERC because this is sort of my chance to be able to plead
for the people of San Diego County before you. The fact is is
the discussion of Shelby, New York, Mr. Hebert, saying that 6
months the ability to put on line. I don't know. Do you know if
that's a nonattainment area, according to the Clean Air Act of
the Federal Government?
Mr. Hebert. I don't specifically know. My thought is that
it--I think it is not, but I'm not certain of that.
Mr. Bilbray. I mean--and that's--there are whole--as an ex-
Air Resources Board member, as Madam President understands,
that puts in a whole new bunch of hoops in there. But even if
the State wanted to waive it, the Federal Government is on top
of it.
And I say this to the FERC commissioners that understand
that the Federal Government has an obligation to participate
proactively because we do create barriers. It keeps the market
from being able to compete. The State does it too and actually
creates defenses for the big guy from little guys being able to
get on line that Commission Hebert was saying that we need
these guys to come on line.
I just hope you're sensitive tomorrow of the fact that this
is not an open market and that the Federal Government is part
and parcel to creating sanctuaries for certain power generators
from legitimate on-line competition. And we hope to tear that
down.
And all I've got to say is, Commissioner, if you look at
those rates up there, I hope you take a look at that, and under
our obligation of the Federal Government to do oversight,
because that's one of the big battles that we have on the
commerce committee that I may agree or disagree with the
subcommittee chairman on, and that is how much oversight and
the safety valve that FERC should create on this. And I guess
this will be a real test there. Mr.----
Mr. Hebert. A couple of things real quick, Congressman. I
think you're absolutely right. And this is where we kind of get
lost in just kind of looking at the horizon and not looking at
everything else.
It's the big energy picture. It's not just what electricity
is costing San Diegans right now. It's what it's costing
everyone throughout America. It's what we're doing on hydro-
electric situations. It's what we're doing with natural gas.
It's what we're doing with electric transmission. It's what
we're doing with the siting authority. It's what we're doing
with Kyoto. It's the big picture.
And individually, what people love to do is they love to do
one thing that is really minuscule when you single it out. And
they say, ``Well, this doesn't harm the market by itself.'' But
when you throw all these together, Congressman, it is a recipe
for disaster, and that is exactly why we are where we are.
We've had a failed energy policy. We've got to rethink this,
and we've got to move forward.
And one of the things that we can do here, if we're willing
to embrace it and take difficult steps, is to look at these
market rules and see what we do need to change about them. Look
at performance-based rate making. Give some reliance, give some
sharing between consumers and the energy company when there are
bad situations.
These prices, you can look at them, look at the one--what
is it? I can barely see it. Maybe 375. What I would love to
know is what that cost a year out if you could have hedged it.
What could you have paid for it that day. And that's why the
hedging market is important.
So it's the overall scheme of things. We need to look at
the big picture, and I think you're doing that.
Mr. Bilbray. I just ask, as you review this item tomorrow,
that you understand that this is not just regulatory reviews,
but the State needs to change. The majority of the population
of this State is under Federal mandate on air nonattainment
areas between San Diego, Los Angeles and Sacramento.
And the fact is is that the largest percentage of the
population in the State lives under rules that the rest of the
country doesn't live under, and those rules have an impact on
the ability to have infrastructure within the State.
And even if New York is nonattainment, you don't have 65
percent of their emissions being mobile sources and a small
percentage being stationary sources. That's why the proposal at
Otay Mesa is going--is actually going to convert trucks as a
way to be able to get the emissions offset. This is the
extraordinary effort we're making. I just ask you to be
sensitive to that.
I do want to compliment you, Commissioner, on saying that
the FERC wants to work with the State. I mean, frankly, I've
got to say this, Madam President, the argument of, ``Well, we
can't do anything. We're going to throw the ball in to the
FERCs,'' I hope that we get a reciprocal agreement here that
the PUC is open and available to work with the FERC, and the
FERC needs to look at the fact that the State is here to
cooperate at doing whatever is possible.
Now, I would ask to go back on the issue to SDG&E. What
percentage of your projected power needs are you asking from
the State PUC for prospective purchase?
Mr. Guiles. Congressman----
Mr. Bilbray. I mean bilateral purchase.
Mr. Guiles. Yeah. Looking forward, we have a request before
the Commission for up to 1900 megawatts, which would be just
about 50 percent of the summer peak demand.
Mr. Bilbray. And my question to you is, that's what you
think you might need. Do you have any projection you might need
more than that?
Mr. Guiles. Not at this time, no.
Mr. Bilbray. See, I'm just saying, if I was going in to
ask, I'd be asking at least 10 percent of what I think I need,
just in case, so we don't come back and say, ``Oh, I just don't
have it clear.''
Would the Madam President of the PUC, would you comment on
that or your perspective on it? Either one of you.
Mr. Wood. Thank you. Congressman Bilbray, I'd like to make
a more general comment about all of the talk about----
Mr. Bilbray. I'll let you, but it's basically because the
chairman didn't let you.
Mr. Wood. Thank you. Well, it's not going to be a general
comment about everything, but about the issue of hedging. I
think we need to put that in a little bit of perspective.
The purpose--as the chairman pointed out at the very
beginning of his remarks, he said that the purpose behind
deregulation was not supposed to be to create higher prices.
That wasn't the goal. And certainly, I think we would all agree
that that was never the stated goal of anybody. And yet we've
come out of it with very significantly higher prices this
summer in San Diego.
We've heard testimony here today to the effect that it
might have been--or it would have been possible months ago to
purchase forward contracts for August at a price of a little
over 7 cents a kilowatt hour, 70 cents a megawatt hour. I've
heard some other numbers bandied around that were in that
range.
Had anyone, at the time that AB-1890 were passed, or even 2
years ago, even a year ago, suggested that it would be
appropriate for the Public Utilities Commission to sanction or
approve rates for energy of 7 cents a kilowatt hour, we would
have been run out of town on a rail.
And the only thing that makes those rates--those prices
look in any sense reasonable--because they're significantly
larger than the average cost of generation by anyone's measure.
The only thing that makes them look reasonable is that we have
this out-of-control market in which market power is clearly
being exercised to produce prices that are maybe five times
what the actual costs of generation are.
Therefore--the point of all of this is that while it may be
that we can reduce the volatility of these markets very
significantly by the use of forward contracts and other hedging
mechanisms, all of the discussion so far has been about
producing prices that are significantly higher than those that
existed prior to deregulation.
I would refer you back to the testimony that I gave before
this subcommittee on June 19, 3 years ago in which I stated
that this particular commodity market theory didn't apply in
the same way that it does for other types of commodities.
Mr. Bilbray. Okay. Let me--I want to ask, did the FERC have
any indication when the State of California came to you that
there might be this glitch or this problem or this catastrophe
on the horizon? Was there any concern by FERC when the State
presented their plan to you that there might have been some----
Mr. Hoecker. When they initially adopted the whole
restructuring in 1996, nothing like this.
Mr. Bilbray. Nothing. There was no concern about the--about
how the clearinghouse was going to be used or the spot market
issue?
Mr. Hoecker. We dealt with setting up these institutions
initially and 30 very complicated amendments to their tariffs
and their rules. This has been anything but a simple process.
It's been very labor-intensive for the Commission and its
staff.
Our theory going into this is that we would take AB-1890,
and in deference to the legislation in California, work through
these issues, try and accommodate the basic plan in that
statute and to help the ISO, the PX and the CPUC in its
activities, get them into our market.
And in many respects, as I think Terry Winter and other
people have said this morning, at certain times it's been very
good. The prices have come down. Did we, when we granted market
based rate authority, anticipate something like this? No. The
FERC's analysis was not predicated on what happens in periods
of acute shortages.
And as Commissioner Massey says, transitory market power
arises in periods of capacity shortages like this, and prices
become irrational.
Mr. Bilbray. When 1890 was brought to you, did you have any
concerns with segments of it, or did you think it was just
pretty good--a pretty good package overall with no problems?
Mr. Hoecker. Well, we had concerns with segments of it.
There was a very lively debate among economists here and around
the Nation as to various features of the legislation. But I
have to tell you that back in 1996, the adoption through the
legislation especially of a regional market mechanism of this
kind was relatively unprecedented.
And what we decided to do, since our view is that this
market is moving toward competition, and we need to use our
resources to help it become a rational competitive market, we
determined to work within the constraints of the legislation.
Mr. Bilbray. Did you--did you communicate to the State your
concerns about that segment of----
Mr. Hoecker. We've spent enormous amounts of time with the
CPUC, not only with the current president, who's been very
good, but past commissioners for the last 4 or 5 years we've
worked very close with.
Mr. Bilbray. Okay. I'm going to yield to the gentleman from
the great State of Arizona, which we like to think of as
Eastern San Diego County.
Mr. Shadegg. Thank you, Mr. Chairman. I also have a time
constraint, so I'm going to try to get through a series of my
questions, and then I apologize, I'm going to have to leave.
I want to thank all the panelists for being here. It's been
a great education for me. One of the things I want to just make
as an opening remark is that I have heard here today an effort
to boil this down to kind of a simplistic effort to blame a bad
guy and to say this is all the result of the greedy exercise of
power by people who even it's been alleged are criminally
violating the law.
Let me start by asking the commissioners from the FERC, do
any of you see anything here that would suggest that this is a
result of criminal conduct or do you see something here that is
more indicative of the market forces that we have created in
the combination of the State law, the California Public
Utilities Commission and the scheme, which I think,
Commissioner Hoecker, you just described as being relatively
unique when it was adopted.
Mr. Hoecker. In my view, Congressman, it's the latter.
Mr. Shadegg. Does anybody want to comment on that?
Ms. Breathitt. Well, our investigation is ongoing, but from
what I've read and what I know and what I've learned thus far,
I don't personally see any evidence of criminal behavior.
Certainly, there are market flaws that we've all recognized and
need to be fixed. And we're going to do that.
Mr. Hebert. Congressman Shadegg, just quickly. I was not on
the commission in 1996. I came on in 1997, so obviously some
things came before us. But there was also discussion always as
to whether or not California was moving in the right direction.
I think they made some good hard choices. At the same time,
we're looking at some different market situations.
I think it would be premature for us to judge whether or
not there's been any criminal or even market discriminatory
conduct until we get all of the evidence before us, which would
be November 1.
But I will suggest that I have been one, as you know, that
is always willing to disagree with the majority or the chair
and to give some obvious credibility to the chair and the
majority of FERC when they acted.
I think, in the beginning, FERC really wanted to give
deference to the State of California and kind of let them see
where they could go with it. Obviously, I think there have been
some problems. We need to get in there and reassess.
I think part of the answers are, move toward performance-
based rate-making, give some incentive to do something, and
also look at the opportunity to use profit in a good way. And
that would be to move away from the ISO like I suggested and
toward an independent transmission company, which would be for
profit and have every reason to do the right thing and be
penalized when they don't.
Mr. Shadegg. Mr. Massey.
Mr. Massey. As others have commented, our investigation is
still underway. Every report that has commented on the
California market, however, has outlined the points that many
witnesses have made today, so many of these flaws are fairly
obvious, I think, in the market.
But basically what I see is market participants attempting
to exploit the market rules to their advantage. It seems to me
that what we're learning is that market rules, market structure
is extraordinarily important in electricity markets.
Mr. Shadegg. The message for me, at least, is that at the
national level, we have to do this right. And I guess
secondarily that I would hope FERC can play hero in trying to
fix it.
Chairman Hoecker just said a minute ago that FERC does, you
believe, have the authority to step in and correct some flaws
in the State system, which may be leading to this circumstance,
and I think that would be--I would encourage you tomorrow at
your hearing to look at that as a possibility because there
obviously needs to be immediate relief.
Let me--Mr. Massey, let me talk--let's just walk through
some of those problems. For example, the shortage of generation
and the shortage of adequate transmission and the
interconnection problems that we have been talking about, none
of those are the result of the power--are short term. All of
those have been built up over time; is that correct?
Mr. Massey. Yes. It seems to me not much generation has
been added in California for years. I hope that is changing. It
sounds to me, from the witnesses that have testified, that it
is. Interconnection policy must be streamlined so generators
can hook up. We have a responsibility at the Federal level to
do that, and the State has a responsibility.
I frankly think that siting of interstate transmission
facilities should be done at the Federal level. That may be a
controversial position here in California, but we do it for
natural gas pipelines, and we've sited thousands and thousands
of miles of interstate natural gas pipelines, and I think we
have a fairly well functioning natural gas market because of
it.
Mr. Shadegg. As we're emerging from a regulated market to
hopefully a deregulated market, which with luck or hopefully
will produce lower prices for everybody, those problems at
least are not caused by the generators, the lack of capacity at
this point. Those are regulatory problems stemming from past
practices, aren't they?
Mr. Massey. Yes.
Mr. Shadegg. You made a comment, and I wrote your testimony
down. You said the rules here in California, which have led
to--I believe you called it market design flaws--those rules
have allowed market power, in your opinion, to be exercised
here. Those are--those are State rules. That's as a result of
the structure which California enacted under its State law in
1996; is that correct?
Mr. Massey. Many of them are. The lack of hedging, I think,
is primarily a result of a State rule. It sounds to me like
State policymakers are changing that rule, and I welcome it. I
think hedging can mitigate market power in the real time
markets. There's no question about it.
The other issue that I emphasize is the lack of the demand
side response. I think that is an issue all over the country.
It's not unique to California. I think we are understanding
that we really don't know what the value of that last megawatt
of generation is in the market because consumers can't choose--
don't have the tools necessary to choose not to purchase it at
that price. And both Federal regulators and State regulators
need to understand this problem and move forward to correct it.
Mr. Shadegg. I guess I'm glad you went to no demand side
response, because I think that's a key part of it. At least in
Arizona, what we've done is we've tried to structure a
situation where individual consumers can choose between
different utilities and give them some ability to exercise some
demand-side response.
With regard to no demand-side response, is a part of the
problem the fact that these IOUs are compelled to buy all power
through this one PX and it can't go anywhere else? Isn't that
actually antithetical to the notion of a deregulation market,
and isn't that a key message that policymakers in California or
policymakers at FERC have to fix?
Mr. Massey. I think it's part of the problem. Both Federal
and State regulators need to work to create incentives for
customers in real time to choose not to consume at a certain
price.
It has been suggested that these regional transmission
organizations should actually operate demand-side markets that
are integrated into supply side markets where consumers that
are willing not to consume actually bid negawatts into the
market. A negawatt would be as valuable as a megawatt. So I
think all our options are on the table. We should explore all
of these ideas.
Mr. Shadegg. And you also made a reference to there being
too much reliance on the spot market. It seems to me--I got to
thinking about that and trying to understand how the average
layman would understand it. When I looked at buying a ticket to
come over here today, I had a choice of buying that ticket 2
weeks out or buying that ticket yesterday morning as I got to
the airport.
Obviously, I could have gotten a much better price by
buying that ticket 2 weeks out to fly over here. And yet, as I
understand the structure of the California law, it discouraged
that advanced purchasing for--it prohibited it to some degree
and discouraged other utilities from engaging in it. Is that--
--
Mr. Massey. The working assumption in California was that
the spot market would produce the lowest prices. And I think we
now have evidence that that has not occurred. Purchasers should
have the flexibility to have a well-balanced portfolio of spot
market prices, of medium-term prices and long-term hedging
agreements. That is what I think ought to be the goal in a
well-functioning market.
Mr. Shadegg. Just to make sure I understand it, though, the
spot market is like the situation when I got to America West or
Southwest and want to buy a ticket, if I buy that ticket 3
weeks out or a month out, they have a chance to know how full
that plane is going to be ahead of time, and they'll want to
sell that for a lower price at that point in time.
If I wait until the day before, I'm going to pay the
highest price possible. And you're telling me that the
structure here was the assumption that the spot market, the
last price would be the lowest price?
Mr. Massey. Well, I don't want to speak for Californians,
but I think that was the working assumption. Now, spot market
prices have been fairly reasonable up until this summer. So the
spot market doesn't always produce high prices. If spot market
prices had remained low, then those who had purchased hedging
contracts at a high price would be criticized for that.
I don't want to be a broken record, but what purchasers
need is the flexibility to engage in a well-balanced portfolio
of short-term and long-term supply.
Mr. Shadegg. Let me ask a different question that nobody
has asked today. Clearly, they've had excessively high prices
in the summer, and there's been a lot of discussion about that
being keyed off of demand and some length of that demand giving
generators the ability to exercise market power.
Is there some reason to believe that current structure is
going to lead to below-market prices this winter when demand
drops?
Mr. Massey. The prices in the winter are usually
substantially lower than in the summer, but frankly, under this
market structure, we do not know what will happen this winter
in California markets.
Mr. Shadegg. I'm sure the gentleman who owned the
restaurant chain who was here earlier would like to see his
prices go to 900 percent below market.
I have other questions, Mr. Chairman, but----
Mr. Bilbray. Well, editorial note. Projections are from the
Energy Department that the electricity rates will drop
marginally, but then the gas rates will skyrocket. So the poor
consumer has to get ready for another major hit.
Mr. Shadegg. If I could ask your indulgence, Mr. Chairman,
I'd like to ask one last question.
Mr. Bilbray. Go ahead.
Mr. Shadegg. Both Reliant and Enron here, Mr. Stout and Mr.
Kean. As I understand it, Reliant at least has made a put offer
on the table at--would you say 5.6 cents? Mr. Guiles or Guiles,
are you now legally able to accept that? And if so, how long
ago were you given that authority?
Mr. Guiles. Not yet, Congressman, but we will be working
with the California Public Utilities Commission so that we can
be taking a look at that, and once we've got bilateral contract
authority approval.
But while I've got the mic, could I comment on a comment
you made earlier about the current market structure? And just
to set the record straight, when we lifted the rate cap--the
current structure, customers can acquire a commodity through
energy service providers. Any customer can do that today. We
have about 20 percent of our customer load that is currently
acquiring commodity outside of SDG&E.
Mr. Shadegg. Retail homeowner customers?
Mr. Guiles. Sure they can. SDG&E, however, is the default
provider, so that if a customer chooses not to switch, then we
would provide that commodity to them. So I just wanted to make
that clarification.
Mr. Shadegg. Thank you.
Mr. Bilbray. Thank you. Yield to the gentleman from----
Mr. Shadegg. I think Mr. Kean had a response to my
question.
Mr. Kean. I'm sorry. I just wanted to point out real
quickly, in other parts of the country, in fact, the default
supplier obligation has been competitively sourced. And by that
I mean utility companies have gone out and had the authority in
advance to go procure their commodity competitively and get a
fixed price for that commodity and insulate their customers
from energy price swings. In fact, our customers, including a
customer in Connecticut, did exactly that.
So there are options in the marketplace separate and apart
from just the kind of deficit spending I think that we're
ending up with in the San Diego context. And I know that we,
for one company, look forward to San Diego getting the
flexibility to procure outside of that context.
Mr. Shadegg. I guess I'd like to just conclude by saying,
you know, I think everybody here is, in fact, playing by the
rules. I don't think we have--we in Government have set the
rules correctly. I think the people of San Diego are suffering.
I think we ought to reject any simplistic notion that there is
one person to blame. There's lots of blame to go around. What
we have to do is find the solution. And I thank you, Mr.
Chairman, for the opportunity to participate.
Mr. Bilbray. The gentleman yields to Mr. Filner.
Mr. Filner. Mr. Shadegg, if you are correct that no one is
to blame, they just figured out how to play the--use the rules
for their own advantage----
Mr. Shadegg. Well, the State legislature set the rules, Mr.
Filner.
Mr. Filner. I understand. I understand. But what happens to
the folks who were victims of all this?
Mr. Shadegg. Well, I think we're trying to fix it for those
victims to all of this.
Mr. Filner. No. I mean, my constituents for the last 3
months who have paid out $350 million more this year than last
year. What do we do about that? I mean, that's----
Mr. Shadegg. Well, I think we're talking about the
Federal--FERC being here. I mean, if you're going to engage me
in a dialog, I'd be happy to get in that dialog. I'd like to
ask FERC if, in fact, they had the ability to go back and deal
with those rates in the past because----
Mr. Filner. That was my first question because I----
Mr. Shadegg. I don't--I'm not certain that your reading of
the law is correct that they can't deal with it in the past.
Mr. Filner. I got it from Mr. Hoecker, so maybe Mr. Hoecker
could respond.
Mr. Shadegg. But I also think it would be useful to see the
Federal Government come in and solve a problem that appears to
have been created by the State government. Often we at the
Federal Government----
Mr. Filner. Apparently, we're the only ones who can do it.
Mr. Bilbray. The Chair is----
Mr. Filner. Mr. Hoecker, do you have the authority to
retroactively roll back prices?
Mr. Hoecker. We do not under the Federal Power Act.
Mr. Filner. You do not. Do you have any advice for how we
deal with the situation of the over--everybody has said the
prices of the last 3 months were not just and reasonable. How
do we make sure the people who are victims do not have to pay
the price for those unreasonable prices? I mean, do you have
any advice for me?
Mr. Hoecker. Advice for you? Well, my advice, first off,
for people who have been overcharged this summer is that we
need to look at all our legal options under State as well as
Federal law. The State has acted to reduce utility rates in the
San Diego area, it's my understanding. I do know----
Mr. Filner. They have--they have deferred the rates. They
have not--they have put a cap, but have set up what is called a
balancing account for future payment. And I could--I don't know
what SDG&E is going to do. Mr. Guiles might want to respond.
But I will bet that the average person or business will get
a bill that says, ``Here's what we should have charged you
under our pass-through. Here's what the State says its cap is.
Here's what you owe me this month, and then here's what the
total amount for the''--and people are going to look at that,
what they owe as the real thing, and Mr. Tyler and others are
going to say, ``Hey, I can't stay in business.'' How do we fix
that? Who's going to pay off that balancing account? Mr. Wood
or Ms.--I mean, who's going to pay that balancing account?
Mr. Hoecker. In truth, the rate payers in San Diego pay off
that balancing account unless that amount is renegotiated.
Mr. Filner. After these just and unreasonable prices have
been exerted for 3 months. I don't think that's who should pay
it off. But who--under your thinking so far--how are we going
to solve this, Commissioner Wood or Madam Chair?
Mr. Wood. This is a real deep hole to try to step into
without benefit of counsel, but I'll throw out some ideas. One
is that I'm not personally convinced, based on my legal advice,
that FERC does not have this authority, first of all.
Because the Federal Power Act is so explicitly clear that
it is required that wholesale prices be found just and
reasonable, they have in this case deferred to a market. It's a
market that is clearly broken. I can't imagine any stretch of
the English language that would cause one to believe that, not
the spiked prices, but the protracted average monthly wholesale
market prices in California, which have been many times
multiples, literally multiples of the cost of service, which
has historically been----
Mr. Filner. And they have nothing--it has nothing to do
with supply and demand, as I hear key people who are logically
sort of fixed on that notion because----
Mr. Wood. It also has nothing to do with real underlying
costs.
Mr. Filner. Exactly. It has nothing to do with the cost. It
doesn't matter--the peak loads I'm told this year were less
than they were last year. The temperatures were less. We didn't
have a heat storm, somebody said earlier. And yet all the
prices went up.
It looks to me, if they didn't do anything illegal--and
whatever they did, I would define as illegal--at least they
learned how to game the system. It took them a year to learn
how to game the system, which produced these incredible
results.
So I mean, I have to ask, I guess, Mr. Stout or--Mr. Wood.
May I finish the answer?
Mr. Filner. No, because I'll lose my time. Go ahead. Go
ahead.
Mr. Wood. Then I'll try to be a little more quick. So one
is I think that FERC may have this authority. Second, I do not
rule out the possibility that the State may, in fact, have the
authority to make a determination about just and reasonable
rates in this case. If FERC is waiving this----
Mr. Bilbray. Now we're getting somewhere. Okay. Keep going.
Mr. Filner. So in a retroactive sense.
Mr. Wood. That is a possibility. Again, I'm not an
attorney, and I haven't studied this issue legally at this
point.
The other is that I do not accept automatically that there
has been no misconduct, legal misconduct in this market. In
fact, I am conducting an investigation at the present time in
which I'm charged to look into this question. I don't want to
prejudge anything there, and I won't. But that has not been
ruled out.
I would also note that----
Mr. Bilbray. That's up to Bob to do. You're not supposed
to----
Mr. Wood. There are other measures of illegal exercise of
market power, of price fixing, in other words, then collusion.
And I think that those need to be looked into, and if indeed we
find--or if the State Attorney General finds or if the Justice
Department finds that there has been some illegal exercise of
monopoly market power, then it ought to be possible to
recapture some of--or maybe all of what has been overpaid by
San Diego consumers.
That all being said, I think we're up against very
considerable obstacles in trying to achieve some sort of
reduction.
Mr. Filner. No question. I don't have real confidence in
either watching the votes on either the State or the Federal
commissions that that thinking is going to be--the thinking I
just propounded would be accepted, so I'm trying to do
legislative action and sort of force that.
I'd be interested from Mr. Stout if he could tell me how
much--what are the profits from the Reliant Energy of San Diego
for the last 3 months.
Mr. Stout. I don't have specific numbers associated with
San Diego. The profits that our corporation makes are public
knowledge. They were published for the second quarter. Reliant
Energy had an operating margin of $184 million out of a $3
billion investment plant.
Mr. Filner. I'm sorry. What? Out of what?
Mr. Stout. $184 million for a $3 billion investment.
Mr. Filner. How did that compare with the year before?
Mr. Stout. The year before was a rather bad year in terms
of profit.
Mr. Filner. I'm glad we were able to save you.
Mr. Stout. We only had $9 million for the same period of
time. In addition----
Mr. Filner. I'm glad----
Mr. Stout. In addition----
Mr. Filner. When I hear that, sir----
Mr. Stout. [continuing] during this year, we doubled the
size of our portfolio. We went from 4,000 megawatts to 8,000
megawatts, and that had a lot to do with the increase.
Mr. Filner. Certainly the prices in San Diego have
something to do with it, right?
Mr. Stout. They have had something to do with it, yes.
Mr. Filner. I mean, you have something like--the PUC says
you have almost 20 percent of the market here in California.
Mr. Stout. I have no idea where they come up with those
calculations.
Mr. Filner. Well, it says PUC, I have--it says you have 17
percent of the California market. And I assume that means that
you have 17 percent of the $350 million that was extra, so that
would tell me how many--how much money that you all made from
that.
Now, you will claim that you played by the rules, or at
least you figured out what the rule were. When you hear
somebody like Mr. Tyler or us politicians say our consumers are
suffering, we have people making life-and-death decisions about
temperature versus food, small business people going out of
business and you're reporting these incredibly higher profits,
is there any relationship--is there any responsibility that you
have for that situation?
Do you feel that you have anything to say about it or is
that, ``Oh, that's the way capitalism works. That's the
market.'' I mean, what's your response to when--you heard Mr.
Tyler earlier, I assume.
Mr. Stout. Well, you have proposed that there be some sort
of return of the profits that we've made this year to the
residents of San Diego. Actually, I would hope that we have the
opportunity to do so, but I would propose that we have the
opportunity to do so through investment and new generating
facilities to help serve the load here in San Diego.
Mr. Filner. Well, how are you going to save Mr. Tyler from
going out of business, then?
Mr. Stout. That's something that policymakers will have to
address.
Mr. Filner. You have no responsibility for the fact that
the games that you play produce $60 million or whatever extra
million dollars, and we have hundreds of people going out of
business. There may be even deaths involved in all of this. You
have no responsibility for that whatsoever?
Mr. Stout. I respectfully disagree with your calculations
in the amount of profit that we have made in San Diego. I have
no idea of the basis for those.
Mr. Filner. Well, give me--you told me you had no answer,
so I'm going to make it up. I mean, I'm using the 20 percent of
the 350, so that's what? That's $70 million. You said you had
no exact figure. Somehow when it comes to profits, you guys
have no answers, but you go to the nth degree to tell me what
environmental regulations we haven't done and how many
megawatts we need from this plant. Tell me a better figure. If
you don't like the $70 million, tell me what the figure is.
Mr. Stout. Well, as I said earlier----
Mr. Filner. That was in 3 months, by the way.
Mr. Stout. As I said earlier, the number that I gave you,
the public number of $184 million, is the best I can give you
in terms of the profit that our company has made during the
second quarter of this year. I simply don't have a breakdown
for San Diego.
The perception that we have made 20 percent of the $350
million is fatally flawed. We don't own that much of a
generation share.
Mr. Filner. All right. To mark--I want you to give me the
amount of money you made in San Diego this year over last year.
Just--you could--I'm sure you have those statistics. Why don't
you just give them to us, and then I can decide whether I'm
being reasonable in saying you ought to return part of your
profits to the people who have gone out of business or who
cannot afford to pay their electric bill.
Mr. Stout. The simple fact is, the power that I sell to the
ISO and the Power Exchange simply goes to the ISO and the Power
Exchange.
Mr. Filner. You have no responsibility for what's going on
here?
Mr. Stout. I have no way of calculating exactly what
portion of that was paid by San Diego customers.
Mr. Filner. You have to agree that a big part of your
profit came from the San Diego price--California pricing
situation.
Mr. Stout. I would agree with that.
Mr. Filner. What?
Mr. Stout. I would agree with that.
Mr. Filner. All right. So you have no responsibility to
try--for us to deal with it except you're going to invest in
more power plants?
Mr. Stout. I'm offering a solution that----
Mr. Filner. That's not a solution for people who have gone
out of business. That's not a solution for people who can't pay
their bills. Commissioner Hebert talked about the granny--it's
granny we've got to tell the truth to. What if Mr. Hunter, who
used this thing about the heart medicine, came back, it was
$10, went to 1,000, and you couldn't afford it. ``Granny,
you're going to die.'' Do you have any responsibility for that?
We have people who can't afford to pay your prices. They're
dying. I think you have some responsibility, and we're going to
have to fix it legislatively if you won't take it.
Mr. Bilbray. I'd like to, on that note, make sure I remind
the Federal Regulatory Commission, as we're looking at
responsibility in this gouging, that 10 percent of the power
gouging right now is being projected as coming out of
Bonneville, which is the Federal Government participating in
what my colleague here calls the gouging of the power
generators.
And I'll tell you, as a representative of the Federal
Government, I don't know how I can justify that our
participation--as Bob was saying, how do you justify this--will
turn over the fact that it's one thing for private people
saying, ``Well, you made the rules, and we're playing by the
rules,'' but those of us in the Federal Government to be part
and parcel in the process.
Now, I don't know from the PUC if there's any way for the
Federal Government not to participate in the gouging, but I
definitely think that physician heal thyselves. We should set
an example so that we can tell--actually have justified
pointing fingers at the private sector gouging that we're not
participating in it too.
And I think that that's a major issue that I'd ask the FERC
to take a look at. Is the Federal Government actually
participating in this gouging. And when the president talks
about it, does he really care, and when Congress talks about
outrage, what are we doing to make sure we're not participating
in the process.
Now, Mr. Hunter wants to have us start producing it at 6
cents, even though there's a competitor over here already ready
to undercut you.
Mr. Hunter. Three and a half.
Mr. Bilbray. Pardon?
Mr. Hunter. Three and a half.
Mr. Bilbray. Three and a half. Okay. Go ahead, Mr. Hunter.
Mr. Hunter. Three and a half is what Sacramento says
they're producing with their new generation capability.
But you know, I think nothing so deserves real free
enterprise as what I would call phony free enterprise. And the
idea that what we've engaged in is free enterprise is
absolutely wrong. It's wrong for a number of reasons.
No. 1, the essence--the quintessential element of free
enterprise is a noncaptive consumer. That's the consumer who
can walk across the street and buy the load of bread cheaper at
the other market.
Our consumers, as this testimony came out today from Mr.
Tyler and the people who have been put together by Terry
Saverson, who is the East County Chamber of Commerce director
who got these bills, as the testimony has developed, these
people are total captives.
Second, another element of free enterprise is that the
person who does the purchasing has to have an economic interest
in the outcome. It's established that SDG&E is the pass-
through, if you will, for this energy. SDG&E doesn't partake in
the economic hardship of the 9,000 percent increase during peak
hours. So you've violated the second rule of real free
enterprise.
Third, you have a desperation market where there is total
flexibility on the part of the seller--that is, they can sell
or not sell--and total inflexibility on the part of the buyer,
which always creates--in the history of man, has always created
higher prices.
The idea that somehow the desperation market is going to
create lower prices for the consumer who has no flexibility of
purchasing is again totally unsupported by any historic
evidence. So you don't have a free enterprise situation, Mr.
Hebert.
And let me tell you, my take--and Mr. Hoecker, we had a
good discussion about 3 weeks ago, but I became somewhat
disenchanted with FERC because I read your charter under
Federal law, and the more I read it and read it over, the more
I came to the conclusion that you do have a duty here, that you
are--one hat that you wear is the emergency response team.
And let me quote the Federal legislation that gives you the
power to do something, I think. Title XVI, Chapter 2,
Subchapter 11, Section 842(d), Just and Reasonable Rates.
``All rates and charges made, demanded or received by any
public utility for or in connection with the transmission or
sale of electric energy subject to the jurisdiction of the
Commission, and all rules and regulations affecting or
pertaining to such rates or charges shall be just and
reasonable.''
The words you've heard during this entire hearing.
``And any such rate or charge that is not just and
reasonable is hereby declared to be unlawful.''
Now, Mr. Sladoje, who is the CEO of the California Power
Exchange, has acknowledged that at certain times during the
purchasing period, the price for energy totally passed through
by SDG&E to the consumer in San Diego has at times gone up to
9,000 percent what it was a few hours earlier.
Now, Mr. Hebert, you, saying we shouldn't regulate, we
shouldn't believe in price fixing, related a story about the
price of gas in the Midwest, when it approached $2 an hour,
people started to get upset. If you relate that 9,000 percent
increase to the price of gas, that's 180-gallon--$180-per-
gallon gallon of gas that you have to buy as a totally captive
consumer. That's a gallon of milk at $200.
I just cited this statute that would seem to empower you to
take action. And instead of taking action, what we've had is
philosophy about the importance of providing more electricity,
which I agree with.
And so to some degree, you're like the emergency action
team, the trauma unit that is called to go out and save
somebody who is dying. And Mr. Hebert, as you answer the phone,
you say, you know, ``What I want to do is talk about the
necessity--because you guys are having a fire. Your place is
burning down. I think we need to start drafting some
legislation that produces in the future some more fire-
resistant buildings.'' Which we may totally agree with.
But nonetheless, this statute was written to empower
somebody--and I think it's FERC--to be the emergency response
team that when a price--and presumably 9,000 percent increases
in 2 hours represent an unreasonable price--to take action and
to prevent that. Since it says it is hereby declared to be
unlawful, you should then have the power to do something about
that price. And I would presume to declare it to be unlawful
and roll it back.
So Mr. Hoecker, why don't you respond to that, and then Mr.
Hebert, tell me why you're not interested in responding to the
fire, and instead you want to philosophize about the importance
of fire-resistant buildings.
Mr. Hoecker, go ahead.
Mr. Hoecker. Can I explain? You're absolutely right in most
respects about how demanding and inelastic this market is and
what a terrible situation the rate payers are in in San Diego.
And the Commission is empowered to do things and obligated to
do things to protect those consumers.
But the way our statute works--since we had granted
generators market-based rates, and based on an analysis of
their possible market dominance in generation, the way the
statute works is if we want to change that rate, if we want to
bring it down, if we want to find that a different rate is just
and reasonable, we are required to have an investigation and
create a record, and we are only permitted to impose that new
rate prospectively.
Mr. Hunter. Well, question for you. We went through this,
and I went through this with several of your staff folks on
this thing. You need an investigation to determine that it's an
unreasonable rate. If you had a bill that shows that milk has
gone to $200 a gallon, which is what you had, in part, from
these past-throughs of these enormous increases, $200 a gallon,
and it's a legitimate bill, it's one where SDG&E has the right
to take court action, to seize your assets if you don't pay the
$200 a gallon for a gallon of milk, that's not evidence that
supply--that suffices or supplies the fact-finding that is
required? You need to do more investigation to determine that
$200 a gallon is too high for a gallon of milk?
Mr. Hoecker. Well, there are two issues there. No. 1 is, my
gut reaction would be of course it's unjust and unreasonable.
It's probably an outrage. We would want to change that rate
because it would be prima facie unlawful. The statute requires
us to do an investigation and to change that rate.
Mr. Hunter. But isn't that an--don't you have everything
you need for the investigation where you have a record of
$200--the equivalent of $200 per gallon of milk being charged
or $180 for a gallon of gasoline? That's what the $9 per
kilowatt hour represents.
Mr. Hoecker. Fortunately, not all the situations we deal
with are that extreme.
Mr. Hunter. Well, that's--well, let me tell you, that's
what the president of the Exchange acknowledged. That was one
of the prices that was charged which was passed through
directly to Mr. Tyler and others like him.
And the reason I say that is--and the reason I was the
author of a letter that Mr. Bilbray and I have sent to you
gentlemen and lady saying, ``If you don't want to do this job
as the emergency task force or the emergency rescue team, we
think you should leave and let somebody else do it.''
Because we have small businesses like the metal business in
east county, which had an increase of in excess of $60,000 for
their electrical rate for 1 month. They don't have the ability
to even withstand 2 or 3 months of investigation. They're going
to go out of business.
And ironically, the hard core pro-free enterprise, ``Just
let me fight it out my own way'' guys like Roy Tyler, who are
more pro-free enterprise than Mr. Hebert, who are total
captives in the system, as we've established, are the ones who
are going to be destroyed by this. The free enterprise guys are
going out of business.
So why can't you take action based on the record--on the
record of the price itself? Because that's all you need to
establish it is--it's not reasonable.
Mr. Hoecker. And we could declare it to be unreasonable.
We'd have to develop a new rate. And what would that be? Based
on a record, we would determine what a just and reasonable rate
is.
Mr. Hunter. Okay. So there is a--so you are undertaking
this investigation, and your position is that the investigation
may culminate in a cap on these rates.
Mr. Hoecker. The investigation could culminate in a variety
of measures, that being conceivably one of them.
Mr. Hunter. I thought that you said that you didn't think
you had the power to cap the----
Mr. Hoecker. We don't have the power to go back
retroactively and order refunds of the moneys that were
collected by some.
Mr. Hunter. One question on that. The statute says if you
determine that it is unreasonable, that the rate are
unreasonable, that they are then declared illegal and unlawful.
If an unlawful rate was charged in July, why don't you have the
right to receive the reimbursement that's a delta between what
you charged and what was reasonable? If it's declared--if it's
deemed to be illegal by Federal statute.
Mr. Hoecker. I think that's a terrific question, but our
reading of the statute and precedent going back 60 years
doesn't support our reaching back and retroactively correcting
that situation.
Mr. Hunter. I never--I mean, you know, I guess we're all
lawyers here, but something is gained----
Mr. Bilbray. Excuse me. Bob and I don't want to be included
in that line.
Mr. Hunter. If something is deemed to be unlawful, it's
unlawful at the time that the action is taken that accrues that
status. And so if you're going to charge 9,000 percent
increases in electricity in July, that 9,000 percent increase
is unlawful at that time. So why wouldn't the extra cost be
something that could be recovered?
If you get--if property is stolen in July--and I'm not
using this to imply that this is a criminal act, but if
property is stolen in July, it's stolen property as of that
time, not at the point that the trial is convened.
Mr. Bilbray. If the gentleman would yield, I'd like to
yield to the commissioners so they can answer your question.
Mr. Hunter. Okay. And I want to let Mr. Hebert have a shot.
Mr. Hebert. You want me----
Mr. Bilbray. That is why--there is two commissioners here
who want to respond. And seeing that you're meeting tomorrow
and have so much authority over this issue, we're going to make
a special effort for you to leave here happy and contented so
that you help us tomorrow.
Mr. Hebert. I want to make sure, Mr. Chairman, an answer,
but I would like to yield to the young lady from Kentucky, if I
may, and I'll come back and answer.
Ms. Breathitt. I am not an attorney, but I wanted to just
expound a little bit more on the--our legal rights to remedy a
situation going forward. But even when I was regulating at the
State level, a regulatory principle in most State commissions
across the country and, I found, at FERC applies the filed rate
doctrine, which prohibits us from retroactive rate-making and
retroactive cost recovery.
Mr. Hunter. Is that a law?
Ms. Breathitt. So it has to be done on a prospective basis.
Mr. Hunter. Is that a Federal statute? Because what I
quoted was Federal statute.
Ms. Breathitt. The filed rate doctrine applies, as I
understand it, to our Federal statute. It also applied to State
statutes when I regulated at the State level. I'm just giving
you that as further support that----
Mr. Hunter. If you folks--and I don't mean to interrupt,
but if you folks have a legal opinion--obviously, you've got
lots of counsel. I'd like to see the legal opinion on that
because it looks like that flies totally in the face of the
statute.
Mr. Hoecker. Congressman, I'll ask my lawyers to sharpen
their pencils on that. I think you're asking a good question.
Mr. Hunter. Okay.
Ms. Breathitt. It doesn't prohibit us from doing the
investigation and correcting wrongs going forward in terms of
price adjustments.
The only other point that I was going to make is in
response to your belief that we have a record now to make this
finding. I wanted to point out that because the Commission
speaks through its orders, and those orders are appealable,
that we have to make sure that our record has been gathered
under our due process standards and that it's--our record is
gathered in an open, transparent manner for all parties to
comment on because they're appealable. They have to be able to
be fact-supported and supported by legal precedent and the law.
Mr. Massey. Can I just make a 15-second comment? Whatever
legal authority we have, we should utilize to remedy these
problems, period. No. 2, we only have the authority Congress
has given us, whatever that is. And No. 3, it seems to me it's
an argument for us to proceed with a sense of urgency in case
it is true that all of our remedies have to be prospective.
Mr. Bilbray. Commissioner, you wanted to----
Mr. Hunter. Let Mr. Hebert have a shot here.
Mr. Hebert. Thank you. As the only Republican, I'm
accustomed to going last, so it works out all right.
Let me clear up a couple of things. I want to make sure
that you understand where I'm coming from, Congressman Hunter.
I'm a former legislator, and I'm a former State commissioner,
and I'm presently a Federal regulator. I understand constituent
needs and concerns, and I do not want you to think or anyone to
think here that I am unsympathetic to that because, quite
frankly, I'm not.
But what I've learned to do is to no longer just worry
about Mississippians, but to worry about people in California
and New York and New England. And that is why, when I talk
about price spikes--and I do want to clear something up--
evidently I've miscommunicated it to you. We don't have
anything to do with gasoline, and I was not talking about the
price spikes on gasoline. I was talking about the 1998 price
spikes where megawatts went to $10,000 a megawatt hour and the
fact that this Commission did not invoke price caps.
And if you look at the evidence--and all I'm suggesting you
do, Congressmen and everyone else here, all I'm suggesting that
they do is look at the evidence. What happened when we didn't
do that? What happened when we let the market--you want to talk
about markets. What happened when we let the market respond?
They built generation. They got new supply.
And that is why I dissented on price caps in New England. I
thought it was important for them to get a market. I dissented
on price caps in New York. I have dissented on every price cap
that's come forward since the beginning.
And the reason is this. The evidence is even beginning to
show that you're seeing higher average prices since you've
reduced the price cap from 750 to 250. Now, that's no accident.
Economists can predict this. Look at the great economists who
understand how to do this. Yes, I am a lawyer, but listen to
the economists, Alfred Cahn, Daniel Yurgin. They will tell
you----
Mr. Hunter. You're talking to the fire because I agree with
your philosophy, but I don't agree with your not reacting to
the emergency of the minute----
Mr. Hebert. No.
Mr. Hunter. [continuing] which will sink these people long
before our philosophy can take place.
Mr. Hebert. I want you to understand that I am. Look, you
want to talk about emergencies, this is September 30, 1999. I
issue a copy of every one of my dissents to the Committee. And
this is a copy of my dissent. I identified early on, almost a
year ago today:
``Prominent advocates claim that electricity will become
more of a financial and less of a physical market. Hedging will
only increase. Textbooks and introductory economics in our own
experience in the Midwest and elsewhere spell out benefits of
allowing the market to produce high prices and the harm of
imposing ceilings, artificial by definition. When we give the
ISO the crutch of price caps, we encourage the organization to
avoid necessary reforms. Price caps give the ISO no incentive
to improve.''
Those are the type of things that I have been saying.
That's not changed. And these are the things that are
occurring. And I have said early on that we need to reassess
this and we need to try to move toward the market.
Now, you can't have it both ways. People want to tell you
things that sound good to the ear. But they may sound good to
the ear, but they're not going to help the people of San Diego.
When you say price caps have worked when, in fact, the evidence
is suggesting they haven't----
Mr. Hunter. Price caps----
Mr. Hebert. And then you say demand-side management will
work. You can't mix those price signals.
Mr. Hunter. But price caps will work--but my point is, you
have a chart where prices are unfair and unreasonable. Your
charter, according to what I read, is to declare those
unlawful.
Now, if your philosophy, your personal philosophy is that's
a nonstarter, we shouldn't be on the trauma care unit. If you
think that the way to meet this is deep philosophical
discussions about the long-term problems and fixing things in
the long term, which I agree with you on--I mean, you start
trying to site a plant right now, it will take you longer than
it took to win World War II to site the plant.
The people--the free enterprise guys who are having the
9,000 percent increases will be gone in 2 or 3 months. So if
you don't want to serve on the trauma care unit and you want to
be in the philosophy unit, I think that's great, but I don't
think you should be on the unit. If you don't agree with
enforcing the law--if this is the law that I'm reading, the
statute that says if it's an unreasonable price--and I think
you would agree a 9,000 percent increase is unreasonable by
most people's standards. If you're not interested in enforcing
what you think is a bad law, you shouldn't be on this board
doing it.
Mr. Hebert. Well, I'll let you make----
Mr. Bilbray. Enforcing the law, the Chair is going to
invoke on this. Mr. Hebert, I understand your frustration with
what's going----
Mr. Hunter. Remember, Bilbray, you borrowed my car a few
days ago.
Mr. Bilbray. Yeah. And you owe me for that.
Mr. Hebert. The Congressman knows----
Mr. Filner. Nine thousand percent more than you paid for
it.
Mr. Bilbray. I should get danger pay out of that.
Mr. Hebert. As the entire panel knows, upon invitation,
I'll be glad to come and sit down with you in your office and
talk with you. And I'm not a policy wonk. I've been fighting
this fight. But you're listening to people who are changing
their tune, people who are even suggesting that pipelines are
in good order, when I've been working for almost 3 years to get
a pipeline to the northeast to give those people a choice.
We've got to get things done.
Mr. Bilbray. Okay. Let me echo that. In the long run, we've
got to confront those who always oppose the creation of
infrastructure. That if we took the same attitude with our
roads and with housing, we would have a much bigger crisis on
our highways and in our housing than what we see if we took the
same attitude as we do with power generation.
Those of us in government have taken an attitude about
power generation as it's somebody else's problem. And the fact
is, politically, it's expedient to oppose the infrastructure
development because there's always some organized group to
oppose the infrastructure expansion.
But there's never anyone out there pushing for the general
public and the consumer to protect them from a deficiency in
infrastructure except those of us who serve in government. And
too often, we sell out and run the other way.
Now, we've got a crisis with electricity in San Diego
today. Anyone with a brain in their head and eyes in their head
knows that natural gas is the next big crisis, which is the
environmentally preferred option for power generation in this
country right now. Like it or not, no matter what one side or
the other side says.
But we haven't built the pipelines, and we're not building
the pipelines, so it's not the great success. It's the fact
that we're behind schedule, we're going to have a crisis this
time. We've got the same crisis when it comes up with other
infrastructure issues.
And I've worked on this from everything from clean water to
clean air to being able to bury garbage. It's always fine for
us to run away from the infrastructure.
That aside, I would ask the commissioners, both State and
Federal, to recognize that it's those of us who are
legislatures have to get back to the business of creating
something that we can conserve rather than always asking the
consumer to slice it thinner.
Please recognize to the FERC members that it says that all
rates fall under that category. It doesn't say proactive. I
understand that you have a supreme court ruling that raises
major concerns, but I would ask you to consider the fact that
the statute does not say that the rates have to be illegal
before they are unfair. It says if they're unfair, they are
illegal, ill-gotten gains.
And I would have to agree with my colleague about the issue
that when it reaches a point to where there has been basically
gouging going on, it's not just immoral, as my colleague from
San Diego might point out, it, by definition, looks like the
statute says it's illegal.
And the question that my colleague from the east part of
the county pointed out, if it is illegal, is it their property,
is it their profit, or is it confiscated gains, illegally
confiscated gains which need to be repossessed?
And I understand that issue of the taking. We've got an
issue there. I've been around since 1976 in government. I have
seen these issues. We've got the issue of will this constitute
a taking if we roll back. All I've got to say is that there are
drug dealers and there are illegal activities out there that
every day we've given the authority to go back and confiscate
ill-gotten gains that fall under the category of unlawful.
I would ask you to at least take that. And I ask both
commissioners. And I want to say this sincerely. The people of
San Diego County are looking to you to come into this community
and respond to this crisis and this disaster just as they would
expect the Federal Government and the State government to come
in in a natural disaster.
We've witnessed this month that there were major disaster
and fires in the west, and we didn't see the State say, ``It's
not our department. Let the Federal Government do it.'' And we
didn't see the Federal Government say, ``Soldiers are not
trained to go fight fires.'' You saw the President found ways
to be able to send soldiers in to do something, not because
they usually do it, but because it needed to be done.
I just ask both of you to rise to the occasion like those
men and women did and do the job that needs to be done, even if
you haven't gotten used to doing it in the past.
I think you for being here today.
Mr. Hunter. Brian.
Mr. Bilbray. We look forward to taking care of it.
Mr. Hunter. Mr. Chairman.
Mr. Bilbray. Go ahead.
Mr. Hunter. Let me ask just one--I just had two questions
for the record for Mr. Guiles.
Mr. Guiles. Yes, sir.
Mr. Hunter. We're looking at this--we're looking at this
proposed plant at Miramar, and I would just ask that you would
continue to engage--your people have been engaging with whether
we can hook into the grid at that point.
Mr. Guiles. Absolutely.
Mr. Hunter. If you could look at that.
And Ms. Lynch, one thing that's come through a lot of our
employers. You know, we have ship building, we have aerospace,
lots of manufacturing here with fixed contracts where people
are just losing their shirts.
And I've noticed that--at least it's been stated by our
business community, for the large employers, and even a lot of
the small business employers who qualify as small business,
there is not rate relief. Is that something that's being looked
at? Because losing your job and your paycheck is just as bad as
being priced out of your house.
Ms. Lynch. It is something we began to look at. My
colleague, Carl Wood, opened an investigation into looking at
that, and then the legislation overtook it, which vastly
expanded rate relief to most businesses. But the largest
businesses who already can directly contract for power, have an
ability to contract on annual contract basis to get certainty.
That number at 6.5 cents is still a pretty high number, but
they can get certainty.
Mr. Bilbray. Okay.
Mr. Hunter. Okay. Thank you, Mr. Chairman. Great job,
Brian.
Mr. Bilbray. I would thank my colleague for coming in
with--just as Duncan Hunter always does, he wants to build
something to address the problem. He's always--in his 20 years
in Congress, I've always been inspired with how much he's
willing to get in there and get the dirt pushed.
I want to thank my colleague for introducing a bill that
may specifically try to address this issue of what is the
authority of the FERC on this issue. Frankly, some of us think
that the legislation isn't needed, and I think--we hope it's
not needed. Let's just say that. But I think that we need to
make sure it's there to move in the next month if we have to.
I would just ask that we also look at--I've asked that bill
about the issue of making sure that if there's gouging going
on, that the Federal Government isn't participating in it by
the sale of our power through the power exchange.
And we'll try to do our part to get the infrastructure side
down. We really ask you in the next week or 2 to try to address
the other side as to the short term, and only you can do that.
The Chair will adjourn this meeting after making sure--
declaring that the record will remain open for testimony and
correction, and I will now adjourn this meeting at this time.
Thank you.
[Whereupon, at 2:08 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
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