[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






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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.
    [GRAPHIC] [TIFF OMITTED] T7633.002
    
    [GRAPHIC] [TIFF OMITTED] T7633.003
    
    [GRAPHIC] [TIFF OMITTED] T7633.004
    
    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.
---------------------------------------------------------------------------
            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.]
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