[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]




          ELECTRICITY MARKETS: LESSONS LEARNED FROM CALIFORNIA

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 15, 2001

                               __________

                            Serial No. 107-7

                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________

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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
CHARLES F. BASS, New Hampshire

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                 Subcommittee on Energy and Air Quality

                      JOE BARTON, Texas, Chairman

CHRISTOPHER COX, California          RICK BOUCHER, Virginia
STEVE LARGENT, Oklahoma              RALPH M. HALL, Texas
  Vice Chairman                      TOM SAWYER, Ohio
RICHARD BURR, North Carolina         ALBERT R. WYNN, Maryland
ED WHITFIELD, Kentucky               MICHAEL F. DOYLE, Pennsylvania
GREG GANSKE, Iowa                    CHRISTOPHER JOHN, Louisiana
CHARLIE NORWOOD, Georgia             HENRY A. WAXMAN, California
JOHN SHIMKUS, Illinois               EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico           BART GORDON, Tennessee
CHARLES ``CHIP'' PICKERING,          BOBBY L. RUSH, Illinois
Mississippi                          KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee                 BILL LUTHER, Minnesota
GEORGE RADANOVICH, California        JOHN D. DINGELL, Michigan
MARY BONO, California                  (Ex Officio)
GREG WALDEN, Oregon
LEE TERRY, Nebraska
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Esposito, Peter G., Vice President of Regulatory Affairs, 
      Dynegy Inc.................................................    92
    Fielder, John R., Senior Vice President of Regulatory Policy 
      and Affairs, Southern California Edison....................   119
    Levin, Robert, Senior Vice President for Planning and 
      Development, New York Mercantile Exchange..................   102
    Moore, Adrian T., Executive Director, Reason Public Policy 
      Institute..................................................   106
    Quain, John M., Chairman, Pennsylvania Public Utility 
      Commission.................................................    40
    Rowe, John W., CEO, Exelon Corporation.......................    97
    Schriber, Alan R., Chairman, Ohio Public Utilities Commission    43
    Travieso, Michael J., Maryland People's Counsel..............    50
    Wood, Carl, Commissioner, California Public Utilities 
      Commission.................................................    34
Material submitted for the record by:
    Electric Power Supply Association, prepared statement of.....   142

                                 (iii)

  

 
          ELECTRICITY MARKETS: LESSONS LEARNED FROM CALIFORNIA

                              ----------                              


                      THURSDAY, FEBRUARY 15, 2001

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2322, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Cox, Largent, 
Whitfield, Ganske, Shimkus, Pickering, Blunt, Bryant, 
Radanovich, Walden, Terry, Boucher, Sawyer, Wynn, Doyle, John, 
Waxman, Markey, Gordon, Barrett, and Luther.
    Also present: Representative Green.
    Staff present: Jason Bentley, majority counsel; Miriam 
Erickson, majority counsel; Bob Meyers, majority counsel; Joe 
Stanko, majority counsel; Andy Black, policy coordinator; 
Karine Alemian, professional staff; Peter Kielty, legislative 
clerk; Sue Sheridan, minority counsel; Alison Taylor, minority 
counsel, and Rick Kessler, minority counsel.
    Mr. Barton. The subcommittee will come to order. It is my 
practice, as subcommittee chairman, to do everything possible 
to start on time, and it is 10. I am gratified that we have a 
number of members here. I will not be calling any votes, since 
obviously I would be outvoted if I were to do so, but we are 
delighted to welcome the Subcommittee of Energy and Air Quality 
members and our audience and our witnesses to our first hearing 
of the 107th Congress.
    I am honored and privileged to be the chairman. I would 
like to welcome apparently in absentia the new members of the 
subcommittee. We have Congressman Chris Cox, Congressman Greg 
Ganske, Congressman Roy Blunt, Congressman George Radanovich, 
Mary Bono, Gary Walden and Lee Terry on the Republican side 
that are new to the subcommittee. On the Democrat side, we have 
Congressman Tom Barrett and Bill Luther, who have been on the 
full committee but not on this subcommittee. We also have both 
new and full subcommittee members Michael Doyle and Chris John. 
Let the record show that Congressman Doyle is actually here in 
person, and we do appreciate that.
    To all members, I want to say that I look forward to 
working with you as we work in this Congress to craft an energy 
policy that is good for the country, and also an environmental 
policy to the subject that is within our jurisdiction that is 
good for the country.
    We are going to be very busy. Energy policy is at the 
forefront of the minds of the American people. All we have to 
do is look at the various energy markets.
    Last summer, with oil prices very tight, prices for oil, 
gasoline and other petroleum products became unacceptably high. 
Supplies of home heating oil were low. Prices for home heating 
oil in the Northeast were very high. In my part of the country, 
the supply for natural gas has not kept up with the demand for 
that product and natural gas prices have been unacceptably 
high.
    The number of refineries in this country continues to 
dwindle, and their capacity has become even further 
constrained. Our transportation and distribution outlets for 
energy have not increased to meet the demands for this country 
and, of course, as we are going to learn more about today in 
our State with the largest population, the great State of 
California, their demand for electricity has outstripped their 
supply for electricity in that market, and we are going to hear 
more about what has been the consequences of that.
    In this Congress, the subcommittee intends to focus on the 
balance of supply and demand in energy. We also want to take an 
inventory of our Nation's energy capabilities and the obstacles 
that we face in order to get a better supply/demand balance. 
Our comprehensive review will be of each of the different fuel 
sources, and of also the various differences between the 
regions of our great Nation. We intend to work closely with 
other committees in the House and the Senate and with the new 
President and Vice President and his cabinet and the executive 
branch.
    Today we are going to begin a series of hearings dealing 
with our electricity markets. We want to focus on the 
experiences of several States which have restructured their 
electricity markets in the last several years. On the West 
Coast, the great State of California which passed its bill in 
1996; on the East Coast, the great State of Pennsylvania, which 
also passed its bill in 1996; and finally in the central part 
of the country, the great State of Ohio, which restructured in 
1999.
    In total, 25 States have passed restructuring legislation 
to implement some--or implemented a regulatory restructuring 
effort in their electricity markets. This subcommittee intends 
to find out what the differences are between each of the 
State's plans and what are the similarities, what has a State 
has done right, what has a State done wrong? What should other 
States know that haven't acted yet, and what should Federal 
legislatures know about our regional markets?
    This subcommittee reported legislation during the last 
Congress dealing with both retail and wholesale markets and 
would do well to learn from the lessons that the States have 
learned as they have restructured their markets.
    Later this year, this subcommittee will review specific 
parts of the electricity industry and the proper role of 
Congress and the Federal Government in improving supply, 
generation to capacity of operation of interstate transmission 
in making States more successful should they choose a retail 
restructuring opportunity.
    So today, as we look at these three specific States, we 
hope that we will learn lessons that we may be able to apply in 
the legislative arena later this year.
    I want to thank our witnesses for attending today, and I 
look forward to hearing your testimony.
    I would now like to welcome my ranking member, the 
Honorable Rick Boucher from the great State of Virginia. Rick 
and I have a close personal friendship and we intend, I think, 
on both sides of the aisle, to forge a great professional 
relationship for this subcommittee.
    [The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Subcommittee on Energy 
                            and Air Quality
    Welcome to the first hearing of the Energy & Commerce Subcommittee 
on Energy and Air Quality. I am honored and privileged to be Chairman 
for this Congress. I would like to welcome the new Members of the 
Subcommittee. From the Republican side are Chris Cox, Greg Ganske, Roy 
Blunt, and, new to the Committee, George Radanovich, Mary Bono, Greg 
Walden, and Lee Terry. From the other side of the aisle, I would like 
to welcome Tom Barrett and Bill Luther who have been on the Energy and 
Commerce Committee before, and new Committee members Michael Doyle and 
Chris John. To the new Members and all Members, on both sides of the 
aisle, I am looking forward to working with you.
    This will be a very busy Subcommittee during this Congress. Energy 
policy is forefront in the minds of the American people now. Last 
summer, the supply of crude oil was low, and prices for oil, gasoline 
and other petroleum products became high. During the winter, supplies 
of home heating oil were low, and prices became high. Lately, natural 
gas supply has not met demand, and residential gas bills have been 
high. Meanwhile, the number of refineries continues to dwindle and 
their capacity becomes further tested. Also, the transportation and 
distribution outlets for energy do not increase to meet the demands of 
the country. And, of course, in California, the supply of electric 
power has not met the amount in demand, and the price of electricity 
has been high.
    During this Congress, this Subcommittee will focus on the balance 
of supply and demand in energy. We will take an inventory of our 
Nation's energy capabilities and the obstacles to a better supply-
demand balance. Our comprehensive review will be of each different fuel 
source and of differences between regions. We will work closely with 
other Committees in the House, our friends in the other body, and the 
new administration to craft legislation that assures sufficient supply 
of energy in an environmentally-responsible fashion.
    Today we begin a series of hearings dealing with electricity 
markets. We will focus on the experience of several States which have 
restructured their electricity markets. On the west coast, California, 
which passed legislation in 1996. On the east coast, Pennsylvania, 
which passed its own bill also in 1996. Finally, Ohio, which 
restructured in 1999. In total, twenty-five States have passed 
restructuring legislation or have implemented a regulatory order.
    This Subcommittee wants to know what are the differences between 
each State's plan, and what are the similarities? What has a State done 
right or wrong? What should other States know, and what should Federal 
legislators know about regional markets? This Subcommittee reported 
legislation during the last Congress dealing with both retail and 
wholesale markets, and would do well to learn the lessons from the 
various State experiences with electric restructuring.and wholesale 
competition.
    Later this year, this Subcommittee will review specific parts of 
the electricity industry and the proper role of Congress and the 
Federal government in improving supply of generation, the capacity and 
operation of interstate transmission, and making States more successful 
when they choose retail electric competition. But, first, a specific 
look at the experience of three States.
    I thank the witnesses for appearing before us today, and I look 
forward to your testimony.

    Mr. Barton. Mr. Boucher.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. As 
you have indicated, this subcommittee does have a long 
bipartisan tradition of addressing our Nation's energy needs in 
a serious and a thoughtful manner. Whether under the leadership 
of Phil Sharp or Dan Schaeffer, we have always tried to put the 
interests of our Nation ahead of the allure of partisan 
advantage, and I want to commend you, Chairman Barton, for 
upholding that tradition during the 106th Congress. I look 
forward to a continuation of that tradition as we embark on a 
bipartisan effort to examine and address the Nation's energy 
and air quality policies during the course of this session of 
Congress.
    Today's hearing is an excellent start to the work that we 
must undertake as we continue to examine the potential need for 
Federal legislation to restructure the electricity market. It 
is incumbent upon the subcommittee to try to gain an 
understanding of what has happened in California and how the 
State is trying to resolve its problems and any lessons that we 
can learn of a general nature from that experience.
    To the extent that California's situation proves anomalous, 
other States that have adopted different retail competition 
plans may be reassured. States still considering retail 
competition can learn what to avoid.
    In any event, with the economy the size of California's and 
in light of the collateral damage which is being felt by 
ratepayers in neighboring States such as Oregon and Washington, 
it behooves this subcommittee to hold educational hearings, 
such as the one we are initiating today.
    I must, Mr. Chairman, express just a mild measure of 
concern regarding the short lead time that was provided for 
this hearing. I know that it is Chairman Barton's preference to 
work cooperatively with the minority and to give members time 
to understand the issues and delve deeply into substance. That 
process is a lot easier when the hearings are undertaken with 
adequate time to develop the issues, to locate top notch 
witnesses and provide members with an opportunity to study the 
testimony in advance.
    I hope that we can work toward that goal in planning future 
hearings of the subcommittee, and in accordance with the 
conversations that I had earlier this week with the chairman, I 
am assured that we will do so, and I thank the chairman for 
that commitment.
    I also want to thank the chairman for his commitment to 
hold an additional hearing regarding the situation in 
California. Unfortunately, members from the region, Members of 
Congress from the region, were not accommodated as witnesses 
during today's hearings, and several witnesses who we believe 
would be invaluable to this examination were not able to 
participate today for a variety of reasons.
    As I noted before, the chairman and I spoke previously this 
week and he has made a commitment to have another hearing 
concerning the situation in California. At that time, 
interested Members of Congress will be invited to testify, as 
well as other witnesses whose experience might prove 
instructional to the subcommittee.
    The California experience offers an interesting look into 
the process and potential pitfalls of restructuring the 
electricity market. Since 1996, California has embarked 
steadily on a restructuring plan, and consumers in that State 
today should be enjoying the benefits of a fully competitive 
wholesale and retail market. Instead, consumers are faced with 
frequent power shortage alerts, increased rates and rolling 
blackouts.
    During this hearing and the next, we will examine the 
causes of these failed consumer expectations.
    In addition to examining the restructuring process that 
California undertook, I think it is important to examine 
whether the steps that California is currently taking to 
rectify its situation and whether the steps that the FERC has 
taken are sufficient to address the needs of both California's 
consumers and electricity suppliers, as well as the needs of 
consumers in the western region of the Nation who are also 
dependent on the same transmission grid and who, in many cases, 
compete with California for the wholesale power that is 
available on the West Coast.
    Looking at the lessons learned in California, as well as 
hearing from witnesses from Ohio and Pennsylvania where other 
restructuring efforts are underway, will provide a useful 
exercise as we begin our examination of the flaws that still 
exist in the national competitive wholesale market and whether 
there is a Federal role to play in fixing that problem.
    There are many questions that must be answered. For 
example, does current law give the FERC the authority to enable 
a functional national wholesale electricity market? Do the 
provisions of the Clean Air Act play a significant role in the 
problems in California? And if so, should we consider Federal 
legislation to address any specific examples of such a 
correlation? These are just a beginning to the questions that I 
think this subcommittee must consider, but today we make a 
positive beginning.
    I look forward to the testimony of the witnesses today and 
at our future hearing, and let me again say how much I look 
forward to a continuation of the bipartisan work that Chairman 
Barton and I have undertaken on these matters, which are of 
fundamental importance to the Nation's economy.
    [The prepared statement of Hon. Rick Boucher follows:]
 Prepared Statement of Hon. Rick Boucher, a Representative in Congress 
                       from the State of Virginia
    Thank you Mr. Chairman, this Subcommittee has a long tradition of 
working on a bipartisan basis to address our nation's energy needs in a 
serious and thoughtful manner, whether under the Chairmanship of Phil 
Sharp or Dan Schaefer, we always have tried to put the interests of our 
nation ahead of the allure of partisan advantage, and I commend you for 
upholding that tradition during the 106th Congress. I look forward to a 
continuation of that tradition as we embark on a bipartisan effort to 
examine and address the nation's energy and air quality policies in the 
107th Congress.
    Today's hearing is an excellent start to the work that we must 
undertake as we continue to examine the potential need for federal 
legislation to restructure the electricity market. It is incumbent upon 
the Subcommittee to try to gain an understanding of what has happened 
in California, how the state is trying to resolve its problems, and any 
lessons that can be learned from its experience. To the extent 
California's situation proves anomalous, other states that have adopted 
different retail competition plans may be reassured. States still 
considering retail competition may learn what to avoid. In any event, 
with an economy the size of California's, and in light of the 
collateral damage being felt by ratepayers in neighboring states such 
as Oregon and Washington, it behooves this Subcommittee to hold 
educational hearings such as we are initiating today.
    I must express concern, however, about the short lead time provided 
for this hearing. I know it is Chairman Barton's preference to work 
cooperatively with the minority, and to give members time to understand 
the issues and delve deeply into substance. This is much easier to do 
when hearings are undertaken with adequate time to develop the issues, 
locate top notch witnesses, and provide members an opportunity to study 
the testimony in advance. I hope we can work towards that goal in 
planning future Subcommittee hearings, and per our conversations this 
week I am assured that we will do so. I thank the Chairman for that 
commitment.
    I also thank the Chairman for his committment to hold additional 
hearings regarding the situation in California. Unfortunately, Members 
from the region were not allowed to testify in today's hearing and 
several witnesses whom the minority believe would be invaluable to this 
examination were not able to participate for a variety of reasons. As I 
noted before, the Chairman and I spoke previously this week and he has 
made a commitment to undertake more hearings on this subject in the 
near future. At that time, interested Members will be allowed to 
testify as well as other witnesses whose vantage and experience might 
prove instructional to the Subcommittee.
    The California experience offers an interesting look into the 
process and potential pitfalls of restructuring the electricity market. 
In 1996, California passed legislation to restructure their electricity 
market and bring full retail competition to its citizens. Since 1996, 
California has embarked steadily on a restructuring plan and consumers 
should be enjoying the benefits of a fully competitive wholesale and 
retail market. Instead consumers are faced with frequent power shortage 
alerts, increased rates and rolling blackouts.
    The California experience has proven a recipe for disaster: 
analysts did not adequately anticipate supply demands; utilities were 
not permitted to purchase power under long term contracts forcing 
utilities to buy power on the spot market at outrageous prices; weather 
pattern changes have resulted in decreased capacity for the region's 
generation units which heavily depend on hydroelectricty; and despite a 
sharp increase in demand, virtually no new power plants have been built 
in California in a decade.
    In addition to examining the restructuring process that California 
undertook, it is important to examine whether the steps California is 
currently taking to rectify its situation and whether the steps FERC 
has taken are sufficient to address the needs of both California's 
consumers and electricity suppliers as well as of the needs of 
consumers in the western region who are also dependent on the same 
transmission grid.
    Looking at the lessons learned in California, as well as hearing 
from witnesses from Ohio and Pennsylvania where other restructuring 
efforts are underway will provide a useful exercise as we begin our 
examination of the flaws that still exist in the wholesale market and 
whether there is a federal role to play in fixing this problem. There 
are many questions that must be answered, for example, does current law 
give FERC the authority to enable a functional wholesale electricity 
market? Do the provisions of the Clean Air Act play a significant role 
in the problems in California, and if so should we consider federal 
legislation to address any specific examples of such a correlation? 
Those are just a beginning to the questions that we must ask as we 
examine this matter.
    I look forward to the witnesses testimony, the additional hearings 
and let me say again how I look forward to a continuation of our 
bipartisan work together on these issues which are of fundamental 
importance to the nation's economy.

    Mr. Barton. I want to thank you, Congressman Boucher. And I 
want to repeat for public consumption, so there is no question 
what I have discussed with you privately, based on your 
suggestion we will have another hearing specifically on 
California, if that is the wish of the minority. Also, based on 
your comments and suggestions, if it is your decision and my 
decision collectively, we may do a hearing where we 
specifically have members-only testimony. Now we may do that in 
conjunction with a hearing. We may do it as a separate stand-
alone. If we do that, we will do as many days as is necessary 
so that all members that wish to participate in terms of 
putting testimony on the record will do so.
    In terms of the timing of future hearings, this first 
hearing we scheduled as soon as the committee was fully 
organized on both sides of the aisle. We were slow on our side. 
You were slower on your side. So both parties are almost 
equally guilty of slowness. But in the future, at the staff 
level and the member level, you and I will be a team in 
deciding, along with the leadership of Mr. Tauzin, the full 
committee chairman, and Mr. Dingell, the ranking member, the 
subject and the timing of the hearings.
    Mr. Boucher. I thank the chairman.
    Mr. Barton. When it is a 50/50 tie, my 50 percent is 1/10th 
of 1 percent more than your 50 percent, simply because we have 
to have a way to break the tie. But hopefully there won't be 
too many cases where we have to go to the tie-breaker 
mechanism.
    So I want to reiterate that we have a lot of work to do, 
and fortunately energy is not a partisan issue, nor is the 
environment. So we are going to work together as a team, both 
at the top and the ranking file of this subcommittee, if I have 
anything to do about it, and as subcommittee chairman I do have 
something to do about it.
    Mr. Boucher. Will the gentleman yield?
    Mr. Barton. I would be happy to yield.
    Mr. Boucher. I want to thank the chairman for that 
commitment and again say that his work has been characterized 
over the years by an outreach to members on the other side, and 
by bipartisan cooperation, and I want to commend you for that. 
I look forward to the work of this Congress with you.
    Mr. Barton. Thank you. With that, I want to welcome our new 
vice chairman of the subcommittee, the Honorable Steve Largent 
of Oklahoma, for an opening statement.
    Mr. Largent. Thank you, Mr. Chairman. I will give a 
slightly different perspective. I guess some think we are 
moving too fast. I would say we are moving too slow. Thank you 
for the timeliness of this hearing.
    Fortunately, this subcommittee had very little to do with 
what is happening in California. It is a crisis in the sixth 
largest economy in the world, and something that I think we 
have to at least begin educating ourselves on the why and 
wherefores, on what is taking place in California. So I thank 
you for holding this hearing, in fact, I think we should have 
done it even sooner if it had been possible.
    Over the last several months, as a Nation, we have been 
taught some valuable lessons. In Florida, we have learned some 
lessons on civics, election law, judicial process. I think 
those are valuable lessons. In California, we are learning some 
extremely valuable lessons on free market economics. We are 
learning lessons about supply and demand. We are learning 
lessons about regulation and the effects that it has on 
markets, and I think the question that is going to be before 
this subcommittee and before our full committee is what is the 
best method to meet those market demands, to balance the law of 
supply and demand. Is it best to continue to try and meet the 
demands of the market by allowing to continue the last 
remaining monopolies in this country, the electric utility 
monopoly, or is it perhaps better to move to a more transparent 
and free market where competition is alive and vibrant? I think 
this question is really the issue.
    Over the course of the last couple of years, we have taken 
off the table Federal mandates to have a date certain when 
States have to move to electric retail competition. Today, we 
are now talking at the Federal level about how to clear up the 
wholesale markets in this country, where there are some really 
significant problems that exist. And I would tell you that the 
focus of my effort on this committee is to work with the 
chairman to resolve these issues. It can be summed up in three 
words, and that is transmission, transmission, transmission.
    We will focus our attention like a laser beam on how we can 
resolve the transmission problems that exist today so that we 
can have vibrant competition in the wholesale market, which 
does not currently exist, even though it desperately needs so.
    So with that, Mr. Chairman, I would like to ask for 
unanimous consent to submit my full testimony for the record 
and look forward to the testimony of our witnesses. Thank you.
    Mr. Barton. Without objection, so ordered.
    [The prepared statement of Hon. Steve Largent follows:]
Prepared Statement of Hon. Steve Largent, a Representative in Congress 
                       from the State of Oklahoma
    Mr. Chairman, I've been waiting with a great deal of anticipation 
for this morning's initial subcommittee hearing of the 107th congress. 
California's electricity crisis has been in the national news now for 
almost three months and it's led to the question--have the lights gone 
out on electricity deregulation?
    That's the question state and federal legislators now face after 
witnessing California's deregulation fiasco. My hope is that 
California's problems will not undermine sincere debate over the long-
term value of getting rid of our last real monopolies and allowing 
citizens to choose their electricity providers.
    In my own home state of Oklahoma, we've passed a state deregulation 
plan, however, now state legislators are understandably reluctant to 
move forward with the implementation plan. No one wants to be in the 
crosshairs as Governor Davis has been over the past few months.
    However, it's important to remember that California is unique. Take 
Silicon Valley for example. The average microchip processing plan uses 
enough electricity to power 50,000 homes. As a consequence, the demand 
for electricity has skyrocketed in California over the last decade. At 
the same time the demand for electricity has failed to keep pace with 
this rising demand.
    Thanks to California's onerous environmental policies, no new 
generation has been built in over a decade. By way of contrast--my 
state of Oklahoma will soon have over 9,000 megawatts of new 
electricity generation capacity. The difference? A generation facility 
that takes two years to complete in California would take seven years 
to complete in California due to delays caused in great part by 
overzealous environmentalists.
    California exacerbated the problem with its well-intentioned, but 
unfortunately, now well thought out deregulation bill, AB 1890. AB 
1890's stranded cost recovery provisions virtually ensured that no new 
competitor would enter the retail market until the costs were fully 
reimbursed.
    California forced its incumbent utilities to purchase power on the 
day ahead spot market by disallowing the use of hedging tools typically 
employed by utilities to ensure they don't pay exorbitant prices in the 
wholesale market.
    Finally, California instituted rate caps in an effort to insulate 
ratepayers from high prices. While caps may be a short term solution, 
they prevent consumers from receiving true price signals and actually 
increase demand because there is no incentive to conserve.
    On the federal level, proponents of electricity restructuring such 
as myself are faced with the challenge of convincing our colleagues 
that federal action won't result in more California-type disasters.
    What should we do at the federal level to promote wholesale 
competition? It should come as no surprise to many of you in this room 
who have worked with me on this issue for the past 3 or 4 years: 
transmission, transmission, transmission.
    Congress must address the adequacy and regulation of transmission. 
Today's grid was not built to handle the load generated by today's 
economy. We must find ways to incentivize the building and placement of 
new transmission. We must also set clear and transparent rules for the 
operation of the grid.
    I firmly believe that the lights are still on for deregulation. I 
look forward to working with our able chairman and my colleagues on the 
subcommittee in a bi-partisan manner on this issue. Consumers in 
California, as well as the rest of the country, deserve nothing less.

    Mr. Barton. We want to welcome back to the subcommittee the 
Honorable Henry Waxman of the great State of California.
    Mr. Waxman. Thank you very much, but under the rules, we 
are called on in the order in which we appeared, so I want to 
have Mr. Strickland and Mr. Doyle precede me in my opening 
statement.
    Mr. Barton. All right. I thought you all appeared about 
simultaneously. If Henry Waxman wants to be a gentleman and 
yield, I am going to let that happen.
    Who was the first?
    Mr. Doyle. We will defer to our senior colleague.
    Mr. Waxman. All right.
    Mr. Barton. Who was the first? Was it Mr. Doyle or Mr. 
Strickland?
    Mr. Strickland. I was first, but I am going to defer to Mr. 
Waxman.
    Mr. Waxman. Well, I thank my colleagues for being so 
courteous.
    Mr. Barton. Let's watch this exercise in gentlemanliness 
here. Mr. Waxman of California, who has seniority and has been 
very active in the past on this subcommittee, we welcome him 
back.
    Mr. Waxman. Thank you very much. And I think perhaps I am 
being deferred to not only because of my age but because I am a 
Californian and at the moment I see myself as the only 
Californian present for this hearing.
    Mr. Barton. We have Mr. Radanovich on our side of the 
aisle.
    Mr. Waxman. Oh, I didn't see him. I am glad that we have 
got some reinforcement from California on the committee.
    Mr. Radanovich. Thank you.
    Mr. Barton. It is a big State.
    Mr. Waxman. We are tackling an extremely important issue 
when we look at the California energy issue. Californians are 
angry and confused. Many people feel as if they are being held 
hostage by out-of-State energy generators. They believe that 
these companies are taking advantage of the energy shortage by 
charging astronomical prices. Others blame our major electric 
utilities, PG&E and Southern California Edison. They think 
these companies were the architects of California's 
deregulation plan, made billions off California consumers in 
the early years of deregulation and are now seeking a State 
bailout caused by their own poor planning. And others blame 
government.
    They are angry that California's former Governor Pete 
Wilson and the California legislature could enact such a flawed 
deregulation bill. They are dismayed that California's current 
Governor, Gray Davis and the California legislature, have not 
yet solved this problem. And they feel abandoned by President 
Bush and the U.S. Department of Energy, who, they believe, hold 
the tools to provide immediate relief to California.
    Sorting out these issues will be difficult but essential. 
If we fail to properly diagnose the cause of California's 
energy problems, we will surely fail in finding a cure, and we 
may find that other places around the country will continue to 
make the same mistakes.
    I don't have the answers yet, which is why I welcome this 
hearing, but I do know that there is at least one red herring 
that is being promoted by special interests looking to exploit 
California's plight for their own gain. I am talking about the 
efforts of some in the energy industry and Washington that 
blame the Clean Air Act for California's energy problems. The 
latest example happened just last Friday when the President's 
spokesman told the press that Governor Davis had asked the 
administration to waive Federal emission standards for 
California so that more electricity could be produced. This was 
hype designed to build support for environmental roll-backs. 
Governor Davis did not request that President Bush waive 
emission limits. All he had asked for was assistance in 
expediting the permitting process.
    The fact is the Clean Air Act has not restricted energy 
production in California. Those plants that need the 
flexibility to operate additional hours are being given 
permission to do so, and nine new power plants have received 
approval to start construction since 1999.
    In anticipation of this hearing, I wrote Mike Kenney, the 
head of the California Air Resources Board, about the impact 
that environmental regulations were having on California's 
energy problems. Here is what Mr. Kenney responded: ``No 
essential electricity generation has been curtailed due to air 
emissions limitations. State law and local regulations provide 
several means to address permit limitations without disruption 
of electrical generation or unmitigated damage to air 
quality.'' And I am going to ask unanimous consent to make Mr. 
Kenney's letter part of the record.
    Mr. Barton. Without objection.
    [The letter follows:]

                                Air Resources Board
                                     Sacramento, California
                                                  February 14, 2001
The Honorable Henry A. Waxman
House of Representatives
2204 Rayburn House Office Building
Washington, DC 20515-0529
    Dear Representative Waxman: As you no doubt are aware, during 
California's current energy crisis, some critics have identified the 
state's air pollution control programs as the cause of the energy 
shortage. With respect to the current energy crisis, it is obvious that 
no one factor can be identified as the cause, The matter is too 
complicated for such a simple explanation. However, under existing 
environmental programs Governor Gray Davis has directed that state and 
local regulators ensure that power generating sources remain in 
operation under environmentally sound conditions. No essential 
electricity generation has been curtailed due to air emissions 
limitations.
    Governor Davis, through the recent exercise of his emergency powers 
under state law, has ensured that power generation will continue. He 
has added substantially to the state's ability to deal with our current 
energy situation. Although existing laws and regulations provide 
mechanisms for addressing our power needs, they can also require 
substantial time and process. The Governor's actions have ensured that 
where statutory and regulatory impediments exist, they will be swiftly 
addressed.
    The Governor's clear instructions and grant of authority to the 
state agencies having jurisdiction over the siting and operation of 
powerplants will have immediate and substantial impacts on adding new 
electricity generation sources. Today, the State has already licensed 
approximately 7,000 MW of new baseload power generation. The State is 
also pursuing approximately 1,000 MW of new peaker generation that 
would potentially be on line by this Summer. In sum, the system works, 
The Governor's utilization of his emergency powers to expedite the 
process of power plant siting while maintaining environmental standards 
confirms that California can maintain its environmental and economic 
objectives.
    California has a unique and long history of achieving both economic 
and environmental success. The Governor's Executive Orders and existing 
statutes and regulations reflect continuing and unceasing efforts to 
balance our economic and environmental needs.
    Our history also reflects a pattern of success even in the face of 
unparalleled and significant challenges. California, the state with the 
largest population in the country, has made incredible strides in 
improving air quality and public health. At the same time, the State 
has enjoyed immense population and business growth. During this current 
energy situation, the State will maintain its record of achieving a 
balance among all the issues to ensure that a reasonable and successful 
solution is achieved.
                              introduction
    Over the last several months there has been an increasing focus on 
environmental laws as contributing to the energy crisis. This concern 
has taken two distinct forms:

1. The charge that environmental laws have prevented maximum 
        utilization of existing electrical generation facilities; and
2. The allegation that environmental laws have prevented bringing new 
        electrical generation facilities online.
    The first comment usually reflects a concern that air quality 
regulations are the primary impediment to power generation. The second 
comment is less specific and simply reflects a general view that state 
regulations have prevented major power plant construction. These 
statements have diverted attention from the true, and complex, causes 
of the current energy situation and have therefore not contributed to 
productive efforts to resolve it. The two comments are addressed below.
    impacts of environmental laws on existing electrical generation
    All central station electrical generating facilities must be 
permitted by the local air pollution control and air quality management 
districts as stationary sources under the State Implementation Plan 
(SIP) incorporated district rules. These permits are based in large 
part upon operator-provided information that includes such factors as 
hours of operation and fuel type. This information has a direct bearing 
on the facility's anticipated emissions. Based on this operator-
provided data, emission limits are imposed through the air permits. In 
short, the permits are prepared based on the criteria that best 
represent the facility's planned operation. It is these operator-
defined limits that have been at issue. These facilities are now in a 
position of having to generate electrical power at rates in excess of 
those assumed during the permit process to meet public needs.
    Despite this unanticipated high level of operation, through the 
joint efforts of the districts, the Air Resources Board (ARB), and the 
California Energy Conservation and Development Commission (CEC), as 
well as the assistance of the U.S. Environmental Protection Agency 
(U.S. EPA), needed electrical generation has not been interrupted. 
State law and local regulations provide several means to address permit 
limitations without disruption of electrical generation or unmitigated 
damage to air quality.
    The ARB has assisted the districts in addressing any potential 
issues arising out of their efforts to maintain power generation. ARB 
has maintained close coordination with the U.S. EPA to ensure that 
state and local response to the energy situation does not raise 
concerns at the federal level. We have approached the electricity 
shortage with an environmentally sound balance of need awareness and 
impact concern. U.S. EPA has indicated its understanding of the 
complexities California is facing and has indicated a continued 
willingness to assist.
    At the Governor's direction, the ARB has attempted to balance the 
State's energy needs with the public's right to clean air. Existing air 
quality regulations have provided the flexibility to address 
expeditiously the unexpected power demands of the State without 
material harm to air quality. These accommodations have been completed 
in very short time frames and have ensured continued power generation. 
Although this task previously required a degree of time and process, 
our ability to accomplish this task has now been significantly enhanced 
by the Governor's Executive Orders.
    The additional grants of authority to the Governor under the 
Emergency Services Act augments existing statutory powers and increases 
the ability of state and local agencies to work together in 
significantly reduced time frames. Whether it is providing for an 
existing source to operate beyond its permitted hours of operation or 
streamlining certification of new peaking sources, the Governor's 
emergency Executive Orders. provide even greater flexibility in 
responding to source specific generation issues than previously 
existed.
impacts of environmental laws on bringing new electrical generation on 
                                  line
    The second area of criticism is that environmental laws impede 
bringing new electrical generation online, All new proposed powerplants 
must be constructed and operated in compliance with applicable federal, 
state, and local air pollution requirements. Within California, the 35 
local air pollution control and air quality management districts are 
responsible for regulating emissions from stationary sources within 
their jurisdiction, including powerplants. At the state level, the ARB 
is the agency charged with coordinating efforts to attain and maintain 
federal and state ambient air quality standards and comply with the 
requirements of the federal Clean Air Act. To this end, the ARB 
coordinates the activities of all the districts in order to comply with 
the Clean Air Act.
    Some have cited California's environmental laws as the reason new 
power generation has not been built in recent years. However, a review 
of CEC's siting history demonstrates otherwise. Information from the 
CEC shows approval of 36 projects totaling 4,313 MW of generation from 
1979 to 1996. Since April 1999, the CEC has approved 9 major power 
projects (including one expansion) totaling an additional 6,278 MW.\1\ 
Six of these plants are under construction and four of those six are 
expected to be online this year, with start dates spanning from July 
through November. Another 14 projects (new sitings and expansions) are 
currently under review for an additional 7,736 MW of capacity. Lastly, 
there is still an additional 7,960 MW of capacity that has been 
publicly announced and for which the CEC anticipates receiving 
applications this year.
---------------------------------------------------------------------------
    \1\ Compare: during the entire Wilson Administration, a total of 
1465 MW of power was added.
---------------------------------------------------------------------------
    More specifically, some have also argued that costs of compliance 
with air quality regulations are too substantial and that they must be 
relaxed if we are to achieve the power generation we need. This 
argument generally has translated into one of insufficient 
environmental offsets for the siting of powerplants. This argument is 
flawed. Today, as mentioned above, approximately 15,000 MW of new 
electrical generation has either been approved or is in the licensing 
process. All of these projects have included environmental offset 
packages. We have also heard this argument with regard to the siting of 
new peaking facilities. Here, a problem potentially did exist for 
expeditious siting; however, the Governor has created an emission 
offset bank at ARB that will ensure that any such peaking facility can 
be sited.
    The CEC's siting process is designed to take 12 months. However, a 
number of factors, other than environmental regulations, have recently 
influenced individual project timelines. Over the last two to three 
years, the actions of local activists, businesses, and others have 
slowed the pace of some projects. In fact, power generators themselves 
have utilized the siting process to hold up the licensing of a 
competitor. Since 1997, competing companies have intervened in 12 of 
the 21 projects proposed licensing. Their participation has slowed the 
process in at least four cases.
    Constraints on electrical generation capacity from central station 
powerplants have caused increased interest in the use of distributed 
generation (DG). DG is electrical generation near the place of use. 
Yesterday, the Governor announced his support for legislative action 
that will provide incentives for distributed generation, Previously, 
the Governor signed Senate Bill 1298 (on September 25, 2000) which 
directs ARB to adopt a certification program and uniform emissions 
standards for DG technologies that are exempt from the permitting 
requirements of districts. This program must be in effect by January 1, 
2003. ARB is on a fast track with this program and expects to propose 
its certification program and uniform emissions standards for ARB Board 
consideration by the end of this year.
    The districts, ARB and CEO have been working diligently within the 
scope of the siting process and applicable regulations to site power 
plant projects, while adequately addressing air quality concerns. It is 
apparent that air quality regulations have not been the key impediment 
in permitting powerplants.
    As the foregoing demonstrates, it is not environmental regulation 
that has prevented the creation of additional power generation. Rather, 
many factors have contributed to the current crisis. Among those is 
also the fact that Market participants can and do manipulate the 
electrical power market by withholding capacity in order to maximize 
their price of electricity.
    Even the Federal Energy Regulatory Commission (FERC) agrees. 
Although it found insufficient evidence of market manipulation by any 
individual market participant:
        ``. . . there was clear evidence that the California market 
        structure and rules provide the opportunity for sellers to 
        exercise market power when supply is tight and can result in 
        unjust and unreasonable rates under the EPA . . . we reaffirm 
        our findings that unjust and unreasonable rates were charged 
        and could continue to be charged unless remedies are 
        implemented.'' \2\
---------------------------------------------------------------------------
    \2\ Order Directing Remedies for California Wholesale Market 91 
FERC 61,294 December 15. 2000 (California Order 215 at pp. 33, 34).
---------------------------------------------------------------------------
    ARB will continue its efforts to ensure that California has the 
maximum electrical power output possible. ARB will work to mitigate the 
adverse effects of this increased electrical output to the extent it 
does not impair it. This can be done within the confines of existing 
law. As Governor Davis has said, California is demonstrating that we 
can cut red tape, build more powerplants and continue to protect the 
environment.
    If you have any questions, please feel free to call me at (916) 
445-4383.
            Sincerely,
                                           Michael P. Kenny
                                                  Executive Officer
cc: Congressman John D. Dingell,
   Ranking Democratic Member,
   Committee on Energy and Commerce

    Mr. Waxman. If air pollution laws were causing the energy 
crisis, Los Angeles should be having the worst problems in 
California because LA has the toughest air quality regulations 
in the Nation, but the Los Angeles Department of Water and 
Power, which did not participate in the deregulation plan, is 
supplying Los Angeles with plenty of power. In fact, despite 
the tough air pollution laws and Los Angeles' tremendous 
economic growth, DWP is able to generate surplus energy 
electricity to be used by other parts of California.
    Those who would blame the Clean Air Act and other 
environmental laws are doing a double disservice to my State. 
Their efforts to roll back environmental laws not only threaten 
the quality of our environment, but they also make it more 
difficult to solve California's energy problems. Turning this 
issue into an environmental battle is a huge mistake. It will 
distract us from identifying and addressing the true causes of 
California's power crisis.
    Times of difficulty and crisis usually bring out the best 
in Americans. I hope that this will be the case once again. We 
need to work together to find the right solution for 
California, not cynically use California's plight as a ruse for 
undermining the Nation's environmental laws.
    Mr. Chairman, I thank you for this opportunity to make this 
opening statement. I look forward to the hearing that you 
promised us a few minutes ago on the California issue, where 
you will invite not only members who wish to testify, but those 
interested parties who have something to contribute. It is 
unfortunate that many weren't able to testify today, but we 
will look forward to hearing from them and getting their 
testimony on the record at the subsequent hearing that you have 
suggested you would be calling. Thank you.
    Mr. Barton. Thank you, Congressman.
    I want to just point out in terms of the record, in terms 
of the witnesses from California, we invited every witness that 
the majority and the minority asked to be invited from 
California and because of--and we had a number of distinguished 
Californians who initially agreed to testify, and then for 
various reasons were not able to.
    Mr. Waxman. Mr. Chairman, I certainly didn't mean a 
criticism for which you should respond, because I wasn't 
criticizing anything except to say there are others who ought 
to be on the record, not just from California, but others who 
have some expertise on this subject. I know that the head of 
our delegation, Congressman Sam Farr, wrote you a letter with a 
request for witnesses, which were not accommodated. Witnesses 
can't always be accommodated at every hearing, and as long as 
we get a chance to hear from people who have something relevant 
to say in the future, that is all any of can request.
    Mr. Barton. We are going to give every opportunity to make 
that happen.
    I want to point out that we are not going to hold people 
tightly today to our 3-minute opening statement requirement if 
you are not chairman or ranking member, but our rules do allow 
for opening statements no longer than 3 minutes, and I would 
hope that we could at least make a cursory attempt to comply 
with that.
    Mr. Shimkus of Illinois, who was the first member here, we 
would be happy to recognize for an opening statement.
    Mr. Shimkus. First on our side. We are so nice today. That 
is great.
    Mr. Barton. We are going to be nice all year long. This is 
the nice subcommittee.
    Mr. Shimkus. It is great to be here dealing with energy 
dereg right now. This will be starting my fifth year. There is 
a lot of lessons across the country on those who have been 
successful, those who have fallen short. This hearing is really 
important, and I agree with my colleague Steve Largent. 
Transmission, transmission, transmission is the bottom line of 
how we need to address the competitive market in the future.
    I would like to submit into the record an article written 
by Harry Levins. Sometimes I question journalism and how they 
can write because they are trained to be writers not in the 
field that they are writing for, but this is the second time 
that I have read articles by Harry Levins from the Post-
Dispatch that is right on. One was early in the energy dereg on 
stranded costs, and this was one just a couple of days ago, and 
I think it would be a great credit for our colleagues to get a 
chance to read it, and if I have your permission, I would like 
to submit that for the record.
    Mr. Barton. Without objection, so ordered.
    Mr. Shimkus. Also on the second panel, I will have John 
Rowe of Exelon, ComEd in Illinois, present, and also Peter 
Esposito of Dynegy. Dynegy is obviously from the great State of 
Texas, but also has a major presence now in Illinois. What we 
have learned in Illinois is that you can't rely on one single 
source of a commodity product to power generating facilities. 
When you do that, you fail.
    Illinois hasn't totally been successful. We did have really 
high price spikes of 2 years ago based upon the summer, but as 
California will get through this, Illinois got through it also. 
But it does require the competitive market to be a competitive 
market, and for people to recover capital investments when they 
build power plants and when they build transmission facilities. 
So this is going to be a very interesting year. I think many of 
us have been waiting for a couple of years to get to this 
point. Sometimes it takes crises to raise issues of national 
level that--an issue like California that helps us address 
common economic principles of supply and demand and, and there 
will be some people who shake their heads out here, the aspect 
of physics that even though electricity is a commodity, it is 
not a stored commodity. Those electrons are just bebopping all 
over the place. It creates some interesting different 
challenges than just a commodity product.
    So I am excited about it, Mr. Chairman, and with that, I 
will yield back my time.
    [The prepared statement of Hon. John Shimkus follows:]
 Prepared Statement of Hon. John Shimkus, a Representative in Congress 
                       from the State of Illinois
    Good morning, Mr. Chairman and to all who have shown up this 
morning. I would like to thank the Chairman for calling this hearing on 
this issue. There is a lot we can learn, not only from the California 
situation, but from other states as well.
    I am very happy to see two companies represented today that play 
important roles in the successful implementation of my home state of 
Illinois's deregulation law. John Rowe of Exelon, ComEd in Illinois, 
and Peter Esposito of Dynegy.
    I would like to take a moment to speak on, not what went wrong in 
California, but what went right in Illinois. To Illinois' credit, 
critical policy decisions were made on the basis of sound economics, 
rather than political expediency. And, the process used to develop the 
eventual legislation was inclusive rather than exclusive. All stake 
holders were invited to sit down and help draft the legislation.
    Illinois' more measured approach has given Illinois electricity 
companies the opportunity to prepare for a competitive market, while 
introducing the concept of choice to consumers. The Illinois law 
recognized that any attempt to undo a century of economic regulation 
could not occur overnight. Nor has the process been without problems, 
as was seen during the price spikes in the cost of electricity during 
the summer of 1999.
    Unlike California, Illinois did not require utilities to sell their 
power plants. Instead, when Illinois utilities chose to sell their 
power plants, the Illinois Commerce Commission required long-term 
contracts between the new owners and the electricity company to 
guarantee that consumers demand will be met at reasonable prices.
    One important factor is Illinois success (so far) is that 
generation of electricity in Illinois comes from a diverse group of 
generation sources. Coal, nuclear, natural gas and renewables all play 
an important role in the generation of electricity in Illinois. This 
balanced energy portfolio means that Illinois is not susceptible to 
price spikes that are a result of one form of generation becoming too 
expensive, like we are seeing currently because of the high cost of 
natural gas. This is a lesson I think the rest of the country should 
look at.
    Again, thank you for having this hearing today Chairman Barton. I 
look forward to hearing how other states are handling electricity 
deregulation and what lessons we can learn from them.
                                 ______
                                 

                      [Sunday, February 11, 2001]

            States hope to learn from California's mistakes
              By Harry Levins, Post-Dispatch Senior Writer
    In hindsight, the state's deregulation plan was a mess in the 
making. New power plants never sprang up. And planners grossly 
underestimated demand.
    California made a mess of deregulating electric power. On that, 
just about everybody agrees.
    But will chaos stalk other states that deregulate?
    ``What's happening in California couldn't happen in Illinois,'' 
says economics Professor Sanford Levin of Southern Illinois University 
at Edwardsville. He speaks with authority; after all, he served as a 
utility regulator on the Illinois Commerce Commission from 1984-86.
    Illinois has already started down the path of deregulation. 
Missouri has yet to move, although most people expect deregulation to 
come sooner or later. In the meantime, Missouri can take a long look at 
California's mistakes.
    ``The `Show Me' motto really does pay off sometimes,'' says Dan 
Cole, senior vice president of Ameren Corp., the parent company of 
Missouri's AmerenUE. With California showing other states how not to 
deregulate, the process should pack less pain here.
    In fact, it seems to be working well in Pennsylvania. That state 
has been deregulated about as long as California. But in Pennsylvania, 
the theory works as advertised. Competition has given Pennsylvanians 
choices--and has held their bills down.
    So what went wrong in California? And what can Missouri and 
Illinois learn from California's foul-up?
``We've pulled the plug''
    For most of the 20th century, all states regulated electric 
utilities. The thinking held that power was too vital to society to be 
tossed into the whims of the free market.
    The utilities agreed to serve everybody in their area as reliably 
as possible, at rates set by the state. In return, the state agreed to 
set those rates high enough to cover the utility's costs, plus a 
certain percentage for profit.
    The formula was fairly standard from state to state. Even so, the 
rates weren't. The Midwest enjoyed generally low rates. The Northeast 
and California paid a premium.
    California sits far from the coal fields of the Midwest. The stuff 
had to be shipped in, at great cost. Anyway, just about everything 
costs more in California.
    But industries in California groused at paying higher power bills 
than their competitors paid in places like Missouri. The California 
executives said that although their businesses had to play by the free-
market rules, the state's utilities did not.
    The executives had a point.
    A regulated utility is all but guaranteed a profit. What's more, a 
regulated utility's profits go up as its costs go up. Under the old 
system, nothing prodded utilities to cut costs. At Wisconsin Power & 
Light, the top dog once said, only half jokingly, ``This is the only 
business in the world where you can increase your profits by 
redecorating your office.''
    But starting in the late '70s, a wave of deregulation swept through 
the land. Suddenly, competition took hold among airlines--and trucking 
companies, railroads, phone companies and so on.
    California wasn't the first state to deregulate power. (New 
Hampshire took that title, in May 1996.) But California was the first 
big state to do so, and the state that the rest of the nation watched.
    On Sept. 23, 1996, then-Gov. Pete Wilson signed the deregulation 
bill, looked up and said: ``We've pulled the plug on another outdated 
monopoly and replaced it with the promise of a new era of 
competition.''
    Now, the promise has gone sour--so sour that Wilson's successor, 
Gray Davis, calls deregulation ``a colossal and dangerous failure.''
    Part of the problem lies beyond California's control. But in 
hindsight, California's deregulation plan looks like a blueprint for a 
blunder.
A plan built on flaws
    The people who drew up California's plan in the early '90s had to 
make some assumptions:

* The planners assumed that if they forced the utilities to sell off 
        their power plants, they'd spare Californians any sweetheart 
        deals between the wholesalers and retailers of power.
* The planners assumed that outsiders would flock into California's 
        massive market to build power plants.
* The planners assumed that a power grid built for a regulated era 
        would serve just as well for a deregulated era.
    Wrong, wrong and wrong.
    California's utilities sold most of their generating plants to 
outsiders. But the state failed to tie the buyers down to long-term 
contracts on selling the power back to California. In fact, the state 
barred most long-term deals.
    The planners looked back to the late '70s and early '80s, when 
California's utilities got locked into wildly overpriced long-term 
deals to buy bits and pieces of power generated by solar and wind 
power. The planners told themselves, ``We'll not make that mistake 
again.''
    In effect, California was like a family that sells its house and 
then rents it back without first signing a long-term lease.
    As for those new power plants that would spring up: They didn't. 
California is hostile territory for power plants. Nobody wants one in 
his back yard.
    Also, power companies decided to hold off on building plants until 
they saw how deregulation shook out. Nobody wanted to invest in the 
unknown. Anyway, most of the state's newer plants burn natural gas, 
which has recently flared up in price.
    Finally, California's stern environmental laws amount to an 
obstacle course for construction.
    California has nine big plants going up or on the drawing boards. 
Contrast that with Texas, which will welcome deregulation two years 
down the road with 70 new plants either on line, being built or in the 
planning stage.
    As for those transmission lines, the ``power grid''--they're 
showing the strain. The original design was meant to let utilities hook 
up with neighboring utilities. That way, they could help one another at 
crunch time.
    But nobody designed the grid as a long-haul highway for moving 
power vast distances. The California grid has bottlenecks that make an 
already tight supply even tighter. And under the state's deregulation 
plan, nobody has much incentive to string more lines.
Supply and demand
    On top of the faulty assumptions, California's planners made some 
downright bad judgments.
    They grossly underestimated the demand for power, which boomed 
along with the state's economy. Back in the early '90s, for instance, 
nobody thought much about the Internet. But today, some people 
estimate, Internet-related activity eats up 8 percent of America's 
power.
    And when it comes to the Internet, California is action central. A 
middling microchip plant sucks up as much power as a small steel mill. 
A center for computer servers and routers will drain off almost 20 
times as much power as the same-sized office building next door.
    The planners overlooked population growth in California's 
neighboring states. Even in the best of times, across a year, 
California must import about a quarter of its power. But the handiest 
sources--booming states like Arizona, Oregon, Washington and Nevada--
now have less spare power to feed California.
    (Much of the cheapest imported power came from the hydroelectric 
plants along the rivers of the Pacific Northwest. But the Northwest has 
hit a dry spell. When air-conditioning season kicks in this summer, it 
may well open a long and very hot summer in California.)
    Finally, the planners seem to have made their biggest blunder by 
barring long-term contracts.
    Instead, California set up something called the Power Exchange, or 
PX. The PX bought and sold power a day ahead of time. Generators would 
notify the PX how much power they'd sell the next day, and for how 
much. Utilities would tell the PX how much power they'd need the next 
day. The PX computers would draw the supply-and-demand curves and set 
the price.
    But the system needed a safety switch. If the day-before numbers 
were wrong--if the supply or demand strayed from the predictions--the 
state had to have an agency that could step in right away. That's 
because the quirky nature of electricity means that supply and demand 
must balance perfectly. Should they wander out of whack, the lights go 
out, or substations go up in smoke.
    The safety switch is called the California Independent System 
Operator, or Cal-ISO. To keep supply and demand in balance, Cal-ISO can 
put out the call for more power, right now. But this right-now power 
costs more--sometimes, a lot more.
    The power generators soon learned to play the system. On Monday, 
they could shave back their offerings to the PX toward covering 
Tuesday's demand. Then on Tuesday, they could sell their power at a 
premium to the desperate Cal-ISO.
    Investigators are poring through the records to see whether the 
generators stepped outside the law's bounds. But the rules as written 
give generators every incentive to hold back their power until they can 
get top dollar for it.
    The state's plan called for temporary rate caps for consumers. But 
by May 2002--or as soon as each utility paid off its past investments, 
whichever came first--the rate caps would come off. Consumers would pay 
the free-market rate for power.
    The theory held that competition would do more than hold down 
rates. Competition would actually cut rates.
    Competition arrived on July 1, 1999, for the 3 million customers of 
San Diego Gas & Electric. For the first summer and winter, nobody 
seemed to notice.
    But last summer, hot weather set in, demand rose--and suddenly, 
electric bills tripled. Consumers hollered, and the California 
Legislature listened. By the end of August, the rate caps went back in 
place.
    Now, San Diego Gas & Electric had a real problem. It had to pay the 
free-market rate for the power it sent through its transmission and 
distribution lines to customers' homes. But the customers were paying 
SDG&E the regulated rate. For a utility, that's the worst of both 
possible worlds: buying dear and selling cheap.
    The problem soon spread northward to California's other two big 
utilities. Last month, they teetered on the brink of bankruptcy before 
the state stepped in. Now, the state is brokering long-range contracts 
with generators.
    But until things settle down, Californians are holding their 
breath, wondering whether rolling blackouts will put them in the dark.
    It's a mess. But so far, it seems to be a uniquely California mess. 
Other states have ducked California's bullets.
    In Illinois, for example, the power supply is ample, and getting 
even more so.
    Illinois is phasing in deregulation instead of trying to make the 
jump in one bound. Businesses have been the first to feel it. By the 
time residential customers enter the free market in May of next year, 
most of the kinks-should be smoothed out.
    Illinois hasn't put a gun to the utilities to sell their generating 
plants. Nor has Illinois or any other state barred utilities from 
hedging against price jumps by buying power through long-term 
contracts.
    Does deregulation work? Ask satisfied Pennsylvanian Bonnie Graham, 
a college administrator in Philadelphia.
    In the old days, Graham's monthly power bill from the Philadelphia 
Electric Co. ran to about $80. Now, she pays about $60 to her new 
provider, Green Mountain Energy of Austin, Texas. She says, ``I'd never 
go back.''
    Illinois hopes to repeat the success of Pennsylvania and avoid the 
calamity of California. People like SIUE's Levin are confident that 
Illinois can hold the gremlins of California at bay.
    Meanwhile, Missouri's legislators will probably sit tight this 
session to see what happens elsewhere. As Ameren's Cole notes, being in 
the second wave isn't always a bad thing.
    But Cole says that at some point, Missouri will have to move into 
the deregulated future. California aside, he says, development is 
following deregulation. Businesses are building where rates are 
cheaper.
    ``Sure, there are problems with deregulation,'' Cole says. ``But 
we're pushing it in Missouri, because we like what we see in 
Illinois.''

    Mr. Barton. We are going to let you bebop a little bit this 
year, too, Mr. Shimkus.
    We are going to go now to Mr. Strickland of Ohio for an 
opening statement.
    Mr. Strickland. Thank you, Mr. Chairman. Mr. Chairman, I am 
going to be moving in and out of the committee today because I 
have divided responsibilities, as I think many of us do.
    I would like to begin my comments by welcoming an Ohioan, 
Dr. Schriber, who is the chairman of the Ohio PUCO. We have 
worked together on protecting the uranium enrichment plants in 
southern Ohio and other matters, and I am very proud, Alan, 
that you are here representing the Buckeye State and look 
forward to your testimony.
    Mr. Schriber. Thank you.
    Mr. Strickland. Mr. Chairman, this country needs a 
comprehensive energy policy. We need to utilize coal. We have, 
I am told, hundreds of years of coal reserves in this country.
    We need to increase refining capacity. We need to use more 
ethanol and other such energy sources, and we need to stress 
conservation.
    I am terribly concerned that the nuclear side of our energy 
needs is in serious jeopardy. Approximately 20 percent of our 
energy needs, electricity in this country, is generated by 
nuclear power plants, and we have only two remaining enrichment 
facilities in this country, and one will be closed in June of 
this year, and I wonder how many members of this Congress 
understand what is facing us.
    It is a looming crisis, and as we consider all aspects of 
our energy needs, I hope that this committee will, at some 
point in the future, focus on the critical needs of our nuclear 
energy.
    With that, I want to thank you for this committee and I 
look forward to learning a great deal today. Thank you.
    Mr. Barton. Thank you. And I would share many of the 
sentiments that you echoed in your opening statement. I think 
they are very well put.
    We want to welcome a new member of the committee and the 
subcommittee to this hearing, Mr. Walden of Oregon.
    Mr. Walden. Thank you very much, Mr. Chairman. I am 
delighted to be on this subcommittee and on the full committee 
and appreciate your expeditious efforts to have this hearing 
scheduled.
    There is no greater issue affecting the Pacific Northwest 
than the energy crisis that is afflicting California. To say 
that there isn't a collision between the environment and energy 
production is to ignore the basic problem we have in the 
northwest, because when we exceed the biological opinion on the 
river system to flow water through the turbines to produce 
power to prevent blackouts and brownouts in California, we are 
engaged in that debate between the environment and energy. And 
that is happening now in the Pacific Northwest. It happened 
last summer when California faced brownouts.
    We exceeded the biological opinion to protect and preserve 
salmon and restore their runs in order to bail out California. 
Now we are in that same spot market with California competing 
for energy at a time when our peak loads are there. It is a 
huge problem that is affecting industry and community from 
farmers to production of aluminum in my district and throughout 
Oregon, and I am delighted that today we are going to begin to 
hear what happened in California, what is happening and then 
take a look, as the committee progresses, on what can be done 
to work our way out of this situation.
    Mr. Chairman, I think we need several things, a thorough 
analysis of all the power assets, especially in the Pacific 
Northwest hydro system, to determine what is fully in use, what 
is not and why, and what could be put into production. 70 
percent of our power in the northwest comes from hydro. We need 
a thorough analysis of the licensing requirements and time 
lines, both from FERC and as it relates to hydro relicensing as 
well as other facilities. Do these time lines make sense in 
today's environment? And are there ways to streamline the time 
lines while continuing to ensure environmental quality and 
protection?
    We need a thorough analysis of incentives for renewable 
energy and conservation, efforts that we are certainly 
promoting in the northwest, because the cheapest production of 
power is that which is never used that results from 
conservation, and so in this time of great crisis, we need to 
be moving forward on conservation as well as production of 
energy and looking at the alternatives and the renewables.
    We also need a thorough analysis of the transmission 
system, both its capability, capacity and reliance. As I have 
been told by leaders on northwest energy issues, that we could 
go ahead and put plants on-line, perhaps using clean coal 
technology further to the east in Wyoming and Montana and yet 
lack the transmission capability and capacity to send that 
power to where it is needed most. And I know that is also an 
issue in California between the southern part and the northern 
part. They may have a surplus in the south, but you have to 
route it up through the northwest to get it to the northern end 
of California, and we need to be looking at that. And again, 
siting issues, construction issues and how those Federal laws 
interact are all critical elements of making sure we have both 
a reliable and sufficient power supply.
    Mr. Chairman, thank you for this hearing. I look forward to 
serving with you on this committee.
    Mr. Barton. Thank you. We look forward to working with you.
    We also want to welcome a new member of the full committee 
and the subcommittee to his first subcommittee hearing, Mr. 
Doyle of Pennsylvania, who at the appropriate time will 
introduce the witness from Pennsylvania.
    Mr. Doyle.
    Mr. Doyle. Thank you very much, Mr. Chairman, and thank you 
for convening this hearing to examine the electric supply and 
market problems in California and to further determine the 
extent to which conclusions can be made about the distinct 
roles of Federal and State regulations through a comparison of 
electricity choice plans enacted in Pennsylvania and Ohio. Just 
as the California power crisis has sparked a national debate on 
deregulation, it has also heightened the need for a full and 
serious discussion about what constitutes a successful State 
regulation plan. One thing that can be learned from a 
comparison of California and Pennsylvania is that regional 
factors should not be ignored, but should guide the formulation 
and implementation of a State's plan. And while population, 
climate and economic development trends all are important 
regional factors to consider, it is of the utmost importance 
that States also look at the factors of energy generation, 
transmission and distribution in much the same ways.
    California has experienced an increase in population, 
severe weather and an economic growth and information 
technology which requires significant amounts of power. But 
California's plan seemingly did not incorporate complementary 
components into their design structure. California didn't 
address serious generation, transmission and distribution 
deficiencies adequately to reflect emerging market and consumer 
demands.
    While Pennsylvania supplies all of its own energy, pays 
close attention to maintaining core capacity of its energy 
producing infrastructure and allows for energy consortiums, 
California has not built a single new power plant since before 
restructuring took place. This, despite the fact that in 4 
years between 1996 and 2000, electricity consumption grew by 
approximately 9 percent.
    Between 1999 and 2000, electricity consumption in 
California grew by 15 percent. And keep in mind that even prior 
to these trends, California never produced 100 percent of the 
energy used but relied upon imported energy from other States. 
To compound this problem, generation capacity has been off-line 
for maintenance and their transmission system is constrained. 
As a result, prices being paid by consumers and businesses have 
skyrocketed. Not one facet of the plan appears to be 
interfacing well with the others. In Pennsylvania, however, the 
plan is reflective of and takes into consideration regional 
factors and has, in turn, accomplished its goals of creating 
more choice, maintaining a dependable energy supply and 
lowering costs.
    As Chairman Quain will speak to later, when Pennsylvania 
began electricity competition in 1997, rates were on the 
average 15 percent higher than elsewhere in the United States. 
Today, Pennsylvanians pay rates on average 4.4 percent lower 
than elsewhere in the country.
    In order to gain greater insight from this comparative 
approach, we must also examine how the plans approach the 
issues of stranded costs, price caps, universal service, public 
benefits and a host of other important issues. We must also 
examine how these States approach the relationship between 
restructuring electricity generation and existing environmental 
regulations. These are the tougher matters that I believe we 
must effectively deal with in order to determine our 
appropriate role in energy deregulation.
    I look forward to working with my fellow members on the 
subcommittee in fashioning a cohesive response to the complex 
and demanding set of issues before us today.
    Thank you, Mr. Chairman.
    Mr. Barton. I want to thank the gentleman for that opening 
statement. And I have got to say for a member who has never 
been on the committee or the subcommittee before, to give that 
kind of an opening statement, very impressive. Sounds to me 
like if I didn't know better, Chairman Dingell wrote that 
statement for you, or something. I am not going to go there, 
but it is very impressive.
    We would now like to hear from another new subcommittee and 
full committee member from the great State of Nebraska, the big 
red machine, Mr. Lee Terry, Congressman Terry, excuse me.
    Mr. Terry. I answer to everything.
    Thank you, Mr. Chairman, for calling this. I will submit my 
formal statement for the record for time. There are a couple of 
issues that have been brought up that I want to just casually 
mention for you, Mr. Chairman. I was contacted by a contractor, 
a developer, who is currently trying to build a power plant in 
California, expressing incredible frustration over the 
permitting, licensing procedures. They are going to meet with 
me next week to go over the details of that. But part of their 
frustration is that they are in the process of building this. 
They thought at the time of crisis that it would be expedited, 
but it isn't. So we will go over the details of that.
    But, you know, we talk about so many levels of problems, 
and I wonder if part of the discussion in any of these hearings 
are going to be at the government or bureaucratic level. I 
don't know if it is bureaucratic indifference or incompetence, 
or if there are truly environmental reasons that don't allow 
them to expedite at time of emergencies like this. But we would 
think that producing and building new power plants would be a 
priority in the State of California. Evidently within the 
government, the message is it is not. So I hope that is an area 
that we will hear about in one of our hearings amongst the 
several other items of shortages in the supply lines. Thank you 
for holding this hearing.
    Mr. Barton. Thank you. Another new committee member and 
subcommittee member from the great State of Louisiana, 
Congressman John. I am not sure this committee is ready for two 
Louisianans, but we welcome you to this subcommittee.
    Mr. John. One on each side of the aisle, too.
    Thank you, Mr. Chairman, and ranking member, for holding 
this committee meeting. I am looking forward to not only 
serving on the full committee, but also this subcommittee, 
because I think that some of the issues that we are going to be 
addressing and that this country must address will come right 
through this subcommittee. Today's hearing is about the 
problems out in California, I am really looking forward to 
hearing from the panelists here, because I believe our role in 
this committee is not to blame anyone for what has already 
happened because there is enough blame going around, whether it 
is the State, the Federal Government or anywhere in between. 
But I think we should take a look at this situation, find out 
all of the facts that have contributed to where we are today, 
and take that unfortunate circumstance and maybe overlay that 
on to how we can make a better situation. You know, today it is 
California. This summer, it could be Florida. It could be 
Louisiana. I believe that as we look into the future of 
electric generation and all of the different things that are 
happening out there, we are truly in a new time, a new economy, 
an e-economy, with the demands on our electronics, whether it 
is our pagers, or our cell phones.
    I just got out of a hearing that opened my eyes on some of 
the things that we are going to have to address in the future 
as far as our demand for electricity. So there are a lot of 
items that we are going to have to look at, and I look forward 
to listening and learning the lessons here, but not blaming any 
one individual or government, but just to learn from this so 
that we don't make these kinds of mistakes again. We must look 
at the price of natural gas, the oncoming line of new 
generating plants that are fueled by natural gas, the effect of 
cold winters, and other contributing factors that will impact 
our energy needs. So thank you, Mr. Chairman. I look forward to 
this hearing as we proceed.
    Mr. Barton. Has the gentlemen completed his statement?
    Mr. John. Yes.
    Mr. Barton. I am sorry. I was in consultation with the 
majority staff director.
    On our side we now go to Mr. Whitfield from the great State 
of Kentucky, one of our veteran subcommittee members.
    Mr. Whitfield. Mr. Chairman, thank you very much. I would 
just make the comment that over the last 8 years or so there 
has been an effort in this country to reduce the use of coal, 
which is our most abundant resource providing about 55 percent 
of the electricity produced in our country. I know that we must 
take steps to encourage the use of coal while meeting 
environmental standards. I would also touch on my friends from 
Ohio, Mr. Strickland's comments about nuclear energy, and say 
that I do think we must ensure that we always have the domestic 
capability to enrich uranium in the U.S. With the closing of 
the plant in Portsmouth and the only other plant in Paducah, 
that is something that we have to be concerned about.
    I yield back the balance of my time.
    Mr. Barton. I thank the gentleman from Kentucky. We look 
forward to working with him.
    We would now like to hear from another veteran of the 
subcommittee who do yeomen's work in the last Congress on these 
issues, Mr. Sawyer of Ohio.
    Mr. Sawyer. Well, thank you, Mr. Chairman. Thank you for 
your leadership over the previous Congress and the one we are 
coming into.
    I would like to take just a moment to echo the remarks of 
my colleague from Ohio, Ted Strickland, on Dr. Alan Schriber, 
who has now been a mainstay of energy management and regulation 
in Ohio for now into his third decade, not all of three 
decades, but components of three different decades. His 
leadership has been of enormous value to all of us.
    Our hearing today is about a multidimensional problem. It 
touches on all of the topics that we have heard members refer 
to, but I would like to focus my remarks today on the 
importance of transmission, with the grid being the literal 
backbone of the electrical system in the United States. Unless 
we continue to improve and expand the transmission grid, the 
system simply will not sustain the growth in our economy. The 
linkages are just that direct. In the long run, we risk 
potentially catastrophic breakdowns if we don't both expand and 
maintain the grid to match changes in demand.
    I would like to refer to an article from the Los Angeles 
Times from January of this year, Power Line Traffic Jams Add to 
Energy Woes. It warned that an antiquated and overworked system 
of electric transmission lines could leave much of California 
starved for power, even if the State can eventually generate 
and import enough electricity to serve its 34 million 
residents. The State's transmission system, the article 
continues, has long been neglected, a victim of poor planning, 
unexpected growth and electricity consumption, and regulations 
that make the lines a poor investment. Indeed, and I continue 
to quote, electricity use in the last decade has grown twice as 
fast as the new transmission capacity. Many have focused on the 
lack of generation in California, but transmission is lagging 
even further behind. Quote, the State is planning to boost 
generation capacity by 25 percent, but its current planning 
leads toward expanding the transmission capacity only by about 
5 percent.
    California is not the only part of the country experiencing 
this particular problem. It is much broader. Tuesday's Energy 
Daily had an article citing a study by the Mid-Continent Area, 
power pull that, quote, calls for upgrades to more than 2,700 
miles of transmission lines in the map system to boost 
reliability but warns that existing transmission rates are not 
high enough to justify investment in new transmission projects. 
We genuinely have a national problem and its dimensions range 
from capital formation to siting decisions.
    How do we close the gap between transmission capacity and 
demand? I believe it requires planning and thoughtful attention 
to long-term needs that promotes rather than discourages 
investment in the infrastructure needed to sustain competition. 
It requires design and maintenance standards and operating 
protocols appropriate to high speed electrical--a high speed 
electrical highway, and it requires timely locational decisions 
to meet the changing needs of the customer base.
    Since I started talking about transmission investment, I 
have been gratified to see that the spread of concern with 
regard to that we have moved from simple repeal of PUCA and 
PURPA and putting a date certain for State action to the kind 
of discussion that we are having today.
    But a funny thing happened on the way to the ISO. 
Electricity is becoming a riskier business than ever with more 
need than ever to attract capital and to assure access and 
reliability.
    In closing, just let me say that according to Chairman Eber 
of the FERC, quote, transmission must become a stand-alone 
business and respond to the market. It must do so, however, 
within the framework of regulation, though in a new form.
    That is what is happening. It will call on us to think 
through new roles for a Federal framework in restructuring 
regional markets. That is to say, not more FERC and maybe not 
less FERC but perhaps a different FERC.
    Thank you, Mr. Chairman, I appreciate your flexibility.
    Mr. Barton. Thank you, Congressman Sawyer.
    We now want to welcome our full committee chairman, the 
distinguished Louisianan, Mr. Billy Tauzin--Congressman, 
Chairman Billy Tauzin, who has not only put energy back in the 
name of Energy and Commerce, we have a chairman who has put 
energy back into the chairman's seat at Energy and Commerce.
    Chairman Tauzin. Thank you, Joe.
    Thank you very much, Joe. We are all getting used to new 
names, and while we are celebrating new names, in fact, the 
fact that we have named the Commerce Committee, renamed it 
Energy and Commerce, is not just for a light show. It is real. 
We have recognized that we are facing incredibly another energy 
crisis in this country and we need to move quickly. It is no 
secret that we have not had an energy policy. If we have had 
one, it may have best been described as an anti-energy policy 
for some time now.
    Defining a policy that is compatible to the needs of our 
country and its energy demands and is compatible to the 
requirements of our clean air policy and clean water policy and 
land use policies in this country is going to be a demanding 
and awesome task and, Joe, I want to thank you and the members 
of the committee on both sides of the aisle for the energy 
which you have brought already to the organization of this 
hearing on California, and the many hearings that we are going 
to have and discussions we are going to have with Vice 
President Cheney and the task force assembled at the executive 
level, and with Senator Murkowski and the senators who have 
pledged to work with us to define a new energy policy for 
America that fairly balances all of those mighty concerns.
    If you are focusing today on California, tomorrow we will 
be focusing on New York; we will be focusing on Chicago; on 
Boston; on places we are told that the energy grids are too 
weak and blackouts, brownouts are likely this summer because of 
bottlenecks in those grids. We will be focusing later on fuel 
supply problems, the likes of which we saw in Chicago and 
Milwaukee last year when fuel supplies were short and energy 
spikes hit consumers, and angry consumers wanted to know why 
and what was going wrong with our supply problems.
    We know several things about this country, and one is that 
we have an insatiable demand for energy, and this new e-economy 
is a gas guzzler and we have to somehow fit our energy supply 
with that huge demand.
    At the same time, we are going to necessarily balance those 
concerns against the environmental concerns of our country in 
maintaining some of the policies we put in place to clean up 
our air and our water and our land. That is why we put energy 
and air quality in the same committee. We know that 
relationship. We know, for example, in California that some 
plants are operating at 25 percent capacity because they have 
already bumped up against the NOX caps. At the same 
time, emergency generators are running full steam, and those 
emergency generators using diesel are polluting the air 300 
times more than the power plants that have shut down. We need 
to put some common sense in these decisions.
    Mr. Chairman, I want to thank you for accompanying me to 
California. I think we are going later this month together to 
actually talk to energy executives and government officials in 
California to get a firsthand look at that problem.
    California represents 12 percent of the Nation's GDP. We 
can't have a crisis in California that is not a national 
crisis. We can't have a crisis in energy facing one community, 
one State in this country, without it becoming a national 
concern. There are six petrochemical plants shut down in 
Louisiana because natural gas prices are so high, in an energy 
world where natural gas is now the premier desired fuel for 
electric generation. We have got a lot to talk about, a lot to 
do.
    Joe, I want to thank you, Mr. Chairman, for, again, the 
energy that your committee is going to bring, and you 
personally are going to bring to this awesome and demanding 
task. Downstairs, Mr. Bilirakis has started the health care 
hearings, and we are organizing this afternoon the ONI work of 
our committee. This committee is back, and we are going to do 
some remarkable things in this 2-year cycle because of the 
talent on both sides of the aisle that is just itching to get 
to these problems and to find solutions for the American 
public. This is going to be an exciting time for your 
subcommittee, Mr. Chairman. I thank you for allowing me to come 
in and interrupt like this. I promise in the future I won't do 
this to you, but I wanted to come here on the first day and 
congratulate you for making this the first hearing, because 
this California situation is something all of us have an 
interest in and the entire Nation has a stake in resolving.
    California, literally, is just the first sign of what could 
be problems all over America until and unless we make some good 
decisions. Joe, thanks for entering this process, for helping 
us find those answers, and I look forward to working with you. 
You have the full support of the full committee and its staff 
in this grand effort. Thank you, sir.
    [The prepared statement of Hon. W.J. ``Billy'' Tauzin 
follows:]
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Mr. Chairman: I'd like to commend you for holding this hearing on 
lessons learned from the California electricity crisis. Over the past 
year, energy issues have been very much in the news. Since last summer, 
the situation in California has been getting the most attention, but 
rising prices for natural gas and oil also give the consumer good cause 
to worry.
    The name of this Committee was changed to Energy and Commerce for a 
reason: we recognize that energy issues are paramount. The increased 
demand for energy in the U.S. gives this Congress and the 
Administration the opportunity and responsibility to develop a 
comprehensive, forward thinking national energy policy. A long term 
strategy that includes all sources of energy is essential to the 
success of our economy. The U.S. demands abundant energy supplies at 
affordable prices.
    This is the first hearing of the Subcommittee on Energy and Air 
Quality. We intend to hold more hearings in the future on other energy 
issues. These hearings will focus attention on the need for a 
comprehensive energy policy and highlight what needs to be done to 
achieve that goal.
    Today's hearing will show that despite the negative publicity about 
electricity, true competition does not result in power shortages, 
blackouts, or high prices. This hearing will explore the causes of the 
crisis and look at other states to identify what they did right.
    I look forward to hearing from today's distinguished panel of 
witnesses. Thank you.

    Mr. Barton. So this is going to be the Energy Bunny 
Subcommittee of the Energy and Commerce Committee. We are going 
to work, work, work, work, work, Mr. Chairman. And we hope, 
produce, produce, produce, produce as well. We welcome your 
participation.
    We want to welcome Mr. Markey for an opening statement. I 
want the audience to look at your watches and let us see if Mr. 
Markey can hold his 3-minute opening statement to under 7 
minutes.
    Mr. Markey. Thank you, Mr. Chairman.
    Mr. Barton. I just picked a number.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    I begin here today my 25th year on the Energy Subcommittee. 
I remember back in the late 1970's, actually, when Senator 
Scoop Jackson used to hold hearings before the Senate Energy 
Committee. We didn't have an Energy Committee in the House. We 
had an Interstate and Foreign Commerce Committee that had 
energy, health, telecommunications. You all serve on this 
committee right now.
    There was a big move to create a House Energy Committee and 
to strip the committee of its jurisdiction. I suggested to Mr. 
Dingell that we make a big move to help solve the problem that 
we didn't have an energy committee in the House and that we 
change the name of the committee to the Energy and Commerce 
Committee, and that would solve the problem, which it did from 
1980 until 1995 when, because the energy crisis had kind of 
abated, the name was changed back to the Commerce Committee.
    Beginning this year, we have changed it back again to the 
Energy and Commerce Committee, dealing with the reality that 
energy is now playing a much more pronounced role in public 
policy in our country, but also as an anticipatory, also NMD 
shield against anyone coming against our jurisdiction in this 
particular area because, Mr. Chairman, you are going to provide 
great leadership for us.
    Mr. Barton. I did not realize it was your idea.
    Mr. Markey. Yes, that was my idea. Coming up with a good 
line.
    Mr. Barton. Yes.
    Mr. Markey. You know, my mother always said to me, Mr. 
Chairman, try to learn as many lessons vicariously as you can. 
It is safer that way. Now, we always don't do that, but we are 
here today trying to learn vicariously from the California 
electricity disaster.
    Some of you recall the film The Perfect Storm, in which 
three storm fronts converged off the New England coast to 
produce monster waves that crashed down and destroyed a small 
Massachusetts fishing vessel. What we have seen today in 
California is an electricity perfect storm, in which converging 
fronts of a flawed State restructuring plan, high natural gas 
prices, increased demand, lower than expected rainfall, reduced 
imports of power from neighboring States, lack of new 
generating capacity, transmission constraints and market 
structure problems have all come together to produce a monster 
wave of rolling blackouts and higher prices.
    For the citizens of California, it is a crisis that leaves 
consumers caught in a vortex of reliability problems and 
looming rate increases. For the rest of us, it is something 
that we only want to experience vicariously.
    Now, we can learn the wrong lessons. President Bush, 
Secretary of Energy are arguing that we should drill in the 
pristine Arctic refuge to find more oil. Unfortunately, only 1 
percent of electricity in California is generated from oil, and 
even if we did drill we wouldn't find any oil and have a 
capacity to bring it to California for at least 10 years; not, 
I think, the time schedule that this committee wants to work 
on.
    California is one of the main engines of the digital 
economy and the digital bits, the currency of this information, 
the economy.
    What are they? Simply bundles of electrons. Every single 
one of the hundreds of millions of devices, PCs, routers, 
servers, transmitters, and so on have exactly two kinds of 
connection; one for bits and one for kilowatt-hours.
    Just how much electricity does the Internet use? Some 
estimates are that up to 8 percent of the Nation's electric 
supply is absorbed by the sprawling and deeply penetrating 
hardware of the Internet. When the broad array of all the 
computers and related equipment are considered, the total 
probably has been estimated to reach 13 percent of all U.S. 
Electricity consumption.
    In fact, in just the past 5 years, our digital economy has 
driven U.S. Economic growth so much that the increased energy 
supply needed to meet this growth is equal to the total 
generating capacity of the country of Italy. Cyberspace clearly 
has an energy cost, and energy still continues to be the engine 
for growth.
    It is true that the increased efficiencies brought about as 
the result of telecommunications and information technologies 
will help us to use energy more efficiently, but the heightened 
economic growth made possible by the digital era also seems to 
be driving increased demand for electricity in California, in 
Massachusetts, and elsewhere around the country.
    Put simply, if oil was the fuel that powered economic 
growth in the 20th century, electricity is the fuel that powers 
the economic growth in the 21st century digital economy.
    So how do we prevent the California catastrophe from 
becoming the California contagion? How do we create a 
functional electricity market that can efficiently and 
inexpensively meet the electricity needs, and do so in an 
environmentally responsible fashion?
    One way to start is to assure that we have a fair and 
competitive market structure. Last year when this committee was 
considering Federal electricity restructuring legislation, I 
tried to offer an amendment that would have helped to reinvent 
the Federal Energy Regulatory Commission, transforming it from 
a regulator to a market regulator. My amendment would have 
given Federal regulators the tools they need in order to 
address market power abuses in the emerging competitive market.
    But there was widespread opposition to my amendment from 
the electric utility industry and from many members on the 
other side of the aisle. There is no market power problem, I 
was told. We should not be giving FERC any more authority in 
this area. We should leave it to the States.
    Well, we ended up doing nothing, and what happened? Last 
fall an investigation by the FERC staff revealed that the 
California market was seriously flawed and caused unjust and 
unreasonable rates for short-term energy to be charged. The 
FERC also observed that California's energy regime provided an 
opportunity for sellers, inside and outside of the State, to 
exercise market power when supply is tight.
    Unfortunately, because FERC does not have the type of 
authority that it should have over market power abuses, it was 
unable to charge particular sellers with abuses of FERC rules. 
And as we know, some of California's problems are beyond its 
own State boundaries, so the State cannot reach those issues. 
Only if we have a national regime and a national wholesale 
market can we move to this new era, but we need national 
regulation, as well, to deal with the national market power 
abuses.
    I know that there are many factors that combined to produce 
California's perfect storm. Some, like the amount of rainfall 
on the West Coast, are beyond our control. But when we see 
evidence of market power abuses that result in excessive and 
artificial levels of market volatility, it seems to me we 
should act.
    I look forward to the hearing today and the expert 
witnesses that you have gathered, Mr. Chairman, and I look 
forward to working with you this year toward the goal of 
producing national legislation.
    [The prepared statement of Hon. Edward J. Markey follows:]
   Prepared Statement of Hon. Edward J. Markey, a Representative in 
                Congress from the State of Massachusetts
    Thank you, Mr. Chairman.
    My Mother always said, ``Try to learn as many lessons vicariously 
as you can. It's safer that way.'' And that is essentially what we are 
trying to do here today, trying to learn vicariously from the 
electricity disaster that has afflicted California.
    Some of you may recall the film, ``Perfect Storm,'' in which three 
storm fronts converged off the New England coast to produce monster 
waves that crashed down and destroyed a small Massachusetts fishing 
vessel. What we are seeing today in California is an electricity 
``Perfect Storm,'' in which converging fronts of a flawed state 
restructuring plan, high natural gas prices, increased demand, lower 
than expected rainfall, reduced imports of power from neighboring 
states, lack of new generating capacity, transmission constraints, and 
market structure problems have all come together to produce a monster 
wave of rolling blackouts and higher prices.
    For the citizens of California, it is a crisis that leaves 
consumers caught in the vortex of reliability problems and looming rate 
increases. For the rest of us, it is something that we only want to 
experience vicariously.
    California is one of the main engines of the digital economy, and 
digital bits are the currency of this Information Economy. What are 
they? Simply bundles of electrons. Every single one of the hundreds of 
millions of devices, PCs, routers, servers, transmitters and so on, 
have exactly two kinds of connections: one for bits and one for 
kilowatt-hours. Just how much electricity does the Internet use?
    Some estimate that up to 8% of the nation's electric supply is 
absorbed by the sprawling and deeply penetrating hardware of the 
Internet. And when the broader array of all computers and related 
equipment are considered, in other words the heart of our new 
Information Economy, the total probably has been estimated to reach 13% 
of all U.S. electricity consumption.
    In fact, in just the past 5 years our digital economy has driven 
U.S. economic growth so much that the increased energy supply needed to 
meet this growth is equal to the total generating capacity of Italy. 
Cyberspace clearly has an energy cost and energy still continues to be 
the engine for growth. It is true that the increased efficiencies 
brought about as the result of telecommunications and information 
technologies will help us use energy more efficiently. But the 
heightened economic growth made possible in the digital era also seems 
to be driving increased demand for electricity, in California, and 
elsewhere around the country.
    If oil was the fuel that powered economic growth in the 20th 
Century, electricity may well be the fuel that powers economic growth 
in the 21st century.
    So, how do we create a competitive and functional electricity 
market that can efficiently and inexpensively meet the electricity 
needs, and do so in an environmentally responsible fashion?
    Last year, when this Committee was considering federal electricity 
restructuring legislation, I tried to offer an amendment that would 
have helped to reinvent FERC from a rate regulator to a market 
regulator. My amendment would have given federal regulators the tools 
that they are going to need to address market power abuses in the 
emerging competitive market. But there was widespread opposition to my 
amendment from the electric utility industry and from many of the 
Members on the other side of the aisle. ``There is no market power 
problem,'' I was told. ``We shouldn't be giving FERC any more authority 
in this area'' ``We should leave it to the states.''
    Well, we ended up doing nothing, and what has happened? Last fall, 
an investigation by the FERC staff reveled that the California market 
was ``seriously flawed and caused . . . unjust and unreasonable rates 
for short-term energy'' to be charged. The FERC also observed that 
California's energy regime provided an ``opportunity for sellers to 
exercise market power when supply is tight.'' Unfortunately, because 
FERC doesn't have the type of authority that it should have over market 
power abuses, it was unable to change particular sellers with abuses of 
FERC rules.
    Now, I know that there are many factors that combined to produce 
California's Perfect Storm. Some, like the amount of rainfall on the 
West Coast, are beyond our control. But, when we see evidence of market 
power abuses that result in excessive and artificial levels of market 
volatility, it seems to me that we should act.
    I look forward to hearing the testimony of the witnesses before us 
today. And I hope, Mr. Chairman, that this will be the first, not the 
last, of a series of hearings focusing on the California catastrophe.

    Mr. Barton. Thank you. We appreciate your 8-minute and 10-
second 3-minute opening statement. We are going to give you 
style points, but I think Mr. Doyle has substance points on 
you.
    Mr. Markey. That is because he agrees with you.
    Mr. Barton. That doesn't hurt. Who does the judging does 
make a difference, that is true.
    We now would like to hear from another of our Californians, 
Mr. Radanovich. We welcome you to the full committee and the 
subcommittee.
    Mr. Radanovich. Thank you, Mr. Chairman.
    California rarely gets together on anything because we are 
such a big and such a large and diverse State.
    But in my 6 years of being here, we did manage to come 
together on one thing, and that is when the State delegation, 
both Republican and Democrat, came back to Washington, together 
with the California delegation here in Congress, to lobby the 
Fed to keep them out of the current deregulation debate back 
here at the time because California had such a great plan and 
the Fed would only screw it up if they got involved.
    That is how our plan started. Of course, it has turned out 
to be not such a terrific plan, and has not worked out very 
well.
    As the only member here, I think, whose district has gone 
through a rolling blackout, I would really want to stress one 
thing. That is that in 2\1/2\ years, things are going to get 
very critical. If there is not both Federal and State 
participation to get us through these 2\1/2\ years, I fear that 
there will be loss of life.
    I am a supporter of temporary cost-plus caps that could be 
had through the FERC, but I don't support those things until 
the State really does a couple of things.
    One is to begin to relax some of the clean air standards, 
because it is my belief, and I hope that we hear more about 
that from some of the testimony today, that California can 
produce 10 percent more of its own energy if that alternative 
is investigated.
    Second, I think the environmental community in California 
needs to stop using environmental policy to stop growth, 
because growth both is and has occurred, and until the State 
collectively pulls its head out of the sand and begins to 
prepare for its future, rather than ignoring the fact that 
infrastructure needs to be expanded, both electricity and 
water, then I think that the Fed ought to wait.
    California needs to do a few things, but we cannot get 
through these 2\1/2\ years without Federal help. I really think 
that temporary assistance, both from the Federal level, and a 
relaxation of some of these standards, or the assertion of a 
temporary cap, is no more dangerous than temporarily relaxing 
some of the State's clean air standards. It does not mean 
eviscerating the law, it does not mean that at all. It means 
temporary assistance to a State that has found itself in very 
dire straits, and it is going to need attention from both the 
Federal and State governments. Thank you.
    Mr. Barton. Thank you, Congressman. We really look forward 
to your input, because it is very, very beneficial to have a 
Congressman whose district is having some of the problems that 
we are trying to address.
    While it is no fun for you in your district, I understand 
that, the knowledge that you have as a result of it is going to 
be very beneficial.
    Mr. Radanovich. Thank you. This summer, Mr. Chairman, it 
will be statewide. Southern California will be getting it this 
summer.
    Mr. Barton. We appreciate your participation on the 
subcommittee.
    Mr. Waxman. Mr. Chairman?
    Mr. Barton. The gentleman from California.
    Mr. Waxman. Just so we have the record straight, Chairman 
Tauzin made a statement, and we respect other people's views, 
but statements of fact ought to be evaluated. Chairman Tauzin 
said that plants are running at 25 percent of capacity because 
of NOX limits. That is contrary to what we heard 
from the California Air Resources Board. I wonder if we could 
get for the record the information.
    Mr. Barton. Let's get to the opening statements before we 
start into a debate on other Members' opening statements.
    Mr. Waxman. He probably has data I don't know about.
    Mr. Barton. We are going to be fact-based, but we will--
obviously, whatever data is there from EIA or the California 
Air Quality Board, the FERC, we will put into the record. There 
is no question about that.
    Mr. Waxman. Thank you very much.
    Mr. Barton. We would now like to hear from another veteran 
of the subcommittee and the full committee, Mr. Bart Gordon. We 
came to Congress at the same time, and our hair was dark and 
our bellies were flat and his belly is still flat. Mine is not, 
nor is my hair dark. Mr. Gordon.
    Mr. Gordon. Thank you, Mr. Chairman. Thanks for your 
leadership here.
    We have had some interesting opening statements, but I 
think it is time to hear from the panel.
    Mr. Barton. Well, thank you, to give us back a little bit 
of time.
    We would like to go to a new member of the subcommittee, 
not the full committee, Mr. Ganske of Iowa, for an opening 
statement.
    Mr. Ganske. Thank you, Mr. Chairman.
    To Mr. Markey, who speaks about the confluence of factors 
that created a Perfect Storm, I say, let us Gladiators lay down 
our swords, Traffic in good will to work together, have a piece 
of Chocolate with Erin Brockovich, and try to figure out this 
energy policy.
    Mr. Chairman, several of us are juggling simultaneous 
hearings on energy and prescription drugs. We actually have 
people on fixed incomes in this country who are trying to 
decide which bill to pay, their medicine bill or their power 
bill.
    So for this hearing, I think it is important to focus on 
two separate questions: First, what role should the Federal 
Government play in assisting California in overcoming its 
energy problem; second, we should examine California as a case 
study in restructuring, and determine what went wrong, because 
clearly, something has gone wrong.
    Mr. Chairman, as our committee resumes work on energy 
issues, I want to reiterate the principles that I think we 
should keep in mind as we deal with energy--this energy crisis. 
All retail customers must benefit and be protected in a 
competitive market. Those companies that have invested in power 
facilities must be treated with responsibility. We need to 
ensure that competitors enter the market on an equal footing. 
We need to clarify any jurisdictional ambiguity that could 
frustrate a competitive market. We must maintain a safe and 
reliable electricity system, and we need to protect the 
environment.
    As I see it, there are many contributing factors to the 
current state of the energy situation in California. One of the 
factors is the failure of power generation and transmission to 
keep up with growing power needs in the State.
    Current regulations under the Public Utility Holding 
Company Act clearly deterred the establishment of greater power 
generating capacity in the State.
    It also seems that the 1996 California restructuring 
changes have violated some basic rules of economics by locking 
in consumer power rates and allowing the rates the utilities 
pay for power to rise. It was only a matter of time until the 
price at which power could be purchased exceeded the amount 
which could be collected from the customer.
    My question is this: Where was the market incentive for 
conservation of energy? By also preventing long-term 
contracting for power, another stabilizing factor in the price 
was removed. Finally, I would also say that I think we are 
making a mistake if we focus only on what California did wrong. 
We should look at what other States may have done right.
    Mr. Chairman, I hope that the lessons we learn today will 
help us in our efforts on the Federal level to help create a 
reliable energy policy. I yield back.
    Mr. Barton. Thank you, Congressman Ganske. We appreciate 
that opening statement.
    We would like to hear from Mr. Barrett, Congressman 
Barrett, of Wisconsin for an opening statement.
    Mr. Barrett. Thank you, Mr. Chairman. I agree with Bart 
that we should get on with the hearing, so I will yield back my 
time.
    Mr. Barton. Thank you.
    We go to Mr. Bryant of the great State of Tennessee for an 
opening statement.
    Mr. Bryant. Thank you, Mr. Chairman. Let me, too, apologize 
as another one of those members that is doing double duty today 
with the Health Care Subcommittee also meeting at the same time 
upstairs on the very important issue of prescription drugs for 
senior citizens.
    I will be quick, like my colleague, Bart Gordon from 
Tennessee, I think just about everything has already been said. 
Let me associate myself with a couple of people's remarks, 
though; with Mr. Doyle, because my chairman said it was such a 
good statement.
    But I do agree with Mr. Doyle's statements, that we have 
to, as others have said, learn not only from the mistakes of 
California, but also from a job well done, it appears, from 
States like Pennsylvania.
    Finally, let me associate myself with the remarks of our 
chairman of the full committee, Mr. Tauzin. What I heard him 
say, among other things, was we need to focus as a subcommittee 
and as a full committee and as a Congress on a national energy 
policy in this country that covers the range not only of this 
issue but natural gas and a complete energy policy. I hope that 
we can, in this Congress, join in with the administration in 
looking at this and not only looking at it, but coming up with 
a comprehensive energy policy.
    With that, I yield back the balance of my time.
    Mr. Barton. I thank the gentleman from Tennessee.
    I see no members on the Democrat side that have not been 
given an opportunity for an opening statement, so we will go to 
Mr. Pickering of Mississippi for an opening statement.
    Mr. Pickering. Thank you, Mr. Chairman. Let me just say 
from the committee's perspective, I think that we have done the 
right thing in the last two Congresses by waiting to see the 
results of the experiments in the States. Now we have a greater 
body of evidence and examples, both good and bad, of what works 
and what does not work.
    Let me say, now is the time for us to develop the 
comprehensive energy policy that our country so desperately 
needs. It will have to contain every component, from the 
reliability of our system to transmission to generation, to 
regulatory reform, exploration and production, alternative 
energy sources, and new technologies.
    Now is the time to act. We have seen from the States what 
works and does not. We should take those lessons to heart as we 
begin working with the new administration, and as Republicans 
and Democrats, to do the right thing for the country.
    Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Mr. Pickering.
    Seeing no other members present who have not been given an 
opportunity to give an opening statement, the Chair would ask 
unanimous consent that all members not present be given such an 
opportunity to put an opening statement in the record.
    Is there objection?
    Hearing none, so ordered.
    [The prepared statement of Hon. Christopher Cox follows:]
    Prepared Statement of Hon. Christopher Cox, a Representative in 
                 Congress from the State of California
    Thank you, Mr. Chairman, for holding this hearing today.
    In 1996, the California state legislature promised consumers that 
its electricity restructuring law would result in substantially lower 
electricity rates. Today, five years later, that law is resulting not 
in lower rates, but in skyrocketing electricity prices, massive power 
shortages, rolling blackouts--and media reports of businesses packing 
up their operations and moving across the border to other states.
    California residents and businesses aren't the only ones suffering. 
The state's electricity shortage is directly affecting neighboring 
states, as California's current power needs are draining power supplies 
available to other states that are also part of the Western grid.
    As the crisis in California grows--and as we approach the summer 
time, when energy consumption will grow even higher--the national 
implications of California's problems loom even larger. Without further 
reforms, the prospects of continuing energy shortages over the coming 
months could severely impact continued economic growth in California. 
And given that California's economy alone accounts for nearly one-sixth 
of the nation's economy, any slowdown in economic growth in California 
will have a serious effect on our nation's overall economic and fiscal 
health.
    Learning the lessons of what went wrong in California are vital so 
that we can take the necessary steps to fix the problems.
    For starters, I hope today's hearing will help shatter a myth that 
continues to persist today: California's 1996 electricity restructuring 
law, as it has been inaccurately described, did not ``deregulate'' 
electricity prices. In fact, the California government's attempt to 
redesign the way Californians can buy and sell electricity has 
fundamentally failed to allow the free market to function properly. Let 
me just highlight three of the most significant failings of the 1996 
law:

 Price controls. As our witnesses will testify today, 
        California's 1996 law only removed government controls on 
        wholesale prices, but continued to heavily regulate retail 
        prices. In fact, the law mandated a 10% cut in the existing 
        retail price.
 A flawed government substitute for market institutions. 
        California's 1996 law banned all long-term power supply 
        contracts, and instead required incumbent utilities to buy all 
        their wholesale power on the day-ahead spot market through a 
        government-run institution called the Power Exchange. Outlawing 
        long-term contracts removed an important moderating influence 
        on prices, as prices in the spot market are far more volatile. 
        Even worse, because the incumbent utilities must buy all their 
        power from the Power Exchange, this has created opportunities 
        for speculation and incentives for power generators to withhold 
        or reduce power supplies in order to increase the sales price 
        of energy sold to the incumbent utilities. The net result is 
        that the utilities were forced to buy high and sell low, an 
        unsustainable development that has now depleted their reserves, 
        destroyed their credit, and left them on the brink of 
        bankruptcy.
 No real consumer choice. A competitive market cannot function 
        properly without adequate consumer choice of electricity 
        providers. But in California, five years later, only 2% of 
        residential customers have chosen a different electricity 
        provider. That's because the 1996 restructuring law has proven 
        very unfriendly for competitive new electricity providers who 
        want to enter the retail marketplace. The law's continued price 
        controls have, of course, proven a significant deterrent to new 
        entrants entering the marketplace. In addition, the 1996 law 
        hits every electricity consumer with a costly tax--
        euphemistically called a ``competitive transition charge''--
        that goes to pay for the stranded costs of the incumbent 
        utilities. This tax is the same no matter which utility you 
        use, so even if you wanted to choose a new entrant--one that 
        has not made significant economically unsound investments in 
        stranded assets--you still have to pay the same large 
        ``competitive transition charge'' that you would if you had 
        stayed with your incumbent utility. Finally, the 1996 law also 
        contained a significant number of regulatory burdens that 
        discourage true consumer choice, such as the ban on renting the 
        incumbents meters which has meant that customers who change 
        their electricity provider have to pay an up-front fee of about 
        $600 to have a new meter installed at their home.
    Encouraging California to repeal its 1996 law--which has proven a 
barrier to lower prices and real consumer choice--is critical. 
California must also be careful to replace the failings of the 1996 law 
with a free market, and not make matters worse by moving in the 
direction of more government regulation and control.
    On this score, I am concerned by Gov. Davis' talk of having state 
taxpayers buy the electricity transmission system from the incumbent 
utilities, and operate it as a state-run enterprise. Given the dire 
need for new investment in additional transmission and generating 
capacity in the state, government ownership of the transmission lines 
will dry up any private interest in building out the additional 
capacity that our state so desperately needs.
    Thank you again for holding this important hearing today, Mr. 
Chairman. In addressing the problems of providing consumer choice for 
ratepayers in California, we must not lose sight of the fact that the 
market can provide a better measure of consumers' needs and demands 
than the government. I hope that we can keep our eye on the long-term 
needs of California's electricity consumers, and seek answers that will 
provide true choice and lower prices for electricity consumers.

    Mr. Barton. We now want to welcome our first panel. We have 
a distinguished panel. We have a Commissioner from the 
California Public Utilities Commission, the Chairman of the 
Ohio Public Utilities Commission, the chairman of the 
Pennsylvania Public Utilities Commission, and a national leader 
in the consumer movement, Mr. Travieso, from Maryland.
    We are going to start, obviously, since there has been 
quite a bit of focus on California, with the Commissioner of 
the California Public Utilities Commission, Mr. Carl Wood.
    Welcome to the subcommittee, Commissioner. We are going to 
put your entire statement in the record. We are going to start 
you with 7 minutes and see how close you come. If you need 
additional time, obviously we are going to give you additional 
time.
    Welcome to the subcommittee.

   STATEMENTS OF CARL WOOD, COMMISSIONER, CALIFORNIA PUBLIC 
  UTILITIES COMMISSION; JOHN M. QUAIN, CHAIRMAN, PENNSYLVANIA 
  PUBLIC UTILITY COMMISSION; ALAN R. SCHRIBER, CHAIRMAN, OHIO 
PUBLIC UTILITIES COMMISSION; AND MICHAEL J. TRAVIESO, MARYLAND 
                        PEOPLE'S COUNSEL

    Mr. Wood. Thank you very much.
    Good morning, Chairman Barton, and members of the 
subcommittee.
    I very much appreciate the opportunity to testify before 
you today on behalf of the California Public Utilities 
Commission, the PUC, the State of California and our 35 million 
residents.
    Your invitation asked that I focus my remarks on the cause 
or causes of the electricity disruptions that Californians have 
been experiencing since June of last year, and those elements 
particular to the electricity deregulation plan implemented by 
California's previous administration, which I view as 
responsible for those disruptions.
    As I appear before you today, California marks its 31st day 
of a continuous Stage 3 energy alert. The three major investor-
owned utilities in California are experiencing severe financial 
difficulties, with vendors and independent generators 
expressing concerns about whether they will be paid for 
services rendered.
    As the Governor and legislature move aggressively to 
address these challenges, with plans to increase generation and 
conservation, and stabilize the financial health of the 
utilities, I think we can learn much from our painful 
experience with deregulation.
    Fundamentally, I believe the premise that provision of 
electricity as an essential service could be effectively traded 
on the day ahead and hour ahead spot markets, absent the full 
range of generation procurement options, was at the root of the 
failure of California's deregulation scheme.
    The flaws in the system adopted reflect this belief--the 
pool structure that was established, the accompanying reliance 
on wholesale trading in lieu of native generation, California's 
retreat from integrated resource planning, and the unmet 
promise of customer choice.
    A balanced reliance on the mix of generation procurement 
options available has historically been necessary to maintain 
reliable, reasonably priced electricity, and it remains so 
today. Historically, California participated in the western 
systems coordinating council, or WSCC. The WSCC was a loose 
pool that permitted coordination and trading of loads and 
resources in the western States.
    During the two decades before deregulation, California's 
utilities relied on trades and purchases from within the WSCC 
to fill out their resource needs, in combination with native 
generation and short- and long-term purchases from qualifying 
facilities.
    For example, San Diego Gas and Electric Company 
successfully reduced its average electric rates from a high of 
12.3 cents per kilowatt-hour in 1985 to about 9 cents per 
kilowatt-hour in 1991. This was accomplished largely by meeting 
its energy requirements with a mix of native generation, and 
trades and purchases. SDG&E met approximately 30 percent of its 
energy requirements through contracts in 1992.
    In contrast, the Federal Energy Regulatory Commission, or 
FERC, authorized efforts to regionalize the Western 
Interconnect, and markets have failed to protect consumers. 
Beggar-thy-neighbor withholding of generation and sales has 
replaced the regional cooperation that worked for years.
    California is now moving to restore a mutually beneficial 
and cooperative approach. A central mistake of California's 
deregulation experiment was the divestiture of a large portion 
of the cost-of-service utility generation plant in our State. 
Over a 2\1/2\ year timeframe, California's investor-owned 
utilities sold 18,393 megawatts worth of fossil and renewable 
generating facilities. These facilities were subject to cost-
of-service ratemaking. They now generate power that is sold 
into the current market at considerably higher prices, I would 
say spectacularly higher prices.
    That market is dysfunctional. Wholesale prices no longer 
bear any relation to the cost of production, demand, or time of 
use. The very power the utilities once owned and controlled is 
now sold on the wholesale market to meet virtually the same 
demand.
    Spot market wholesale trading should be used to meet 
electricity demand on the margin only as part of a mix of 
resources relied on to meet requirements. But nothing in 
California's deregulation experiment limited reliance on the 
spot market to meet any demand, even including baseload. 
California is now moving to permanently reduce its reliance and 
exposure to wholesale markets.
    I believe policymakers at the time should have taken a more 
measured approach to authorizing the divestiture of native 
generation. It may have been appropriate to authorize 
divestiture of some amount of utility generating facilities to 
improve the development of a workably competitive wholesale 
market and the power exchange.
    However, losing the benefit of regulatory control over this 
portion of California's energy requirements in such a short 
time period significantly diminished California's ability to 
minimize price volatility during the uncertain transition 
period.
    California's PUC, our legislature, and Governor Davis are 
all in agreement that no further divestitures should be 
authorized, given the current dysfunctional market.
    Thought the 1980's and 1990's, the California Energy 
Commission and the PUC conducted a joint integrated resource 
planning process. Future resource needs were forecasted and a 
mix of demand side management, generation, and purchases were 
identified to meet those needs.
    In 1992, this process resulted in a finding by the PUC that 
1,300 megawatts of additional generation should be procured 
from qualifying facilities through an auction. After receiving 
bids to provide power it regarded as being too high-priced, 
Southern California Edison Company appealed to the FERC.
    Ultimately, FERC found that the Commission's auction 
process was flawed and the utilities settled outstanding 
claims, but the auction process and the building of the new 
generation facilities was blocked. No additional power was 
procured through that process, and the PUC determined not to 
incorporate a State resource planning component into its 
deregulation experiment.
    This retreat from integrated resource planning in 
California aggravated the problems that stemmed from market 
uncertainty. The State ignored its energy efficiency building 
standards during the building boom of the mid-1990's and 
discouraged the construction of cost-of-service power plants, 
all in the hope that unregulated investors would build 
sufficient new generation capacity for predicted future needs.
    No warning signals were built into the deregulation 
experiment to provide policymakers with adequate warning that 
the market was not delivering sufficient new capacity.
    The deregulation experiment also held out the promise that 
all customers would be able to choose their energy provider. 
But in reality, this promise was a false choice. Direct access 
sellers, or energy service providers, set up shop in California 
and solicited customers, but were not assigned to a duty to 
serve customers comparable to the obligation borne by 
traditional utilities.
    These providers never penetrated the market to any 
significant extent, and at the first sign of trouble in the 
market, they closed their doors and returned their customers to 
the regulated utilities. The prospect of choosing your energy 
provider turned out in practice to be little more than a 
rationale for the unbundling of the distribution utility.
    As I said before, I regard the provision of electricity as 
an essential service. Policymakers concerned about economic 
stability should assure a reliable, reasonably priced supply of 
this essential service. The State and the Federal Energy 
Regulatory Commission have the responsibility and jurisdiction 
to take corrective actions when, as today, reliability or 
reasonable prices are compromised. We are taking those actions 
in California.
    Unfortunately, FERC has not exercised its authority under 
and responsibility under the Federal Power Act to protect 
consumers from unreasonable rates. FERC recognized last year 
that the market was dysfunctional and that the wholesale rates 
being charged were unreasonable, but nonetheless, has failed to 
act effectively.
    In spite of FERC's inaction, California's policymakers are 
working together to restore reliability and price stability to 
the market.
    Again, thank you, Mr. Chairman, for the opportunity to come 
before you this morning.
    [The prepared statement of Carl Wood follows:]
   Prepared Statement of Carl Wood, Commissioner, California Public 
                          Utilities Commission
    Good morning Mr. Chairman, and members of the Subcommittee. I 
appreciate the opportunity to testify before you today on behalf of the 
California Public Utilities Commission (PUC), the State of California 
and its 35 million energy-consuming residents.
    Your invitation asked that I focus my remarks on the cause or 
causes of the electricity ``disruptions'' Californians have been 
experiencing since June 2000 and the elements particular to the 
electricity deregulation plan implemented by the previous 
administration which I view as responsible for those disruptions.
    As I appear before you today, California marks its 31st day of a 
continuous Stage 3 energy alert. The 3 major investor-owned utilities 
are experiencing severe financial difficulties, with vendors and 
independent generators expressing concerns about whether they will be 
paid for services rendered. As the Governor and Legislature move 
aggressively to address these challenges--with plans to increase 
generation and conservation, and stabilize the financial health of the 
utilities--I think we can learn much from our painful experience with 
deregulation.
    Fundamentally, I believe the premise that provision of electricity 
as an essential service could be effectively traded on the day ahead 
and hour ahead spot markets absent the full range of generation 
procurement options, was at the root of the failure of California's 
deregulation scheme. The flaws in the system adopted reflect this 
belief--the pool structure that was established; the accompanying 
reliance on wholesale trading in lieu of native generation; 
California's retreat from integrated resource planning; and the unmet 
promise of ``customer choice.'' A balanced reliance on the mix of 
generation procurement options available has historically been 
necessary to maintain reliable, reasonably priced electricity--and it 
remains so today.
The Pool
    Historically, California participated in the Western Systems 
Coordinating Council (WSCC). The WSCC was a loose pool that permitted 
coordination and trading of loads and resources in the western states. 
During the two decades before deregulation, California's utilities 
relied on trades and purchases from within the WSCC to fill out their 
resource needs, in combination with native generation and short- and 
long-term purchases from qualifying facilities. For example, San Diego 
Gas & Electric Company successfully reduced its average electric rates 
from a high of 12.3 cents/kWh in 1985 to about 9 cents/kWh in 1991. 
This was accomplished largely by meeting its energy requirements with a 
mix of native generation, and trades and purchases. SDG&E met 
approximately 30% of its energy requirements through contracts in 1992.
    In contrast, the Federal Energy Regulatory Commission (FERC)-
authorized efforts to regionalize the Western Interconnect and markets 
have failed to protect consumers. Beggar-thy-neighbor withholding of 
generation and sales has replaced the regional cooperation that worked 
for years. California is now moving to restore a mutually beneficial 
and cooperative approach.
Divestiture and Wholesale Trading
    A central mistake of California's deregulation experiment was the 
divestiture of a large portion of cost-of-service utility generation 
plant. Over a 2\1/2\ year timeframe, California's investor-owned 
utilities sold 18,393 MW worth of fossil and renewable generating 
facilities. These facilities were subject to cost-of-service 
ratemaking. They now generate power that is sold into the current 
market at considerably higher prices. The market is dysfunctional. 
Wholesale prices bear no relation to the cost of production, demand or 
time of use.
    The very power the utilities once owned and controlled is now sold 
on the wholesale market to meet virtually the same demand. Spot market 
wholesale trading should be used to meet electricity demand on the 
margin only as part of a mix of resources relied on to meet 
requirements. But nothing in California's deregulation experiment 
limited reliance on the spot market to meet any demand, including 
baseload. California is now moving to permanently reduce its exposure 
to the wholesale markets.
    I believe policy-makers at the time should have taken a more 
measured approach to authorizing the divestiture of native generation. 
It may have been appropriate to authorize divestiture of some amount of 
utility generating facilities to improve the development of a workably 
competitive wholesale market and the Power Exchange. However, losing 
the benefit of regulatory control over this portion of California's 
energy requirements in such a short time period significantly 
diminished California's ability to minimize price volatility during the 
uncertain transition period. California's PUC, Legislature, and 
Governor Davis are all in agreement that no further divestitures should 
be authorized given the current dysfunctional market.
Retreat from Integrated Resource Planning
    Throughout the 1980s and 1990s, the California Energy Commission 
and the PUC conducted a joint integrated resource planning process. 
Future resource needs were forecasted and a mix of demand side 
management, generation, and spot purchases identified to meet those 
needs. In 1992 this process resulted in a finding by the PUC that 1,300 
MW additional generation should be procured from Qualifying Facilites 
(QFs) through an auction. After receiving bids to provide power it 
regarded too high, Southern California Edison Company appealed to FERC. 
Ultimately, FERC found the Commission's auction process flawed and the 
utilities settled outstanding claims. No additional power was procured 
through that process, and the PUC determined not to incorporate a state 
resource planning component into the adopted deregulation experiment.
    This retreat from integrated resource planning in California 
aggravated the problems that stemmed from market uncertainty. The state 
ignored its energy efficiency building standards during the building 
boom of the mid-1990s and discouraged the construction of cost-of-
service power plants, all in the hope that unregulated investors would 
build sufficient new generation capacity for predicted future needs. No 
warning signals were built into the deregulation experiment which 
provided policymakers with adequate warning that the market was not 
providing sufficient new capacity.
The Promise of ``Customer Choice''
    The deregulation experiment also held out the promise that all 
customers would be able to choose their energy provider. But in 
reality, this promise was a false choice.
    Direct access sellers, or energy service providers, set up shop in 
California and solicited customers, but were not assigned a duty to 
serve customers comparable to the obligation traditional utilities 
bear. These providers never penetrated the market to any significant 
extent. At the first sign of trouble in the market, these providers 
closed their doors and returned customers to the regulated utilities. 
The prospect of choosing your energy provider provided little more than 
a rationale for the unbundling of the distribution utility.
Corrective Actions
    As I said before, I regard provision of electricity as an essential 
service. Policymakers concerned about economic stability should assure 
a reliable, reasonably priced supply of this essential service. The 
state and the Federal Energy Regulatory Commission have the 
responsibility and jurisdiction to take corrective actions when, as 
today, reliability or reasonable prices are compromised. We are taking 
those actions in California.
    Unfortunately, FERC has not exercised its authority under the 
Federal Power Act to protect consumers from unreasonable rates. FERC 
recognized last year that the market was dysfunctional, and that the 
wholesale rates being charged were unreasonable. In spite of FERC's 
inaction, California's policymakers are working together to restore 
reliability and price stability to the market.
    Again, thank you for opportunity to come before you this morning.
California Actions under Governor Davis
 California has dramatically streamlined powerplant permitting 
        and accelerated power plant construction and put a halt to 
        further divestiture of cost-of-service utility generating 
        facilities.
 We have ratcheted up conservation and energy efficiency 
        efforts, spending billions of tax dollars and incentivizing 
        billions more in private investment in generation and energy 
        efficiency.
 v We have streamlined interconnection of distributed 
        generation and proposed legislation to remove barriers to 
        bringing clean and renewable distributed generation on line.
 We are prosecuting anti-competitive behavior by generators and 
        marketers.
 We (the PUC) has expanded utility bilateral and forward 
        contracting authority.
 We have provided rate relief to SDG&E customers and suspended 
        penalties to interruptible customers experiencing 
        extraordinarily frequent interruptions.
 We are promoting reliability by inspecting generating 
        facilities that are experiencing unplanned outages.
 We (the PUC) has worked to ensure continuing utility financial 
        integrity.

    Mr. Barton. Thank you for that statement. Mr. Doyle would 
like to introduce our next witness.
    Mr. Doyle. I want to thank Chairman Barton for extending 
the courtesy to introduce a fellow resident of Pennsylvania, 
John Quain, Chairman of the Pennsylvania Public Utilities 
Commission. I am pleased not only that Chairman Barton included 
Pennsylvania as part of our discussion about electricity 
deregulation, but that the expertise of Chairman Quain was 
sought out. I am sure we will all learn a lot due to his 
contribution to today's proceedings.
    Chairman Quain was named Chairman of the PUC Pennsylvania 
in 1995. Prior to his appointment to the Commission he was a 
managing partner in the law firm of Tucker Arensburg. At the 
request of Governor Ridge, Chairman Quain facilitated the 
development of consensus legislation in the electric and gas 
industries that led to the introduction of customer choice and 
utility competition in Pennsylvania.
    He is well known for his role in the development and 
implementation of Pennsylvania's Electric Generation Customer 
Choice and Competition Act.
    Chairman Quain currently serves on both the National 
Advisory Counsel to the Gas Research Institute and the National 
Advisory Committee to the Gas Industry Standards Board.
    Welcome, Chairman Quain.
    Mr. BARTON. Welcome. We will put your statement in the 
record in its entirety. Mr. Wood took a little more than 8 
minutes, and we will give you at least 8 minutes.

                   STATEMENT OF JOHN M. QUAIN

    Mr. Quain. I will not take 8 minutes. I will not read my 
statement. It is not my custom to do it. You have my statement 
and I know that you have read it. We have talked ahead of time.
    Congressman Doyle, thank you for those kind remarks.
    We entered into this journey of deregulation back in 1995, 
late 1995, and the Commission at that time held a hearing to 
determine whether electric generation, as distinguished from 
transmission and distribution, ought to be deregulated.
    With the conclusion of our investigation, I had the 
privilege of sitting down with Governor Ridge in July 1996. 
Pennsylvania's rates were about 15 percent above the national 
average. That was making us noncompetitive for jobs in the 
national economy, noncompetitive for manufacturing in the 
national economy.
    But we also had at that time an industry in the electricity 
market that was safe and reliable, so our challenge was to 
bring down rates without sacrificing either safety or 
reliability.
    As Congressman Doyle indicated, the Governor asked me to 
convene a stakeholder group. We decided, with the good will of 
our General Assembly, not to follow the normal legislative 
process, but because we were dealing with a fundamental human 
needs commodity, we had to get the details right. This is a 
complex area, as everyone has recognized. There are a lot of 
moving parts all going at the same time.
    So we put together a consensus group, a stakeholder group, 
consisting of 50 different interests sitting around the table; 
not 50 people, 50 different interests. We actually negotiated 
every single phrase in the entire dereg bill.
    At the conclusion of many months--actually not many months, 
many hours, over a 3-month period of time--we had a consensus 
piece of legislation where every stakeholder, save one, the 
environmental community, who we disagreed with because they 
wanted portfolio requirement, and our goal was to bring prices 
down--the entire stakeholder group either did not oppose or 
supported the deregulation bill.
    At that table were low income advocates, consumer 
advocates, large industrial customers, independent power 
producers, Senators, Representatives, members from the 
Governor's office, electric utilities, and the like.
    We all moved to the General Assembly. In one night, without 
amendment, our bill passed. But that was only the beginning of 
the challenge. We then had to implement it. What our bill 
provides is for the Public Utility Commission in Pennsylvania 
actually to implement it.
    When we went through the stranded investment issue, as you 
can expect, with about $18 billion at issue, we had significant 
disagreements. As we issued eight separate orders, we followed 
the same process. For all orders or appeals, we brought back 
all participants, all litigants, and actually sat down and 
settled eight in a row. So today in Pennsylvania, there is not 
a single issue on appeal, either on the legislation or with 
regard to the eight separate implementation orders for 
investment rate caps and the like.
    As Congressman Doyle said, our goal was to bring down our 
rates from 15 percent above the national average. Today they 
are 4.4 percent below.
    The news does not stop there. We had over the first 3 years 
about $3 billion in savings to all classes of customers, not 
simply large industrial customers. In 1999, the Philadelphia 
School District alone saved $3.6 million. This year the 
Commonwealth of Pennsylvania saved $3.1 million. Residential 
consumers saved somewhere between 10 and 15 percent on a 
regular basis.
    The good news continues. We have seen a growth in projected 
job growth, about 36,000 jobs by the year 2004, just as a 
result of deregulation. We have set the marketplace in action 
which actually encourages new generation to be built within our 
grid, the PJM interchange. Today about 15,000 megawatts, or 
about 25 percent increase in generation, is being proposed to 
be built in the grid over the next 5 years.
    We cannot escape the laws of supply and demand. They are 
necessary to the economy and necessary for a competitive market 
to work. But my message to this committee today, Mr. Chairman 
and members of the Committee, is competition can work. It is 
good, because I don't care what kind of regulator you are, 
either soft or the most strident, there is simply no substitute 
for good old-fashioned American competition if you get the 
fundamentals right.
    Our challenge now is to continue that effort. We work on 
deregulation literally every day. We have over the last 4 
years, and we will continue for the foreseeable future, because 
we are managing this transition from monopoly to competition. 
It cannot happen overnight, but it can and does provide 
benefits.
    Thank you, Mr. Chairman. I look forward to the questions.
    [The prepared statement of John M. Quain follows:]
  Prepared Statement of John M. Quain, Chairman, Pennsylvania Public 
                           Utility Commission
    Mr. Chairman, members of the Committee, good morning. Thank you for 
your kind invitation to appear before you. In the time available to me, 
I would like to summarize for you the Pennsylvania experience with 
electricity deregulation. Pennsylvania's story has been a success 
story.

 As of October 1, 2000, more than 550,000 customers in 
        Pennsylvania were purchasing their power from a competitive 
        supplier.
 Customers across Pennsylvania have saved nearly $3 billion 
        since the beginning of electric choice in 1997.
 It is anticipated that 36,000 new jobs will be created in 
        Pennsylvania as a result of competition by the end of 2004.
 Approximately 15,000 megawatts (MWs) of generation are 
        projected to come on-line in the Pennsylvania-New Jersey-
        Maryland Interconnection (PJM) in the next five 
        years.1 That represents a 25% increase in regional 
        generation.
---------------------------------------------------------------------------
    \1\ If all proposed projects are included, this total could be as 
high as 46,000 MWs. Many additional projects beyond the 15,000 MWs 
previously referenced are only proposals, however.
---------------------------------------------------------------------------
    When Pennsylvania began electricity competition in 1997, rates 
were, on average, 15% higher than elsewhere in the United States. 
Today, Pennsylvanians pay rates, on average, 4.4% lower than elsewhere 
in the United States. One of the questions that has repeatedly come up 
in the past weeks and months
    is whether the situation now prevailing in the California electric 
industry will happen in Pennsylvania? I assure you that so long as 
Pennsylvania continues on its present course, it will not.
    The reliability of our electric system is sound. Retail competition 
works. Well thought out, collaborative industry restructuring as 
embodied in the Electric Competition Act passed by the Pennsylvania 
General Assembly, has assured the maintenance of system reliability and 
the viability of customer choice.
    In preparing my comments for today, I was asked to outline a 
comparison and contrast of the situations in Pennsylvania versus 
California.
    Both programs tried to reach the same goal of customer choice and 
electric generation competition. However, there are many differences 
between our two restructuring efforts and the consequences of those 
efforts. Following are some of the most fundamental differences:

 Pennsylvania's restructuring law and its implementation were 
        based on collaborative efforts by all participants.
 Pennsylvania started competition with a generation surplus and 
        an adequate, reliable transmission infrastructure, conditions 
        that prevail to this day. Pennsylvania is a net exporter of 
        power.
 PJM, which serves approximately 9.5 million customers, has 
        57,000 MW of installed capacity whereas CAL-ISO, which serves 
        approximately 10 million customers has 45,000 MW of installed 
        capacity.
 Pennsylvania is the second largest producer of electricity in 
        the US.
 The growth of demand in Pennsylvania over the next five years 
        has been projected at 4%, while PJM regional demand growth is 
        projected at 10%. During the same time period, a conservative 
        estimate is that generation is expected to increase by 25% or 
        15,000 MW.
 Generation within PJM is based primarily on coal fired units 
        and nuclear units. California's generation is based to a large 
        extent on natural gas and hydro-power imported from the Pacific 
        Northwest. High natural gas costs and falling water supplies 
        have both impacted the price of electricity in California.
 Pennsylvania's utilities have the option of retaining their 
        generation in an affiliate company or of selling that 
        generation.
    Pennsylvania's restructuring program and the development of 
competition has been the beneficiary of ongoing stewardship and careful 
monitoring by the Governor's Office, the State General Assembly's 
oversight committees, the Public Utility Commission, the Office of 
Consumer Advocate, the Office of Small Business Advocate, and by the 
active participation of all parties with a stake in the evolution of 
competitive markets. Ongoing oversight must maintain the delicate 
balance that prevents government intrusion while avoiding government 
indifference. We want reliability maintained. We want energy markets to 
work. To achieve those goals, we know that we must be vigilant.
    We also understand that while the majority of electricity 
generation in PJM is coal or nuclear, natural gas does provide 15-20% 
of peak load, and that the new generation proposed for PJM is almost 
entirely gas-fired. While our Commission does not have jurisdiction 
over generator siting or fuel portfolio choices, we are encouraged that 
the PJM ISO is now considering the long-term impact of fuel choice on 
proposed generation.
    In conclusion, Pennsylvania's utility industry is strong. Our 
customer choice programs have been a success and are rightly 
recognized, nationally and even internationally, as models. Through the 
collaborative process, considered legislation, careful implementation 
and ongoing stewardship, I am confident that we have avoided and will 
continue to avoid many of the problems that have beset other states.
    I thank you for your attention, and I look forward to your 
questions.

    Mr. Barton. Thank you, Chairman.
    I would like to yield to Congressman Sawyer to introduce 
our next witness.
    Mr. Sawyer. Thank you very much, Mr. Chairman. Ted 
Strickland and I tossed the coin and I won.
    It is a pleasure to welcome Alan Schriber to this panel. He 
has served as chairman of the Public Utilities Commission of 
Ohio since 1999, when he was appointed by Governor Bob Taft. It 
has been an extraordinary time in the very long history of that 
institutional asset in the State of Ohio.
    He also served as a commissioner from 1983 to 1989 under 
Governor Dick Celeste. He brings a number of assets to his 
work, but they include a B.S. In economics from the University 
of Wisconsin at Madison in 1967, an M.S. In economics at Miami 
University in 1972, and his doctorate in economics at Indiana 
University, Bloomington, in 1976.
    I would mention, just as an aside, that Chairman Schriber 
also serves as the chairman of the Ohio Power Siting Board. It 
is a critical component in the process that Ohio is taking to 
site new power generation, and I might add, transmission, to 
prevent the situation that occurred in California from 
occurring in Ohio, and to do it in a way that is compatible 
with environmental and public needs and concerns. I am happy to 
welcome him to our panel today.
    Mr. Barton. Mr. Chairman, your statement is in the record 
in its entirety. We will give you 8 minutes also, and if you 
need a little more, a little less, that is fine.

                  STATEMENT OF ALAN R. SCHRIBER

    Mr. Schriber. Thank you very much, Chairman Barton.
    Mr. Chairman, members of the Committee, thank you, and the 
kind words of Congressman Strickland and Congressman Sawyer. 
That is all I needed was a little more pressure to perform. But 
I do appreciate it very much.
    I am going to take a little bit of a different tack here 
today, because I think what we want to pursue, at least what I 
would like to pursue, for the benefit of the Committee, is what 
we have learned from the experience of California. It is not my 
mission today to go into a post-mortem of what went wrong. I 
think we are all pretty much aware of many of the circumstances 
that led that State to where it is. Of course, I would be happy 
to answer questions about that later.
    I think above all else those of us in States that have been 
undergoing restructuring, and ours is very recent, we are 6 
weeks into it, bear a very heavy responsibility. We have talked 
about what one State may have done wrong and what other States 
may have done right. I am not absolutely convinced, and I don't 
think any of us can be convinced, that what we have done in 
Ohio, just because it is significantly different from what was 
done in California, is right, but we hope it is.
    I think that brings us to a virtually sacred obligation to 
be vigilant. Among other things, as time goes on, we have to be 
very careful. We have to look for early warning signs. We have 
to be aware of what the market is doing. We have to have 
capabilities of monitoring the market.
    Yes, we all get phone calls of prices have gone this way 
and that way, and we get lots of consumer complaints. We are 
alerted to the fact, and we know quite well, that natural gas 
prices are high, and electricity marketers may be offering 
different rates at different times.
    But equally important and probably more difficult is to 
monitor the supply side of the market. There are, of course, 
two sides of this market. When we look at the supply side of 
the market, again, we are looking for early warning signals of 
what might go wrong.
    Without going into a great amount of detail, for example, 
the relationship between retail prices and wholesale prices, it 
is a good signal. Can we monitor loop flows across grids? Can 
we determine whether there is congestion? Can we determine 
reliability? Can we determine whether or not our ancillary 
services that accompany the generation of electricity and the 
flow of electricity--can we keep on top of that?
    Any combination of these activities could lead us to be 
very, very concerned where we are going. If that concern does 
come to fruition, what do we do?
    I think each commission, and I think we have the support--I 
am happy to say that I believe we have the support of the 
legislature and the Governor's office to really step in when we 
need to. We need the ability, and we have the ability in our 
code--we have lots of laws. With the bill that is set up, it 
gave the Commission the ability to implement our restructuring 
law, gave the Commission the right, the obligation to step in 
if need be and take dramatic action where need be. We should 
not hesitate to do that if we get the wrong signals from the 
markets, because we do believe that we need to cut anything off 
at the pass that could be deleterious to our State.
    I would also note that the supply of electricity is 
obviously paramount in everyone's mind. Ohio does have a Power 
Siting Board, which I chair. Our Power Siting Board, I can't 
say that every State does, I know a lot of States do not have 
power siting boards. We have a Power Siting Board with a lot of 
authority. Not only do we just site the facilities for ``public 
utilities,'' as defined in the law, but we also site 
generators, merchant generators who would otherwise not be 
considered public utilities, interstate transmission lines we 
site, natural gas pipelines, and the like.
    I am happy to say that in the last couple of years, in the 
last 2 years, since--the last 3 years, since 1998, we have 
approved 6,000 megawatts to date.
    Between last year, the year 2000, and this year, 2001, we 
will have 2,560 brand new megawatts of electricity on board. We 
have before us, before the siting board, another 8,000 
megawatts pending. These are applications pending before us.
    Now, clearly much of that is coal, or rather, natural gas. 
I am prepared to tell you that we would love nothing more than 
to entertain some good baseload coal-burning power plants in 
Ohio. We believe that there is the technology, the clean coal 
technology at hand. We believe that Ohio, of course, does have 
the natural resource, and we believe that the baseload coal 
plants are a necessity because we know that natural gas is 
going to be used everywhere, in every manner, and that will do 
nothing to enhance the price of natural gas.
    Finally, I need to point out that in my prior iteration as 
a commissioner, demand side management seemed to have been a 
catchword that really did catch on at the time. It seemed to 
have gotten away from us. I think it is something that 
desperately needs to be revisited.
    We do need to look at the demand side. We need to look at 
conservation. Conservation is accomplished not just through the 
incentives that are provoked through high prices, but I think 
we as a government have an obligation to incent and to push 
very hard for demand side considerations.
    With that, I will conclude mine and look forward also to 
further questions.
    [The prepared statement of Alan R. Schriber follows:]
  Prepared Statement of Alan R. Schriber, Chairman, Public Utilities 
                           Commission of Ohio
                                summary
    The purpose of the testimony is not to reconstruct the economic 
disaster that befell the State of California, but rather to illustrate 
that there is something that we all can take with us as we meander down 
the same electric restructuring trail.
    Nevertheless, it is difficult to ignore some of the missteps that 
California took because they are at the very essence of the challenges 
that all states have--or might--take.
    In-so-far as the supply of electricity seems to be at the top of 
the list as an expedited remedy, it helps to have an effective power 
siting authority. In Ohio, such a board exists to expedite the 
certification of new power plants and has met with a significant amount 
of success to date.
    While having a substantial amount of generation to serve native 
load is vital, greater comfort--as well as competition--can only come 
to fruition with a smooth, efficient transmission system that allows 
power to move across regions. Unfortunately, the very significant 
economic issues that govern such a process is not yet in place.
    Even with what we think of as an ``optimum'' restructuring plan, it 
is imperative that we remain vigilant to any warning signals of 
impending problems. This involves the utilization of both manpower and 
data committed to the market monitoring process. With the support of 
the legislature in electric restructuring, as well as exiting broad 
authority, it is imperative that the regulatory body step in decisively 
and quickly to foreclose any potential harm to both the public and the 
utilities dedicated to serve it.
                              introduction
    Mr. Chairman, Members of the Committee, my name is Dr. Alan R. 
Schriber. I am the Chairman of the Ohio Public Utilities Commission and 
the Ohio Power Siting Board and am here today to express our views. I 
would also respectfully request that my written statement be included 
in today's hearing record.
    The Ohio Public Utilities Commission is charged with the duty of 
regulating the retail rates and services of electric, gas, water and 
telephone utilities operating within our jurisdiction. We have the 
obligation under State law to assure the establishment and maintenance 
of such energy utility services as may be required by the public 
convenience and necessity, and to ensure that such services are 
provided at rates and conditions which are just, reasonable and 
nondiscriminatory for all consumers.
    I greatly appreciate the opportunity to appear on behalf of the 
Ohio Public Utilities Commission before the House Energy and Power 
Subcommittee. I would also like to commend the Chairman for holding 
this hearing to examine the issues regarding the problems being faced 
by the State of California and the efforts of the State of Ohio to 
avoid a similar crisis as it implements competitive retail electric 
service.
                 why ohio is different than california
    At the outset it's important to note that my testimony is not 
intended as a post-mortem on what went wrong in the state of 
California. I have attended numerous conferences and have read many 
articles, as you too undoubtedly have, that have told us about the 
catastrophic events that befell the State of California. Nevertheless 
it's illustrative to contrast some of the more pertinent components of 
California's experience to those of our own state in order that we 
avoid the same outcome.
    Ohio for example, did not force dissolution of generation by its 
utilities. This led us to impose retail price caps through a market 
development period with the knowledge and comfort that wholesale prices 
are not so critical; Ohio Utilities are capable of fulfilling native 
load demands with their own generation. There is a down side to this, 
however, in so far as it represents an opportunity cost to the utility 
companies who would otherwise be selling off-system into a more 
lucrative market. Additionally, as wholesale prices rise, competition 
is thwarted even though the Ohio Commission has the statutory authority 
to incent ``shopping'' through the imposition of shopping credits.
    Finally Ohio has a very aggressive power siting board that I also 
chair, as well as a transmission system which, while far from perfect, 
is nevertheless superior to that in the western states. Ohio is in no 
great hurry; we are willing to learn as we go. This is precisely why we 
have a true market development period of up to five years in most 
cases; a period during which we believe the transition to a truly 
competitive generation market can be achieved. Nevertheless, as 
discussed further on, we need to be alert to system discrepancies and 
failures. The Ohio Commission has been endowed with broad authority to 
impose fixes wherever necessary, actions that we will not hesitate to 
take if need be.
    Much of this authority has been conferred upon us by Ohio's state 
legislature through the passage of electric restructuring legislation 
(S.B. 3) in 1999.
                    ohio's restructuring legislation
    Ohio's experience in restructuring our electric utility marketplace 
has been one in which legislative and regulatory leaders have sought to 
learn from the experiences of others. Our state analyzed legislation, 
policies, and practices from a variety of states and watched closely as 
market began to unfold; first in California, and later in other states 
like Massachusetts and Pennsylvania. This information was carefully 
digested and used to craft what we believe to be an effective electric 
energy policy.
    Ohio's restructuring legislation, (SB 3) established a policy for 
the state to begin competitive retail electric service on January 1, 
2001. Among other things, it provides for:

 The availability of adequate, reliable, safe, efficient, 
        nondiscriminatory and reasonably priced retail electric 
        service,
 The availability of comparable price, terms, conditions, and 
        quality options for election by the consumers to meet their 
        needs,
 Diversity of supplies and suppliers, including encouraging the 
        development of distributed generation and small generation 
        facilities,
 Innovation and market access for cost-effective supply- and 
        demand-side retail electric service,
 And finally, ensuring electric retail service consumers 
        protection against unreasonable sales practices, market 
        deficiencies, and market power.
    These policies serve as the cornerstone for the state's 
restructured electric marketplace and are important guidelines for the 
future of our restructured market.
                              power siting
    The Ohio Power Siting Board was originally created in 1972 and 
consists of the following members: the Chairman of the PUCO, who also 
serves as Chairman of the Board; the Director of Environmental 
Protection; the Director of Health; the Director of Development; the 
Director of Agriculture; the Director of Natural Resources; and an 
engineer representing the public who is appointed by the Governor from 
a list of three engineers provided by the Ohio Consumers' Counsel. In 
addition, the Board includes four legislative members who serve in a 
non-voting capacity.
    The Ohio Power Siting Board reviews, evaluates and approves the 
siting of ``major'' electric generating plants and major electric or 
natural gas transmission lines. The definition of a major utility 
facility is a generating plant of 50 megawatts or more, an electric 
transmission line of 125 kilovolts or more, and a gas or natural gas 
transmission line capable of transporting gas at more than 125 pounds 
per square inch of pressure. In order to receive approval as a major 
utility, an entity must apply for and obtain a certificate of 
environmental compatibility and public need. Issuance of the 
certificate depends on the need for the facility and the minimization 
of potential environmental harm.
    An advantage to this process is its jurisdictional trigger. While 
many states have a siting process their authority applies only if a 
``public utility'' is building a facility. In Ohio, our authority is 
dictated by the size of the facility, regardless of who is the builder. 
Therefore, new entrants and independent power producers can take 
advantage of our streamlined process, just as a traditional utility 
can.
    The Board has several statutory criteria that must be met prior to 
the issuance of a certificate. Those criteria include: the need for the 
facility; the probable environmental impact of the proposed facility; 
whether the facility represents the minimum adverse environmental 
impact considering the technology that is available and the nature and 
economics of the various alternatives; that the facility is consistent 
with regional plans for expansion of the electric power grid of the 
electric systems serving Ohio and interconnected systems, and that the 
facility will serve the interest of electric system economy and 
reliability; the facility will comply with all air and water pollution 
control and solid waste disposal laws and regulation; the facility will 
serve the public interest, convenience and necessity; the facility's 
impact on agricultural lands; and, that the facility incorporates 
maximum feasible water conservation practices.
    Ohio has a very efficient and effective siting process that has 
invited new entrants into the market. The process provides for public 
participation, both formal and informal, affords legal and technical 
scrutiny and still commands timely decision making. Having a due 
process that invites public participation has enabled development in 
our state. Other states do not have processes that are as streamlined 
as Ohio's. Consequently, delays and slow progress toward siting new 
facilities has been a problem.
    Ohio has also encouraged a healthy portfolio mix. Many states are 
only building gas-fired peaking units. Although a majority of the 
generation capacity additions in Ohio have been gas fired peakers we 
also had some gas-fired base load plants, a coal gasification (high 
sulfur coal and municipal waste) plant under consideration, and a 
compressed air storage facility. In addition, one of the largest 
biomass plants in the country utilizing 100% waste wood fuel, and some 
coal base load units have also been discussed as potential additions.
  interstate transmission: regional transmission organizations (rtos)
    While Ohio is comfortable with expected electric generation and 
transmission additions, it is difficult to know what will happen with 
the market. A state cannot afford to waste valuable and scarce 
resources as well as limited sites. Consequently, regional needs must 
be determined (i.e. transmission vs. generation; base load vs. peaker, 
coal/nuclear vs. gas-fired, biomass and or distributed generation 
opportunities) and only an integrated regional strategy will accomplish 
this.
    While additional generation capacity will go a long way toward 
helping to foster a competitive market in the Midwest, we do have our 
problems. The development of a much-needed regional transmission system 
has been extremely slow.
    Thus far, the Federal Energy Regulatory Commission (FERC) has 
relied totally upon a voluntary approach to the development of a 
regional transmission entity. Under this approach, utilities would be 
allowed to turn over control of transmission facilities and functions 
to a third party. This new entity would then be allowed to run the 
combined system as one regional transmission unit. Although the FERC 
has laid out requirements and guidelines for the formation of such an 
entity, their efforts thus far have been insufficient and have failed 
to provide the necessary guidance on this matter.
    States like Ohio continue to look to the FERC for an action agenda 
that simply has not materialized. We believe that FERC must become more 
engaged, although we recognize that they are currently operating below 
their statutory compliment of members. However, more should and could 
be done. Because this has not been the case, numerous states in the 
Midwest have banded together to create initiatives that would 
facilitate the solutions to these problems and begin to move 
electricity throughout our region.
    Until such efforts can come into fruition, a number of barriers to 
transmission remain. For instance within the state of Ohio three 
separate entities are seeking to develop regional transmission 
organizations (Midwest Independent System Operator, Alliance Regional 
Transmission Entity and PJM-West). With three different entities 
pursuing their own structure and system, ``seams'' that inhibit the 
flow of electricity and market choices for Ohioans are likely to 
develop. We are very concerned about the development of such ``seams'' 
both in Ohio and in our region.
    Our markets for electricity are becoming more regional in their 
scope and effect with the onset of retail competition. Concurrent with 
this change has been increasing discussion and contemplation regarding 
the issue of jurisdiction over transmission facilities and pricing. 
With the growth of retail competition has come an expectation that 
states will surrender jurisdiction over retail transmission. This has 
caused much concern in states where competition has been implemented as 
well as those that have opted for the status quo.
    Historically, states have had the authority to site facilities. 
They possess the unique local knowledge and skills essential to ensure 
the timely development of new facilities. Furthermore, they are in the 
best position to work with their regional neighbors to effectively and 
efficiently implement facilities that will avoid everyday local 
problems. State and local officials are also the first line of contact 
when constituents have problems or concerns related to these proposals.
                          early warning signs
    How does a regulator or a legislator detect problems in the 
marketplace and what are the early warning signs that indicate a 
problem exists? This is not an easy question to answer but it is vital 
to the operation of the industry in a competitive utility marketplace.
    A wide-variety of market concentration indicators can be employed 
to measure and calculate what is happening in the market. Every day 
accountants, economists and other industry experts employ a variety of 
tools such as indexes and empirical or econometric analyses to extract 
and calculate the health of emerging electric markets. Comparisons 
using statistical analysis are conducted to determine what conditions 
exist and where future problems may arise. Complex models are even 
being developed to simulate future problems and potential solutions. 
However, as utility markets become more competitive and these 
industries move further from the oversight and regulation of utility 
commissions, the ability to obtain this data becomes increasingly 
difficult.
    Regulatory commissions that once depended upon data requests and 
subpoenas to obtain information are finding that they must utilize 
market data and various other sources to obtain information. 
Consequently, it becomes essential that a more diverse stable of market 
indicators be employed. These include the constant, real-time 
monitoring of prices and commodity trading taking place in the 
marketplace as well as a host of other techniques that seek to obtain 
information in as rapid a manner as possible.
    Another important function involves the development of 
comprehensive systems to monitor and track the flow of electricity over 
regional transmission systems. If early warning programs are 
implemented to identify and correct constraints and bottlenecks future 
problems can be averted in advance.
    Furthermore, states must look closely at both current and future 
supplies as they relate to current and future demand. More than ever, 
states must be proactive in the siting of new generation facilities and 
not simply react when supplies get low. Staying ahead of the curve will 
be essential to avoiding problems.
    Other early warning signs will come from consumers themselves. In 
the past, utilities were regulated on the front end and problems were 
avoided through burdensome regulatory proceedings. Today, these 
regulatory proceedings have been replaced by restructured, streamlined 
systems. Consequently, states are now faced with reacting to problems 
that arise later in the process and must solve them in an efficient 
manner. By monitoring the types, number and range of complaints being 
lodged with public utilities commissions, states can obtain a snapshot 
of what is happening in the marketplace and utilize this information to 
determine and correct potential problems.
    The National Regulatory Research Institute sums the issue of early 
warning signs up best in their 1999 Market Analyses of Public Utilities 
paper. They write:
        ``Organizationally, commissions can use the consumer complaint 
        function, not only to resolve individual complaints, but also 
        to detect patterns of internal market failure and market 
        misconduct. At the same time, a market performance division 
        would examine market structure issues. By examining such 
        industry-specific information together, a commission can 
        conduct a more complete and dynamic market analysis that 
        identifies industry-specific problems. Once identified, the 
        commission can address these problems and set policies that 
        promote meaningful customer choice . . .''
    In the end, states must make every effort possible to proactively 
address problems in the most effective and efficient manner possible. 
New skills, technology and techniques will be valuable assets for 
monitoring the developing market to ensure that competition develops.
             powers of the ohio commission to ``step in:''
    To preclude a reoccurrence of what happened in California, states 
need to have the ability to move as expeditiously as possible to 
address potential problems. Ohio's electric restructuring legislation 
(S.B. 3), as well as other statutory requirements recognize this 
important fact.
    S.B. 3 provides consumer protection by overseeing electric utility 
restructuring while at the same time providing shopping opportunities 
to all customer classes. Among other things, PUCO jurisdiction over 
electric utility companies and competitive retail electric service 
providers includes the following:

 Commission authority to monitor retail electric competition in 
        the state and, if the Commission determines that there is a 
        decline or loss of effective competition of a declared 
        competitive service, the Commission shall ensure that that 
        service is provided at compensatory, fair, and 
        nondiscriminatory prices and terms and conditions
 Further, if the Commission finds that an electric utility has 
        engaged in abuse of market power, the Commission, after an 
        opportunity for hearing, may take such measures within a 
        transmission constrained area in the utility's certified 
        territory as are necessary to ensure that retail electric 
        generation service is provided at reasonable rates within that 
        area.
 Competitive and noncompetitive retail electric services are 
        subject to State authority regarding energy emergencies.
 The Commission has the authority to suspend or rescind 
        certification of competitive retail electric service (CRES) 
        providers for anti-competitive, unfair, or unconscionable 
        practices.
 Complaints can be filed, or the Commission can initiate an 
        investigation, concerning the electric utility's or CRES 
        provider's compliance with Commission rules or Ohio laws.
 The Commission has the jurisdiction to determine if the 
        electric utility is in compliance with its electric 
        restructuring plan.
 An electric utility's Market Development Period (MDP) can not 
        end sooner than 12/31/05 unless the utility files a request for 
        early determination of the MDP upon a showing that effective 
        competition exists or 20% of a customer load class has 
        switched. Requires Commission approval.
    In addition to the powers granted under Ohio's electric 
restructuring legislation, the Ohio Commission has a number of other 
important roles under the laws of the state. For instance, the 
Commission has general supervision over all public utilities within its 
jurisdiction. The Commission may examine such public utilities as to 
their general condition, capitalization, franchises, and as to the 
manner in which their properties are leased, operated and managed.
    The Commission has rules that define various foreseen types and 
levels of energy emergency conditions for critical shortages or 
interruptions in the supply of certain utility services, including 
electricity. The Governor also has the power to take various actions to 
alleviate the shortage or interruption of utility services.
    Furthermore, when the Commission deems it necessary to prevent 
injury to the business or interests of the public or to any public 
utility in case of emergency. The Commission may temporarily alter, 
amend, or, with the consent of the public utility concerned, suspend 
any existing rate. Rates set by the Commission apply to one or more 
public utilities in the state and remain in force for as long as the 
Commission prescribes.
    Finally, the Commission has jurisdiction to conduct complaint 
proceedings against a public utility as to any matter affecting the 
rates, charges or the service provided by the that utility.
              demand-side management and energy efficiency
    I would be remiss if I did not mention the importance of the 1980's 
watchword, ``demand-side management.'' In Ohio, the framers of S.B. 3 
included a provision for an Energy Efficiency Revolving Loan Fund, to 
be included in all customer class rates as a temporary non-bypassable 
wires charge on distribution service. It is administered by the 
Director of the Ohio Department of Development, after consultation with 
a newly created Public Benefits Advisory Board. The moneys in the 
revolving loan fund are to be used for financial assistance for 
investments in products, technologies or services, including energy 
efficiency for low-income housing, and for residential, small 
commercial, small industrial/business, local government, educational 
institutions or agricultural customers. (Section 4928.61 and 4928.62, 
Revised Code)
    In addition, S.B. 3 also continued the work of the Department of 
Development in its energy efficiency and weatherization programs 
targeted for the high energy cost, high-volume use structures occupied 
by low-income customers eligible for participation in Ohio's energy 
assistance ``percentage of income payment plan'' program. The goal of 
this low-income energy efficiency and weatherization program is to 
reduce the energy bills of the occupants. Participants must meet 
Federal low-income guidelines and is funded by a State Universal 
Service Fund rider established as a non-bypassable wires charge on 
electric distribution service.
                               conclusion
    We have come a long way since California took the first bold steps 
to open their retail market to competition. Many lessons have been 
learned but much hard work remains. States must be vigilant in 
monitoring their markets, protecting the interests of their 
constituents and working cooperatively to ensure that competition is 
successful. With that in mind, I would again like to thank you for the 
opportunity to testify before you today and would be happy to answer 
any questions you might have.

    Mr. Barton. Thank you, Mr. Chairman.
    We now want to hear from Mike Travieso. He is the People's 
Counsel for the State of Maryland. He is also the Secretary for 
the National Association of State Utility Consumer Advocates, 
on whose behalf he is testifying today. Congressman Wynn of 
your State was very helpful in allowing and helping us 
communicate with you to get your attendance. We welcome you 
here.

                STATEMENT OF MICHAEL J. TRAVIESO

    Mr. Travieso. Thank you very much, Chairman Barton, 
Congressman Boucher, Congressman Wynn, members of the 
committee. I am Mike Travieso.
    Mr. Barton. Mr. Wynn, would you like to further introduce 
Mr. Travieso?
    Mr. Wynn. Thank you, Mr. Chairman. I am anxious to hear his 
testimony. Thank you for coming.
    I want to make the comment that Maryland has a very 
thoughtful and successful experience with deregulation. I think 
he will add greatly to our storehouse of knowledge. With that, 
thank you for coming.
    Mr. Travieso. Thank you very much.
    I am Mike Travieso. I am here on behalf of NASUCA. I am not 
from the great State of Pennsylvania, but I am from the great 
State of Maryland.
    We have had a similar experience as Pennsylvania in the way 
we deregulated. First, I would like to take us back a little 
bit in time to the 1994-1995 era in California to listen to the 
promises that were made then to the customers of the utilities 
as to the benefits of retail competition and the wisdom of the 
market structure that they had set up.
    One thing that is important to remember is that this 
structure was designed by the participants. The utilities were 
involved in the design. The suppliers, the generators, were 
involved in the design. But there was very little involvement 
on behalf of small consumers and residential customers.
    I represent them. My job is to represent all the small 
consumers and the residential customers in the State of 
Maryland. NASUCA as an organization is made up of 42 agencies 
like mine whose job it is to represent small customers and 
residential customers. So our perspective I think is a little 
different than the perspectives that you may have heard or you 
may hear from the next panel.
    Back in 1994-1995, there were promises made to all 
consumers, including residential customers, that the rates 
would go down as a result of competition. These promises have 
actually been made in virtually every State that has 
deregulated. The theory is that competition will squeeze out 
inefficiencies and will produce lower prices; that a 
competitive market is better than a regulated one in terms of 
providing these kinds of benefits.
    The two agencies that are members of NASUCA in California, 
our agency in northern California and UCAN, our agency in 
southern California, were opponents of the deregulation bill in 
1995, and they pointed out that there were some serious 
problems with the way the market was designed back then.
    I guess one message I would have to the members of the 
committee is, in your deliberations, please pay attention and 
give some weight to what the consumer advocates are saying, and 
what they are saying in connection with policy issues and 
economic issues, because we have a tremendous amount of 
experience. We have consultants and we have done a lot of work. 
Of course, we have been the victims of a flawed plan in 
California.
    A little bit on the point of electricity as an essential 
quantity or an essential item that is necessary for all 
residential customers, in fact, for all businesses. Electricity 
is a little different than a lot of other commodities. It has 
to be looked at a little differently when you are considering 
deregulation, because it cannot be stored, because it is an 
essential quantity, it is an essential item. Economists will 
say that demand is inelastic, so when there are problems with 
the supply and demand issues with respect to electricity, the 
consequences are far more severe because there are fewer 
opportunities available to consumers.
    We would hope that this committee and Congress in general 
would focus on the wholesale markets. Many of the States have 
already set in place retail deregulation plans, as has 
Maryland, and I think we would agree that the laboratory for 
those plans and the experience should be gained at the State 
level, but we would certainly urge that Congress consider the 
best way to deal with the wholesale market and use some of the 
experiences from California to formulate your policies.
    We think there are a number of flaws in the design of the 
California market. I think Carl Wood has pointed out a number 
of them. I would only point to the fact that there were some 
mistakes made in the estimates of supply that would be 
available to serve the market, looking toward the future, and 
would refer again to the plants that were canceled, that were 
not built, not because of any constraint, any problem with 
permitting or anything else. They were just canceled.
    I would point out, as well, that there was a large 
overestimation of the amount of energy that would be saved 
through demand side management programs. The planners relied on 
the utilities to put these programs in place. They were counted 
as reducing the demand, but when push came to shove, the 
utilities discontinued these programs, and therefore, energy 
was not conserved, and that obviously increased the demand.
    So there needs to be consideration given to what the actual 
supply will be and what the demands will be, and the planners 
need to take a very clear look at energy growth and at things 
like conservation.
    A major flaw affecting California also was the prevention 
of the utilities, for example, from entering into long-term 
power contracts which would allow them to meet their retail 
obligations.
    Maryland has price caps, Pennsylvania has price caps, 
virtually every State, I think, that has deregulated has retail 
price caps. The reason for that is that advocates have asked 
for them. We don't really see necessarily that small customers 
are going to gain a benefit through electric deregulation. 
Therefore, most advocates have urged that prices be stabilized 
during the transition period, and also be reduced. This has 
happened in many States.
    I don't think the flaw in California is that there were 
price caps. I think the flaw is that there was a wholesale 
market that didn't operate properly, and the concept of price 
signals really would be inapplicable under those circumstances 
because sending a retail customer a 22-cent per kilowatt-hour 
price signal is not valid, since 22 cents does not represent a 
valid price.
    So I certainly wouldn't agree with the concept that retail 
rates can't be capped, and the reason for that is that, for 
example, in Maryland, we have permitted our utilities to retain 
their assets and to enter into long-term contracts, and they 
have done so. So they can hedge. They can have 4-year contracts 
at a price that will allow them to meet their retail 
obligations, and we have done that in Maryland. That is one of 
the things that we have done.
    I would urge the Congress to empower the FERC to do a 
number of things that they don't currently do. The reason for 
that is that I think, as I have said before, energy markets, 
wholesale energy markets, are a far different animal than lots 
of other markets. They lend themselves to market power abuse. I 
think there is a substantial amount of evidence that indicates 
that there was market power abuse in California. You have 
hourly markets and you have the suppliers with enough 
information to withhold energy, withhold their production until 
the prices go way up, and they can make more money doing that 
than they can selling at the hour prices.
    So it is a serious problem. I think there is evidence of 
that in California. We would urge Congress to allow FERC
    to--not to diminish their responsibilities, but to--I think 
we agree with Chairman Markey--to give them the authority to 
deal with market power abuses, to protect the small consumers 
against price volatility in the wholesale market; to take the 
public interest into account.
    I think markets take private interests into account because 
that is what they are supposed to do. They have stockholders, 
and their obligations are to maximize their profits. But in the 
electricity business, at least from the retail consumer 
standpoint, there are things that markets do not necessarily 
respond to. One of them is conservation, demand side 
management, renewables, low income issues.
    There are a lot of things that are extraneous to markets, 
and markets don't necessarily work with respect to those kinds 
of issues.
    So our message is to pay attention to the wholesale market, 
to give FERC the market monitoring authority that they need, 
and to give them authority to require the formation of RTOs, 
ISOs, and to own the transmission lines independently; to 
establish the boards of these organizations without the 
interested parties controlling them; and to make sure that 
there is some benefit somehow for small customers, and that we 
don't end up paying for mistakes like we are doing in 
California and some parts of New York, and we may well do in 
other places.
    Thank you, Mr. Chairman.
    [The prepared statement of Michael J. Travieso follows:]
    Prepared Statement of Mike Travieso, People's Counsel, State of 
                                Maryland
    My name is Mike Travieso. I am the People's Counsel of the State of 
Maryland. I also serve as Secretary of the National Association of 
State Utility Consumer Advocates (NASUCA), on whose behalf I am 
testifying today.
    NASUCA is an organization of 42 state utility consumer advocate 
offices from 39 states and the District of Columbia, charged by their 
respective state statutes with representing utility consumers before 
state and federal utility commissions and before state and federal 
courts. For the most part, consumer advocates represent residential and 
small commercial consumers. As a result, NASUCA members are intricately 
involved in electric utility restructuring debates in their respective 
states, and--through NASUCA--in Washington as well. NASUCA greatly 
appreciates the opportunity to testify at this legislative hearing.
                            i. introduction
    First, I would like to commend Chairman Barton, the members of the 
Committee, and your staffs for your consistent recognition throughout 
your careful deliberations that it is the impact of your actions on 
consumers of electricity that is of paramount importance. NASUCA truly 
appreciates your continuing efforts seek out the views of consumers and 
consumer representatives. We look forward to continuing to work with 
you in developing policies and legislation that benefit all consumers 
and complement what many states have already chosen to do.
    As this Committee proceeds with consideration of restructuring 
legislation, NASUCA is confident that you will continue to keep the 
interests of consumers foremost in your mind. Electricity is an 
essential component of modern life. The actions taken by this 
Committee--and ultimately the Congress--will have a profound effect not 
only on electric consumers, but on the future of the nation as a whole. 
Therefore, NASUCA urges
    Congress to adopt those policies and principles that are fair and 
benefit all electric consumers. We will have accomplished very little 
if the end result of our labors is to bring competitive benefits to 
only a small segment of the electricity market, while rendering basic 
service less affordable and less reliable for all other Americans.
    I also want to commend you for holding this hearing specifically on 
the California energy crisis. I think we can learn much from our 
friends on the West Coast. While it is interesting to compare and 
contrast the retail schemes in California to other states such as 
Maryland or Pennsylvania, I want to take the few minutes I have before 
you today to talk about wholesale markets. The fact is that each state 
retail plan will differ to accommodate the particular needs of its own, 
but the need for a federal role to assure a vibrant wholesale market 
remains constant. The reality is that retail competition will fail 
unless there is a vigorous wholesale market. The truth is that Congress 
will and should have little to say about a state's retail market, but 
it is ultimately your responsibility to insure that the wholesale 
markets work. They don't in California, and, for the most part, do on 
the East Coast within PJM. However, even the PJM wholesale market has 
some shortcomings. I would like to take the next few minutes discussing 
these and finish with a few suggestions on what you can do to help.
                             ii. california
    What went wrong in California? By now you may have heard the answer 
to this question from a number of other witnesses. Therefore, I will 
try to be brief and specific on the problems which NASUCA members in 
California have identified.

1. California relied on inaccurate estimates of future supply and 
        reserve capacity in 1996 when it deregulated.
2. California relied on inaccurate projections of demand-side 
        management acquisitions by its investor owned utilities post 
        1996.
3. California relied on capacity from out-of-state generators which was 
        not under any contractual obligation to the California market.
4. California required that utilities which had retail price guarantees 
        with their customers purchase all of their power from the 
        California Power Exchange. Much of this power was purchased on 
        the spot market and utilities were either not allowed or not 
        encouraged to enter into forward, long-term power purchase 
        agreements to hedge their future retail obligations.
5. The Power Exchange was separated from the California Independent 
        System Operator and the two organizations did not routinely 
        share data. The operation of the California wholesale market 
        was unnecessary complex and provided an opportunity for 
        generators to maximize profit by artificially creating 
        emergency situations, leading to extraordinary prices.
6. The California PX and ISO were entities created and designed by 
        parties with vested economic interests. They were brand new in 
        1998.
7. There was not an efficient, pre-existing wholesale market operating 
        in California prior to 1996.
8. California does not have a capacity market.
                                iii. pjm
    Could what happened in California happen in Maryland? There are no 
guarantees when markets are deregulated but Maryland, as a member of 
the PJM ISO has the benefit of a wholesale market that is better 
designed and operated. Also, the PJM wholesale market better reflects 
the results which would occur in a workable competitive market. What 
are the differences?

1. PJM has been in existence for many years. It is a regional wholesale 
        market and system which includes Pennsylvania, New Jersey, 
        Maryland, Delaware and the District of Columbia. It functions 
        as an ISO and power exchange. PJM has control of the 
        transmission lines; a set of market rules requiring each load 
        serving entity to have a reserve capacity commitment; an 
        independent board; and it operates both an energy and capacity 
        market.
2. Because the PJM wholesale market is established and stable, it 
        appears to be able to attract investment in new generation 
        sufficient to meet expected future demand.
3. Generators, load serving entities, marketers and retail customers 
        can arrange for bi-lateral contracts and do not have to buy 
        power/sell power through the spot market.
4. PJM has an internal planning process designed to identify market 
        flaws and to remedy them. Customers are active participants.
5. About 2500 MW's of new plant is under construction in the PJM region 
        and much more is waiting PJM evaluation, although there is no 
        guarantee that any of these units will actually be built.
6. In Maryland, while we have retail price freezes like in California, 
        the utilities were able to retain their assets or arrange for 
        long-term power purchase agreements to meet these future 
        obligations.
7. In Maryland, when the price freezes end, customers who have not 
        switched to a new provider will not face spot market prices. 
        Instead each utility's load at that time will be subject to an 
        RFP process so that if the wholesale market is competitive, 
        suppliers will submit bids producing reasonable prices.
                        iv. congressional action
    What can Congress do to protect consumers and to insure that truly 
competitive wholesale markets develop? NASUCA believes that the key to 
future reliability, as well as to reasonable retail prices, is a 
vigorously competitive wholesale market. If the wholesale market is 
subject to easy manipulation, insufficient market power monitoring and 
little or no investigation of market abuses and no strong enforcement 
actions, the retail market will fail.
    Steve Ward, NASUCA President testified last year before the Senate 
Energy and Nature Committee on the importance of giving FERC specific 
authority relating to market power:

1. The authority to monitor wholesale markets;
2. The authority to eliminate undue concentrations of market power in 
        any relevant market;
3. The authority to remedy anti-competitive conduct or the abuse of 
        market power by any player, including the authority to 
        administer both behavioral and structural remedies. Market 
        participants must have a lot to loose if they are caught 
        engaging in market abuses.
4. FERC needs the authority to require the creation of independent 
        ISO's which all transmission owners must join. FERC must have 
        the authority to investigate and remedy practices which give an 
        unfair advantage to affiliates of transmission owning 
        companies.
5. FERC must be able to assure reliability of electric supply 
        throughout the United States. Federal legislation ought to give 
        states a prominent role in assuring that consumers have an 
        adequate and reliable source of power within their borders.
6. Encouragement should be given to the development of load shifting 
        and load management programs which are designed to reduce peak 
        demands. One way to do this is to foster a demand side market 
        which allows demand-side resources to be bid against supply 
        side resources.
7. Efforts to continue with the research and development of renewable 
        energy resources should be continued and expanded. Reliance on 
        natural gas alone for new plants is dangerous, as we have seen 
        from the doubling of the price of natural gas over the last ten 
        months.
8. NASUCA does not believe that this is the appropriate time to repeal 
        the Public Utility Holding Company Act or to remove FERC merger 
        review authority.
                             v. conclusion
    Deregulation does not necessarily lead to vigorous competition. In 
fact, NASUCA believes that truly competitive wholesale markets cannot 
develop without effective controls on those who are in a position to 
distort the market. It remains to be seen whether electric deregulation 
will produce the consumer benefits promised by those who championed it. 
Certainly in California and some parts of New York State it seems to 
have produced just the opposite of what was promised, customer savings. 
Maryland's residential customers are concerned about what will happen 
when the price freezes are lifted. Some problems exist in the PJM 
market, like the practice of ``delisting'' (withdrawing capacity and 
energy from the market). Current prices in the energy and capacity 
markets do not reflect actual marginal costs. Current PJM market prices 
seem to indicate that residential customers may not see any savings, 
but the proof will arrive in July, 2004 when the market will begin to 
serve PEPCO's Maryland customers.
    Thank you for the opportunity to present these comments.

    Mr. Barton. Thank you.
    We are now going to go to the question period. I have 
consulted with Congressman Boucher, and we are going to have 
one round of questioning for this panel, but we are going to 
have a little extra time. Instead of a 5-minute round per 
member, let us put set the clock at 7 minutes. We will be 
liberal in the use of the 7-minute rule, but we have another 
panel and a number of members present, so we are going to try 
to do one round and give each member 7 minutes.
    The Chair would recognize himself for the first question.
    This is not a hearing to just jump on California. That is 
why we have Pennsylvania, Ohio, and some consumer 
representatives. But we do need to compare.
    The first thing that I would like to get in the record from 
California, Pennsylvania, and Ohio, is what your baseload 
equation is, what your supply equation is, and also peak 
supply, peak demand for each of the States.
    Could we start with you, Commissioner Wood? Could you tell 
us what the baseload supply generation capacity is in 
California and what the demand--baseload demand is, generally?
    Mr. Wood. I am afraid I don't have those numbers off the 
top of my head. The generation resources in California tend to 
be structured a little differently from some other States, from 
what I can tell, and most of the resources or many of the 
resources don't conveniently sort themselves also out into 
baseload, load following, and peaking units.
    Mr. Barton. Let me hit it another way.
    Mr. Wood. Yes.
    Mr. Barton. Again, we simply have to get some sort of a 
fact basis in the record.
    Correct me if I'm wrong on California, that your general 
generation capacity on a daily basis is about 38,000 megawatts, 
is that right?
    Mr. Wood. That is a pretty typical figure, although there 
are extreme seasonal swings as well as time of day swings.
    Mr. Barton. Your demand is 45,000 megawatts?
    Mr. Wood. That is what the peak looks like. That is the 
outside of high demand, 45, maybe as high as 48,000.
    Mr. Barton. Okay. Commissioner Quain or Chairman Quain, can 
you give us what the situation is?
    Mr. Quain. You saw me checking the numbers myself. I don't 
generally look at them on a State basis, we generally look at 
them on a grid basis, but I have both.
    Pennsylvania is a net exporter, generally. We have in 
Pennsylvania about 30,000 megawatts. The peak is just a little 
under that on a stand-alone basis, but we look at both on a 
grid basis, and the numbers there, Mr. Chairman, are about 
57,000 megawatts on the PJM grid basis with a peak of about 54 
or 55. We have about 6,000 in the ground.
    Mr. Barton. Your supply equation, your supply situation, is 
larger than your demand situation?
    Mr. Quain. Absolutely, but there is also an ability to 
bring in, on long-term and short-term contracts, to balance any 
particular supply or demand in the event a generating unit is 
down for unscheduled maintenance, for example.
    Mr. Barton. Chairman Schriber?
    Mr. Schriber. Mr. Chairman, I would probably speak more 
accurately in terms of reserve margins.
    Ohio, if you take into consideration peaking power, 
baseload, we are talking roughly 35,000 megawatts. During peak 
periods normally in the summer in Ohio, we have reserve margins 
now that are down from up in the 20 percent range to somewhere 
between 6 and 10 percent reserve margin, which is--may sound 
fairly comfortable, but it is not as comfortable as you might 
think if you have an extraordinarily hot summer.
    Mr. Barton. Your supply equation, your supply availability, 
is larger than your----
    Mr. Schriber. Exceeds our demand, yes, sir.
    Mr. Barton. This is a general statement, and if you 
disagree, the panelists, I want you to say so. But is it fair 
to say that one of the differences between California and 
Pennsylvania and Ohio is that in Pennsylvania and Ohio your 
supply margin is greater than what your expected peak demand 
is, and in California, it is not? Is that a fair statement?
    Mr. Quain. That is one of the major differences.
    Mr. Barton. Would you agree with that, Commissioner Wood?
    Mr. Wood. Present, as contrasted to when the deregulation 
legislation was passed, yes, it certainly is true.
    Mr. Travieso. As far as Maryland is concerned we are 
members of PJM, the Pennsylvania-New Jersey-Maryland 
interchange, and our peak is included in the PJM peak and our 
supply is included in the PJM supply. At the moment, there are 
4- or 5,000 megawatts of excess capacity in the ground.
    Mr. Barton. One of the lessons that I think we need to 
learn from the different States is that if you are going to 
restructure or deregulate, you should make sure there is a 
mechanism to, to the largest extent possible, guarantee that 
the supply availability is larger than the expected demand 
request.
    Is that a lesson that we should think about?
    Mr. Schriber. I would say so, Mr. Chairman.
    Mr. Quain. Could I add just one qualifier? That doesn't 
necessarily mean that the generation has to physically exist in 
your State.
    Mr. Barton. I understand that. I would think you would 
agree that if it is not in your State, you have to have 
contracts to get it in your State and a transmission capability 
to transmit it to your State?
    Mr. Quain. Absolutely.
    Mr. Barton. Commissioner Schriber, in your testimony you 
went to some detail about the siting process in Ohio.
    Mr. Schriber. Yes.
    Mr. Barton. California has a siting process also, and when 
you look at the history, the time it takes to site a plant, in 
California it can take as long as 3 years or longer, and in 
Ohio it takes a year, 6 months to a year to make a decision.
    I would like Commissioner Wood and you to elaborate on your 
siting procedures in your States, to the extent that you can 
fairly briefly.
    Mr. Schriber. I can't speak precisely to how California 
sites, obviously.
    In Ohio, briefly, we have the authority to usurp, to a 
great extent, home rule, which often gets in the way when you 
have a State without a siting board. We work in concert with 
the Ohio EPA, who also will grant a certificate.
    Our whole thing is need and convenience in the public 
interest. If an application before us is deemed worthy of an 
application, it is because there is a need for that power and 
it is convenient, and again, it is something that we have the 
capability of implementing without a lot of local interference.
    Mr. Barton. In Ohio, what is the maximum time before a 
decision is rendered on whether a plant shall be sited or not? 
If every intervention step is taken, how long would it be 
before a decision is rendered, yes or no, in your State?
    Mr. Schriber. On a gas peaking plant, I would say the turn-
around time could be 6 months to a year, at the most.
    Mr. Barton. At the outside?
    Mr. Schriber. The outside.
    Mr. Barton. Commissioner Wood, in California, where the 
people have required a more interventionist system, could you 
answer the same question; what is the maximum amount of time 
that--not necessarily a decision, but some decision is rendered 
on whether to allow a plant to be built?
    Mr. Wood. It is hard to answer that directly for the reason 
that it is a very dynamic situation right now. It was 
recognized some time ago, early in the Gray Davis 
administration, that we had slow processes which were not 
appropriate to a market-driven situation, they were appropriate 
to a regulated situation.
    In the last number of months, especially since the summer, 
many of these processes have been expedited, particularly for 
peaking units, and so that the time necessary has been 
compressed very considerably.
    Mr. Barton. Let me ask it this way. In your memory bank, 
what is the shortest time period in which a decision has been 
rendered, not necessarily yes, but just a decision, on a 
request to build a plant in the State of California, the 
shortest that you have actually got a decision rendered?
    Mr. Wood. I believe that for peaking plants, for smaller 
peaking units, those are now being done in the range of about 6 
months.
    Mr. Barton. So you know of a case that a decision was made 
within 6 months?
    Mr. Wood. I cannot say that. The reason for that is that 
the body that does the siting in our State is the California 
Energy Commission, not the Public Utility Commission. So I 
don't deal with those.
    Mr. Barton. What about the longest? I hear anecdotal 
stories of 3 years.
    Mr. Wood. Yes. Certainly before the recent changes, there 
were plants that took multiple years to--for the entire siting 
process to be completed. But as I say, it is dynamic, so it is 
hard to say at the moment.
    Mr. Barton. I understand that what are purported to be 
remedies are being instigated in California.
    My time has expired. I want to, before I yield to Mr. 
Boucher, bring to the members' attention a report that has just 
been released this week by the CERA Energy Group, the Cambridge 
Energy Research Associates. It is entitled ``Power Beyond 
California's Power Crisis: Impact, Solutions and Lessons.''
    This is a proprietary report, but I have spoken with the 
founder of the research association, Daniel Yergin. He is going 
to give every member a copy of this report so we can study it. 
It is fact-based. It is non-judgmental in a political sense. It 
goes into a great amount of detail about the history in 
California, the current situation, and some proposed solutions.
    I would call this to the members' attention as we get into 
this problem in more detail.
    I now yield to Mr. Boucher for 7 minutes for questions.
    Mr. Boucher. Thank you very much, Mr. Chairman.
    Mr. Travieso, I would like to call your attention to some 
comments that were made recently by Dr. Mark Cooper, who is 
with the Consumer Federation of America. You may know him. He 
cautioned that problems that are similar to those that have 
been experienced in California could also be experienced in 
other States that have adopted retail competition plans.
    Specifically, he said the following: Without vigorous 
Federal policies to open the transmission network and prevent 
the abuse of tight markets, consumers will pay billions more in 
unjustified overcharges.
    Do you share those concerns from your perspective as the 
public advocate in Maryland?
    Mr. Travieso. Yes, I do. Mark Cooper and I have actually 
met with our public service commission chairperson, not about 
this subject, but I am very familiar with Dr. Cooper and have 
read a number of his papers and been on panels with him.
    The issue, I think, is that the phrase ``tight market'' is, 
to me, the key. Let me give you an example of one of the issues 
that is now facing PJM. PJM has a much better market, a better 
functioning market, than California does. As Chairman Barton 
was pointing out, there is more capacity than demand, and 
plants are being built. But here is one of the things that is 
happening at PJM. There is a capacity market at PJM. There is 
also a requirement that suppliers have a 19 percent reserve; 
that is, that they actually have 119 percent of the capacity 
they need to meet the demand.
    Well, those two things intersect because actually in PJM, 
there is just about an additional 19 percent above what is 
needed typically. So what that means is that there is a very 
tight market, in the capacity market, for suppliers who have to 
buy capacity to meet their requirement and the sellers who know 
that the suppliers have to buy the capacity to meet the market. 
So the prices in the capacity market currently do not actually 
reflect competitive prices. They reflect market power prices 
because of the tight market.
    That is an example of an issue that PJM is currently 
working on.
    So these kinds of issues exist in any wholesale market that 
deals with a commodity like electricity.
    Mr. Boucher. I heard you suggest in your testimony that the 
tight market circumstance certainly is reflected in the 
decision by power suppliers in some instances to withhold power 
in order to maximize price. But does that situation also 
pertain with regard to transmission?
    I have heard suggestions that perhaps the wholesale 
transmission market is not working particularly effectively and 
that some transmission owners may actually be operating in such 
a manner as to favor their own economic interest and withhold 
transmission at a time when the market is tight and when 
transmission should be made available to other suppliers.
    Mr. Travieso. Well, transmission is a bottleneck, in 
economic terms. If someone has control over that bottleneck and 
also has an interest in generation, then there is an 
opportunity to favor one's own generation. One of the benefits 
of the PJM marketplace is that the transmission owners have 
assigned control and management of their transmission 
facilities to an independent operator, PJM.
    So I think we dealt effectively with that problem in the 
PJM region.
    Mr. Boucher. What about on a national basis, however? Do we 
have a problem with an inefficient transmission market with 
respect to wholesale transactions? And if you think that we do, 
is this a concern that Congress should address or does FERC at 
the present time have adequate authority to address the problem 
administratively?
    Mr. Travieso. Well, I am not really an expert on the 
transmission problems in other areas. I do think that there are 
some States where each owner of the transmission system can 
charge a rate and it is like a pancake rate. So it inhibits the 
free flow of electricity because a generator has to pay like a 
postage--instead of a postage stamp rate, has to pay a rate per 
mile, and that adds a significant cost. So there are issues 
there.
    Mr. Boucher. Dr. Schriber, let me ask you to comment on 
this question, if you would.
    Mr. Schriber. Thank you, Congressman. I would like to.
    I think probably the greatest impediment we have to the 
development of a good retail market, in any State, is the lack 
of a substantial, vibrant, if you will, wholesale market which 
includes transmission. Electricity simply does not move as it 
should move between regions.
    It is interesting to find, when you go to conferences, read 
lots of papers, everybody is willing to tell you what is wrong 
with regional transmission organizations. At the present time, 
it is very difficult to find anybody or any group of people who 
are willing to come together and say here is the problem, here 
is how we solve it. It is an economic problem. It is a physical 
problem. But the economics are confounding a lot of people.
    The other part of the question: Where does FERC belong in 
this equation? For a number of years FERC has been shorthanded. 
It is a 5-member commission that hasn't had 5 members. They 
couldn't get votes and, quite frankly, it is my opinion that 
they have not stepped forward at times when they should have.
    In Ohio, where we actually have three regional transmission 
organizations operating, it makes no sense. What we would 
advocate and we would ask the States around us to advocate for 
is a regional RTO, if you will. If FERC is not willing or able 
to step forward and do so, we are more than happy to.
    Mr. Boucher. Does FERC have the authority to do that, in 
your opinion?
    Mr. Schriber. Yes, FERC does have the authority.
    Mr. Boucher. So we do not need to empower FERC any further 
in that regard?
    Mr.  Schriber. In my opinion.
    Mr. Boucher. But perhaps to encourage it to simply take 
some steps that would address the problem?
    Mr. Schriber. Yes, sir.
    Mr. Boucher. Let me ask you another question. I was 
somewhat intrigued by your testimony concerning the need for 
demand-side management, a sentiment with which I entirely 
agree.
    I wonder if you could take just a moment to describe to us 
what the Ohio PUC has done to encourage demand-side management, 
and what kind of response you have gotten to that encouragement 
from the investor-owned utilities in the State.
    Mr. Schriber. Congressman Boucher, we have not done much in 
the way of demand-side management in the last number of years. 
This was, again, a product of the 1980's. It was like gasoline. 
We all have very short memories, and I think our memories are 
beginning to come back. I do believe fervently that it is time 
that we do step forward.
    It is difficult to incent utilities to move forward with 
demand-side management. On the other hand, a simple, to me, 
real-time metering is something that I cannot comprehend is not 
in each of our homes. I can't imagine why they cannot put a 
meter in our homes that tells us what we are using, how much, 
at what time of day, so we can see what the price is this hour, 
next hour. It is inconceivable the technology that we have 
today, that we don't have those in our homes. That, to me, 
would be an outstanding start because if we know what we are 
buying, just like when we go to the supermarket, if we know 
what we are buying and how much we are buying of it, we know 
what it is going to cost us.
    Mr. Boucher. Thank you very much.
    Mr. Chairman, my time has expired.
    Mr. Barton. Thank you.
    We would now like to recognize Congressman Largent for 7 
minutes for questions.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Wood, what was the rationale for not allowing utilities 
to enter into long-term contracts in California?
    Mr. Wood. The creation of the Power Exchange and the 
funneling of all of the transactions, the utility transactions 
through the Power Exchange, was really a fundamental 
underpinning of California's deregulation experiment, as I 
understand it. I wasn't a policymaker at the time.
    The major concern was that the utilities, if they retained 
control over either the supply side of the equation, which 
would be ownership or control of the generation, or the demand 
side, which meant purchasing as the major purchaser on behalf 
of their customers, they would be able to exercise market power 
and that might be detrimental. In the case of what was 
addressed by the Power Exchange, it would be detrimental to the 
interests of competition among generators and marketers.
    Therefore, the Power Exchange was established as a 
transparent market in which it would not be possible for the 
utilities to exercise any market power. They were made 
essentially passive participants in that market.
    This concept was, in effect, endorsed by FERC which 
recognized it as a centerpiece or an underpinning of the 
California's deregulation structure, and although it wasn't 
embedded in the legislation itself, the legislation was 
passed--AB-1890 was passed after the final decision by the 
commission that established the PX. And so it was implicitly 
endorsed by the legislation. That was, as I understand it, the 
rationale.
    Mr. Largent. Was it also endorsed by the utilities?
    Mr. Wood. The entire project was endorsed by the utilities 
as part of a compromise essentially between the utilities and 
large customers with eventual sign-on by other parties. Later 
on, several years into the experiment, at least one of the 
utilities, Southern California Edison, asked for--began to ask 
for some changes in that regime.
    Mr. Largent. So essentially it was just a bad call by 
everybody?
    Mr. Wood. Certainly in retrospect, it looks that way. Up 
until May 22nd of last year, it looked like a great idea. 
Prices were stable, they were low, they were below regulated 
prices and then the wheels came off after that date.
    Mr. Barton. Will the gentleman yield?
    Mr. Largent. Yes.
    Mr. Barton. It is true now that because of what has 
happened, long-term contracts are allowed in California?
    Mr. Wood. Yes. Long-term contracts have been permitted 
since August 3 of last year. There is a condition attached to 
them that unless there is a sign-off by the PUC staff on the 
reasonableness ahead of time, or that it falls within a certain 
safe harbor, then the utilities may be subject to 
reasonableness review afterwards, and if their actions are 
found to be unreasonable then they could be--they could face 
some sort of disallowance. But in the face of that, 
nevertheless the utilities, at least Southern California Edison 
and PG&E have engaged in long-term contracts since that time.
    Mr. Largent. Mr. Travieso, I had a question for you. You 
said something that was of interest to me about empowering FERC 
to address market power abuses like those that took place or 
are taking place in California. Can you define market power 
abuse and maybe give us an example of the type of abuse you are 
talking about that took place in California?
    Mr. Travieso. Yes. I don't have personal knowledge of this, 
but I guess I would direct the committee to an article that I 
think does a pretty good job of discussing this issue. It was 
published in the Public Utility Fortnightly, January 1 of this 
year, by Robert McCullough, called ``Price Spike Tsunami.''
    He has done a very good analysis, I think, of which plants 
ran and when they didn't and how the price curves changed, and 
the famous May 22nd date is the date that he uses to start 
with.
    One example would be if you are a generator and you own two 
different kinds of plants, one of which is a baseload or a 
plant that runs fairly often, and the other of which is a plant 
that comes on at the peak or near the peak, you could choose, 
for example, to have an outage, an unplanned outage, in your 
plant that runs at a lower bid price. And there actually have 
been--the number of outages have gone up from 5 to 10 percent 
up to about 50 percent in California in recent months. You 
could choose to have an unplanned outage on the unit that runs 
at a lower bid price. That would then force the demand price to 
go up because the supply would go down. If you thought that you 
could run the other plant, the peaking plant, long enough and 
at high enough price for it to be profitable, you would do 
that. And there is some evidence that that occurred.
    Mr. Barton. Would the gentleman yield?
    Mr. Largent. In just a second I would be glad to yield.
    Are you saying that there is some evidence that there was a 
conspiracy of sorts to shut down a lower profitable plant, a 
base plant, a baseload plant, and go to a peaking plant that 
you have more profit? You are saying that that was deliberately 
done?
    Mr. Travieso. I don't know if it is a conspiracy. In the 
investigation that FERC had, the staff reached some conclusions 
along those lines but the FERC never adopted them. But it 
doesn't even have to be a conspiracy. I mean, individual owners 
of plants, with enough information--and one of the flaws of the 
California system was they got a tremendous amount of 
information about what the demand was going to look like the 
next day--could make that rational decision without it even 
necessarily being any kind of illegal act. They could make that 
decision just based on a rational business decision. But the 
effect would be to raise the price substantially, to raise the 
retail price.
    Mr. Largent. The gentleman.
    Mr. Barton. I just want to try to set the record, or put 
into the record, it is my understanding that until they 
abolished the Power Exchange in California that everybody that 
supplied power had to put it in through the Power Exchange, and 
there was a market clearing process established that the 
highest price anybody bid that day was the price that everybody 
received. It is also my understanding that the distributor of 
utilities had to purchase from the Power Exchange and sell at a 
fixed rate that was set by the law unless they had an existing 
long-term contract that they were allowed to continue.
    So the example that is in your article that you referenced 
doesn't make sense from the standpoint that anybody supplying 
power, unless they had a long-term contract before the Power 
Exchange went into place, would get the identical price 
regardless of which plant they were utilizing.
    Mr. Travieso. Well, there are hourly markets, and the 
market at the end of the day for the last 300 or 400 megawatts 
to meet the demand that you can't shed, produces prices that 
are $3,000 a megawatt. That is why--has produced prices that 
were $3,000 a megawatt. That is why somebody in the situation I 
described could choose to try to create that situation. And the 
bid prices for power during nonpeak hours from baseload plants 
had traditionally been $30 an hour. So there is an incentive, 
based on the structure of the market, to do that.
    Mr. Largent. I just had one other question, Mr. Chairman.
    Mr. Barton. Sure. I took part of your time.
    Mr. Largent. Mr. Quain, I just wanted to ask you, I was 
listening to the response by Mr. Travieso about capacity, the 
119 percent. And either Mr. Quain or Mr. Travieso, if you know 
the answer to this question, I am just wondering how much new 
generation is currently under construction or in the process of 
being brought on-line within the PJM power market grid?
    Mr. Quain. I do know that, Congressman, and only because I 
was asked a similar question yesterday by the Pennsylvania 
State Senate. PJM has cues, and I think they go A, B, C, D, E 
and F, and the higher up in the queue you are, the more 
likelihood of completion. In queues A and B, which has a 75 
percent likelihood of completion, there are currently 15,000 
megawatts. Of that, 6,000 either in upgrades for existing units 
or new construction are currently being built now. The 
remainder expects to be built over the next 5 years.
    Going to queues C, D and E, I think it goes down to there 
is an additional 31,000 megawatts. Now, clearly, the further 
you go down the queue, you have to question the likelihood of 
financing being available, whether the market conditions will 
exist that will allow those investors to believe that their 
investment is indeed prudent and continue to construct those. 
So that is the long answer to your question.
    Mr. Largent. So the tight market that you mentioned, Mr. 
Travieso, will become significantly less tight as this new 
generation is brought on-line?
    Mr. Travieso. We would hope so. There is 2,500 megawatts 
that actually is currently under construction.
    There is an issue, though, with respect to what gets built 
in the future, and that is because the way the PJM system works 
is, they review these projects and they determine the effect 
that the new plant will have on the transmission system and 
they assess the cost of that to the developer.
    So, developer one will have a certain effect on the 
transmission system and that will increase the load on the 
line. As you get further along, you get two or three power 
plants along, the third plant will have an enormous effect or 
could have a multiplier effect on the transmission system, 
which means that the cost of that project could be 
substantially more for the same plant than the cost of the 
first project in line.
    I haven't seen any studies or analysis which attempts to 
take that into account in terms of the likelihood that these 
projects will get built. But the short answer is I think we are 
going to have significant increases in capacity, but when the 
risk changes and the reward changes based on costs of the 
project, I haven't seen any analysis of that. But at some point 
it could.
    Mr. Largent. Thank you.
    Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Congressman Largent.
    I will recognize Mr. Waxman for 7 minutes for questions.
    Mr. Waxman. Thank you, Mr. Chairman.
    Mr. Wood, I want to thank you very much for your testimony. 
Perhaps we should be paying particular attention to your 
testimony since you predicted several years ago the problems we 
are seeing in California today.
    As you are no doubt aware, there are sometimes advocates 
who will exploit a problem to advance an unrelated agenda, and 
I am concerned about this in the case of California because the 
President, some Members of Congress, and even a few generators 
have blamed our State's environmental laws as being responsible 
for California's energy problems. They have also blamed the 
Federal Clean Air Act, the Endangered Species Act, the forest 
roadless policy, the ban on drilling in the Arctic National 
Wildlife Refuge or, it seems, almost any other law they never 
liked in the first place.
    Mr. Wood, you mentioned several causes for California's 
problems in your testimony but you don't mention environmental 
laws. I would like to have it clear in the record: Are 
environmental laws responsible for California's electricity 
problems?
    Mr. Wood. No, not in my opinion.
    Mr. Waxman. Have clean air laws or other environmental laws 
prevented the generation of electricity?
    Mr. Wood. No, they have not prevented it.
    Mr. Waxman. Have the environmental laws prevented the 
construction of adequate electricity generation facilities?
    Mr. Wood. No, that has not been the cause.
    Mr. Waxman. If I understand, your view of the root cause of 
California's problems is the creation of a dysfunctional 
market, not environmental regulations; is that correct?
    Mr. Wood. That is right. It is reliance upon, solely upon 
market mechanisms to provide adequate generation in a timely 
manner, and that has not occurred; which, as you pointed out, I 
testified before this subcommittee 3\1/2\ years ago and pointed 
out the problems of relying on the market in a business cycle 
context where new generation would come on-line in response to 
price signals but perhaps not in a timely manner.
    Mr. Waxman. Well, under this current system it is 
remarkably easy for suppliers to game the system to drive up 
prices, isn't that correct?
    Mr. Wood. Yes, it certainly is. And that has been partly 
discussed already, but if you are interested I could maybe 
explain some of the mechanisms.
    Mr. Waxman. If you could briefly. I had some questions, but 
I think it is important to get this on the record.
    Mr. Wood. Yes. In the California market, several of the 
players of the generators each control 14 percent or more of 
the total generation that is available. Those include AES, 
Duke, Dynergy, Reliant and Southern Company. As I pointed out 
in my testimony, for the last month we have every day been in a 
stage 3 emergency. That means that reserves are less than 1\1/
2\ percent. In that environment, any generator can withhold a 
relatively small portion of their total generation in order to 
drive prices up.
    The net effect would be, if, for example, the actual cost 
of generation, the marginal cost for a particular producer, is, 
let's say, $70 a megawatt hour, given the current high gas 
prices, but if withholding, say, one-quarter of the available 
generation by that particular market participant would result 
in prices that were, say, $280, or four times the price, they 
would be a net beneficiary even though they weren't running 
part of their own generation.
    This explanation does not require collusion, and therefore 
it doesn't require market power abuse. It merely involves the 
exercise of market power. As I have been told--I am not an 
economist, but I have been told by economists that when market 
power exists, it is exercised. It is really a definition of 
market power that it will be exercised.
    So this constitutes an exercise of market power.
    I would also point out that while FERC has not seen it 
necessary, and in fact apparently has denied that it is 
possible under their existing authority, to intervene in this 
situation, to require refunds or any restitution of that sort--
I saw an item recently that in England, which is considered by 
many a model for successful deregulation, the generation 
regulator in that country last summer called Southern 
California Edison's English affiliate, generating affiliate, on 
the carpet for withholding generation in order to drive up 
prices. So in that example of a deregulated country, they still 
have a market referee which looks over these kinds of abuses.
    Mr. Waxman. In California, we had no market referee so we 
had an incentive, in essence, through this market-based system 
to take advantage of the consumers by charging these 
extraordinarily high prices by manipulating the supply.
    Mr. Wood. That is right. So far it has been taking 
advantage of the utilities, except for a period of time in San 
Diego, the results of these abusive market behaviors.
    Mr. Waxman. That is because they have put caps on retail 
sales?
    Mr. Wood. That is right, the frozen prices.
    Mr. Waxman. I know the legislature, the Governor, the 
Public Utilities Commission in California, are working around-
the-clock to resolve this problem, and in doing so the State 
has sought the help of the Federal Government, specifically the 
Federal Energy Regulatory Commission. In fact, many of the 
western States have also sought FERC's assistance in 
temporarily taming these wholesale prices. Recently 8 western 
Governors, 5 Republicans and 3 Democrats, have called on FERC 
to implement a temporary cost-plus pricing requirement on 
wholesale electricity, but FERC has rejected these calls for 
assistance.
    Do you believe FERC has a role, a responsibility, to act?
    Mr. Wood. A plain reading of the Federal Power Act seems to 
indicate they have an obligation to act. The Federal Power Act, 
as I recall, requires that wholesale prices be just and 
reasonable and says that if they are not, then they are 
unlawful.
    Again, I am neither an economist nor a lawyer, but my 
understanding is that when there is an unlawful act or an 
unlawful situation implicitly, if not explicitly, there is some 
sort of remedy. The FERC is the agency of government set up 
under the Federal Power Act to enforce that law, and I think 
clearly they have that obligation.
    Mr. Waxman. Well, when California deregulated it, handed 
over its authority over generators to FERC, and the assumption 
was that FERC wouldn't allow the exercise of market power, 
particularly in the way we have seen it. Yet FERC has failed to 
conduct a comprehensive and detailed investigation. It has 
failed to take any action to temporarily control these unjust 
and unreasonable rates.
    Some have argued that if the PUC would simply raise rates, 
PG&E and Southern California Edison could regain financial 
stability if they just allowed for the increase in rates, and 
FERC has identified that the dysfunctional market in California 
can result in unjust and unreasonable prices and some market 
participants can exercise this kind of market--can exercise 
market power. Does simply raising rates make sense with this 
kind of market in place?
    Mr. Wood. Whoever--if you raise rates, it simply transfers 
the burden of this dysfunctional market to another group of 
parties, which would be the customers of all classes. 
Presently, the utilities have been a buffer. They have suffered 
immensely as a result of it, and unfairly, I believe. But it 
doesn't solve the problem. It simply means the consumers, 
rather than the utilities, then have to pay these unjust and 
unreasonable prices.
    Mr. Waxman. Well, the Secretary of Energy, Mr. Abraham, has 
expressed concern that if we didn't allow prices to be 
increased it would discourage new generation. In your view, is 
this true and is there a way to provide much needed emergency 
relief to California without discouraging new investment?
    Mr. Wood. At this point, I can't imagine what would 
discourage new investment in California. The owners of the 
plants that were divested have probably paid off their entire 
initial investment over the last 8 months or so. It is a gold 
rush there, but even under--in a well-regulated market, that 
allows for a reasonable return on investments, which is what I 
think all of us in California are asking for, there is ample 
opportunity to invest profitably in California.
    We have a wonderful economy, as you know, in our State. It 
is the most diverse economy in the United States. It is a 
strong economy, which is heavily based in a powerful 
agricultural sector, a very advanced technological sector, and 
the prospects, I think, for investment there are outstanding, 
including in the energy area.
    Mr. Waxman. Mr. Chairman.
    Mr. Largent [presiding]. The gentleman's time has expired.
    Mr. Waxman. My time has expired, but let me just for the 
record, if I might point out that the Government Reform 
Committee held a hearing in September and they indicated the 
applications for electric turbine permits moved through the 
process in a timeframe that averages 12 to 18 months. States 
would take the first steps in this process. EPA frequently does 
not become involved except to concur in what the State is 
requiring for pollution reductions.
    This isn't an unreasonable timeframe for a big industrial 
facility that will be in operation for the next 30, 40 or 50 
years. But I thought the committee ought to have the benefit of 
the record on that.
    Mr. Largent. I thank the gentleman. The gentleman from 
Illinois.
    Mr. Barton. Before we recognize Mr. Shimkus, we would like 
Commissioner Wood, for the record, since Mr. Waxman has alluded 
to it, the records of the various regulatory authorities in the 
State of California on permits that have been requested and the 
length of time to make a decision, yea or nay on those for, 
say, the last 10 years. Is that possible?
    Mr. Wood. I believe so. As I pointed out earlier, this 
process is controlled by the California Energy Commission, and 
I will take that request.
    Mr. Barton. I understand they are different.
    Mr. Wood. And arrange to get that information for you.
    Mr. Barton. Thank you.
    Mr. Waxman. I think we ought to have the Energy Department 
in California come in and testify so we can get some of that.
    Mr. Barton. I just bet we can allow that to happen.
    Mr. Largent. The gentleman from Illinois is recognized for 
7 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman.
    I am going to refer back to a question that Mr. Largent 
asked and also this article from Harry Levins from the Post-
Dispatch. The question that Congressman Largent asked was why 
did California not go to long-term contracts? I want to make 
sure, Congressman Waxman--I want to make sure you don't leave 
because this is a California thing and I am just throwing this 
out because it relates to Congressman Largent's question. Harry 
Levins says this in this article which we submitted for the 
record so you all should be able to get it, ``The planners 
looked back to the late 1970's and early 1980's when California 
utilities got locked into wildly overpriced long-term deals to 
buy bits and pieces of power generated by solar and wind power. 
The planners told themselves, we will not make that mistake 
again.''
    Based upon your position, is that a plausible answer why 
California didn't lock themselves into long-term contracts?
    Mr. Wood. That is part of it. We had a very aggressive 
implementation of PURPA, which resulted for years in billions 
of dollars of overmarket electricity prices, although we ended 
up with a very diverse resource base as a result of it. But by 
the early 1990's, there was an overhang of over 20 percent 
excess capacity in the western market and the utilities were 
very reluctant to see any new generation built outside of rate 
base. And therefore, when the Public Utilities Commission in 
the early 1990's would not let Southern California Edison at 
least build new generation and rate base, which they wanted to 
do, but required that it be built outside of rate base, because 
even then the commission was looking forward to the days of an 
unregulated nonrate-based market and generation, then Edison 
aggressively opposed that, went before FERC and got the project 
locked based on a technicality.
    So that was a large part of it, yes.
    Mr. Shimkus. And this is why hearings are important to 
research. I mean, we are having a crisis in California right 
now, a crisis made by decisions--based upon decisions that were 
made in the 1970's and 1980's. And if what seems to be correct 
is part of those decisions were made based upon the PURPA 
requirement in Federal law, which we discussed here numerous 
times in energy dereg, and for my new colleagues on the 
committee, this is an important statement to understand, but 
also as a big renewable supporter from commodity growing States 
of corn and soybeans, I always find a way to talk about ethanol 
and biodiesel anytime I get a chance, we are not saying it is 
bad. It is just you need to understand the full picture, that 
the PURPA requirement did cause some decisions to be made. In 
this case, they may not have been the best decisions.
    Mr. Wood. Congressman Shimkus, if I could just note, there 
is a remarkable parallel between the implementation of PURPA in 
California and some of the things that we did in our 
deregulation project, particularly the Power Exchange. Under 
PURPA, in California, the utilities were essentially made 
passive not price takers but accepters of generation at a fixed 
contract price that didn't really correspond to actual costs, 
and that resulted in what was called the QF gold rush in the 
mid-1980's, with subsequent problems.
    The Power Exchange similarly recommended, or resulted in 
making the utilities passive price takers in the market, and 
preventing them from acting effectively or having a truly 
dynamic market involving equal interaction between buyer and 
seller, and with consequent disastrous results.
    Mr. Shimkus. And I appreciate your testimony because it 
speaks to the argument of the basic economic equation of supply 
and demand, and consumers paying prices for the goods they want 
to receive. We want to make sure that obviously as policymakers 
that the market works so that we have the folks represented by 
Mr. Travieso, and in my perspective Marty Cohen from the 
Citizens Utility Board in Illinois, that the competition, the 
market equation, works and we have more choices at lower cost. 
And it does. But we interspersed the equation of demand and 
control through the regulatory scheme.
    Illinois is going through high natural gas prices. One of 
the reasons is because of our focus on power generating and 
peaker plants to meet above-load demand. We have drawn down 
stocks of natural gas that have been used--built up to be used 
as the heating fuel of choice in much of the Midwest, double 
the price. This is all interrelated. That is why the Chairman 
is correct in doing a couple of things, pushing for a national 
energy audit. What are we producing? What fuels are we using? 
So we can understand the context by this whole debate, what 
fuels are we consuming?
    My position is, we need to explore a lot of the 
alternatives of basic fuel.
    A question for Mr. Quain. Of the plants in the PJM market, 
what are the basic fuel components of the plants that are on 
the drawing board?
    Mr. Quain. What is on the drawing board is almost all 
natural gas.
    Mr. Shimkus. And that should be a scary signal to anybody 
whose home is heated by natural gas, which prices have doubled.
    Mr. Quain. I agree with that statement. I would note that 
currently we have 57 percent coal, about 36 percent nuclear, 
and I think as we look forward we have to look at fuel 
diversity as we build these new plants. I couldn't agree more.
    Mr. Shimkus. I think part of a national energy policy and 
strategy will be looking at our fuels, making sure we put the 
money into research and development to make sure they meet our 
environmental standards, but we have to have a diversified 
portfolio. In my opening statement I submitted for the record, 
Illinois does have a very diverse portfolio of coal-based 
generating, nuclear generating. Also, peaker plants are 
sprouting up all over the place.
    As much as you hear problems about the electricity price in 
California, we are hearing it. We are hearing it on natural 
gas. And it is because of the whole national energy equation.
    My time has expired. I am not going to go over. I 
appreciate the time. I yield back.
    Mr. Largent. I thank the gentleman.
    Now the gentleman from Pennsylvania is recognized for 7 
minutes.
    Mr. Doyle. Thank you, Mr. Chairman.
    I have two questions, and I will give them to you both at 
once and then if you each take 105 seconds to answer, my 7 
minutes will be up.
    I know it is not an easy question, but what specific 
oversight do you think should rest at the Federal level and 
what should rest at the State level to maximize the potential 
benefits of deregulation? And then second, in a more general 
sense, generally what do you think is the best way to encourage 
States to consider retail competition? And you can each just 
take a stab at it down the line.
    Mr. Wood. The first question was what sort of oversight 
should rest at the Federal level?
    Mr. Doyle. Right.
    Mr. Wood. Clearly--first of all, I think that existing 
oversight of interstate transactions is appropriate. I don't 
think it is appropriate for the FERC to overreach that. There 
are many transactions which, in fact, are intrastate and they 
should remain that. And in general, retail transactions should 
remain within State jurisdiction. But the Federal Government 
plays a necessary role in overseeing interstate wholesale 
transactions.
    What we are finding--what we have found in California, 
certainly, is that there is a need for somebody to ensure that 
the market, to the extent that it exists, is workably 
competitive and to ensure that. All other markets that I can 
think of in the United States are effectively regulated in some 
way, not to determine prices but just to make sure that they 
remain workably competitive.
    We do not have an effective system for doing that right now 
with electricity, certainly in the western United States.
    Your second question, I am sorry, I didn't get it written 
down.
    Mr. Doyle. Just generally, what do you think is the best 
way to encourage retail competition, reciprocity requirements, 
relieving States of the requirements of PUCA and PURPA? Just, 
you know, what are your thoughts on how we can encourage retail 
competition?
    Mr. Wood. I think that is really, respectfully, the wrong 
question. The question that I would say more properly should be 
how can you permit and allow to develop as appropriate retail 
competition, because there are and there will be States which 
for their own reasons, and very legitimate reasons, see that it 
is not beneficial to enter into retail competition. I won't 
list States but I think some of them are very well known.
    In California, we are seriously rethinking the dimensions 
of our experiment. It remains the Governor's belief and hope 
that deregulation can work, but we have--we are moving toward 
putting a lot of things on hold. That has happened in a number 
of other western States as well.
    So anyway, having said that, I think that, again, the most 
effective thing that can be done is to assure that there will 
be fair and ``policed,'' if you don't like the word 
``regulated,'' markets so that it will embolden States to 
launch into ventures like this. I think everybody in the 
country is terrified now because of what happened in 
California.
    If there had been some kind of market enforcement, then we 
would have problems but they wouldn't be nearly of the 
dimensions that we are facing right now, and it would enable 
other States to move forward or in whatever other direction 
they want to go with more confidence.
    Mr. Quain. Did you take my 110 seconds?
    Mr. Doyle. 105.
    Mr. Quain. I will give you a very broad answer, 
Congressman, because obviously the devil is always in those 
details. I think the one thing that Congress can do is define a 
visionary long-term as well as short-term national energy 
policy. We need to know where we are taking this Nation, given 
the growth in energy demands on it, and we need to have a long-
term energy policy to do that.
    I think encouraging transmission investment, encouraging 
generation investment can be part of that; encouraging 
production; encouraging demand-side management. Research and 
development also can be part of that; making sure that we take 
care of the less fortunate amongst us to make sure that this 
human needs commodity gets to every household as well as to 
every large industry. All of that has to be part of it.
    Having said all of that, I think it is appropriate for 
Congress to put parameters for States to work within. What is 
happening in California is not just only a California problem. 
It is affecting our State, not nearly to the extent that it is 
the residences and businesses of California but it is 
advocating the Nation and we need to have certain parameters by 
which we all agree to play.
    With that in mind, each State, I think, needs to have the 
flexibility to design the program for their own demographics, 
economy, whatever, geography, climate; but nobody works best 
without a deadline, and I think Congress would do--if you 
believe in electric restructuring as I do, if it is functioning 
properly and put together properly, it works. I think putting a 
deadline by which States should act would help the process a 
great deal.
    Mr. Doyle. Thank you.
    Mr. Schriber. Congressman Doyle, let me answer your second 
question first: How could we encourage States? I think the most 
important thing that we could do at this time is to enhance the 
wholesale side of the market. Not only does that bring 
electricity to the doorsteps of the State that wishes to 
restructure, but, and I think what has evaded a lot of 
questioning here, is the fact that electricity will move out of 
the State, too. That could have some serious consequences. But 
the larger the market, the more electricity is going to flow 
and you are going to have a better market, and that will 
encourage more, I believe, States to become involved at the 
retail level.
    As far as oversight goes, I firmly believe, as I said in my 
opening remarks, that what we have learned as commissions, as 
commissioners, is that we have to be very, very vigilant. We 
have to look for the early warning signs and we have to swallow 
hard and step on some toes and stop the process if it is going 
in the wrong direction.
    Mr. Doyle. Thank you.
    Mr. Travieso. Congressman, I think at the Federal level we 
certainly should be concerned about reliability. I think we 
should be concerned about market power and mitigation of market 
power in the wholesale markets; fair access and control of the 
transmission system through ISOs or other similar organizations 
such as that, and maybe helping create a market for load 
management. There really isn't such a market in PJM, as I 
understand it, at the moment. That would be a market where 
large users of electricity can bid in to the market, 
discontinuing using a certain amount of their load and get paid 
for it and make an economic decision as to whether they want to 
do that or not.
    At the retail level--I mean at the State level, I think 
certainly the retail market should be within the State's 
control. Things like distributed generation, the rates of 
distribution, demand-side management at the retail level, and 
things like renewables, I am not sure where they belong. There 
certainly could be a Federal policy and there could be a State 
policy to encourage the development and use of renewables.
    With respect to encouraging States to consider 
deregulation, I think the best thing you could do is nothing 
for the time being. We have 25 States that have adopted 
deregulation statutes. The market is infantile at the moment, 
and even in California we don't have a very long experience. I 
think it would make sense to see what happens in these various 
States, see how it progresses with different plans in place, 
see whether competition develops, see whether they have market 
power issues. I don't know, for one, what is going to happen in 
Maryland when our price caps are lifted in 4 years. I have no 
idea. So I think that would be useful data for you to have 
before you made a decision about whether you should require 
that on a national basis.
    Mr. Doyle. Thank you, gentlemen.
    Mr. Barton The gentleman's time has expired. Before we 
recognize Mr. Walden, let me make an announcement just kind of 
for the good of the order. We are not going to take a lunch 
break, but with the members still present if each of them take 
their full 7 minutes and extend it a little bit, it is probably 
going to be 2:30, 2:45 before we are through with this panel. 
So if you are in the audience or you are on the second panel 
and you want to stretch your legs or just go out and get a 
sandwich, feel free to do so. Just do it discreetly so that we 
don't bother too much our witness panel.
    If you are on the first panel and you need a personal 
convenience break, you got my permission to just kind of head 
out and come back and we will continue on without you.
    Mr. Walden is recognized for 7 minutes.
    Mr. Walden. Thank you, Mr. Chairman. I hope I don't lose 
the whole audience here.
    Mr. Wood, I guess I was listening to your comments earlier 
today about how the California consumers shouldn't bear the 
price for this debacle of restructuring. I think I am capturing 
what you said, in terms of price caps. You made some comment 
about it shouldn't be shifted to them. They are kind of the 
innocent bystanders in this. Is that accurate?
    Mr. Wood. What I meant to say, whether it came across 
clearly or not, is that the consumers should not have to pay 
for the unjust and unreasonably high wholesale prices.
    Mr. Walden. Right. Now, do you believe that there is any 
relationship between price and consumption in the energy 
markets?
    Mr. Wood. Depending on class of customer, there is some. 
There is not as much as one might think.
    Mr. Walden. But there is some.
    Mr. Wood. There is some.
    Mr. Walden. You don't think conservation is driven by 
price? If my bill goes up to $600 a month, you don't think I am 
going to turn my lights off or turn my thermostat down much to 
reduce my bill?
    Mr. Wood. We have some empirical data on that. In San 
Diego, during the summer of last year, people were exposed to 
price signals representing 300 percent increases in their 
bills. We saw consumption go down by no more than 10 percent 
across all classes of consumers.
    Mr. Walden. Over what period of time?
    Mr. Wood. That was just in the summer.
    Mr. Walden. How many months?
    Mr. Wood. That was a period of about 3 months.
    Mr. Walden. Because I would think there would probably be a 
1-month lag or 2 before they saw the price. When you get your 
bill, you don't know you have been stung.
    Mr. Wood. Right. People were aware of what was--this is 
toward the end of that period.
    The information that I have talking to experts about it is 
that in the long run there is quite a bit of elasticity of 
demand that can be triggered by price signals. In the short 
run, there is very little. It requires cultural changes for 
small customers. It involves technical changes for large 
customers.
    Mr. Walden. So the longer you put off that elasticity, the 
longer it is going to take to get to conservation, or that 
place?
    Mr. Wood. Conservation coming from price signals, yes.
    Mr. Walden. Right. I guess the question I have is, you 
know, the Northwest is still in the spot market because we are 
short about 3,000 megawatts.
    Mr. Wood. That is right.
    Mr. Walden. So the extent to which Californians don't 
suffer a price increase and therefore don't conserve results in 
higher prices in that spot market, because you are out 
competing for more energy than you otherwise would be, right?
    Mr. Wood. That is true.
    Mr. Walden. So, therefore, those of us in the Northwest who 
are seeing our bills go up 40, 50 percent, are paying the price 
for the price caps because California isn't taking those on? I 
mean, that is hitting us at home right now in my district, in 
my State, because we are out there competing with you at your 
peak period at a time which would not normally be our peak 
period because we don't have price controls.
    Mr. Wood. Well, I think that your question assumes that a 
price responsiveness by all consumers would result in the 
reduction of prices to the people that you represent.
    Mr. Walden. No. It might, but it also reduces the amount 
your utilities are in the market or in the spot market. Right?
    Mr. Wood. Yes.
    Mr. Walden. If demand goes down, they are not out competing 
at this point, right?
    Mr. Wood. That is true.
    Mr. Walden. So therefore the price on the spot market ought 
to be less?
    Mr. Wood. Well, it ought to be, but the experience has been 
that there is not much of a correlation between supply--between 
supply and demand relationships and price in the spot market in 
the West since the beginning of last summer. And I can--if you 
would like--I don't know that I have----
    Mr. Walden. I would love to see that. I didn't take a lot 
of economics in college.
    Mr. Barton. Well, you still have retail price caps in place 
in California.
    Mr. Wood. Yes.
    Mr. Barton. They were suspended in San Diego briefly, and 
then because of the uproar for the wholesale price passthrough, 
they were reimposed in August. That is my understanding. So 
there really wasn't much of a history to determine whether 
there was a price response.
    Mr. Wood. What we know is that during certain hours of the 
day when demand is low and supply is adequate, that there was 
not a significantly large drop in prices during those hours. 
And from that, we extrapolate that--and also during days of the 
week and of the month and so forth when similar conditions take 
place, we saw a price plateau. We didn't see peaks and valleys 
anymore.
    Mr. Barton. But I think Commissioner Schriber's point in 
his testimony that we really don't have demand meters, I don't 
know the exact buzz word but--or a person knows what they are 
paying at 4 o'clock in the afternoon, they know that on a 
monthly basis they get a bill and it gives an average kilowatt 
per hour price, but they don't know that at 4 o'clock on August 
10 that they should have been charged $20 a kilowatt hour? So 
we have really not given the price signal to the market at a 
time when it would mean something, in my opinion. That is just 
an opinion, though.
    Mr. Walden. I share your opinion, because I don't think 
some of our industries are looking at an hourly basis. They are 
looking over the next 6 months. They are seeing projected rate 
increases for Bonneville to be out in the spot market at 60 
percent or 300 percent, or something like that, and trying to 
figure out if they should plant their crops, because it is 
going to cost 2 or 3 times as much to pump the water later this 
year. So I do--I mean, I believe there is a relationship there 
between demand and supply as it relates to price. It may not be 
something that is quick and direct on a daily or hourly basis, 
felt by the consumers, but people are sure planning that way as 
we go down the road.
    Let me touch on two other questions. One is when the 
Federal Government mandates that suppliers with surplus send 
power to utilities that may be bankrupt, who ultimately should 
be responsible for that cost if those utilities can't pay it?
    Mr. Wood. If the prices that are being charged in the 
wholesale market are not just and reasonable, then the just and 
reasonable portion should be the responsibility of the ultimate 
users of the retail ratepayers. But the remaining amount should 
be disallowed and should be refunded by the generators or 
marketers who are charging the unjust and unreasonable prices.
    Mr. Walden. Okay. We can argue about that part of it, but 
the specific question is, when the Clinton administration, and 
followed by the Bush administration for a few weeks, continued 
the order mandating that some suppliers send power to companies 
they might not otherwise have thought were creditworthy, are my 
ratepayers going to get stuck with that bill if those utilities 
in California can't pay for it?
    See, I look at that as kind of a takings. I am telling you, 
you ought to send your credit card to my Chairman here and he 
may use it and not be able to pay it back, and tough luck; and 
it is your family that is going to pay the bill. And that 
concerns me that in the Federal law that allows for that to 
occur. In an emergency situation maybe the ratepayers in a 
completely unaffected State in terms of deregulation in 
California get stuck paying the bill while your ratepayers have 
a rate cap.
    Mr. Wood. All I can say is that there are many unjust 
distortions that start occurring once we start tracing the 
consequences of this dysfunctional market. I wouldn't--I don't 
want to get argumentative and I wouldn't argue really with your 
conclusions.
    Mr. Walden. Let me just conclude with one other comment, 
because in your colloquy with my colleague from California, you 
seemed to be saying that the environmental restrictions laws on 
the book had no impact on power supply or price. Is that--I 
mean, that is what I thought I heard.
    Mr. Barton. This will have to be your last question. We 
have let you go about a minute and a half over. Let the 
gentleman answer the question and we will go to Mr. Strickland.
    Mr. Wood. Yes, that is my conclusion. We have sited and 
seen constructed over the last couple of years quite a number 
of power plants in California. The process may take somewhat 
longer than this in some other States, but I don't view this as 
an obstruction. It may change the planning.
    Mr. Walden. To either price or supply?
    Mr. Wood. That is right.
    Mr. Walden. Could I just have a slight follow-up since I 
yielded to you?
    Mr. Barton. Oh, all right. Very slight.
    Mr. Walden. From the perspective of the hydrosystem, 
clearly the Endangered Species Act plays a role in price and 
supply in water years. I am not arguing you blow that out, but 
I just don't get it, how you can say those laws don't have an 
impact. Do you care to respond?
    Mr. Wood. Between 1990 and 2000 the State of California 
added 2,670 megawatts of new capacity. The surrounding States 
also added new generation. The State of Washington added over 
1,300; the State of Oregon, 890.
    The planning horizon for these things is a longer time than 
for many other products. I don't really quibble with your 
conclusions. It is a very dysfunctional, distressing situation. 
I am concerned about the hydro-issues in the Northwest as well.
    Mr. Walden. Thank you, Mr. Chairman.
    Mr. Barton. We now go to the gentleman from Ohio, Mr. 
Strickland, for 7 minutes.
    Mr. Strickland. Thank you, Mr. Chairman. I will try not to 
use my 7 minutes, but I note that approximately, I think, 52 
percent of the electricity generated in this country is 
generated through coal; another approximate 20 percent or so is 
generated through nuclear power. I note that California and the 
West is heavily reliant upon hydropower, and because of 
rainfall and the snowpack and so on, they may be experiencing 
difficulties in the future.
    The question that I would like to address to the four of 
you is this: Do you think that we should have Federal policies 
that encourage diversity of fuel in order to make sure that no 
one region of the country certainly does not become overly 
dependent upon a single source of electricity?
    Mr. Wood. Yes.
    Mr. Quain. Yes.
    Mr. Schriber. Yes. However, I think that the market in and 
of itself is going to dictate a lot. We have heard and heard 
and heard about the woes of natural gas, and I think that in 
and of itself will cause a lot of people to move away from 
natural gas. So perhaps the national policy might be to direct 
industries and direct us to adhere more to the messages that 
the market is sending us.
    Mr. Travieso. I would be concerned about that kind of a 
policy because whenever we have done that in the past we have 
made a mistake. It seems to me that if you picked one fuel, 
let's say you picked coal, we really don't know what is going 
to happen with the price of coal or the use of coal. Nor do we 
know whether the market would want to build a baseload plant. 
That is really--what is happening in the marketplace, the 
reason these plants are natural gas plants, is because they are 
the most efficient plants that the developers want to build. So 
the market has caused them to use this particular kind of fuel.
    I do think that where there is a problem with competition 
and market entry, like with renewables, and where we want to--
if we had a national policy that favored the use of renewable 
energy, then maybe Congress should do something about that.
    Mr. Strickland. Okay. There are four States represented 
here. Would you share with me what percentage of the 
electricity in your individual States is the result of nuclear 
power, roughly?
    Mr. Wood. In California, the proportion is about 7 percent 
of the annual average load.
    Mr. Strickland. Pennsylvania?
    Mr. Quain. Pennsylvania is 36 percent.
    Mr. Strickland. Ohio.
    Mr. Schriber. Congressman Strickland, I am trying to 
calculate real quick here. With our nuclear plants that I can 
think of, we are probably looking at less than 10 percent.
    Mr. Travieso. I don't have the exact number. I know it is 
40 percent above our gas and electric, which represents a 
significant percentage of the total generation. So it is 
probably about 20 to 25 percent.
    Mr. Strickland. The reason I ask you is I am particularly 
concerned about nuclear power and I don't want to be a Johnny 
one-note here, but the fact is that I believe we are entering 
into a period in this country where Russia has their finger on 
our national light switch. And the fact is that we are 
importing a huge percentage of the fuel necessary for our 
nuclear power plants from Russia and attempts are underway to 
import even more of that fuel, while at the same time our 
domestic capacity to create this fuel is in danger of being 
obliterated, I believe.
    There is a report that was done by the Nuclear Regulatory 
Commission last fall, a report that I have been trying to get a 
redacted copy of, Mr. Chairman, so that all members of this 
committee and members of this Congress can know what it says, 
and thus far the NRC has refused to provide that information.
    But we cannot afford to allow ourselves to enter a 
situation where some 20 percent of our electricity output is 
controlled by a foreign country.
    I just thank this panel. I think you have helped us all to 
become more knowledgeable about a whole complex of difficult 
issues. With that, I will return my time.
    Mr. Barton. Thank you, Congressman.
    I recognize the Congressman from Nebraska, Mr. Terry, for 7 
minutes.
    Mr. Terry. Thank you.
    Commissioner Wood, you were appointed by the Governor. I am 
unfamiliar with your----
    Mr. Wood. In California, the Governor appoints 
commissioners, who are then confirmed by the State Senate.
    Mr. Terry. You were appointed when?
    Mr. Wood. I took office in June 1999.
    Mr. Terry. You are a Davis appointee?
    Mr. Wood. Yes.
    Mr. Terry. Have you heard of the regional clean air 
incentives market, RECLAIM?
    Mr. Wood. Yes.
    Mr. Terry. In layman's terms for us, could you explain what 
RECLAIM is?
    Mr. Wood. Probably not real well. But there are emission 
quotas or permits that were granted to various industrial 
facilities, and as those facilities reduce their usage or go 
out of business or whatever, then those quotas can be traded. 
They are useful in allowing----
    Mr. Barton. Will the gentleman yield? If I were to 
characterize the RECLAIM program as a State program to reduce 
NOX emissions by 80 percent from current levels over 
a 5-year period, and it creates an emission trading credit 
system; if a plant wants to continue to operate above its 
certificated emissions, it can purchase on the open market a 
NOX trading credit for so much a ton, would you say 
that is a fair assessment of the program?
    Mr. Wood. I would so stipulate, yes.
    Mr. Terry. Just another way of saying it. Thank you, Mr. 
Chairman.
    Mr. Barton. Just to expedite the process.
    Mr. Terry. We will get into that aspect, as well.
    Now, as I understand it, the vast majority of power 
generation, the power plants in California are 30 years old, 40 
years old, and probably have a great deal of NOX 
emissions, so the payment of these tax credits, when they 
exceed the emissions, is an inherent part of the process.
    Are you aware, during the last year that this crisis has 
evolved, what has happened to the price of those trading 
credits?
    Mr. Wood. This is another one of those spot market issues. 
On the spot market, the prices went up considerably, although 
most of the generators, to my understanding, do not rely upon 
spot market purchases of those credits.
    Do you know the price, the fluctuation of the price of the 
credit from, let's say, year 1999 to December of 2000?
    Mr. Wood. I heard testimony back in September at hearings 
that we held in San Diego, and what sticks in the back of my 
mind is we saw fluctuations of on the order of tenfold or more. 
But I am not sure that is true.
    Mr. Terry. Generally the price of the credit is about $1 
per pound----
    Mr. Barton. Per ton.
    Mr. Terry. Per ton.
    Mr. Barton. It is per pound. I am wrong.
    Mr. Terry. Fluctuated to as high as 50. And the average in 
December 1999 was $45, so $45 times an average.
    Now, that certainly, as I understand the system, and maybe 
you can set me straight, but when the generator has to pay in 
essence a penalty for exceeding the NOX, what the 
State allows for nitrogen oxide to be placed into the air, a 
$45 increase, this is passed on to the cost of production, and 
then through the pipeline to the consumer? At least, someone 
has to absorb that cost.
    Would you agree with that scenario?
    Mr. Wood. I believe there are two processes working here. 
One is the permits for a certain amount of emissions, and the 
other is penalties paid when those are exceeded. This is not my 
area of expertise.
    In any case, the State, specifically the Governor, 
intervened in this situation last year and has, through a 
negotiated process, created accommodations for generators, 
because they had to run in order to maintain reliability of 
this system, that exceeded their emissions quotas.
    Mr. Terry. I understand that. It is not labeled a penalty, 
by the way. You purchase this credit to exceed.
    So this is all getting down into the issue of whether any 
environmental laws from the State of California in any way 
affect the price.
    Are you saying, then, that the generator having to pay $1 1 
month and then up to $45 or $50 per pound for this credit is 
not impacting price?
    Mr. Wood. It affects price on the margin. But the problem 
is that even with this particular issue included with the high 
gas prices, we are not seeing any correspondence between 
underlying costs and prices in the wholesale market. If we 
were, then your conclusion, I think, would be true, that the--
--
    Mr. Terry. If a study showed that just in December of 2000, 
that the necessity to pay the additional costs for these 
credits added anywhere from $500 million to $2 billion to the 
cost of power, you would refute that study, that conclusion?
    Mr. Wood. From $500 million to----
    Mr. Terry. Yes.
    Mr. Wood. It certainly did not add that much to the actual 
cost of generation. If you have a marginal pricing structure, 
then by raising the marginal cost of the least efficient 
producer, then you could produce a result like that in the 
market, I suppose.
    Mr. Terry. Thank you. I yield back.
    Mr. Barton. Thank you, Congressman.
    Congressman John is recognized for 7 minutes.
    Mr. John. Thank you, Mr. Chairman. I have two brief 
questions, one of which may seem as a follow-up to my colleague 
from Ohio, Mr. Strickland. It deals with fuel diversity.
    We talked about California, and Mr. Strickland talked about 
nuclear energy, but I would like to take it one step further. 
Do you have the numbers, the figures in front of you, that show 
the percentage breakdown of the fuel types used by electricity 
generators to supply the State of California?
    I want to ask the witnesses from California and 
Pennsylvania to see if there are any lessons that we may learn 
in this area of fuel diversity.
    Mr. Wood. As it happens, I do have those figures. I didn't 
do it in preparation for this, as a matter of fact, but I have 
a slide that shows this.
    These are average proportions based on experience over an 
entire year. It changes quite a bit from season to season.
    But about half, 49 percent, is oil and gas, which is almost 
all natural gas. Renewables constitute 6 percent, coal about 1 
percent, geothermal 5 percent, hydroelectric 24 percent, 
nuclear 7 percent, and then imports 8 percent.
    Again, at times imports are much higher than that, and at 
other times imports are almost nonexistent. The imports include 
various hydro, as well as coal.
    Mr. John. Okay.
    Mr. Quain?
    Mr. Quain. If memory serves me, it is 57 percent coal, 36 
percent nuclear. The last percent is a combination of oil, 
natural gas, and a little bit of hydro, some renewables.
    Mr. John. Looking at those percentages where gas is a 
prominant generator in both of your States, somewhat, coal 
being more in Pennsylvania and hydro being a player in 
California.
    Are there any conclusions that we can draw about fuel 
diversify or maybe we should diversify a little more?
    Are there any conclusions that you could see?
    Mr. Travieso. Yes, which is why I answered your earlier 
question in one word, yes. Fuel diversity to me is a hallmark, 
just like financial diversity is a hallmark for personal 
finances. You want to be able to put on and shut down 
facilities at points in time when, as compared to other fuels 
that are out there, other generators are there, that are high. 
So at a point in time when natural gas is high and coals are 
low, you burn less natural gas for generating purposes and 
increase your coal. The same thing with nuclear.
    But if you don't have a diversity, you can't take advantage 
of the cycles of the marketplace as the economy drives one 
particular fuel over another.
    Mr. Barton. Will the gentleman yield?
    Mr. John. Yes.
    Mr. Barton. I want to ask the chairman of the PUC in 
Pennsylvania, you mentioned a little bit of supply of renewable 
in your supply equation. But my understanding is on the 
consumer side that a fair number of Pennsylvania consumers have 
opted for the green consumer option.
    Do you know offhand what percentage of your switchers have 
switched to the so-called green--retroactive.
    Mr. Quain. I don't know the exact number. I would be happy 
to give that to you offline, because I think it might be 
proprietary. But we had virtually no green power in 
Pennsylvania before electric deregulation. Now some of the 
highest energy in the country was produced in the Philadelphia 
area. We have a lot of consumers who are paying even higher 
than those rates just to say that they are using green power.
    Mr. Barton. But that is a proprietary number?
    Mr. Quain. The number of customers, I believe it is. But I 
would be happy to give it to you.
    Mr. Barton. We don't want to get proprietary information, 
but any generic----
    Mr. Quain. It has been one of the real thrills. When we did 
this, we knew there would be consequences we could not foresee.
    I never dreamed, for a PICO customer paying some of the 
highest rates in the country, that there would be many who 
would be willing to say they would pay more to say they are 
burning environmentally compatible energy.
    Mr. Barton. These are some of those rich Republicans in the 
Philadelphia suburbs that want to be green, is what it seems to 
me like.
    Mr. John. I would ask the gentleman, how complex and 
flexible can you be in turning off and on, as you mentioned 
earlier, the market supply, when the gas prices are up? Can you 
turn that off and on? Help me----
    Mr. Quain. With certain facilities you can. You have what 
you call baseload facilities, and then you have peaking 
facilities. That is why a grid like PJM is a very efficient and 
effective way, not only for reliability but for pricing 
purposes.
    When you look at low curves, in the morning when we are all 
asleep, the load is very low and you are burning the cheapest 
power to meet that demand. As people get up and start to turn 
on their ovens and start to ride the trains to work and the 
manufacturing facilities are starting to tune up, you can see 
that load grow. So as that load grows, you continually put on, 
incrementally, the more expensive generation to meet that 
demand. That is why we got into the conversation over here 
about time-of-day rates.
    So yes, that is exactly what happens. By the time you hit 
your peak, you are stressing the system to the extent that all 
generators that are up and running properly are being used. If 
you can bring down that demand to a reasonable level and 
flatten it out, then the result is you are burning less, more 
expensive fuel, and still meeting the demand that you need with 
less expensive fuel.
    Mr. John. I want to get to my next question here. There is 
a story in the Los Angeles Times today, the headlines are, 
``Impatience with State's Approach to Crisis Grows.'' It is 
talking about the legislature and the Governor.
    I guess one of the scenarios that is a possibility is for 
the State of California to take over the transmission grid in 
exchange for paying billions of dollars to the utilities to 
help them refinance all of their debts.
    I would like your comment this scenario. I would like to 
know, is that a good thing, a bad thing? Is that just a Band-
aid, a quick fix, or can the State actually handle the grid and 
the operation of it by owning it?
    I am just concerned about where this is going. Maybe just a 
brief comment from you. Is that a viable solution?
    Mr. Wood. Of course, I have personal opinions about it, but 
I would like to ask if I could take a pass on that, 
specifically because the issue is before the legislature and 
the Governor right now. I am not an elected official in the 
State. I think it would be appropriate for me to stay out of 
that debate until I am called upon by our State elected 
officials.
    Mr. John. Okay. That is all I have, Mr. Chairman.
    Mr. Barton. Thank you.
    The gentleman from Kentucky, Mr. Whitfield, for 7 minutes.
    Mr. Whitfield. Thank you very much.
    Mr. Wood, you had indicated that in California, that 1 
percent of the electricity produced is produced by the use of 
coal. Is that correct?
    Mr. Wood. That is the in-state proportion, that's right. We 
do get quite a bit of coal-fired power from outside of the 
State.
    Mr. Whitfield. About 20 percent of your demand is met by 
outside-produced power, is that correct?
    Mr. Wood. The imports are about 8 percent, on average.
    Mr. Whitfield. 8?
    Mr. Wood. On average. As I said, at times it is quite a bit 
more than that.
    Mr. Whitfield. I read some article a while ago that said 
that you were importing about 20 percent of your total demand.
    Mr. Wood. The numbers that I am providing are historical 
data, and it very well may be that certain things have changed. 
I am sorry, I don't have really an exhibit to offer here. I 
could get it for you if you would like.
    Mr. Whitfield. That is all right. In Pennsylvania 57 
percent is produced by coal?
    Mr. Quain. That's right, Congressman. Frankly, I would like 
to see more, if we could make it comparable with the clean air 
quality standards.
    Mr. Whitfield. What about in Ohio?
    Mr. Schriber. Much more than 57 percent. I can't tell you 
the exact number.
    Mr. Whitfield. Maryland?
    Mr. Travieso. Similar to Pennsylvania. The majority of our 
electricity is coal-produced.
    Mr. Whitfield. Mr. Wood, when this bill was passed in 
California, many people refer to it as restructuring rather 
than deregulation because a lot of the goals of deregulation 
were never met. But the utilities were required to divest 
themselves of 50 percent of their generating capacity, is that 
correct?
    Mr. Wood. Of their fossil generating capacity, yes.
    Mr. Whitfield. Okay. And the other 50 percent was required 
to be sold to the power exchange, is that correct?
    Mr. Wood. All of their retained generation, which it turned 
out they actually divested 100 percent of their fossil 
generation, but they retained hydro, nuclear as well as some 
long-term contracts and out-of-state produced power that was 
utility controlled. That was required to be sold into the power 
exchange, yes.
    Mr. Whitfield. Okay. And then they were required to buy 
back from the power exchange?
    Mr. Wood. That's right, all of their needs to serve their 
domestic load.
    Mr. Whitfield. And any demand that you could not meet from 
power generated within the State, you obviously had to go out 
of the State to buy?
    Mr. Wood. That's right.
    Mr. Whitfield. And it is your position that part of the 
problem is that these wholesale prices were unjust and 
unreasonable?
    Mr. Wood. That is right. And not just we were paying, but 
prices that existed throughout the Western Interconnect in the 
wholesale market.
    Mr. Whitfield. It is my understanding that the power 
exchange also was buying power from municipally owned or 
government-owned utilities in California.
    Mr. Wood. That's right.
    Mr. Barton. Will the gentleman yield?
    Mr. Whitfield. Yes.
    Mr. Barton. I know you are just one commissioner and you 
are not the government of California, but if in fact it was the 
political wisdom of the powers that be in California that these 
wholesale rates were unjust and unreasonable, why did they not 
immediately let people go outside the power exchange and enter 
into bilateral contracts, enter into long-term contracts, and 
even, heaven forbid, go to the New York Mercantile and begin to 
hedge against these prices?
    If in fact you really believed that the prices were unjust 
and unreasonable, why did that not happen until effectively the 
FERC came in, I believe in December, and basically threatened 
to abolish the power exchange if California government did not 
do it?
    Mr. Wood. The first indications of market dysfunction 
started to show up on May 22, but that was just a series of 
peaks. We didn't actually see sustained high prices until the 
first week in June. We started to recognize that we had a 
problem by late in June, and by August 3 we had considerably 
expanded the ability of the utilities to enter into long-term 
contracts.
    So that is a remarkably fast turn-around for regulators in 
our State, and I think for public officials almost anywhere, 
frankly.
    Mr. Barton. By definition, if you really have a market, a 
willing buyer and a willing seller, by definition that price is 
just and reasonable or the buyer would not buy and the seller 
would not sell.
    I am just saying that is just pure Economics 101, this 
whole concept of just and reasonable, when you look at the 
facts. There have been several studies by the FERC staff, and I 
understand even in California by some of the regulatory 
authorities. They don't come to the conclusion that--obviously 
the prices were high, but the prices were high because there 
was a huge demand, and the price naturally did not get through 
to the consumer, so the demand increased.
    You had an unregulated wholesale market but a regulated 
retail market, which I might stipulate might be unjust and 
unreasonable State legislation.
    Back to the gentleman from Kentucky.
    Mr. Whitfield. I agree with you, Mr. Chairman.
    I was reading an article in the National Journal, and it 
was talking about the fact that many people in California feel 
more power should be generated by government-owned utilities, 
by municipally owned utilities, and that public power is the 
way to go.
    Yet, when we do the analysis, and someone's testimony that 
I read for this hearing pointed out that these State agencies 
and local water authorities in California have been selling 
excess power to the power exchange, and the State water 
project, they said, for example, made $23, $24 million in 
profit from selling power to the power exchange. Los Angeles 
Municipal Authority made close to $200 million in profits by 
selling power to the power exchange. Even the city of Redding 
earned over $8 million, and the local municipalities using the 
preference power were buying power from Bonneville Power 
Administration and selling that at 5 to 10 times what they 
bought it for, and that Bonneville Power itself in the year 
2000 made $207 million in profits, a 116 percent increase over 
what they had made the previous year.
    So it looks like to me that even the public power utilities 
are making money on your situation as well. The thing that 
particularly seems unfair about this, unlike the State's 
private utilities, the munis were not required to sell off 
their generation plants, were not forbidden to sell off long-
term contracts to hedge against price increases, and they had 
the option of buying from and selling into the power exchange, 
while not being required to do so.
    So this argument that public power is the way to go--it 
seems to me there is really not any rational reason that we 
should believe that, with the advantages that they have under 
this deregulation law in California.
    Would you agree with that, or not?
    Mr. Wood. The behavior of the municipal and government-
owned utilities in the California market was they behaved 
similarly to private companies, for profit maximization.
    What creates the attractiveness of entities like Los 
Angeles Department of Water and Power, which is the country's 
largest municipal, is that they did not in fact deregulate in 
the sense that the other utilities did. They didn't divest 
their generation capacity; they kept adequate generation, they 
retained regulated retail rates, and as a result of that, rates 
in that service territory remained stable and reasonable. The 
utility itself was not put in financial jeopardy.
    Whether that is an argument for municipal power or just a 
general argument against the way we went about deregulation for 
the investor-owned utilities, people can draw their own 
conclusions.
    Mr. Whitfield. You are saying the investor-owned utilities 
were not required to divest, but they chose to?
    Mr. Wood. They were required to divest a large part of 
their generation, but they considerably exceeded what they were 
required to do.
    Mr. Whitfield. The munis were not required to divest?
    Mr. Wood. They were not. There was an internal debate. 
There was a very close call. Originally the mayor of Los 
Angeles wanted to divest their generation, but the city council 
informally prevailed and they held onto all of their 
generation.
    Mr. Whitfield. It is true that Governor Davis----
    Mr. Barton. This will have to be your last question.
    Mr. Whitfield. You took my time.
    Mr. Barton. I took 1\1/2\ minutes of your time.
    Mr. Whitfield. But the Governor has issued some abatement 
orders, and he is doing executive orders that do not require 
bringing these utilities online to meet all the existing 
environmental and regulatory requirements, is that correct?
    Mr. Wood. I am not sure which utilities you are referring 
to. Are you referring to new power plants?
    Mr. Whitfield. Yes, new power plants.
    Mr. Wood. I believe in a general way all of the 
requirements remain. However, the permitting processes have 
been dramatically speeded up. He has put together what is 
called a green team, which helps to expedite these processes 
and cut through government red tape.
    Mr. Whitfield. Thank you.
    Mr. Barton. The gentleman from Massachusetts, Mr. Markey.
    Mr. Markey. Thank you, Mr. Chairman.
    Mr. Barton. Seven minutes.
    Mr. Markey. Thank you, Mr. Chairman.
    Last fall the FERC conducted an investigation into the 
California situation. That investigation found the California 
electricity market was ``seriously flawed and caused unjust and 
unreasonable rates for short-term energy.'' The FERC also found 
that California's energy regime provided ``an opportunity for 
sellers to exercise market power when supply is tight.''
    What actions do you think FERC and this committee should 
take when a State or regional electricity market becomes 
dysfunctional, as California has, and should we give FERC 
stronger market power authority, including, one, authority to 
mandate participation in regional transmission organizations, 
and to assure RTOs are fairly structured; two, enhance merger 
review authority, including the power to review mergers of 
utility holding companies, generating companies, or power 
marketers; three, authority to assure there is open and 
nondiscriminatory transmission access and an ability to 
interconnect to transmission systems; and four, enhance 
authority to take action against bad actors who game the 
system, manipulate prices, or cross-subsidize unregulated 
businesses using monopoly transmission or distribution assets?
    Dr. Schriber?
    Mr. Schriber. Thank you, Congressman.
    First of all, I believe it was with respect to the RTOs, 
the regional transmission organizations, that should clearly 
have been a FERC endeavor, including open transmission access, 
because that after all deals with the regional interstate, if 
you will, transmission of electricity.
    Mr. Markey. Do you agree with that, sir?
    Mr. Travieso. Yes, that is NASUCA's position.
    Mr. Markey. Do you agree with that, Mr. Quain?
    Mr. Quain. Yes.
    Mr. Markey. Mr. Wood?
    Mr. Wood. No.
    Mr. Markey. Mr. Schriber?
    Mr. Schriber. Merger review, I believe the States should 
maintain merger review. In general, if market power is of great 
concern within a State because of the outcome of a merger, that 
should be something----
    Mr. Markey. You don't think the FERC should have merger 
review?
    Mr. Schriber. No.
    Mr. Markey. Mr. Travieso?
    Mr. Travieso. We disagree with that. This is a regional 
market. These are regional companies, if not national 
companies. We are very concerned about market power, and 
particularly the relationship of gas and electric companies. We 
would support merger review.
    Mr. Markey. Mr. Quain?
    Mr. Quain. I think forecast merger authority. I don't know 
to what extent.
    Mr. Markey. Enhanced----
    Mr. Quain. I don't think so. I think that is primarily a 
State action. We do look exactly at that, and have held 
hearings and made conclusions with regard to market power.
    Mr. Markey. Mr. Wood?
    Mr. Wood. I believe FERC should have enhanced merger review 
authority, but that this should not preempt the States to also 
make decisions.
    Mr. Markey. Very helpful.
    Next, Dr. Schriber?
    Mr. Schriber. I am not sure what the next was, sir.
    Mr. Markey. The next one would be to assure open and 
nondiscriminatory transmission access.
    Mr. Schriber. That, too----
    Mr. Markey. And interconnection.
    Mr. Schriber. Interconnection would be intimately related 
to the regional transmission organization issue, and therefore 
would be a FERC endeavor.
    Mr. Markey. Do you agree with that?
    Mr. Travieso. NASUCA supports that.
    Mr. Markey. Mr. Quain?
    Mr. Quain. Yes. But they already have adequate authority on 
that. I am not sure they need more.
    Mr. Barton. Would the gentleman yield?
    Mr. Markey. Yes.
    Mr. Barton. The two chairman of the PUCs, they don't think 
their State should have any authority on transmission issues 
and siting issues, transmission lines?
    Mr. Schriber. Absolutely, siting.
    Mr. Quain. Siting, sir, yes. But we don't currently have 
jurisdiction over transmission. We look at it and work with the 
FERC on it, but we do that through a collaborative process, and 
it works.
    Mr. Schriber. The siting is one issue, the economics is 
another.
    Mr. Markey. Mr. Wood?
    Mr. Wood. At least with respect to the western States, 
there should be considerable Federal deference to voluntary 
cooperative efforts among the States.
    Mr. Markey. What if there is no voluntary cooperation?
    Mr. Wood. I think there should be some minimal Federal 
standards for open transmission access, although I believe that 
we already have workable processes for a regional transmission 
organization.
    Mr. Markey. Sometimes States don't want to cooperate with 
other States, though. Have you noticed that?
    Mr. Wood. Yes, but we have a history prior to our 
deregulation of close cooperation among the western States.
    Mr. Markey. We are not talking about before deregulation, 
we are talking about after deregulation. How has it been 
working since then? A little bit more fraternal tension?
    Mr. Wood. As I indicated in my testimony, we are working 
toward improving cooperation, for obvious reasons.
    Mr. Markey. We won't call it a dysfunctional family, we 
will just say you are going through a difficult time with other 
family members in the region. Sometimes you need someone to 
move in. I'm just trying to stay within my time.
    Mr. Barton. It is so delightful to see Congressman Markey 
trying to stay within the time.
    Mr. Markey. I am trying to stay on time, Mr. Chairman.
    Finally, on the enhanced authority to deal with the bad 
actors, the gaming of the system, manipulating of prices, the 
cross-subsidies, should the FERC have enhanced power to be able 
to deal with those issues, since they by definition in many 
instances go across State lines? Mr. Travieso?
    Mr. Travieso. We agree. We don't think they have adequate 
powers now. We think they should be enhanced.
    Mr. Markey. Dr. Schriber?
    Mr. Schriber. Within the State we have plenty of authority. 
We should use that authority.
    Mr. Markey. How about across States lines when they are 
gaming, so you can reach the bad actors?
    Mr. Schriber. Gaming is something created by the market. I 
am not sure it is irrational behavior.
    Mr. Markey. Can you reach all the cross-subsidization of 
unregulated business issues within your own State, or do you 
need any outside long arm reach?
    Mr. Schriber. Within our own State we have rules of conduct 
of all players in the electricity market, even those that are 
unregulated.
    Mr. Markey. Mr. Quain?
    Mr. Quain. I agree with Dr. Schriber again, we have 
adequate authority in the State. I think that is where it 
belongs. If there is criminal activity, there are laws on the 
books that exist already with regard to antitrust, et cetera.
    Mr. Markey. Mr. Wood, enhanced FERC authority?
    Mr. Wood. In the wake of divestiture, we do not have that 
authority in the State anymore, and I think FERC has 
considerable authority which they have so far chosen not to 
exercise.
    But I would strongly support additional authority, as well 
as direction from Congress.
    Mr. Markey. Dr. Schriber, Mr. Quain says there is already 
adequate authority at the State level. You have said you don't 
have adequate authority at the State level, it is Federal 
level, and you don't think it should be at the Federal level 
because it doesn't have to be at the Federal level, and you are 
saying it should be enhanced at the Federal level because you 
don't have it at the State level, which leads to a rather 
disconcerting set of circumstances.
    Mr. Barton. That is why we are holding these hearings.
    Mr. Woods. Congressman, just briefly I prefaced my comment 
saying in the wake of our divestiture, had we not seen the 
divestiture of these plants, we would have retained 
considerable State authority. That may be the case in other 
States.
    Mr. Markey. Okay.
    Thank you, Mr. Chairman. I appreciate your giving me this 
time, and I tried to reciprocate by staying within your very 
wise time limits.
    Mr. Barton. Thank you. All joking aside, it is obvious that 
Congressman Markey knows the issue. He has been on this 
committee a long time. Those were excellent questions. Those 
are some of the key questions we will address as we move toward 
structuring a restructuring bill.
    Mr. Markey. Praise from Caesar. Thank you. I appreciate it.
    Mr. Barton. An acknowledgment of the ability of the 
gentleman from Massachusetts.
    Another very distinguished and able member of this 
subcommittee, the Mr. Cox of California, for the last round of 
questions to this panel.
    Mr. Cox. Thank you, Mr. Chairman. I have to say, despite 
all of the horror stories coming out of my State in California, 
it is a pleasure to hear the stories from other States, and it 
is good to know that it does not have to work the way it worked 
in California.
    I am particularly pleased to hear what is going on in 
Pennsylvania, where customers have been given a meaningful 
choice between electricity companies, new companies have been 
encouraged to enter the market, something that has not happened 
in California, prices have gone down, people, according to 
consumer surveys, are happier with their service than anyplace 
else in the country.
    So I think we would do well today to spend a little bit of 
time eliciting from Mr. Quain as much as we can about how not 
to make even worse the problems we have in California.
    Let me start by trying to clear the air on something that 
seems unwilling to go away. That is this notion that what 
happened in California was deregulation.
    It is so vastly different than what has happened in these 
other States, where we have had competition, we have had 
consumer satisfaction, we have had prices go down, we have had 
supplies increase, that I just want to put it straight to the 
representatives from other States.
    In 1996, the California legislature mandated a 10 percent 
reduction in retail prices. It imposed that price cap 
effectively until 2002. By law, it created a government-run 
monopoly power exchange that prohibited any utility from buying 
power on the open market. It outlawed market contracts for 
electricity beyond the spot market. It specifically outlawed 
forward contracts. It outlawed any market transactions between 
utilities and power generators. It forced utilities to sell 
significant portions of their power generation.
    It did a lot of other dumb things, too, to prevent people 
from coming in, or at least to discourage them from coming in, 
such as saying that you have to buy a new meter to put on your 
house at the expense of hundreds of dollars if you are 
interested in switching.
    For all of those reasons, we should not be surprised, not 
only at what is going on in California, but also that only 2 
percent of retail customers ever experienced anything like 
changing.
    So let me put the question based on that premise: Is that, 
in your view, deregulation, or is that just restructuring the 
way things work? I will put it to each member of the panel.
    Mr. Travieso. In Maryland, we did No. 1 and we didn't do 
any of the other ones. There is a statutory rate reduction. We 
didn't negotiate a 6\1/2\ percent rate reduction. We do have 
price caps which last between 4 and 8 years. We all thought 
that was important. Our legislature, our Governor, thought that 
was important.
    Mr. Cox. I appreciate that. All I am asking, I think it 
should go without saying that if you have price controls in 
place, that you have regulation. That can be good, that can be 
bad. We can talk about that. But we should not be mistaken 
about what it is. It is a regulation.
    Mr. Travieso. It is a regulated rate, and we wanted that.
    Mr. Cox. Right.
    Would you consider what California did to be regulation, or 
its opposite?
    Mr. Travieso. It is a mix. It is a mix.
    Mr. Cox. Specifically, the things that I outlined, are 
those regulations?
    Mr. Travieso. Those are regulations. Yes, sir.
    Mr. Cox. They certainly seem to me to be precisely that.
    Dr. Schriber?
    Mr. Schriber. At the risk of sounding somewhat absurd, I 
would say it is regulated competition. It is purely regulated, 
and to some degree competitive, but mostly regulated.
    Mr. Cox. You are describing now California.
    Mr. Schriber. California.
    Mr. Cox. I think--I will give you a moment to explain. What 
I am trying to understand is whether it is deregulation.
    Mr. Schriber. It is absolutely not deregulation, it is in 
my mind a restructuring, an attempt to impose a competitive 
market given constraints that are regulated.
    Mr. Cox. All right.
    Mr. Quain?
    Mr. Quain. It is definitely not deregulation. I am not sure 
how I would characterize it.
    But let me add, none of us are purely in a deregulated 
market at this point. Stranded investment recovery is not 
deregulation, either. Neither are price caps. What I think the 
challenge is, is how you move from a monopoly environment to a 
purely deregulated environment. That is a period of transition, 
and States have handled that differently.
    Mr. Cox. How would you compare your State with California 
on the spectrum of progress from a purely regulated monopoly 
utility system to market competition that is not much 
regulated?
    Mr. Quain. We are encouraged by the benefits we have seen 
over the last 3 years, but we recognize, I think as has been 
said here by my friends from Ohio, that we need to be vigilant. 
We need to watch this thing and manage it for not just the next 
couple of months, but for years going forward, until we get out 
of the whole stranded investment recovery, we get out of rate 
caps, we get out of the upset between supply and demand, the 
wholesale market settles down, and we truly do have an open and 
competitive market.
    We have made tremendous progress, but we continue to have 
to work at it.
    Mr. Cox. Mr. Wood, you got appointed in 1999. You were 
previously on the record opposing what was done in 1996, so 
your fingerprints are not on this.
    How do you characterize it, regulation or deregulation?
    Mr. Wood. I think Chairman Quain's description was a good 
one, but one thing I would point out is that you could say 
similar things about virtually any of the State's restructuring 
efforts. Virtually every State that I am aware of has some sort 
of residual benchmark or default kind of regulated rate for a 
transitional period, which California had as well. We screwed 
up a lot of other pieces of it, which some other States 
hopefully have not done yet.
    Mr. Cox. Let me now talk about the future, because the 
future is coming very, very fast.
    In today's papers, there is more evidence that the State of 
California, the State government, is moving toward acquiring 
transmission.
    I wonder if I could hear from--Dr. Schriber, you seem 
interested in commenting. We will start with you.
    Mr. Schriber. Congressman, I think that the first thing 
California, in my opinion, needs to clean up is its financial 
situation. We are talking about billions and billions of 
dollars, and I can't imagine anyone wanting to transmit power, 
I can't imagine anyone wanting to provide power with the 
specter of not being repaid.
    So if the government of California is to participate, I 
would say it would be, first of all, to guarantee, to the 
extent that they can, a certain level of debt by which the 
companies in and of themselves can begin to operate.
    I don't think that in any shape or manner the State should 
take over any of the facilities involved with conveying of 
electricity.
    Mr. Cox. Mr. Quain, do you have a view on that?
    Mr. Quain. I have yet to see the government run much of 
anything that private industry cannot run better if the rules 
are set properly. They are clearly not in California.
    It would make me very nervous to be part of advising any 
State official in that environment to take over that process. I 
think you have to fix the underlying problems and get the 
market to help work with you, not against you.
    Mr. Cox. If the State of California ends up owning the 
transmission lines and if they are then leasing them to the 
utilities, it is pretty clear that the State of California is 
in the business. About 20 percent of California's electricity 
is now provided from other States, but the State of California, 
which is supposed to be the regulator, is also going to be the 
regulated entity.
    We saw in spades how this did not work in the Soviet Union. 
The worst environmental protection in the world existed in the 
Warsaw Pact countries, the horrible problems that we may never 
clean up in our lifetimes, because there was not an arm's-
length relationship between the regulated entity and the 
government that is supposed to be the regulator.
    How does California, as it gets into this business, avoid 
that conflict of interest? Maybe I should start with our 
consumer advocate who is here.
    Mr. Barton. This will have to be our last question.
    Mr. Travieso. I think there is a model that exists already. 
It is the municipal utility model, which has been very, very 
successful and has produced some of the lowest rates in the 
country.
    Mr. Cox. They are regulated by a different level of 
government.
    Mr. Travieso. They are regulated by a public service 
commission, but the model is, they actually own the 
transmission system. They own the delivery system and they own 
some generation, and they buy the rest through long-term 
contracts, and that system has actually worked.
    Mr. Cox. But you have got to have an arm's-length 
regulator, yes?
    Mr. Travieso. They are owners of both generation and 
distribution, so there is--they are like an old-fashioned 
vertically integrated utility.
    Mr. Cox. You don't need an arm's-length regulator?
    Mr. Travieso. We don't regulate municipal utilities. They 
are subject to their recall votes. They are just like elected 
officials who run the municipal utilities. They can be voted 
out of office if they don't do the right thing.
    Mr. Cox. They didn't do the right thing in California. The 
utilities, as we just heard from Mr. Wood, that were owned by 
the government ended up profiteering.
    As a matter of fact, municipals get preference on Federal 
power, and they bought Federal power at very cheap rates and 
they resold it at a markup of 500 percent to 1,000 percent, and 
profiteered from the situation.
    Is that not evidence that we need an arm's-length 
regulator?
    Mr. Travieso. From the consumer perspective, I would much 
rather have been a customer from the Los Angeles municipal 
utility than I would be in the situation that----
    Mr. Cox. Because they were exempted from the 1996 law. They 
didn't have to sell off their capacity.
    Mr. Travieso. Exactly. They performed the function just 
like a regulated utility would. They actually are proof in 
California that the regulated model works better than the 
deregulated model.
    Mr. Cox. Mr. Chairman, I think my----
    Mr. Barton. Not quite. What that proves is people that 
actually plan on a supply reserve sufficient to meet expected 
demand works well. We give the municipal authority of the city 
of Los Angeles great credit for having the foresight----
    Mr. Cox. To be exempted from the 1996 law.
    Mr. Travieso. That is what long-range planning is. That is 
what the utilities were required to do under the vertical 
integration.
    Mr. Quain. Can I add one thing? I am nervous about what my 
colleague is saying over here.
    My understanding of how regulation--how independent boards 
started in the first place is because these kinds of decisions 
did not lend themselves to the legislative process. They are 
difficult. You have to raise rates. They are unpopular. They 
are hard. They are not politically driven.
    If we all agree that even putting them in separate 
agencies, as I believe is not the best answer, we have to move 
even from that to something more competitive. Going back the 
opposite way has to be an absolute wrong solution.
    Mr. Cox. Mr. Chairman, I will just wrap up and observe that 
it has been said here by this panel that California needs to 
get its fiscal house in order, rather than take on these new 
liabilities. I think that we are kidding ourselves if we think 
we are protecting consumers by capping these rates in our 
State, in California, at the same time that the State 
government is spending $1 billion each month to go buy power in 
the spot market, and then prepares to issue these power 
purchase bonds which all these taxpayers are going to have to 
pay for.
    That $1 billion a month works out to about $50 per taxpayer 
in the State of California each month that is getting passed on 
directly to taxpayers. You can pay it as a citizen taxpayer or 
you can pay it as a ratepayer for electricity, but you are 
still paying for it.
    What we are doing I think is trying to mask what is 
actually going on and causing even further distortions of the 
market. So I am very, very concerned. I am very pleased that we 
have some good examples before us today that we can follow. I 
look forward to the next panel.
    Mr. Barton. Thank you.
    We want to release from purgatory this panel. I want to ask 
for the record, though, before I release you, my opening 
question asked for supply demand information in terms of 
capacity generation, both baseload and peak load. I would like 
each of my chairmen and my commissioner to get that for your 
respective States, and if it is possible, for you to get it for 
the State of Maryland. You are not an elected official or an 
appointed official, but if it is possible, we would like to 
have it from Maryland also.
    Mr. Travieso. Yes. I could get that for you, Mr. Chairman.
    Mr. Barton. I would also like to ask unanimous consent that 
we submit into the record a December 21 document from the 
California Energy Commission entitled ``Docket 000 Site 2,'' to 
request information from the California Energy Commission on 
some of these siting issues, and also I ask unanimous consent 
to put in the record a Congressional Research document entitled 
``Air Quality Issues,'' with specific emphasis on the 
reclaiming program in the State of California.
    Is there objection?
    Hearing none, so ordered.
    [The information referred to is retained in subcommittee 
files.]
    Mr. Barton. Gentlemen, thank you. We will probably have 
additional written questions for you for the record. We would 
ask that you reply in a timely fashion. We appreciate your 
attendance and your testimony.
    As they are leaving, we are going to have a 10-minute 
break. It is quarter 'til, so at 5 until we will reconvene, and 
we would like our second panel to be at the table at 1:55.
    We will recess for 10 minutes.
    [Brief recess.]
    Mr. Barton. I think our panel is available. Although I said 
five till, we will start a little bit early, and hopefully we 
will have other members in attendance.
    I want to welcome our second panel. Our first panel was the 
public sector. Our second panel is the private sector. These 
are the people that have either done business or attempted to 
do business in some of the States that we have looked at today, 
and we in addition have an academic expert who is from 
California who has looked at some of these issues and lived 
some of these issues, so to speak.
    We are going to start with Mr. Peter Esposito, who is the 
Vice President of Regulatory affairs, Dynegy. We welcome you to 
the subcommittee Mr. Esposito. Your testimony is in the record 
in its entirety, and we will welcome you for 8 minutes to 
elaborate on that.
    Mr. Esposito. Hopefully, I can use less, Mr. Chairman.
    Mr. Barton. Hopefully.

 STATEMENTS OF PETER G. ESPOSITO, VICE PRESIDENT OF REGULATORY 
 AFFAIRS, DYNEGY INC.; JOHN W. ROWE, CEO, EXELON CORPORATION; 
     ROBERT LEVIN, SENIOR VICE PRESIDENT FOR PLANNING AND 
  DEVELOPMENT, NEW YORK MERCANTILE EXCHANGE; ADRIAN T. MOORE, 
EXECUTIVE DIRECTOR, REASON PUBLIC POLICY INSTITUTE; AND JOHN R. 
    FIELDER, SENIOR VICE PRESIDENT OF REGULATORY POLICY AND 
              AFFAIRS, SOUTHERN CALIFORNIA EDISON

    Mr. Esposito. Mr. Chairman, members of the subcommittee, I 
appreciate this opportunity to appear before you today. Dynegy 
owns or controls approximately 14,000 megawatts of generating 
capacity in the United States, of which 2,750 is in California. 
That is about 5 percent of the California market.
    Despite our relatively small presence in California, we 
have spent thousands of hours and hundreds of millions of 
dollars to provide California consumers and businesses with 
power. As a recent FERC staff investigation revealed, which I 
would like to enter into the record with your permission, we 
have been running the generating plants we bought from the 
California utilities in 1998 and 1999 more heavily in the last 
year than in the last 3 years and perhaps ever.
    [The information referred to can be found at:]

    http://www.ferc.
fed.us/electric/buklkpower/Public-Feb1.PDF]

    Mr. Esposito. These intermediate and peaking plants are 30 
to 40 years old and inefficient. Because California's current 
needs are resulting in delayed maintenance we were forced to 
run them until they break, often at great additional expense, 
and despite growing financial risk we have committed to produce 
power.
    Dynegy is presently negotiating with the California 
Department of Water Resources on a long-term sale at prices 
substantially below current spot prices. Dynegy takes its 
mission to serve our customers very seriously. It is good 
public and corporate policy to recognize that no one benefits 
if power is not reliable and consumers are shocked with 
staggering price increases.
    What went wrong in California, I think we have pretty much 
covered the base. I am going to sort of summarize my remarks 
here. Essentially, California has added no generation in the 
last 10 years. That number is 600 megawatts. Meanwhile the peak 
has increased 15 percent, 33 percent in Silicon Valley. Notably 
California is dependent on imports for about 25 percent of its 
peak load. Last year it lost about 5,500 megawatts of import 
capabilities because of a dry hydro year. Now, that is a big 
chunk of its load.
    Also, we had a significant increase in natural gas prices. 
Spot prices increased five to tenfold in December and January 
and have doubled for long-term contracts for the natural gas 
that fuels 50 percent of California's generation.
    Congressman Markey referred to this as the perfect storm. I 
use the same term and many others do.
    California overrelied on spot and real-time markets. No one 
waits around until the last minute to buy airline tickets at 
the highest price. Yet this is exactly what the California 
power market was operating at until January 1, and because of 
other aspects of California's legislation San Diego customers 
who never had a realistic chance to enter into long-term fixed 
price contracts also paid those highest last minute prices last 
summer.
    And as we spoke about just now, California did not 
deregulate the market. They deregulated only the wholesale 
side, maintaining price caps on the retail side. This capped 
competition out. Competition would have provided customers with 
the opportunity to enter into fixed price contracts on their 
own which they were essentially unable to do because of the 
structure of the California market.
    They isolated customers from real price signals that could 
have caused them to reduce consumption. In fact, the retail 
rate increase of 10 to 30 percent in the context of a portfolio 
of long-term and short-term forward contracts would likely 
solve California's current financial crisis. When I explained 
this to one San Diego man of modest income, he responded this 
is about the price of a Snickers a day to fix the problem.
    Other States have not and will not make the same mistakes 
as California. Texas. Unlike California, Texas started down the 
path toward deregulation in an environment where generation was 
being added, some 8,652 megawatts in the last 5 years with 
12,745 megawatts under construction for operation in 2002. 
Texas is upgrading its transmission facilities and has an 
expansive gas pipeline infrastructure. In implementing retail 
competition, Texas has a price to beat structure similar to 
Pennsylvania's shopping credit structure, both of which 
encourage retail competition. Both have mandated price cuts but 
in neither case is the utility required to buy in real-time 
from the spot market. In Texas there is also an adjustment for 
fuel increases. So customers will see price increases subject--
resulting from fuel.
    Illinois' retail choice program incorporates transition 
power purchase arrangements where utilities who divested their 
generation entered into long-term buyback contracts rather than 
again depending solely on the spot market.
    The basic message I would like to leave you with today is 
not to overreact to the California power crisis. The market is 
already self-correcting for natural gas price increases which 
drove a lot of the increase in the price of power this fall and 
winter, and producers are drilling at a frantic pace. FERC is 
taking action to address wholesale power market issues, and 
California, albeit long after it could have obtained more 
favorable prices, is addressing long-term contracting issues.
    Congress need not micromanage these issues. Rather, it 
should develop a well thought out national energy strategy and 
address the need for open access to power transmission lines as 
we have spoken about earlier. This policy should include 
addressing the need to increase supplies of natural gas and 
power through access to public lands for drilling and efficient 
siting of both power and gas transmission lines.
    Remember, gas fuels 90 percent-plus of new generation of 
America. Increasing supplies of gas is the No. 1 thing that 
will reduce the cost of power in this country in the short 
term.
    Encourage full diversity, clean coal renewables, perhaps 
even nuclear.
    Promoting demand site responses, for example, incentives 
for conservation and efficiency research and development, tax 
credits for conservations and the like.
    Repealing the Public Utilities Holding Company Act so that 
excessive costs can be removed from transmission and 
distribution assets and economies of scale realized.
    Affirm FERC's authority to require participation in 
regional transmission organizations and otherwise encourage 
FERC to exercise all its authority to assure that new 
generation is interconnected as quickly and cost effectively as 
possible. I have spent a lot of time this morning talking about 
the need for transmission. Unless you can interconnect the 
generation, that transmission is not going to be of a whole lot 
of use.
    And finally, give FERC eminent domain authority, when 
necessary, to resolve interstate transmission siting problems.
    In the short term there is no silver bullet that is going 
to fix all of California's ills. California must do its part by 
finalizing long-term contracts currently being negotiated with 
Dynegy and other suppliers and by developing a mechanism to pay 
the outstanding balances owed to power suppliers so that order 
can be restored to the market.
    Finally, one fact that policymakers in State and Federal 
Government should be aware of is that Dynegy's plants in San 
Diego are facing a 60 percent reduction in emissions limits 
this year, which equates to about 750 megawatts of capacity 
being taken off line at some point. This will further tax 
hydroelectric and other assets all over the West. We have heard 
that others face the prospect of similar cutbacks in other 
areas of California, and we recognize that the California 
agencies are addressing these issues, but there is uncertainty 
over when and if these issues will be resolved, and this can't 
last a whole lot longer.
    I appreciate the invitation to join you today and I am 
pleased to answer questions. Thank you.
    [The prepared statement of Peter G. Esposito follows:]
Prepared Statement of Peter G. Esposito, Vice-President and Regulatory 
                          Counsel, Dynegy Inc.
Introduction:
    Mr. Chairman, I appreciate this opportunity to appear before this 
subcommittee today.
    As you know, Dynegy is a major national generator and marketer of 
energy that is active in California. Dynegy owns or controls 
approximately 14,000 MW of generating capacity in the United States, of 
which 2,750 MW is in California. That's about 5% of the California 
market.
    Despite our relatively small presence in California, we have spent 
thousands of hours and hundreds of millions of dollars to provide 
California consumers and businesses with power. As a recent FERC staff 
investigation revealed, we have been running the generating plants we 
bought from the California utilities in 1998 and 1999 more heavily in 
the last year than in the last 3 years, and perhaps ever. These 
intermediate and peaking plants are 30 to 40 years old and inefficient, 
averaging a 12,000 heat rate when new technology achieves 7,000 heat 
rates. Because California's current needs are resulting in delayed 
maintenance, we are forced to run these plants until they break, then 
take whatever steps are necessary to bring the generating facilities 
back on-line as soon as possible, often at great additional expense. 
And despite growing financial risk, we have continued to produce power.
    Gov. Davis and California Legislature are now focused on 
constructively solving the problem. Dynegy is presently negotiating 
with the California Department of Water Resources on a long-term sale 
at prices substantially below current spot prices.
    Mr. Chairman and members of the subcommittee, Dynegy takes its 
mission to serve our customers very seriously. Recognizing that no one 
benefits if power is not reliable and consumers are shocked with 
staggering price increases is good public policy and good corporate 
policy.
What Went Wrong In California.
    1. Demand grew substantially without corresponding increases in 
supply. California has added virtually no generation during the last 10 
years. Meanwhile, its demand increased substantially--15% at peak, 33% 
in Silicon Valley--as a result of a booming internet-related economy.
    Notably, California is dependent upon importing power for about 25% 
of its peak load. While California's power appetite was growing, so too 
was that of its neighbors. Although California represents 42% of the 
summer peak in the West, California's neighbors have accounted for 85% 
of the West's peak load growth in the last 5 years. This left 
California's neighbors increasingly short of excess power to export to 
California. While this problem was brewing, a below average hydropower 
year further limited California's in-state production and its 
neighbors' export capabilities. On top of that, summer 2000 was the 
second hottest in 100 years. The end result was a reduction of 
approximately 12% in peak import capabilities last summer. Then add a 
significant increase in natural gas prices, the final ingredient in the 
recipe for what some refer to as a ``Perfect Storm''--spot prices 
increased 5- to 10-fold in December and January and have doubled for 
long-term contracts for the natural gas that fuels more than 50% of 
California's generation--and you can see what got us here. Making 
matters worse, when surplus power could be found, it could not always 
be moved to market, because of transmission constraints.
    2. California Over-relied on Spot and Real-Time Markets. No one 
wants to wait until the last minute to buy airline tickets at the 
highest price; yet this was the required operating mode for 
California's utilities and customers. And, because of other aspects of 
the legislation, San Diego Gas & Electric customers, who never had a 
realistic chance to enter into long-term, fixed price contracts, also 
paid those highest, last-minute prices
    3. CA did not ``deregulate'' the market. California made a critical 
error by deregulating only the wholesale market, while maintaining rate 
caps on retail purchases. This kept out retail competition that could 
have given customers more price certainty when stranded cost 
collections were complete and price caps came off as they did in San 
Diego. Additionally, price caps also isolated consumers from real price 
signals that would have caused them to reduce consumption. In fact, 
when San Diegans briefly saw real-time prices last July, they reduced 
demand substantially. No one wants to increase retail rates, but when 
the price for the natural gas that fuels over 50 percent of 
California's peak demand is multiples of the price embedded in capped 
energy rates, no one should be surprised by the need for higher retail 
rates. Indeed, a retail rate increase of 10 to 30%--in the context of a 
portfolio of long- and short-term forward contracts--would likely solve 
the current financial crisis. Yet, rather than increase retail rates 
(as other Western states have done), California has chosen so far to 
create a financial train-wreck for its utilities in hopes of avoiding 
the obvious need for a rate increase.
Other States Have Not And Will Not Make The Same Mistakes as California
    Texas: Unlike California, Texas started down the path towards 
deregulation in an environment where generation was being added, some 
8,652 MW in the last five years, with 12,745 MW under construction for 
operation in 2002. Additionally, Texas is upgrading its transmission 
facilities, and has an expansive gas pipeline infrastructure. In 
implementing retail competition, Texas is developing a ``price to 
beat'' structure that encourages competition. While Texas has a 
mandated rate cut, there is a mechanism to adjust utility rates for 
increases in fuel costs, so Texans will see appropriate price signals.
    Pennsylvania: Pennsylvania is widely touted as a retail success 
story, and rightfully so. Like Texas' ``price to beat,'' Pennsylvania's 
``shopping credit'' encourages retail competition. Additionally, in 
neither of these markets is the utility forced to buy from spot and 
real-time markets.
    Illinois: Similarly, Illinois' retail choice program incorporated 
transition power purchase arrangements, where utilities who divested 
their generation assets entered into long-term transitional buy-back 
arrangements, rather than depending solely on the spot market for 
supplies.
What Can The Federal Government Do?
Congress Should Not Over-React To The California Power Price Crisis
    While natural gas prices are still twice what they were a year ago 
in much of the country, they are already self-correcting from the 
December and January highs. While no one is predicting the kind of 
price collapse that occurred in the early '80s, the market is 
feverishly responding: Price signals are inducing an all-out drilling 
effort, the Alaska gas pipeline has been resurrected, and El Paso alone 
has 6 LNG proposals in the works.
    Rather than being tempted to legislate price caps or to re-
regulate, Congress should be cognizant that the FERC has already dealt 
with and seen the results of a variety of price caps in California and 
has settled on a $150 soft cap, one that can take into account rises in 
the price of gas and other inputs. In the Northeast, the FERC has a 
$1,000 safety net price cap in effect, one which is much less likely to 
deter the addition of new generation than the lower caps tried in 
California. And bear in mind that cost-based regulation and government 
tinkering are what resulted in $16.8 billion in so-called stranded 
costs that California utilities collected from their customers.
    Develop a well thought out national energy strategy and address the 
need for open access to power transmission lines, including:

1. addressing the need to increase supplies of natural gas and power, 
        through access to public lands for drilling, and efficient 
        siting of both power and gas transmission lines; (Remember, gas 
        fuels over 90 percent of new generation in America; increasing 
        supplies is the No. 1 thing that will reduce the cost of power 
        in this country.)
2. encouraging fuel diversity, e.g., clean coal, and renewables;
3. promoting demand-side responses, e.g., incentives for conservation 
        and efficiency research and development, tax credits for 
        conservation and the like;
4. repealing PUHCA so that excessive costs can be removed from 
        transmission and distribution assets and economies of scale 
        realized.
5. affirming FERC's authority to require participation in regional 
        transmission organizations and otherwise encouraging FERC to 
        exercise all its authority to assure that new generation is 
        interconnected as quickly and cost effectively as possible; and
6. giving FERC eminent domain authority when necessary to resolve 
        interstate transmission siting problems.
    In the short-term, there is no silver bullet that will fix all 
California's ills. California must do its part by finalizing the long-
term contracts currently being negotiated with Dynegy and others and by 
developing a mechanism to pay the outstanding balances over to power 
suppliers so that order can be restored to markets.
    One fact that policy makers in State and Federal government should 
be aware of is that Dynegy's plants in San Diego are facing a 60 
percent reduction in emission limits, which equates to taking about 750 
megawatts of capacity offline, further taxing hydroelectric and other 
assets all over the West. We have heard that others face the prospect 
of similar cutbacks in other areas of California. While we recognize 
that California agencies are addressing these issues and that the EPA 
is aware of them, there is uncertainty over when and if these issues 
will be resolved, uncertainty that cannot last much longer.
    We appreciate the invitation to join you today and I am pleased to 
be available to answer your questions.

    Mr. Barton. Thank you, Mr. Esposito. We now want to hear 
from Mr. John Rowe, who is the CEO of Exelon Corporation, which 
I guess is the old Revlon Corporation, who has moved out of the 
cosmetics business. We will let him answer that question in his 
testimony. Mr. Rowe is also either the current or at least the 
past President of EEI, if that is correct.
    Mr. Rowe. Correct, Mr. Chairman.
    Mr. Barton. So we are delighted to have you, and your 
statement is in the record in its entirety and we recognize you 
for 8 minutes to elaborate on it.

                    STATEMENT OF JOHN W. ROWE

    Mr. Rowe. Thank you, Mr. Chairman. I shall try to be brief. 
I appreciate the members of the subcommittee who have been 
patient enough to wait for us, particularly Congressman Shimkus 
from my own State of Illinois.
    I lack the capability to be effective in the cosmetics 
market, so it is fortunate that Exelon is a power producer and 
deliverer. It is the combination of what used to be 
Commonwealth Edison and Northern Illinois and Philadelphia 
Electric in Pennsylvania. We are the largest suppliers of 
electricity in Illinois and Pennsylvania, two States where we 
believe that utility restructuring is working but we have much 
work to do to keep it working.
    Simply put, the question I hear is should we continue to 
work on electricity markets or should we go back. Well, what I 
am here to say is there is no back to go to. We got to 
competition precisely because earlier models failed, and there 
is no sensible alternatives except to make competitive markets 
work for our consumers.
    If you all remember, in the seventies and early eighties, 
utilities, whether privately owned or publicly owned, lost the 
public confidence, the political legitimacy or the economic 
legitimacy to monopolize the development of generation. This 
was replaced in the mid-eighties and early nineties with 
something called integrated resource management or integrated 
resource planning. That proved to have all the merits of 
central planning and Chicago tort litigation. It drove the 
prices up rather than down, made supply more brittle and 
politicized what should be economic acts.
    I believe that Illinois experience and Pennsylvania 
experience strongly suggests that we can make competitive 
markets work, but we have to do it prudently, carefully and 
with a willingness to change our mind when we are wrong. In my 
judgment, California failed, as you have heard from many 
others, because it built too little capacity. It relied too 
extensively on natural gas and imports, something that can be a 
national problem. It relied far too extensively on spot markets 
and did not allow utilities to engage in forward contracts or 
own enough capacity of their own. It expected utilities to be 
providers of last resort for all customers under all 
conditions, without allowing them the resources to do that, and 
it shielded customers from the price impacts of their own 
decisions.
    Illinois and Pennsylvania are presently working largely 
because capacity is being built, nearly all gas; largely 
because we have a diverse existing base of coal and nuclear 
power in both States; because the utilities have been allowed 
to be effective suppliers and have been given the resources to 
meet their obligations; and because utilities in these States 
are working on effective regional transmission organizations, 
such as PECO's participation in the PJM pool.
    We have not, however, solved all the problems or skinned 
all the cats in our States. Gas is the only easy kind of 
generation to build and even gas fired plants are subject to 
nimbi pressures. Transmission can be built, but it is not easy, 
and as several folks have said, expanding the transmission 
system is vital to an effective wholesale market.
    In addition, we have not in either State resolved 
ultimately the tension between expecting utilities to be a 
supplier or provider of last resort to all consumers and the 
desire at the same time to have a competitive wholesale and 
resale market. Simply put, you can't have every customer 
entitled to move and utilities required to buy to provide them 
at the same time. It just doesn't add-up andd we have still to 
solve these problems in my State.
    What can Congress do at the present time? I believe it 
dreadfully important that Congress reaffirm the national goal 
of effective wholesale electricity markets. I believe Congress 
can and should encourage the development of both additional 
supply and additional energy conservation. I would strongly 
urge any actions that will help encourage gas drilling and the 
addition of additional gas pipeline capacity. I would also 
strongly urge things which protect our existing coal and 
nuclear fleets such as passage of the nuclear waste bill which 
Congress did pass last year but was vetoed.
    I would urge the Congress to do what it can to eliminate 
obstacles to a working transmission market and to a working 
wholesale market, particularly repealing the Public Utility 
Holding Company Act, the Public Utility Regulatory Policies Act 
and the taxes which now exist if we try to transfer our 
transmission to regional transmission authorities as we ought 
to do.
    I would urge Congress to support FERC's efforts to develop 
regional transmission organizations. I believe that FERC has 
the authority it needs to do this right now but it has not been 
exercised in a consistent and firm way, and Congressional 
endorsement in this respect might be helpful.
    In sum, I believe we can make effective wholesale and 
retail markets work, but in order to do that we have to have 
evolving supplies of electricity generation which meet the 
needs of our consumers.
    Thank you.
    [The prepared statement of John W. Rowe follows:]
 Prepared Statement of John W. Rowe, President and Co-Chief Executive 
                      Officer, Exelon Corporation
    Mr. Chairman and Members of the Subcommittee: I appreciate the 
invitation to appear before the Subcommittee to discuss the impact of 
electricity market restructuring both in California and in other 
states. My name is John W. Rowe. I am the President and Co-Chief 
Executive Officer of Exelon Corporation. Exelon, formed last year by 
the merger of Unicom Corporation and PECO Energy, is headquartered in 
Chicago, Illinois. We serve over five million customers principally in 
Illinois and Pennsylvania, which have both restructured their 
electricity markets. My testimony today will focus on the very positive 
results in both of those states, and will briefly suggest some actions 
that I believe Congress should take to enhance electricity supplies and 
competition in wholesale markets nationwide.
    California heralded the New Year with a wave of rolling blackouts, 
spiraling wholesale electricity prices, and threatened utility 
bankruptcies. The state which symbolizes the electronic age, and that 
represents roughly an eighth of the U.S economy and of its population, 
faces electricity supply issues not seen since the Great Depression and 
the collapse of the great utility holding companies. Nonetheless, the 
recent crisis in California is not a signal that competition and 
deregulation have failed. It is my firm belief that market-oriented 
restructuring of the electric industry remains the best opportunity we 
have to provide consumer benefits and to develop reliable new sources 
of supply. Indeed, the experiments in market-based restructuring that 
are underway reflect the previous failures of public confidence in 
long-term planning by public utilities and regulators.
    Both the Illinois and Pennsylvania experiences--about which I will 
be speaking today--are proof positive that thoughtful, market-oriented, 
evolutionary restructuring works well for all concerned. The California 
experience was not an accident or the product of bad luck. It was the 
product of choices--choices about siting generation and transmission, 
and choices about a market design that imposes asymmetric risks on 
utilities to the ultimate detriment of all. If other states make 
similar choices, similar consequences can be expected to follow. In 
short, the California experience is no reason to reject restructuring; 
it is rather a forceful lesson on the importance of doing it right.
Status of Restructuring in Illinois and Pennsylvania
    When Illinois restructured its electric industry, it was cognizant 
of the risks that both utilities and consumers faced. Instead of the 
radical approach taken by California, Illinois adopted a phased-in plan 
that protected consumers, allowed utilities to manage their costs, and 
encouraged the development of new generation. Illinois' Customer Choice 
law was enacted in late 1997. It allows all retail customers to 
purchase delivery services from their utility and to choose their 
electric supplier on a schedule phased in over three years. The largest 
customers were eligible for such choice in the fall of 1999, and all 
non-residential customers are now eligible. Recognizing that the 
benefits of supplier choice accrue first to large customers, which 
competitors are more eager to supply, the legislature deferred 
residential customer choice until May 2002. In exchange, the law 
provided for an automatic 20% rate cut for residential customers. 
Customers were shielded from the volatility of market prices for 
electricity because ComEd is required to continue offering bundled 
retail service at cost-based rates until a fully competitive market 
develops. At the same time, however, utilities are given tools to 
manage their electricity costs, including the ability to retain 
ownership of generating plants, to enter into long term purchase power 
agreements and to hedge their exposures on the wholesale market.
    As of February 7, 2001, over 10,000 customers in ComEd's service 
territory alone have chosen to take unbundled service. This amounts to 
4,500 MW of load (a megawatt is about equivalent to the power needed to 
serve 1,000 homes) and 17.8 million MWh of electric service. This 
constitutes nearly 30% of the sales that were eligible for unbundled 
service under the law. Illinois has experienced no adverse consequences 
from restructuring; neither reliable electric supply nor the financial 
health of the utilities has suffered, and new construction of 
generation has received an impetus.
    Pennsylvania has also embarked on a successful restructuring. 
Pennsylvania's retail restructuring began in December 1996 and all 
retail customers have had the right to choose their electric supplier 
since January 2000. To date, about 18% of the customers of PECO Energy, 
Exelon's Pennsylvania utility, have chosen a competitive supplier, and 
because the larger customers have a higher rate of switching, this 
amounts to about 35% of PECO's peak demand. PECO has more customers in 
the competitive market than any other U.S. electric distribution 
company. One reason for the higher rate of switching in Pennsylvania is 
that customers were given higher incentives to switch and a certain 
number of customers were actually required to switch suppliers.
    Pennsylvania also has significant advantages that will allow it to 
avoid the California experience. Wholesale electric markets in 
Pennsylvania and neighboring states, and the institutions that manage 
those markets, are the most mature in the country. PECO Energy's 
service territory is located in a regional transmission organization 
and power pool known as the Pennsylvania-New Jersey-Maryland 
Interconnection, or ``PJM.'' PJM is the most mature, liquid, and 
efficient wholesale electricity market in the country. To date, these 
institutions have shown themselves sufficiently flexible to avoid the 
price spikes experienced in California. In large part, this success has 
resulted from the fact that PJM provides a reasonable and stable 
environment for companies to make investment decisions about generation 
and because PJM operates a wholesale market in which power sales can 
occur efficiently. Pennsylvania law also contains protections for 
retail customers, while at the same time allowing utilities to recover 
and manage their costs of supply. Like Illinois, Pennsylvania's rules 
for the transition to competition were designed to protect retail 
customers while the market matures. In PECO Energy's service territory, 
there will be a transition period until 2010, during which PECO is 
required to provide service at capped rates. Rates for energy delivery 
are capped through 2006. As in Illinois, this transition period 
provides significant protection for all retail customers.
Illinois and Pennsylvania Have Avoided the Supply Problems Experienced 
        in California
    In a restructured market, it is essential to encourage development 
of new generation by independent producers that is adequate to meet 
growth in demand. In Illinois, ComEd has taken a proactive stance in 
encouraging developers in its service territory, and the results have 
been gratifying. Today, 2,000 MW of new capacity have already come on 
line. This year we expect over 3,600 MW more to come on line, all of 
which is permitted and is currently under construction. In 2002 another 
7,500 MW are scheduled to come on line, of which 3,600 MW are currently 
in a definitive stage, that is, either construction has begun or 
equipment has been ordered. For the longer term, over 11,600 MW are 
projected for 2003; none of those projects is yet in a definitive 
stage.
    PJM has also been successful in encouraging adequate development of 
new capacity. Currently, 46,000 MW of new generation projects have 
applied to be interconnected to the PJM transmission system. Of that 
amount, 16,000 are in a stage that gives confidence they will come into 
service by 2004--4,200 MW are already under construction, construction 
is about to begin on another 9,100 MW, and 3,700 MW consist of upgrades 
to generation stations that are already operating.
    The capacity increases in both Illinois and Pennsylvania have come 
on top of a large base of reliable generation using diverse fuel 
sources. ComEd has at its disposal a number of large nuclear and coal 
units for its baseload generation. Exelon owns the largest nuclear 
fleet in the country and in recent years the plants have been 
performing extremely well. California has not only experienced great 
difficulty in expanding its generation to match growth in demand, but 
is far more dependent on natural gas and imports from other markets. By 
way of illustration, in 1999, just over 16% of California's power was 
generated by nuclear plants 1, while nuclear generation 
accounted for approximately 50% of the electricity generated in 
Illinois 2. Although ComEd also can turn to extensive 
natural gas fired resources during peak hours, for the 12 months ending 
last September, we depended on gas-fired generation only about 1% of 
the electricity we sold.3 In Illinois as a whole, gas was 
responsible for less than 3% of power generated in 1999 4, 
whereas it was responsible for 31% of electricity consumed in 
California 5. Pennsylvania, like California, has substantial 
nuclear generation and less reliance on natural gas. In 1999, nuclear 
power accounted for 36.5%, and natural gas 2%, of Pennsylvania's 
electricity.6 Substantial nuclear baseload capacity helps 
insulate utilities from the extreme variability experienced in natural 
gas prices.
---------------------------------------------------------------------------
    \1\ 1999 California Net System Power Calculation (California Energy 
Commission) (available on the Web at http://www.energy.ca.gov/
electricity/system__power.html)
    \2\ Electric Power Annual 1999, Vol. I, App. A, Tables 7, 11 (U.S. 
Energy Information Administration, Aug. 2000) (available on the Web at 
http://ww.eia.doe.gov/cneaf/electricity/epav1/ta7p1.html and . . . 
ta11p1.html)
    \3\ ComEd ``Environmental Disclosure Statement'' for the 12 months 
ending 9/30/00 (filed with the Illinois Commerce Commission and 
available on the Web at http://www.icc.state.il.us/icc/ec/edis/
010101comed.pdf).
    \4\ Electric Power Annual 1999, supra, Tables 7, 10.
    \5\ 1999 California Net System Power Calculation, supra.
    \6\ Electric Power Annual 1999, supra, Tables 7, 10, 11.
---------------------------------------------------------------------------
    California's record on building generation of any type has also 
been poor, and analysts agree that this is a root cause of California's 
problems. Less than 1,000 MW of new generation have been built in the 
entire state of California in the last five years.7 Far from 
reducing California's dependence on imports, this construction has 
failed to keep pace with demand during a period of significant growth 
in the California economy. For example, between 1996 and 1999, 672 MW 
of new generation came on line in California, and during the same 
period the peak demand increased by over 5,500 MW 8. The 
bedrock lesson of the California crisis is that states must recognize 
the need to encourage new power plant construction. States must avoid 
imposing unduly restrictive regulations and lengthy and labyrinthine 
permitting and siting procedures, and must be ready to site not only 
gas-fired peakers, but new baseload capacity as well.
---------------------------------------------------------------------------
    \7\ Report of the CaPUC and California Electricity Oversight Board 
to Gov. Davis, August 2, 2000, p. 36 (available on the Web at http://
www.cpuc.ca.gov/word__pdf/REPORT/report.doc).
    \8\ Id.
---------------------------------------------------------------------------
Illinois and Pennsylvania Have Avoided the Market Failures Experienced 
        by California
    Illinois and Pennsylvania have also shown that restructuring can be 
accomplished while avoiding the market flaws inherent in the complex 
California scheme. Unlike California, where the legislature imposed 
rigid and inefficient market structures in advance and required a 
flash-cut to competition with no transition period, Pennsylvania had a 
pre-existing wholesale market and restructuring in Illinois was phased 
in over three years, giving market participants time to develop 
workable offerings as the market evolves on its own. Both have avoided 
the market design flaw that has nearly bankrupted the California 
utilities.
    First and foremost, both Pennsylvania and Illinois allow utilities 
to manage their supply obligations and hedge the costs of meeting them. 
Mature, stable commodity markets include spot, short-term, long-term, 
forward, option, and futures products and buyers and sellers use these 
products to reduce and manage their risks. Electric utilities use these 
tools, as well as their own physical generation or generation under 
contract, to manage their risks.
    California made that difficult or impossible. In California, the 
utilities were required to divest all non-nuclear and non-hydroelectric 
generation, and to sell their remaining generation into a daily central 
spot market from which they were required to buy all the power they 
needed to serve their customers every day. The utilities' ability to 
hedge their exposure in that market was severely restricted. The 
restriction on hedging was compounded by the sale of the utilities' 
generating assets. California utilities sold much of their own 
generating capacity and retained obligations to serve retail customers 
at fixed prices, while at the same time being unable to enter into 
long-term power purchase agreements with the buyers--the type of 
contracts that California officials are now turning to in an attempt to 
address their problems. When the problems with this became apparent, 
California had artificial rate caps imposed, which further blurred 
price signals to generators.
    By contrast, Illinois and Pennsylvania utilities are able to use 
market tools to manage their supply risks. Both Illinois and 
Pennsylvania utilities are free to hedge their exposure to wholesale 
market risk through power purchase agreements and other market tools to 
control future price risks. They have also been able to divest 
generation where it is economically rational to do so, while entering 
into long-term purchase arrangements with the new owners of the 
plants--as well as other generators. Exelon provides an example of how 
this policy can be successfully implemented. Exelon believes that all 
generation in a competitive market should be on the same unregulated 
footing, and also that all generation in a control area should not be 
in the hands of a single owner. Consistent with this philosophy, ComEd 
sold all its fossil generation to non-affiliated parties by 1999. This 
year, both PECO Energy and ComEd transferred their nuclear generation 
to an affiliated generating company, Exelon Generation Company. In both 
cases, however, the utilities were able to enter into long-term power 
purchase agreements that assure an adequate supply of power at 
reasonable prices. In short, Illinois and Pennsylvania have chosen to 
keep their utilities as active players in the power markets, rather 
than to drive them out.
    In sum, restructuring has not been the cause of California's 
problems. Policy choices have, however, contributed to the crisis. We 
must avoid making similar policy choices, just as we must continue to 
move toward efficient competitive markets in electric power. Both 
Illinois and Pennsylvania show that this can be accomplished, to the 
benefit of all.
    For the longer term, Illinois and Pennsylvania, as well as all 
other restructured markets, will have to find solutions to the chicken-
and-egg problem inherent in the transition to full competition. The 
more responsibility for arranging supply the delivery company is made 
to retain, the less incentive and ability new entrants in the market 
will have to compete. Wholly eliminating the delivery company's supply 
obligations would expose customers to too much risk, but requiring the 
delivery company to supply electric service to all customers at low 
rates may stifle competition. The utility will be forced to lock up so 
much of the available supply through forward contracts that competitive 
suppliers will have reduced wholesale supply choices. Moreover, if 
delivery company rates for supply are kept low, competitors may have 
difficulty beating them. Creative solutions to this problem are the 
final stage of restructuring. Such solutions must be found, because 
there is simply no going back to the model in which a monopoly utility 
makes all the plans for an area of the country.
What Should Congress Do About Electricity Markets?
    I hope that my testimony today will convince the Members of the 
Subcommittee that competition and deregulation can, indeed, lead to 
positive results. The situation in California, when contrasted with 
Illinois and Pennsylvania, clearly shows the importance of doing it 
right. Proper market structures are not something of importance solely 
to academic economists; they are vitally important in the real world.
    As the Members of this Subcommittee contemplate their legislative 
agenda for the new Congress I would encourage you to think about an 
electricity supply initiative. It is vitally important that we have 
adequate electricity supplies to serve a healthy, growing economy. It 
is also vitally important that we have robust, healthy, wholesale 
electricity markets. Most observers believe that the retail market 
issues are best addressed by State authorities. However, the wholesale 
market issues are clearly the responsibility of Congress and other 
Federal officials.
    There are a number of statutes on the books, such as the Public 
Utility Holding Company Act (PUHCA) and the Public Utility Regulatory 
Policies Act of 1978 (PURPA), that inhibit development of electricity 
supplies by limiting market entrants. There are also a number of tax 
issues that the Congress should address, such as the tax consequences 
of selling transmission assets to form Regional Transmission 
Organizations (RTOs) and depreciation schedules for utility assets. 
Action on both fronts is long overdue and would facilitate the 
development of more robust, competitive wholesale markets to the 
benefit of all consumers.

    Mr. Barton. Thank you, Mr. Rowe. We appreciate that 
testimony. We now want to hear from Mr. Robert Levin, who is 
the Senior Vice President for Planning and Development at the 
New York Mercantile Exchange. Your testimony is in the record 
and we welcome you to elaborate on it for up to 8 minutes.

                    STATEMENT OF ROBERT LEVIN

    Mr. Levin. Thank you very much, Mr. Chair. On behalf of the 
New York Mercantile Exchange and myself, I thank you for 
inviting us and me back here before you again.
    I am not going to focus this afternoon on some of the 
problems that have already been gone over here, and in 
particular, insufficient generation, unforeseen increases in 
demand in California, the uncapped wholesale, combined with the 
capped consumer market or even more recently the financial 
vacuum that has been inflicted in California with everything 
going on.
    Rather, I am going to focus on market structure, a market 
structure that NYMEX found to be corrupt, one that reflected in 
our view that the California government felt that it was wiser 
than the marketplace, in terms of the institutions that were 
necessary to support deregulation, in terms of the commercial 
standards, in terms of conditions and practices that were 
necessary to support deregulation and all the way down to how 
prices should be formed under deregulation.
    This market was severely hamstrung from the start. It was 
the inevitable result, unfortunately, of deliberate policies. 
Gross commercial inefficiency was not a consideration that 
California took into mind when it came up with its program. It 
was severely criticized by a number of parties, especially by 
the New York Mercantile Exchange, usually in the form of me. 
From 1994 all the way through 1997, we appeared there with 
formal appearances and written testimony more than a dozen 
times. Some of it we even predicted less competition, higher 
prices, lower consumer value.
    We believe that it is important you have an appreciation of 
the debate that took place then because that debate is not 
over. It is my goal to get you to take sides. Of course, I 
would like you to be on my side, but frankly if you are on 
either side that would be better and at least acknowledge that 
there are sides because that was some of the problem as all 
this was unfolding. Some of the parties decided that both 
parties--both sides were arguing for the same thing and it was 
very hard to get heard when you said, well, no, we are not. So 
I will try to lay it out for you.
    One side believed you can mimic a competitive market 
through government interference. Buyers and sellers need not 
directly interact. You can create an artificial middleman to 
buy from all the sellers, to sell to all the buyers for 
transactions. You can make that middleman exclusively spot 
because it doesn't matter, and besides, spot, according to this 
program, is more efficient. You can force much of the 
participation into this market by mandating it, in particular 
the utilities. You can create a series of other biases which I 
will be glad to lay out for you, but I am not going to right 
now, that also practically forces almost everything else into 
that market, and just to reflect how devoted to this notion of 
being in the spot market this program was, it insisted that the 
system operator--this is the one that is responsible for 
keeping the lights on, the one that in times of perhaps panic 
has to rush to the market and buy really at the last second--
that the system operator, too, participates solely through the 
spot market.
    This is an issue that obviously didn't involve NYMEX 
directly, but even here we debated and suggested why don't you 
allow them to use the tools that are available in all other 
free competitive markets, in particular something called a call 
option, so they can ahead of time lock in, as an insurance 
policy, prices they need to buy for. This was not part of that 
program.
    On the other side was the belief to allow markets to 
develop their own institutions, their own commercial terms and 
conditions and standards, to aggressively promote the 
competition of sellers for buyers, to aggressively promote the 
development of commercial rivalry. This is very fundamental on 
the one hand, but I almost feel as if I have to go into some 
examples so people will understand why rivalry matters.
    It occurs to me that perhaps sometimes even in this 
building, somehow, somewhere, somebody might be influenced, or 
maybe even inspired by rivalry. They may find themselves 
wanting to best the other side. They may work harder, longer, 
stay up late into the night. They may think up many ideas, 
experiment with them. Some of those ideas may turn out not to 
be very practical. Some of them may be practical, but the other 
side turned out to beat you to it, and then once in a while, 
inspired by that rivalry, you beat them.
    Now, this may seem fundamental. It may seem odd that I 
would waste your time, and I hope that I am not in talking 
about it, but this type of experimenting, taking risk at one's 
own expense and innovating, meeting the customized needs of 
others, and I will give you a couple of examples for a moment 
for electricity, was not allowed to happen as a practical 
matter in California. In fact, from NYMEX's perspective, what 
is deregulation without that? We don't understand what it is. 
We don't think they ever had deregulation. We don't think a 
single price auction that formerly competitive rivals who have 
very strong rivalries in the natural gas business to get 
customers to line up with each other, but now they go to one 
market for all their sales, we don't understand how that could 
be the same thing. That doesn't sound like competition.
    What kind of examples are there? Let me give you a few. 
Let's suppose you have a company such as an apartment house or 
like an industrial plant or school system, maybe some sort of 
shopping mall that is a big purchaser of electricity. They go 
market--now, if they can go and have sellers come up to them 
and compete for their business we might find that they are 
willing to buy at a set price. We might find in the course of 
that negotiation that if they can identify an unvarying amount 
of their load that that price will come down because that is 
valuable for the seller, the supplier. To have dependable, 
unvarying load reduces the cost to the supplier. They might 
negotiate further and the supplier might say that under certain 
circumstances can I interrupt my sale to you, and that buyer 
might say I have the ability to lower how much I use. Maybe it 
is a grocery chain that can put the shades down, lower the 
refrigeration--excuse me, increase the refrigeration, lower the 
air conditioning temperatures and lower the price more, and 
perhaps as their own backup they may have their own generation 
or own supply. This did not take place in California.
    But it does take place in the electricity market. As a 
matter of fact, it takes place in Pennsylvania, among other 
places. Commercial flexibility really matters.
    I think----
    Mr. Barton. You have got about 20 seconds.
    Mr. Levin. Let me just conclude by saying if you would 
allow this market to develop, you will get immediate benefits 
that they sorely need in California. They need to reduce the 
load because right now the State is buying on behalf of 
everybody. At some point, I don't know what the future role of 
the utilities is there. I'm not sure anybody does. The 
utilities may have to go back and buy on behalf of their 
consumers. Anything that would reduce the load that they have 
to carry will take them out of their current market 
circumstances, certainly take them out of the spot market. All 
of this would be immediately beneficial.
    So we come before you today once again to promote true 
competitive free markets, to point out, as I think has already 
been pointed out, that California has not experienced that, and 
if they had been allowed, to we think this discussion--well, 
maybe this hearing might not even have had to take place.
    Thank you.
    [The prepared statement of Robert Levin follows:]
Prepared Statement of Robert Levin, Senior Vice President for Planning 
             and Development, New York Mercantile Exchange
     Mr. Chairman, my name is Bob Levin. I am Senior Vice President for 
Planning and Development for the New York Mercantile Exchange 
(``NYMEX'' or the ``Exchange''). On behalf of the Exchange, I want to 
thank you for the opportunity to participate in today's forum 
concerning events in the California electricity marketplace.
    The New York Mercantile Exchange ``NYMEX,'' established in 1872, is 
the largest energy futures exchange in the world and the only futures 
market in the United States devoted exclusively to pricing, hedging, 
and trading industrial commodities. The merger in mid-1994 with 
Commodity Exchange, Inc (``COMEX,'') which provides a forum for trading 
gold, silver and high grade copper futures contracts, created the 
world's largest physically-based commodity exchange.
    The Exchange pioneered the development of energy futures and 
options. From a modest 34,000 heating oil contracts traded in 1978, 
NYMEX energy futures and options volume grew to more than 89 million 
contracts in the year 2000 and now includes crude oil, gasoline, 
natural gas, electricity and propane in addition to heating oil.
    NYMEX provides the world's most efficient forum for energy price 
risk management. The visible and highly competitive daily trading of 
energy futures and options on the exchange provides a true world 
reference price for each of the commodities traded.
    NYMEX has no stake in the direct outcome of the electricity market. 
It draws no direct benefit from either higher prices or lower prices. 
NYMEX only seeks the opportunity to compete in the provision of 
marketplace services, having never sought the role of government 
granted franchise to provide these services. In fact, NYMEX has 
expressly fought against the establishment of government created or 
sanctioned franchises to serve as marketplaces for electricity, 
believing those institutions should develop in response to market 
forces alone competing for the business of market participants in the 
same way that market participants should be competing with each other.
    With this motivation, NYMEX has been an active participant in 
regulatory and legislative proceedings related to electricity 
deregulation and restructuring at both the state and federal levels 
since 1994. In this capacity, NYMEX provided scheduled testimony four 
times before the California Public Utilities Commission (``CPUC''), two 
times before the appropriate California Legislature committees, and 
more than a half dozen times before the Federal Energy Regulatory 
Commission (``FERC''). NYMEX has provided formal written comments in 
these proceedings on about two dozen occasions. The theme of our 
testimony and comments has been consistently to support true market 
competition.
    The debate that has taken place over the years regarding 
electricity deregulation or restructuring has been largely one between 
supporters of government intrusion to induce prescribed results and the 
supporters of unmolested competition. To date, there are no examples of 
a truly competitive free market for electricity in the US.
What went wrong in California?
    It is the Exchange's belief that California missed the opportunity 
in the mid 1990's to foster the creation of a truly competitive 
electricity marketplace. NYMEX's comments are designed to address three 
implicit questions: what was wrong with California, how can it be 
remedied, and how does this apply to other markets, PJM in particular? 
To answer each of these questions, the most relevant factor is to what 
degree was direct access, the actual competition between sellers of 
electricity to directly serve end-users, supported.
    Direct access is key because it represents the core of what is 
meant by market competition. The engine of competition in any market is 
the head-to-head competition for customers that takes place between 
suppliers of the market's underlying product. Rivalries develop in such 
head-to-head competition and these rivalries lead to experiments to 
better serve customers through innovations in product and service or 
the lowering in cost. The competitive process cannot take place unless 
the seller directly serves customers--otherwise there is no market 
whatsoever and no sales. This is how competitive free markets operate 
for virtually every product and service. This might seem obvious to the 
average person, but under ``deregulation,'' electricity has operated 
according to a different paradigm.
    One notable exception, however, is the ``deregulating'' electricity 
market, which has relied to a varying extent on market artifices to 
serve in the middleman function. The artifices are state-created or 
mandated franchises to serve simultaneously in the role as buyer for 
any (sometimes all) sellers and seller for any (sometimes all) buyers. 
They have consistently been formed to serve the spot market (i.e. next 
day market, hourly market over the next 36 hours) and to clear offers 
to sell at one price.
    It is no accident that where electricity markets have been 
structured to rely more heavily on this type of artifice, the 
development of direct access has been more inhibited and the level of 
real market competition has been muted. As a case in point, California 
was expressly designed to frustrate the development of direct access. 
The consequence of this action was eventual disintegration of 
competition, higher prices, and virtually no customization to better 
serve customers.
    It may seem ironic, but direct access has not been the central 
consideration in either state or federal proceedings to date to 
``deregulate'' electricity. In some venues, it has been accorded 
serious consideration, but even in these circumstances, the major focus 
has been on developing competition in generation. This has been 
conducted without regard precisely to how end-users would directly 
participate.
    NYMEX is of the opinion that direct access is the most critical 
component of deregulation. In fact, without direct access, there can be 
no deregulation. With respect to competition in generation, suppliers 
would have at least as great an incentive to reduce their generating 
costs in serving a direct access market as one where they are steered 
into selling to a government franchised artificial buyer. Furthermore, 
direct access is the only vehicle through which the customized needs of 
end-users would be served.
    Under the alternative to direct access, transactions are 
concentrated in the state-franchised spot market pool which is subject 
to greater overall price volatility and higher incidence of spiking 
prices. Tending towards the extreme, California adopted policies that 
drove the overwhelming majority of their transactions into the spot 
market. A market centered around direct access transactions would never 
find itself at the mercy of the spot market to the extent California 
was. There would be far greater reliance on forward contracting.
    California's major flaws were that it undercut the development of 
direct access and forced its market to rely artificially on the spot 
market. It did this through mandating participation in the spot market 
by utilities, applying the add-on competition transition charge 
(``CTC'') to artificially render direct access transactions as 
uneconomic, and not providing an effective program for firm 
transmission. The result has been very limited participation in direct 
access in California.
    PJM (Pennsylvania-New Jersey-Maryland Interconnect), in these Mid-
Atlantic states' approach to electricity competition in the electricity 
marketplace, has promoted direct access to a much greater extent than 
California and they will benefit accordingly. Nonetheless, it has 
incorporated some programs which hinder direct access and, to the 
extent this is done, has introduced a level of artificiality to its 
market. In particular, PJM has adopted a policy governing transmission 
congestion that introduces a substantial level of confusion to 
participants in the direct access market. Though well-intentioned, it 
was adopted over the expressed objections of supporters of direct 
access. Any perceived benefits (and there is a debate as to whether 
there are benefits) are exceeded by the very real commercial costs. One 
of the impacts of this program is that increases the exposure of market 
participants to uncertain spot prices, the very structural flaw that 
has unraveled the California market. This is not to say that PJM is as 
exposed as California--its support of direct access programs provided 
some insulation--but it is by no means immune.
Critical Market Considerations Have Been Ignored
    The area of consideration where NYMEX has provided most of its 
input has been on market structure. NYMEX has advocated allowing market 
structure to develop on its own without government interference. NYMEX 
has not been very successful in this pursuit. California, in 
particular, rejected this position. In response to this, NYMEX 
predicted the ultimate outcome of California's policies to be lower 
competition, higher prices, and lower consumer value. The past eight 
months these predictions have become manifest.
Conclusion
    Perhaps the single most important thing that California failed to 
do in avoiding a supply and price crisis was to remove impediments in 
the electrical grid to true competition among buyers and sellers of 
electricity. Any California plan that addresses this issue should 
support direct access to the market for all buyers and sellers--the 
current system still greatly restricts access. California's plan relied 
on market artifices, frustrating the development of direct access and 
driving an overwhelming majority of transactions onto the ``spot'' 
market, where one is forced to trade only ``day-ahead.'' The result of 
the monopoly Power Exchange's ``spot'' market was higher volatility and 
higher prices for electricity. Buyers and sellers of power could not be 
reasonably assured that they could make or take delivery of electricity 
in forward contracts. The California plan stressed developing 
competition among generators, but failed to provide for the most 
critical component--direct access. This and many other critical factors 
which support truly competitive markets were omitted in the California 
plan. PJM has promoted direct access to a somewhat greater extent than 
California but it is still exposed to the same structural problems that 
are plaguing the California market.
    Mr. Chairman, once again thank you for the opportunity to testify. 
I will be glad to answer any questions.

    Mr. Barton. Thank you, Mr. Levin. We now want to hear from 
Mr. Adrian Moore, who is the Executive Director of the Reason 
Public Policy Institute in Los Angeles, California. Your 
statement is in the record and we recognize you for your 8 
minutes.

                  STATEMENT OF ADRIAN T. MOORE

    Mr. Moore. Thank you, Mr. Chairman, members of the 
subcommittee.
    It is household knowledge that the deregulation experiment 
or restructuring in California has proven to be a disaster 
across the Nation. Under pressure to deregulate and lower 
electricity rates, State legislators acted hastily without 
really understanding all the issues at hand, and we are now 
reaping the consequences of their actions. We have got 
something that is neither fish nor fowl. This came up in the 
first panel. We are not really the old, regulated monopoly 
structure. Neither are we a truly deregulated, competitive 
market. Something more like what Pennsylvania has, we are in 
this strange world of our own, unlike any other State that has 
attempted to deregulate its electricity market.
    Now State leaders are again acting in haste and with only a 
partial understanding of all of the consequence of their 
proposals, and we are moving very rapidly toward a State 
dominated, if not State owned and operated electricity system, 
the likes of which you don't see outside of Eastern Europe.
    Meanwhile, summer of 2001 projections are looking 
particularly grim. The most optimistic projections coming out 
of the California Energy Commission show us having a couple of 
megawatts better more supply than demand under the most 
optimistic assumptions. We know those assumptions are not worth 
the paper they are written on. Blackouts are inevitable this 
summer under any realistic view of the future.
    In the end, California residents have been denied the 
benefits of competition and choice in electricity that 
residents in other States have enjoyed. We heard in the first 
panel from several of these States. There are a number of 
others as well. So it is particularly a shame for California 
residents in that regard.
    So what went wrong in California? I am going to avoid the 
academic impulse to really drill down into things and just try 
to hit some highlights, many of which have already been 
covered. The first and most important though is California did 
not deregulate. They restructured, and what that means in a 
fundamental and easy to understand way is the day-to-day 
operational decisions and the long-term planning decisions of 
the electric utilities after restructuring were more controlled 
by the rules imposed by government than before. You could argue 
that it wasn't even a restructuring, it was just a switching 
around of deregulation to free up controls on the generation 
part of the market and impose far more controls on the rest of 
the electricity market.
    With a nod to some comments Mr. Doyle made earlier, another 
common failing in analysis of what happened in California is a 
tendency to oversimplify. The causes of price increases in 
California, if you just look at that slice of the problem, are 
enormously complex. I include in my testimony a diagram which 
is simply a flow chart--it is at the end--of all of the factors 
that you could argue fed into price increases. It filled the 
entire page with a sea of little bubbles and arrows of forces 
at work here. That is the diagram.
    Mr. Barton. I would commend all my subcommittee to actually 
study this. It took me 30 minutes last night, but I did study 
it and it is very useful.
    Mr. Moore. The lesson of that diagram is simple. Policy 
solutions are only going to carve out a little slice of that 
diagram and not really affect overall outcomes.
    Some specific pathologies with California's deregulation 
have already been discussed. The power exchange and the pool 
model differed dramatically from the pool as a theoretical 
concept, and that is implemented in other States primarily by 
being mandated and being a monopoly, and I will draw some 
parallels of that with other policy choices in a few minutes.
    The price control is another problem that has already been 
well discussed, but you know, put simply, prices are the 
mechanism that tell consumers when it makes sense to consume 
more or less of a good and tell suppliers when to invest in 
more or less production. Okay. That is a great tautology, but 
this is not a simple market. There is a good chance that the 
increase in wholesale prices or, I should say, a good chunk of 
the increase in wholesale prices in the California market is 
not simply a function of rules in those wholesale markets. It 
is not simply a function of supply and demand, and again, this 
goes back to my diagram. There are four quadrants in that 
diagram. There are forces acting on the supply side and forces 
acting on the demand side, market rules and institutions 
created by California law, and then those extra market forces, 
things going on in the natural gas markets, things going on in 
the market for emission controls, et cetera, et cetera, that 
impinge upon electricity markets. All of those things interact. 
So price decisions within the California market and price 
controls are necessarily abstracting away from all of that 
reality and therefore are bound to bring about distortions.
    Discouraging entry in new power supplies, the gentleman 
from Pennsylvania made some excellent points in that regard 
about the difference. The last numbers I saw California had 130 
companies offering to sell power to customers in that State. 
That is a remarkable difference from California where there are 
virtually none besides the original utilities at this point, 
and even at the beginning there weren't a whole lot in the way 
that was anticipated.
    And partly that is a function of the power exchange I just 
mentioned by creating a monopoly centralized exchange like 
that. The theory was that would encourage small suppliers to 
come into the market, but the fact is lots of other 
restrictions, including the price controls and so forth, 
discouraged that entry so you didn't wind up with the effect 
that was intended.
    And I also want to give a nod to Mr. Waxman and emphasize 
that I don't believe that air quality regulations as such are a 
significant part of the problem. Within the framework of the 
standards that exist, there is room to deal with this crisis 
without fundamentally revamping those standards. Now, I have 
lots of issues with the air quality standards, the national air 
quality standards, but out of academic honesty, I have to say 
that this particular crisis isn't a very good lever for 
revising those standards in any fundamental way. The problem 
really is how do we work within those standards and there is 
lots of room to work within those standards that are not being 
fully captured.
    RECLAIM came up earlier, and under RECLAIM, which is a 
market mechanism for achieving compliance with air quality 
standards, there are constraints imposed by that market on 
electricity generation as such, but at least it is a market 
mechanism and we don't want to explode that mechanism in an 
attempt to solve the electricity crisis. We should work within 
that mechanism, and there is room to do so.
    Now, I am not going to talk about the contrast with other 
States, though that is one of the questions the committee asked 
because the first panel addressed that, but I do want to point 
out something that tends to get overlooked. There is an 
organization called the Center for the Advancement of Energy 
Markets which has a very nice rating and benchmarking system 
for assessing State electrical deregulation schemes, and in 
June of 2000, they ranked California 16th in the Nation in 
moving toward a system that actually offered--their real bottom 
line benchmark is a system that offers consumers real 
meaningful choice and competition in the market. Now, that is 
16th in the Nation at a time when a little over 20 States had 
even done anything toward deregulation. So California has not 
been for some time a model of deregulation by any stretch.
    The really interesting thing about Pennsylvania, which did 
not come out in the last panel, is if you compare the actual 
reforms that were made--the institutional changes made in 
Pennsylvania and California, they are remarkably similar. The 
one overriding difference is no mandates. Pennsylvania used 
lots of the same institutions California did. They just made 
them voluntary like a real market. California made them 
mandatory, monopolies, controlled. They worked great as long as 
market conditions were exactly the same as they were at the 
time the legislation was passed. As soon as the world changed, 
those institutions had no built in mechanisms for change. They 
were not able to change, very fragile, and the whole thing 
started collapsing and we are living through the collapse right 
now in California.
    Mr. Barton. You are going to have to collapse the rest of 
your statement.
    Mr. Moore. I will go right down to recommendations here. In 
my testimony, I talk a lot about what the State ought to be 
doing but I won't belabor you with that. At the Federal level, 
the first recommendation I make is to recognize that the 
Federal role has to be limited. State law created California's 
problem. The bulk of any resolution lies with State law as 
well. FERC has done a very good job in spite of some criticisms 
that have been heard so far today. FERC has done a good job of 
trying to set California up for success, trying to create a 
competitive wholesale market in which a competitive retail 
market created by a State could function. The fact the State 
has failed to work within that wholesale market the way much of 
the many other States have, as we heard this morning, does not 
indict FERC's management of the wholesale market.
    Another thing the Federal Government, Congress, could worry 
about is ensuring to the extent that it remains important a 
functioning wholesale market. The fact that FERC has done well 
so far doesn't mean we can just forget about the wholesale 
market. Transmission issues have come up. I second a lot of the 
recommendations that have been made that if we don't start 
thinking seriously about transmission we are not going to be 
able to ship electricity back and forth across State lines the 
way we need to, and we are going to continue to run into these 
bottlenecks.
    Something that hasn't come up at all that is fully under 
Federal purview is Federal hydro power. Bonneville Power 
Administration and other Federal power entities, who are all in 
the California market, has highlighted how absurd and 
distortionary Federal hydro power sales policies are. 
Bonneville Power Administration made huge profits selling in to 
the California market. Municipal utilities in California made 
huge profits buying that power at cost, owned by me a taxpayer, 
but because I don't live in a municipal utility district, it 
was sold to my neighbors at that cost and sold to me at a 500 
to 1,000 percent markup, though we equally owned that 
electricity in an abstract sense, and this has really screwed 
up the market in a lot of ways, and I recognize this is 
political buzz saw.
    Congress has visited the issue of Federal hydro power sales 
many times. It is a very regionally divisive issue, but I think 
the problems in California have brought a whole new light on 
just how distortionary they are.
    Federal agencies need to do their part. There are a number 
of examples where unrelated policies have impinged upon 
electricity markets, and what has come up are environmental 
rules, but there are a number of other issues as well. I know 
of an example of a plan to use wind power to pump water uphill 
during the night when people aren't using the wind power and 
run it downhill during the day----
    Mr. Barton. You really do need to conclude. We will talk 
anecdotal evidence after the hearing. So get to your bottom 
line right now.
    Mr. Moore. Yes, Mr. Chairman. Federal agencies need to be 
encouraged and incentivized to help make power come online in a 
lot of different ways.
    And finally, formulating Federal restructuring policy at 
whatever level it occurs needs to recognize there are many 
paths to success. The first panel highlighted that. There is no 
one sure way to restructure a market and so a ``one size fits 
all'' solution is clearly contraindicated in this particular 
industry.
    Thank you.
    [The prepared statement of Adrian T. Moore follows:]
   Prepared Statement of Adrian T. Moore, Executive Director, Reason 
                        Public Policy Institute
                              introduction
    It is household knowledge nationwide that California's electricity 
restructuring has proven disastrous. Under pressure to deregulate and 
lower electricity rates, state legislators acted hastily without 
understanding the issues at hand or the consequences of their actions, 
creating a restructured electricity market that was neither fish nor 
fowl--neither the old, regulated monopoly system nor a competitive, 
deregulated market. Now state leaders are again acting in haste and 
with partial understanding and moving the state towards a state-
dominated if not state-run electricity system the likes of which is not 
seen outside of Eastern Europe. Meanwhile, Summer 2001 looms ahead, 
where the most optimistic projections show the state teetering on the 
verge of blackouts--the reality is those blackouts are a near certainty 
given current policy directions. In the end, California residents have 
been denied the benefits of competition and choice in electricity that 
residents of other states have enjoyed, and current policies look as 
though California rates will remain above national averages for years 
to come.
                     what went wrong in california
California Did Not Deregulate, and Why That Matters
    Many consider California a poster child for why electricity markets 
cannot and should not be deregulated. But this is wrong for two 
reasons.
    First, and foremost, California did not deregulate the electricity 
market, but rather ``restructured'' it, requiring far more state 
intervention in electricity transactions than existed before. In doing 
so, the law created a micromanaged market where suppliers of 
electricity have the ability and incentive to manipulate prices to 
their advantage, and utilities are forbidden to shop for better prices. 
It is simply not accurate to label California's electricity reform 
``deregulation'' when, for example:

 State regulators determine the prices customers pay for their 
        electricity;
 Utilities are not allowed to seek out competitive contracts on 
        their own, but must purchase electricity in a mandatory ``power 
        exchange'' with bidding rules that require paying the highest 
        bid price;
 The state determines what set of activities utilities 
        undertake, such as requiring them to sell their electricity 
        generation plants and buy electricity through the power 
        exchange;
 Price caps and onerous market rules discourage new competitors 
        from entering the market; and
 New regulatory strictures created by the restructuring law 
        constrain business decisions on such matters as plant 
        maintenance and transmission lines.
    The past year of price spikes and the looming threat of blackouts 
result not from ``unfettered free markets,'' but from the political 
micromanagement and market distortions that restructuring wrought.
    Second, dwelling on California's failures instead of on states that 
have had considerable success in deregulating electricity, such as 
Pennsylvania, is like skipping the Superbowl to watch the last place 
teams work on new plays. States and other entities that have made 
effective and efficient use of deregulation should be studied for 
successful strategies, rather than California's experience tarring 
deregulation with the brush of inevitable failure. Fortunately, despite 
news stories about a few states delaying their progress towards 
deregulation, most states are continuing to move ahead.
The Causes of Prices Increases are Very Complex, However Much We Want 
        Them to be Simple
    The simplistic story of why California's electricity prices 
skyrocketed over the past year is that demand for electricity had grown 
equal to, and even beyond, the supplies of electricity available in the 
state. Between 1996 and 1999, California's electricity demand grew by 
5,500 MW (14 percent), eight times the 672 MW (2 percent) increase in 
electricity generation capacity added over the same period. Of course, 
these numbers do not explain why new electricity capacity was not added 
as demand grew, or why demand did not shrink as supplies ran short.
    Even detailed studies of the California electricity market 
oversimplify the problem--usually highlighting about a half-dozen 
factors that influence prices. In fact, as the attached Figure (What 
Caused California's Electricity Prices to Rise?) shows, a tangled web 
of factors led to price increases.
    Many of the price influences in the Figure (the un-shaded ones) 
came about due to factors in other markets or natural changes in the 
economy, and there is little that policy makers can do to influence 
them. But many other price influences (the shaded ones) are shaped, and 
even created, by state policy decisions, most of them part of the 
restructuring plan. Notably, failure to provide incentives to build new 
power plants is not a failing of restructuring. Since the restructuring 
law passed in 1996 the state has seen an unprecedented growth in new 
power plants--after 12 years of no new plants at all, the last few 
years have seen nine new plants approved by the California Energy 
Commission. The problem is not that companies don't want to build more 
plants, the problem is that it takes four to five years from initial 
application to starting operations--in other Western states it takes 
half as long.
    The key lesson of this example, and of the attached Figure is that 
simple solutions are not possible--many different facets have to change 
for prices to return to normal levels. Policy alternatives open-ended 
enough to accommodate the interconnections between factors and 
resilient enough to accommodate changes in some or all factors may be 
able to bring electricity prices back to more normal levels.
Specific Pathologies of California's Restructuring
    California's 1996 restructuring law was intended to bring about 
competition and customer choice in power generation, but wound up a 
bundle of compromises, getting unanimous approval only by offering 
something for everyone (legislators, utilities, consumer groups, 
environmental groups, etc.), and creating a muddled, centrally planned 
market lacking equal opportunity for all participants, incentives for 
new firms to enter the market, and meaningful opportunities for 
customers to choose among service providers.
    For a few years these flaws caused not catastrophe but only 
disappointment. Virtually no new firms entered the market, so few 
customers switched providers, and prices did not change much beyond the 
mandated 10 percent rate cut. Indeed, most people seemed to forget 
California had restructured the electricity market.
    But the summer of 2000 changed that. For four years electricity 
demand had grown 14 percent with the state's population and the 
increasingly digital economy. Meanwhile, electricity supply had limped 
along to a mere two percent growth. The state had become a big energy 
importer, bringing in 20 percent of its electricity from neighboring 
states.
    In 2000, as temperatures started to rise, demand for electricity 
threatened to outstrip supply, and flaws in the system created by 
restructuring became gaping fractures, unleashing a flood of woe. 
Wholesale prices rose dramatically, causing radical price spikes in San 
Diego where retail prices were no longer capped. Caps were quickly re-
imposed in San Diego, but as the utilities were forced to pay far more 
for electricity than they were allowed to charge customers, their 
losses began to rack up to billions of dollars. Meanwhile, with prices 
capped, customers had no incentive to conserve electricity and thus 
moderate demand, and the state began to flirt with blackouts. Winter 
failed to bring sufficient relief, and California's crisis has 
continued to grow.
    California's electricity restructuring embraced some vividly unique 
policies, such as establishing a mandatory, centralized market for all 
exchanges (the Power Exchange), vesting complete control of the grid in 
a centralized body (the Independent System Operator), and rejecting the 
messy, uncontrollable practice of bilateral forward (long-term) 
contracts between utilities and power generators.
    A complete discussion of restructuring elements that have proven 
problematic, and in some cases disastrous, would be tedious, so I will 
touch on just five fundamental elements. That five substantive problem 
areas can be singled out is a lesson in itself--something as complex 
and dynamic as a competitive market cannot be planned and packaged in a 
piece of legislation. Attempts to repair the mistakes of restructuring 
can easily fall victim to the same hubris, rather than focusing on 
simplifying the rules and minimizing interventions and distortions so 
that market forces can work. Examining these five problem elements of 
the restructuring demonstrates a cataclysm of unintended consequences 
and an overall inability of the structure to adapt to changing market 
conditions.
    A. Planning the Market--The Independent System Operator and Power 
Exchange--Participants who crafted California's electricity 
restructuring did not have much faith in the market process. 
Legislators were concerned about loss of control over the system and 
that customers would not understand it. The utilities came from a 
regulated monopoly culture and were not used to operating in 
competitive markets. Consumer groups are perpetually suspicious of 
market power and abuses by corporations. Environmental groups did not 
want customer choices to undermine existing conservation and renewable 
resource mandates. For all of them, restructuring meant developing a 
set of specifications for the market that would achieve the new, 
vaguely defined objective of competition, while retaining those 
elements of the old system deemed imperative.
    Two characteristics stand out about the rules for the Power 
Exchange (PX) that restructuring put in place. First, it is a mandatory 
centralized market, with the private utilities required to buy and sell 
all of their power through the PX, and second, the bidding rules 
created a market-clearing price that aggregated prices upward.
    The market was mandatory for several reasons. Restructuring 
architects wanted to be certain utilities did not tie themselves down 
with long-term contracts that would lock in current prices when 
everyone expected prices to fall. Regulators were also concerned that 
the market be transparent--everyone can see what is being bid and 
bought in the PX. They worried that a market where utilities could make 
contracts directly with power generators or could use alternative 
markets would make it difficult for consumers to see how power was 
being exchanged in the market. Unfortunately, reality has not lived up 
to the ideal. Data on bids and transactions take months to become 
available, and the information is often incomplete or aggregated. 
Nothing in the data on the PX Web site that helps consumers to choose 
among power providers.
    The second noticeable fact about the PX--its bidding rules--arose 
from concerns similar to the first. In order to provide the 
transparency regulators sought, they enacted bidding rules to create a 
market-clearing price. Think of this simplified version of the rules. 
Suppose there are 12 power generators, each of which provides 10 units 
of electricity. Each day they bid what price they want to be paid for 
their 10 units of electricity the next day. Suppose total demand for 
electricity is 100 units. The PX then starts with the lowest bid and 
adds up the bids until it reaches 100 units (10 power generators). 
Since the PX governs all transactions between the utilities and 
generators, and pools them, the market-clearing price is the one that 
delivers all 100 units demanded--which is the highest of the 10 
selected bids (if the price offered was lower, the 10th generator would 
not sell, and total demand would not be met). All sellers receive this 
highest bid, market-clearing price, and the utilities have to pay that 
price for all their electricity.
    As long as supply is greater than demand, bids under this rule 
should be competitive. The two highest-bidding power generators' bids 
are rejected, so the generators have an incentive to bid competitively. 
When the PX was created, everyone assumed supplies of electricity would 
grow faster than demand as competition stimulated new entry into the 
market. But, due to other elements of the restructuring and existing 
regulations, market entry and increasing supplies did not materialize 
(more on this below). So, in our simple story, total demand rose to 120 
units of electricity. Once that happened, power generators soon 
realized that all of their bids would be accepted no matter what price 
they asked. With a myriad of forces at work driving up wholesale 
electricity prices (again, more on this below), PX bidding rules 
allowed, and even encouraged, power generators to charge very high 
prices and make very large profits.
    Meanwhile, the alternative to buying power in real time in the spot 
market is to contract for delivery of electricity at a specified price 
over a specified period--forward contracting. Forward contracts lock in 
a price, so if prices go up, the buyer has made a good deal, but if 
prices go down, the seller made the better deal. But both buyers and 
sellers often prefer to have some forward contracts to balance the 
risks of the spot market--uncertainty and volatility.
    By requiring utilities to buy all of their power in the PX, the 
restructuring bill did not at first allow the utilities to enter into 
forward contracts. In 1999, the PX began to offer forward contracts, 
but the PUC would not allow the utilities to contract forward for more 
than five percent of their load. The PUC also would not allow the 
utilities to form forward contracts directly with power generators 
(bilateral contracts), but limited them to the PX block forward 
contracts.
    Only in August 2000, well into the summer crisis, did the PUC 
relent and allow the utilities to seek bilateral forward contracts 
outside the PX. In December, FERC released the entire 40,000 megawatt 
(MW) load in California from the mandatory PX, granting utilities 
discretion to contract forward as much of their load as they deemed 
necessary through the PX block forward contracts or bilateral forward 
contracts. However, the PUC has yet to relax its restrictions on 
utilities' forward contracts.
    The resistance to allowing forward contracts has several 
rationales. The arguments against forward contracting, especially 
bilaterally, are the same as those in favor of a mandatory PX. First, 
since the PX was intended to offer the perfectly planned market for 
real-time exchanges, there was deemed to be no need for forward 
contracts. Restructuring anticipated plentiful supply and a competitive 
spot market that would drive prices down. Allowing utilities to forward 
contract would probably mean they would lock themselves into high 
prices, and the state would wind up having to let them pass those 
higher prices on to customers. Second, bilateral forward contracts 
would not be transparent to consumers as are PX transactions, and thus 
would not feed into their choices.
    But this is static thinking. As customers are given real choices of 
electricity suppliers, utilities have to factor those choices into 
their forward contracts as well as spot purchases. Utilities are 
obliged to accommodate the supplier choices of the customers in their 
distribution area. If they wind up with high-price contracts or too 
much load forward, there is no regulatory failure, just a mistake by 
the utility, for which their shareholders must pay. There is no need 
for a regulated pass through. And customers don't care about how the 
utilities manage their load; they will shop for price and ancillary 
services.
Price Controls
    Prices are perhaps the most fundamental building block of markets, 
the mechanism by which information is carried through the economy, 
encapsulating data about costs and tradeoffs so vast that even today's 
computers cannot predict price changes. Put simply, prices help tell 
consumers when it makes sense to consume more or less of a good, and 
tell suppliers when to invest more or less in production.
    Unfortunately, cutting and capping rates is almost irresistible to 
some politicians as they craft restructuring. It offers oft-illusory 
stability during the transition to competition, as well as an immediate 
``accomplishment'' politicians can point to. The architects of 
California's electricity restructuring were quick to jump on the 
bandwagon, severing prices from the market. The law mandated an across-
the-board 10 percent rate cut, and created a Competitive Transition 
Charge (which came close to offsetting the cut) to finance paying down 
utility stranded costs. The caps on retail rates were set to stay in 
place for each utility until it had paid off its stranded costs, or 
2002, whichever came first.
    These price controls are the cause of many of California's current 
problems. They: a) discouraged new firms from entering the California 
market so customers have never really been offered meaningful choices 
among electricity providers; b) reduced incentives to invest in new 
electricity generation plants in the state or new transmission lines to 
import electricity, either of which might have alleviated the current 
electricity shortage; c) blocked all signals about electricity 
shortages from reaching customers, leaving them no incentive for 
voluntary and gradual demand reductions that might have minimized the 
current crisis; and d) created a wedge between wholesale and retail 
prices that led to billions of dollars in losses by state electric 
utilities.
    By cutting rates 10 percent from the start, the law set a barrier 
to entry by new firms. Most people will not switch to a new electricity 
provider unless they are offered a significant price reduction. With 
rates already cut 10 percent, entering companies would have to offer 
electricity for nearly 20 percent less than the pre-restructuring price 
to get many customers, and that is hard to do right off the bat. Even 
worse, the law required new companies selling electricity to customers 
to charge the Competitive Transition Charge to help pay down the 
stranded costs debt. That added to the new sellers' costs, making it 
even more difficult to find a way to offer customers dramatic enough 
rate reductions to persuade them to switch companies.
    The result protected the incumbent utilities, as few new companies 
chose to enter California's electricity market. Customers, expecting 
``deregulation'' to bring a flood of marketing mailers and dinner-time 
solicitation calls to switch electricity providers, are rarely offered 
any choices, and today still get their electricity from the same 
company with the same service options as they always have. As of June 
2000, only about 2 percent of customers in the state had switched 
providers, and many of them were industrial and large commercial sites.
    Price caps also discouraged investment in new power plants in 
California. In a free market, as demand expands, prices will rise until 
supply expands as well. The rising prices tell producers it is time to 
add capacity and give the ones who best estimate future demand better 
returns on their investments. But with price controls in place, no such 
signals are sent to suppliers. Instead, they can invest the same money 
in building power plants elsewhere where there are no price caps to 
minimize their return on the investment. And electricity plants have 
unique risks--some plants will not run all year, only going online when 
demand reaches high levels. Those plants have to cover a whole year's 
costs (fixed and variable) in those limited hours of operation, and 
prices must go up at such times of high demand to balance things out. 
But that balance is knocked flat by controls that don't allow prices to 
fluctuate with supply and demand.
    In simple terms, the reason for the current electricity crisis in 
California is that demand grew while supply remained flat. As demand 
exceeded supply and prices were capped, limiting conservation, the 
state started to experience shortages. Prices that rise as demand rises 
not only signal suppliers to add production but also tell consumers 
they may want to consume less. Population and job growth drive up the 
total statewide demand for electricity, even if homes and businesses 
are each using about the same amount they always did. If that makes 
prices go up, consumers will look for ways to conserve until supply 
increases and brings prices back down.
Discouraging New Power Supplies
    California is not an easy state in which to build a power plant. 
Licensing procedures and rules are expensive and time-consuming. 
Environmental regulations are among the most stringent in the nation, 
and power plants are unpopular neighbors, often sparking resistance 
from local residents. In California, plants often take three to five 
years from concept to operation, while in other Western states the 
process can be as short as one year.
    Thanks to these barriers, in 1996, as restructuring was debated, 
California had not seen a new power plant built in a decade. Yet the 
state still had excess energy generation capacity. Indeed, one reason 
for restructuring was to let market incentives determine capacity 
decisions. The architects of restructuring assumed that competition and 
profit opportunity would bring new power plants to keep electricity 
supply well ahead of demand in spite of the difficulties state 
regulations present. And, despite restructuring's failure to allow a 
competitive market, restructuring did stimulate new capacity--between 
March 1998 and the end of 2000 the California Energy Commission had 
licensed nine new power plants that will generate over 6,000 MW, about 
16 percent of the state's average daily load.
    But these new plants are so slow in coming--the first won't be 
online until mid-2001--they won't help solve the current shortage. The 
long delays in adding capacity in California had set the state on the 
road to shortages long before restructuring. Since 1988, the state 
energy commission has been predicting that demand would catch up with 
and surpass supply. But state leaders did nothing to change the 
barriers that discouraged new companies from building new power plants. 
At first, discussions of deregulation may have discouraged new 
investment, since private companies did not know what kind of law the 
state would pass. But restructuring ended that uncertainty and 
companies saw an opportunity to make money from growing demand in 
California. The new plants they are now building will likely assure 
that the current shortage will not persist.
Government-Owned Utilities Are Protected from Competition, but Allowed 
        to Profit from it.
    Government agencies generate almost a quarter of the electricity in 
California (see Figure 2) and thus are an important part of the state 
electricity market. Restructuring allowed municipal utilities (munis) 
to choose whether or not to enter the competitive market. So far they 
have not chosen to do so. Instead, munis and other government power 
generators took advantage of the PX and ISO to sell their excess power 
and earn considerable profits in the process.
    In 2000, government generators made big money from the wholesale 
price spikes that caused the state so much pain. State agencies and 
local water authorities sold their excess power into the grid--the 
State Water Project, for example, made $23.6 million in profit from 
selling power at high PX prices. Large munis followed suit--the 
granddaddy of them all, the Los Angeles DWP made close to $200 million 
in profits. Even small cities like Redding, which earned $8 million in 
profits, took advantage of the situation.
    Some of the power that munis sold came from the Bonneville Power 
Administration (BPA), federal hydropower that is some of the cheapest 
electricity in the nation and is offered first to government utilities 
before private utilities can buy any. California's munis bought all of 
this ``preference power'' they could and resold it into the PX and ISO 
for five to ten times what they bought it for. BPA itself sold power 
into the California market and in 2000 earned $207 million in profits 
(a 116 percent increase over the previous year).
    Because they have made money during the crisis, while the private 
utilities have run up huge losses, munis argue both that deregulation 
is a bust and that government ownership of utilities is superior to 
private ownership. But the munis' sunny days are an artifact of 
restructuring's rules. Unlike the state's private utilities, munis were 
not required to sell off their generation plants, were not forbidden to 
use forward contracts to hedge against price increases, and they had 
the option of buying from and selling into the PX. Ironically, 
restructuring wound up shackling the state private utilities while 
leaving the munis free from any state restrictions.
    In fact, evidence indicates that munis are less efficient than 
private utilities and could benefit from competition. Munis' average 
charges for residential customers are slightly lower than the average 
for private utilities but a bit higher for industrial customers. But 
munis' average total cost for electricity generation is 10 percent 
lower than for private utilities, thanks to a batch of subsidies. Since 
munis' rates are not 10 percent lower, the difference is waste and 
bloat. A number of studies have shown that private electric utilities 
are more efficient than munis.
    As California and other states continue to move toward competitive 
electricity markets, the distortions caused by government utilities' 
exceptions and subsidies have to be rectified. Federal preference power 
is owned by all U.S. taxpayers, but since it is offered with preference 
to munis, it serves to transfer wealth from customers of private 
utilities to customers of munis. The fight to make federal hydropower 
equally serve all U.S. taxpayers has been long and contentious, but 
recent events in California once again highlight the need for such 
reforms.
    Also, a state's electricity market cannot be truly competitive if 
customers in many of its largest cities are not allowed to choose their 
electricity provider, and when tax policies and regulations give 
government generators advantages over private ones. As restructuring 
moves forward, munis should be integrated into the competitive market.
Divestiture--Determining Industry Structure from the Top Down
    Before restructuring, the state's electric utilities were 
vertically integrated, meaning they owned all elements of the system--
generation, transmission lines, and distribution systems. Fearful that 
incumbent utilities would give their own power plants favorable access 
to the grid and thus stifle competing power generators, restructuring's 
architects created strong incentives for utilities to sell off (divest) 
their power generation plants. The utilities responded by quickly 
selling their natural gas power plants, though, due to resistance in 
court by environmental groups, their hydropower plants have not been 
sold.
    Today, many state leaders have changed their mind about utilities 
selling the rest of their power plants--Gov. Davis has proposed 
forbidding the utilities to sell any more power plants, and a bill to 
restrict utility asset sales was introduced in the state Assembly. 
These proposals make the same underlying mistake as the original 
decision to get utilities to sell their generators, assuming the future 
of the market is known and there is a ``correct'' industry structure 
for that known future market.
    Deciding what assets an industry should or should not own requires 
knowledge about the future, knowledge public officials don't have. 
Regulators find it easy to theorize about possible bad behavior by 
vertically integrated utilities in a competitive market but are less 
able to predict possible harm to the market from dis-integrating 
utilities. The policy flip-flop of California's leaders on divestiture, 
as market conditions have changed, brings home the consequences of 
dictating market structure. There are many advantages to vertical 
integration--reducing transaction costs, economies of scope (producing 
multiple goods more cheaply), improved coordination, and hedging 
against risks, to name a few.
    Public policy should not dictate industry structure. Utilities can 
best make their own decisions about what assets they need to own to be 
competitive. When deregulation aims only to make electricity generation 
competitive, regulators overseeing utilities' distribution operations 
will have to guard against utilities favoring their own power plants 
over those chosen by electricity consumers. Effective rules linking 
customer supplier choices with requirements into the grid will make 
such oversight easier.
        stark contrasts: successful deregulation by other states
    In the rush to condemn electricity deregulation as the cause of 
California's current woes, many observers have overlooked the success 
stories in other U.S. states and worldwide, as well as the well-crafted 
plans of states like Ohio and Texas. These examples show that 
California's chaos is not the result of deregulation, but rather the 
consequence of their politicized restructuring process.
    Indeed, the Center for the Advancement of Energy Markets has ranked 
state deregulation plans according to how effective they are in 
transitioning from monopoly to competition and customer choice. In July 
2000 they ranked California 16th in the nation, with many states 
ranking lower only because their deregulation plans were incomplete.
    At the top of the rankings is Pennsylvania, where customers were 
given meaningful choices between electricity providers, new companies 
were encouraged to enter the market, prices have gone down for those 
who shopped for price, and ``green (including renewable) power'' has 
achieved a respectable market share. Most importantly, Pennsylvanians 
reveal in surveys that they are happier with their electricity service 
than most people in the nation. Deregulation--done right--does work and 
does benefit consumers.
    Pennsylvania, which passed deregulation legislation at the same 
time as California, has fully implemented deregulation for all 
customers. Pennsylvania's customers have seen average prices decrease 
and an increase in service options, including ``green power.'' Of the 
states that have deregulated wholesale and retail electricity markets, 
Pennsylvania has had the highest rate of customers switching to 
alternate generation providers, and Pennsylvania's customers express 
the highest satisfaction with their electricity services in the United 
States. Pennsylvania achieved this deregulation success through market-
based default (or standard offer) prices, non-mandatory divestiture of 
generation, accelerated phase-in of all customers, and the use of 
financial instruments and regional markets, all of which encouraged 
alternate providers to enter the market and create real competition. 
Other states with early deregulation, such as Massachusetts and Rhode 
Island, did not experience Pennsylvania's success, and have recently 
adopted policies that have succeeded in Pennsylvania (such as higher 
default prices to encourage entry).
    Other nations began experimenting with electricity deregulation 
before the United States, most notably the United Kingdom, Australia, 
Argentina, Norway and New Zealand. The United Kingdom's process has led 
to a 26 percent average price decrease and improved satisfaction with 
electricity service. Australia's national structure, with states 
responsible for deregulation decisions, resembles the structure of the 
United States more than the United Kingdom's centralized government 
effort. Since 1991, Australia's customers have experienced an average 
price decrease of 24 percent.
    Texas also appears poised to succeed in realizing the benefits of 
electricity deregulation. While its legislation went into effect only 
in June 1999 and its pilot program to test the process starts in June 
2001, many view Texas as a blueprint for deregulation success. It has 
incorporated the negative lessons from California with the successes of 
Pennsylvania, the United Kingdom, Australia and elsewhere to craft a 
process that gives new providers real incentives to enter and provide 
competitive services at lower prices to Texas consumers. The Texas 
legislation stipulates a ``price to beat'' or default price that is six 
percent below the January 1999 average price; this price is low enough 
to generate price decreases for consumers but high enough for market 
entrants to see profit potential. The ``price to beat'' then becomes a 
retail cap that is effective for only five years. Also, Texas has not 
mandated full generation divestiture, but has followed the Pennsylvania 
model of restructuring studies, with the incumbent utility retaining no 
more than 20 percent of the generation capacity in their service area. 
The full retail market is set to open in January 2002. Finally, but 
perhaps most importantly, Texas will not establish a centralized 
electricity market like California's Power Exchange, but will instead 
allow buyers and sellers to transact how they see fit through for-
profit financial markets. This flexibility will enable all market 
participants to limit their risk (and their consumers' risks) of energy 
price volatility, and to be creative in devising financial instruments 
to manage that risk.
    California's experience is in no way representative of the 
consequences of deregulation; in fact, when done well, these success 
stories show just how much benefit both consumers and innovative 
sellers can gain from electricity deregulation. Electricity 
deregulation can deliver consumer choice, consumer savings, and a 
business climate that encourages entrepreneurship.
                            recommendations
    California's electricity crisis requires policy alternatives that 
balance immediate approaches to ensuring sufficient supplies of 
electricity and solving the utilities financial crisis with longer-term 
approaches that will bring California to a competitive market with 
customer choices, lower prices, and a more reliable power supply.
    There is no easy way out of the current crisis--the forces acting 
on the market are very complex, as is the electricity market itself. 
Policy makers must act quickly, but not in haste, avoiding 
interventionist policies that lock in yet another round of unintended 
consequences at some future date. With a little time to learn from the 
mistakes of the initial restructuring and from more successful 
deregulations elsewhere, the state's leaders can craft policies open-
ended enough to accommodate the complex interconnections in the market 
and resilient enough to accommodate changes in market conditions. To 
that end, we offer the following policy recommendations.
Recommendations for the State Level
    1. Articulate a vision of moving toward competition that will 
alleviate concern of regulatory intervention. Too many state leaders 
are offering isolated policy ideas, would-be silver bullets, and 
conflicting proposals that fail to tell the market what direction 
policy is moving and what endstate is sought. Inflammatory, populist 
rhetoric by state leaders replete with threats of police action and 
takings only exacerbates uncertainty about California's electricity 
market. A clear and well-articulated endstate and set of goals will 
help policy makers formulate coherent and coordinated policy proposals 
and reassure the public and the market.
    2. Change the law to make the PX voluntary. A spot market is a 
necessary component of the overall electricity market. But centralized 
mandatory pools bring to the market perverse incentives and rigidities 
that create distortions and an inability to adapt to changing market 
conditions. As a voluntary spot market, the PX can become an 
independent competitive exchange and develop bidding rules that attract 
both buyers and sellers.
    3. Help alleviate the barriers to long-term power contracts. State 
leaders have acknowledged that the utilities need to add forward 
contracts to their portfolios to hedge against wholesale power price 
fluctuations but have not developed adequate policies to help make 
forward contracts happen.
    The governor's 14 January proposal to have the state enter into 
forward power purchase contracts is not wise. The state would be taking 
on futures risks with no experience or skills in evaluating those 
risks, and putting taxpayers at risk for its mistakes. One unavoidable 
lesson of California's electricity restructuring is that policy makers 
are ill-equipped to accurately predict how markets will evolve.
    State leaders could achieve similar results by offering state 
guarantees to back utilities' initial forward contracts. This would 
alleviate the credit risk that is driving up forward prices offered to 
utilities, but dilute the taxpayer's risk and let the utilities 
negotiate the contracts with their experience, expertise, and incentive 
to prognosticate correctly.
    State leaders should immediately convene a summit of leaders from 
state agencies and cities that generate electricity for resale to 
explore opportunities for cost-based forward contracts with the 
utilities. Government agencies control about one-quarter of the state's 
power generation and resell about 40 million MWh each year. Though 
their loads are very seasonal, if even 10 to 20 percent of that load 
could be forwarded to the utilities at cost, it would help push forward 
prices down and lever additional contracts.
    4. Create a plan for phasing out price caps. A market cannot work 
without market prices--consumers don't know when to reduce consumption, 
and suppliers don't know when to increase production. In the short run, 
price caps only guarantee that utilities will continue to bleed red 
ink, suppliers will look for other markets in which to sell, and 
consumers will have no incentive to conserve electricity. Putting a 
stop to further losses will also make it possible for the utilities to 
purchase power on their own.
    Gradually, but predictably, raise the price caps. Convene a working 
group to create an initial schedule and revise the schedule 
periodically as market conditions change.
    Tie rate cap increases to milestones in accomplishing other policy 
changes that increase competition and customer choice in the market and 
reduce utilities' market power. If other policy changes are successful 
in allowing market entry and new competitive choices for consumers as 
well as increased electricity supply, the timetable to remove price 
caps can be moved up.
    Meanwhile, implement a system to guard against exercise of market 
power in utilities' customer charges. Until consumers have options in 
the face of high prices or bad service from utilities, regulatory 
oversight is necessary.
    Encourage utilities to implement real-time pricing and metering so 
that consumers can adjust their use of electricity as prices change. 
Implementing real-time pricing and metering can also justify 
accelerating the schedule for removing price caps.
    5. Accelerate completion of new power plants with a constructive 
approach to licensing and enforcing environmental rules. Restructuring 
spurred a level of investment in new power plants not seen in decades 
in California, but the permitting and construction process takes years 
longer than in other Western states. The problem is not as much the 
standards as how they are enforced. State regulators do not care if 
power plants get built, only that the standards are followed. State 
leaders must get state regulators on board with a new, constructive 
approach that works with developers to get power plants built without 
violating the standards. In an 8 February Executive Order, Governor 
Davis embraced this approach to speeding up expansion of California's 
electricity supplies.
    6. Integrate municipal utilities into the market as it becomes 
competitive. California's electricity market will not be truly 
competitive if customers in many of its largest cities are not allowed 
to choose their electricity provider. As restructuring moves forward, 
municipal utilities should be integrated into the competitive market. 
Over the long run, state leaders should challenge the federal 
government to end the inequities and wealth transfers that federal 
subsidies for municipal utilities and preference distribution of 
federal hydropower inflict on California residents.
    7. Do not dictate utility industry structure. Requiring the 
utilities to sell their power plants turned out to be a mistake when 
market conditions changed in ways policy makers did not predict. 
Forbidding utilities to sell power plants repeats the same error. 
Policy makers do not know the future of the electricity market and 
should not lock the utilities into any arbitrary structure based on the 
exigencies of the moment. Ensuring that utilities do not favor their 
own generation plants is better served by developing good rules to 
govern how customer choices are reflected in grid loads, by encouraging 
distributed generation, and ultimately competitive electricity 
distribution systems.
    8. Work out a deal with the utilities to split their current losses 
between their customers and their shareholders. Since state policy is 
really to blame for the current crisis, customers and the utilities 
will have to share the costs, and utilities should not be able to take 
back all the losses from customers once rates are uncapped. To spread 
out the portion that will be passed on to customers, the state might 
back a securitization (as was done with the utilities' stranded costs).
Recommendation for the Federal Level
    1. The federal role must be limited. State law created California's 
problems, and the bulk of any resolution of the crisis lies with state 
law as well. FERC has done a good job of setting California up for 
success, making the changes in wholesale market rules necessary to 
return California to the path to a competitive electricity market. 
Current federal policy allows the states to pursue deregulation their 
own way and at their own pace, and for most this has proved beneficial. 
Yet, I recognize the pressure on Congress (especially the California 
delegation) and the Administration, to do something!
    2. Ensure a well-functioning wholesale power market. FERC has done 
a great job of allowing a functioning wholesale electricity market to 
evolve. To build on that success, it is vital that the federal 
government address, as much as it can, disincentives to invest in 
transmission lines, which are increasingly crucial to the regional 
movements of electricity on which a competitive electricity market 
depends. Current rules limit the rate of return on transmission lines 
to a level that does not compensate for the high risks that political 
uncertainty impose on transmission investments. Allowing higher rates 
of return until all parts of a region are deregulated would encourage 
investment.
    3. Reform policies for selling federal hydropower. BPA's role in 
the California market has highlighted how absurd and distortionary are 
the policies for selling its power. In the Northwest, BPA power selling 
policies are so skewed it makes sense for some factories to shut down 
and resell their electricity. In California, some residents benefit 
from low-cost federal electricity while others do not, though as 
taxpayers they all ought to have equal rights to it. The only sensible 
policy for selling this electricity is in open auction to any viable 
purchaser. And yes, I recognize this recommendation is a political 
buzzsaw, but it is still right.
    4. Federal agencies need to do their part. In many small ways, 
decisions by federal agencies have significant impact on California's 
electricity market. I know of a case where the Interior department has 
for years delayed a land transfer that would allow a project storing 
off-peak wind power for peak periods, even though Interior supports the 
land transfer--its just bureaucratic inertia. In another case, logging 
and road restrictions in California's National Forests restrict the 
collection of biomass (dead wood, underbrush, etc.) used to power 31 
power plants in California that generate nearly two percent of the 
state's peak electricity demand--enough to make the difference between 
a Stage 3 power alert and blackouts. All federal agencies need to work 
within their means to help the growth California's electricity supply, 
and they need not compromise other policy goals to do so.
    5. In formulating federal restructuring policy, consider the many 
paths to success. California's failure is unique--other states have hit 
bumps in the electricity deregulation road, but relatively minor ones. 
Pennsylvania shows that deregulation can succeed, and Texas shows the 
process can be refined yet further (though we don't know the outcome 
there yet). The bottom line is that the move from regulated monopoly to 
competitive markets is an evolutionary one, with no single right path, 
and no static end-state to arrive at. Policies have to be open-ended 
and flexible, and balance transitional interventions with longer-run 
removal of market restrictions. And patience is a virtue here--markets 
take time to evolve, if we will wait for them.

    Mr. Barton. Thank you. Last but not least, we have Mr. John 
Fielder, who is the Senior Vice President for Regulatory Policy 
and Affairs for the Southern California Edison Company, a 
company that has not only felt the pain, has actually lived the 
pain and is living it today. We welcome you. Your statement's 
in the record and you are recognized for up to 8 minutes to 
elaborate on it.

                  STATEMENT OF JOHN R. FIELDER

    Mr. Fielder. Thank you, Chairman Barton, Congressmen. I 
wish I could say it was a pleasure to be here, but right now it 
is not a pleasure to be anywhere. I mentioned earlier maybe it 
is even better to be here than in Sacramento these days because 
it is a circus in Sacramento.
    This is a mess. I am not going to spend a lot of time 
reviewing how we got here. I think the prior panel and the 
prior speakers have kind of touched on most of the issues. I 
would like to spend the time I have talking about where we 
think we ought to go to get out of this mess.
    I think everybody agrees that we made serious mistakes. I 
say we in a collective. There is a bit of a misperception that 
the utilities were kind of behind deregulation in California. I 
don't want to go back and do finger pointing too much, but the 
Public Utilities Commission started the deregulation process 
over the objections of the utilities in 1994, and we wrangled 
for about 2\1/2\ years before we ever got to the legislature 
with AB 1890. The utilities were happy being vertically 
integrated, noncompetitive utilities. We have been monopolies 
for a hundred years. We thought it worked fine.
    The compromise that came about in the legislature was only 
in reaction to the PUC's action, and I think a lot of the 
problems with 1890 and a lot of the problems with the way we 
implemented it was the fact that it was a compromise and 
somebody mentioned we had all the parties at the table, and you 
know what that looks like when you get done with a several 
month process that turns out to be a compromise.
    Most of the problems need to be resolved at the State 
level, and I think there are 1 or 2 things that can be resolved 
or helped at the Federal level looking forward. I mean, this is 
such a mess that some of the options that we might have had 
open to us going forward are gone.
    The first thing that the State needs to do is to make the 
utilities financially viable. Now, in the rhetoric of 
California, what this implies is rate increases and it does 
mean raising the retail rates for customers that have used the 
power that we have delivered to them. We have run up debts of 
about $5 billion, $5.5 billion dollars.
    Mr. Barton. We is just your company?
    Mr. Fielder. Our company. I am sorry, I am talking about 
Southern California Edison now. PG&E has got its own problems. 
They have actually run up a little more than we have and that 
has happened in 8 months. Eight months ago we were a 
financially healthy company. We were a single A-plus rated 
company. We had good bond ratings. We were profitable. Today, 
our shareholders have lost two-thirds of their value. We have 
had to suspend the dividend for the first time in the company's 
100-year history. We have had to lay off over 2,000 employees, 
cut back on service, minimize investments in the distribution 
system. It has just torn this company asunder.
    On a going forward basis we have to raise rates to amortize 
some of this $5 billion that we have paid out and borrowed on 
customers' behalf to deliver energy. Now, a lot of people think 
that that is going to be a big rate increase. Let me tell you 
that with the plan that we have proposed to amortize it over 
10-years and using some bonds that would be issued by the 
State, it is less than a penny a kilowatt hour to amortize that 
past debt. That would enable us to pay the bills that we 
haven't been paying. We have over $700 million in bills. We 
haven't paid generators. We haven't paid qualifying facilities 
because we are out of cash. Our credit lines are borrowed to 
the max and we don't have any money and it is kind of like when 
you used all your credit cards and now it is time to pay the 
bill, there is no money there to pay, and we can't borrow 
anymore.
    So we need to raise the rates to amortize the past 
undercollection. That will get us our credit lines back. We can 
then borrow money as we have for years and try to procure power 
and keep the utility in balance with the demands that the 
customers are placing on us. One of the things that has 
happened in the last 2 weeks is the State has passed a law now 
that says they are going to procure the power for customers 
that is over and above what the utilities can provide through 
their own generation and their own contracts.
    So the State is in the power business. The State Water 
Resources Board is acquiring power today. They are trying to do 
it under long-term contract. They have not got very much of the 
supply under long-term contract. They are spending, as somebody 
mentioned, about a billion dollars a month. I think that is 
low, and you know even with a $10 billion surplus in the State, 
they will run through that without some other market reforms in 
just a few weeks or a few months.
    The second thing we need to do is we need to get off the 
spot market, as people have said. We need to get into long-term 
contracting. The State has taken that over. We had proposed 
that the utilities should do that. It is a little bit of a 
revisionist history, some of the stuff that was said in the 
earlier panel.
    We saw as early as 1998 the risk that you could have with a 
spot market. In the summer of 1998 we had spot prices run up to 
prices that we had never seen. Now, they only stayed there for 
a few hours or a few days and then came back, but in the 
spring, in March 1999, we actually applied to the Public 
Utilities Commission to get authority to do bilateral contracts 
and get off of the spot market, even though this was 
inconsistent with what the PUC's policy was. That application 
was opposed by virtually everybody in the State, generators, 
marketers, energy service providers, big customers, small 
customers, because it was kind of the mantra that we are trying 
to get the utility out of this business, and if you tie up 
long-term contracts to supply and get lower prices than what 
they think the competitive market will yield, we won't have a 
competitive market, we won't have direct access.
    So that mentality was there early and in spite of our--over 
the last 2 years we have tried seven times to get authority to 
do bilateral contracts and not until last summer, when the 
horse was out of the barn by then, were we given the authority 
and even then it was with a lot of strings attached.
    What bilateral contracts we were able to enter into we had 
canceled because we are not creditworthy anymore. So the State 
is basically in the power procurement business. For how long, 
we don't know.
    The third and fourth things that the State needs to do, and 
they are finally getting around to this, is we do need to 
change the permitting processes and put some more incentives in 
place to get new generation built in the State. When we started 
this deregulation process, everybody thought the common wisdom 
and all the forecasts were that we had 30 percent surpluses. So 
when we started this thing in 1994-95 there was a surplus of 
generation and I think that gave people confidence that we 
wouldn't run into the problems we had. We misjudged it. Demand 
grew more than what anybody thought and we are now short and we 
need a crash program, and the legislature is about ready to and 
has done a lot to provide incentives for generators, to 
streamline the permit process, to put some better bureaucracy 
behind the environmental permitting process and hopefully get 
some generation online in the near future. Right now we don't 
expect to get more than about 1,000 megawatts before the end of 
2001. Most of that comes after the summertime. The forecasts 
are, and the CERA report that you mentioned, Mr. Chairman, is 
forecasting, and I think probably conservatively, 20 hours of 
rolling blackouts sometime this summer and it is just the fact 
of the physics.
    The other thing that we need to do is we need to move on 
the demand side and really increase the awareness and the 
conservation ethic in the State. We have spent hundreds of 
millions of dollars, billions of dollars over the last 10 years 
on energy efficiency. Commissioner Wood or somebody mentioned 
that the State, the utilities didn't do a good job of energy 
conservation since this market became deregulated or 
restructured or screwed up, whatever you want to call it, but 
the fact of the matter is that another policy of the Public 
Utilities Commission was to get the utilities out of the energy 
conservation business, out of the energy efficiency business. 
They wanted to turn it over to the private industry so that 
utilities were basically cut back in their role of delivering 
energy efficiency.
    We think the utilities are the best place to deliver energy 
efficiency. We have done it for 10 years or more and when you 
disburse that role to the marketplace that is disorganized and 
has its own provincial financial interests at stake, you don't 
get the energy efficiency that you are paying for.
    Last, let me just say with respect to the FERC, and I know 
this is not popular, but we need some type of respite to work 
ourselves out of this from the high volatile spot prices that 
we are seeing. There is no new supply that is going to be in 
the market in the next few months. We can't keep paying 250, 
300, $400 a megawatt for power. There is just not enough money 
in the State to keep paying those kinds of prices. We need to 
work out some kind of policy with FERC and the generators that 
gives us a temporary respite, whether it is a cost-plus type 
cap, as Mr. Radanovich suggested, or some other mechanism that 
gives us some breathing room because we are not going to be 
able to get out of the mire we are in if we have to keep paying 
those high spot prices.
    I will stop there and will answer some questions.
    [The prepared statement of John R. Fielder follows:]
Prepared Statement of John R. Fielder, Senior Vice President, Southern 
                           California Edison
    Good morning. I am John R. Fielder, Senior Vice President of 
Regulatory Policy and Affairs for Southern California Edison. I 
appreciate the opportunity to testify before you today on the problems 
which threaten not only California's electric system, but the economic 
well-being of the state and potentially the entire country.
    Eight months ago, my company was financially healthy. Our credit 
rating was A+ and our market capitalization was approximately $6.5 
billion, based on a share price of $20. Today, our credit rating is 
deeply speculative grade or ``junk.'' We have temporarily suspended 
payments for borrowed funds totaling $638 million. In addition, we also 
deferred making power purchase payments totaling approximately $730 
million. Our stock price has dropped from a 52 week high of $28.50 to a 
low of $6.25, but has risen recently to approximately $12. We have 
eliminated common dividend payments to our shareholders for the first 
time in our 100-year history. Not by coincidence, California has 
endured 30 straight days of Stage 3 Emergency alerts, the most serious 
level leading to rolling blackouts.
    Southern California Edison has found itself in a precarious 
situation where we had to buy wholesale electricity at artificially 
high prices and resell at artificially low prices. As a result, we 
incurred $4.5 billion in undercollections as of the end of 2000.
    We initially financed this massive revenue shortfall by borrowing 
in unprecedented amounts. However, we have now exhausted our credit, 
and have limited cash reserves. As a result, we have suspended payment 
for power and some of our outstanding debts. We are implementing major 
cost reduction measures totaling nearly half a billion dollars 
annually, which will reduce our workforce by approximately 1850 
positions and limit critical investments in the electric system. If 
sustained, these reductions in staff and operating budget will 
certainly jeopardize the reliability of our system and our ability to 
adequately serve our customers.
    These measures are not enough, however. With the widening gap 
between wholesale and retail prices, even the most drastic cutbacks we 
could possibly make would only generate enough cash to buy another few 
weeks' worth of wholesale electricity. Last January, in response to 
seller concerns about the creditworthiness of the state's major 
utilities, the California Department of Water Resources began buying 
power in the wholesale markets in an effort to avoid massive blackouts. 
Later that same month, California approved the issuance of $10 billion 
in bonds to finance future purchases of electricity.
    During this past year, California has seen wholesale electricity 
prices skyrocket. In 2000, California paid nearly $21 billion more for 
wholesale electricity than it paid the year before--a nearly fourfold 
increase. In 1999, the bill for areas served by the Independent System 
Operator (ISO) was $7.4 billion; in 2000, it rose to $28 billion.
    As staggering as this increase is, it does not reflect the true 
cost of the electricity crisis to California. The high prices we have 
been paying have not ensured adequacy of supply. Power emergencies have 
become an everyday occurrence. There are several power plants under 
construction or in the permitting stages in California, but not nearly 
enough for the state to pull ahead of the current supply shortage--not 
to mention the substantially higher demand anticipated next summer. 
Neither is there sufficient power to sustain the state's economic 
growth. Without dramatic action to accelerate the provision of new 
supply to the market, the problem has the potential of continuing for 
years.
    However, the problem is not entirely one of supply shortage. 
Ironically this winter, during a time of relatively low load, we 
experienced the well-publicized rotating blackouts in Northern 
California on January 17 and 18. In addition, both we and PG&E were 
forced to repeatedly curtail ``interruptible'' customers--those who 
agreed during a supply crisis to a limited number of interruptions in 
exchange for lower rates. These customers include schools, small 
businesses and larger manufacturers. While the California Public 
Utilities Commission (CPUC) has decided to suspend the fines for this 
program and make it purely voluntary, this has increased the likelihood 
of rotating blackouts.
    The shortfall this winter has been caused both by problems in the 
California market structure, and worries about the creditworthiness of 
the California utilities. As a result, generators have decided to 
either not run their plants or send their supply elsewhere, creating 
artificial shortages and the constant threat of more rotating 
blackouts, even when there is no shortage of supply.
    How did we get here? What has gone wrong? No participant in this 
crisis is free of blame: Everyone can now see that the market structure 
adopted in California's electricity restructuring is terribly flawed, 
even though the intent was to introduce competition and ultimately 
lower prices for consumers.
    The Federal Energy Regulatory Commission (FERC) over-relied on 
competitive markets to control consumer prices, even in the face of 
overwhelming and incontrovertible evidence that California's market was 
dysfunctional, needed significant repair, and was producing prices that 
were ``unjust and unreasonable''.
    The CPUC either refused or significantly restricted our ability to 
purchase power in forward markets or outside the California Power 
Exchange. Through seven different filings made with the CPUC over the 
course of two years, my company has consistently asked for authority 
and more authority to enter into such contracts. Once the CPUC granted 
such authorization, they did so only reluctantly and imposed 
significant restrictions on our ability to do so.
    All of us, including the utilities, were not as insightful as we 
should have been about the way the market would work and the way demand 
and supply would get out of balance in the California economy. 
Generators and other suppliers took advantage of a situation that 
obviously gave them significant economic gains.
    Everyone involved, private companies and public agencies, 
undoubtedly believed they had good reasons for what they did. 
Predictably, there has been a lot of finger pointing and casting of 
blame. None of this fixes the problem, however; and the longer it goes 
on, the deeper the crisis becomes. What is needed now is strong and 
decisive leadership directed to solving the problem.
    What needs to be done? At the state level, California officials 
need to take a combination of actions including raising rates, finding 
ways to finance both the past and future utility undercollections, and 
other actions to reestablish the creditworthiness of California's 
utilities. This is critical, because the reality is that the electric 
grid requires substantial capital investment for modernization and 
expansion. Financially crippled utilities will not be in a position to 
make the required investment that is critical to the health of this 
vital infrastructure industry. Furthermore, increased rates similar to 
those implemented in neighboring states will send the appropriate price 
signals to consumers and encourage conservation.
    California officials, working in cooperation with federal 
regulators, need to implement market structure reforms, including 
reduced reliance on the spot market by encouraging long-term contracts. 
New methods of compensating peaking units, through bilateral contracts 
with buyers or the ISO, are needed so these plants can recover their 
costs without inflating the overall cost of generation. The state also 
needs to consider ways to streamline the siting of new plants.
    While there is much that California can and should do, there is 
also a clear need for immediate federal action. Under the Federal Power 
Act, only the federal government has authority over wholesale rates. 
Clearly something must be done about current wholesale rates. The FERC 
found the rates in the California market to be unjust and unreasonable 
on November 1, 2000, and prices have only gone up since then. The law 
unequivocally requires that FERC set just and reasonable rates; the 
courts have made clear that FERC may depart from cost-based pricing and 
permit market-based pricing only where it finds that the markets will 
restrain prices to just and reasonable levels. The FERC cannot continue 
to rely on an overly doctrinaire approach to competitive markets when 
the markets are not sufficiently competitive to control prices and 
ensure fair rates.
    We believe that the imposition of temporary cost-based price caps 
or load-differentiated price caps is fair to both consumers and 
sellers. Those sellers who truly have high costs will be allowed to 
recover those costs, including a reasonable return on their investment, 
but only when their high priced power is needed to keep the lights on. 
We recognize that price caps may be only a temporary solution. However, 
longer term solutions take time, and immediate relief is needed now.
    In conclusion, I would like to thank the Subcommittee and you, 
Chairman Barton, for holding this hearing. We are working hard in 
California to develop and implement long-term solutions to the problems 
in our wholesale electricity market. But we cannot do it alone. Active 
and attentive leadership is needed at the federal level to ensure that 
the promise of reliable and affordably priced electricity is available 
to all citizens of California and the West. Nothing short of the well-
being of our citizens, our economy, and the future of competitive 
electricity markets are at stake.

    Mr. Barton. Thank you. The Chair recognizes himself for 7 
minutes. Right now the State of California, are they directly 
purchasing power, Mr. Fielder?
    Mr. Fielder. Yes, sir.
    Mr. Barton. Are they purchasing it on the spot market or 
the long-term market or how are they purchasing it?
    Mr. Fielder. I believe they are purchasing most of it on 
the spot market. They are trying to enter and negotiate long-
term contracts with suppliers.
    Mr. Barton. The power exchange as it existed is gone, is 
that not correct?
    Mr. Fielder. That is true.
    Mr. Barton. So what spot market are they looking for power 
in?
    Mr. Fielder. Well, they will go to a generator and ask for 
supply to be delivered tomorrow.
    Mr. Barton. So they can go to anybody in the country and 
anybody in country can come to them?
    Mr. Fielder. Yes, sir.
    Mr. Barton. So it is an open market now, but it is a single 
buyer and it is the State of California.
    Mr. Fielder. Let me clarify. Whatever the Department of 
Water Resources is not able to acquire for the day's load, the 
ISO will continue to go out and do purchases like they have 
been doing to keep the lights on.
    Mr. Barton. So conceivably, if there are no transmission 
constraints, and there are transmission constraints both 
regionally and nationally, but if we had a perfect transmission 
system, then very conceivably an open market like the State of 
California is engaged in you could very quickly see these 
wholesale prices come down if you had a larger national supply 
sufficient enough that the demand didn't exceed it in 
California. Is that----
    Mr. Fielder. I think I would limit it to a regional supply. 
It is not very practical to ship power from----
    Mr. Barton. Because of the transmission constraints.
    Mr. Fielder. Not because of the transmission constraints 
but because of the physics. By the time you generate power in 
Virginia and ship it to California, the losses eat up all the 
power.
    Mr. Barton. What would happen is Virginia would wheel it to 
Tennessee, and Tennessee would wheel it to Arkansas, and 
Arkansas would wheel it to Oklahoma, and we would just be doing 
tumble wheels until it all of the sudden got out there.
    Mr. Fielder. When you get on the west side of the Rockies, 
if you didn't have any transmission constraints, then you could 
deliver power from anywhere in the western grid to California 
customers and----
    Mr. Barton. Which is the ultimate goal of the national 
restructuring debate, which admittedly we don't have that now.
    Mr. Fielder. Right.
    Mr. Barton. I want to go to Mr. Esposito. There was a lot 
of discussion in the first panel and some of our questioners 
about market manipulation and just and reasonable pricing, 
gaming the system. Would you like to comment on that, since 
Dynegy is one of the companies that might have engaged in such 
behavior had such behavior actually occurred?
    Mr. Esposito. Thank you, Mr. Chairman. I certainly would. I 
am the designated bleeder here. We are an extremely competitive 
company. We are in there to make some money and we are not 
going to apologize for that. On the other hand, when we hear 
that we have been out gouging or manipulating markets we take 
great umbrage at that.
    I think if you look at the FERC report that was issued the 
first of February, a staff report by people who had no dog in 
the hunt, by people who audited 60 percent of the outages--now 
you don't usually audit anywhere near 60 percent of anything 
when you go do an audit--that audit shows that we and the other 
so-called out-of-state generators ran our plants much harder 
than they had been run in prior years. There is absolutely no 
evidence of withholding. In fact, we went out of the way to 
keep the plants running. We had a pump go down at one point and 
went to South America to find a pump. If we wanted to withhold, 
we could have just sent the pump out to get rebuilt and waited 
3 months. So the real evidence is absolutely contrary to that.
    As far as the market itself----
    Mr. Barton. Well, the first--this FERC report, is that a 
public document?
    Mr. Esposito. I have got it right here, Mr. Chair.
    Mr. Barton. The fact that you have it doesn't necessarily 
mean it is a public document. We have learned otherwise over 
the years.
    Mr. Esposito. This was a report that was issued at the 
Western Governors Association meeting in Portland. It is on 
their Web site and----
    Mr. Barton. If that is a public document, I would ask 
unanimous consent that we put it in the record so that members 
of the subcommittee that wish to could take a look at the FERC 
report.
    Is there objection to that? Thank you.
    Mr. Esposito. As far as the market structure goes, there is 
a problem when you set a market up where everybody pays the 
highest price at the last minute. We and others in the industry 
have been at FERC advocating that that market be changed for a 
long time, and you know, if you look at that market, we, I 
know, in December when gas prices ran up were incurring costs 
north of $600 a megawatt-hour. When you add 40 or $50 emissions 
credits, you could easily get over $600. So everybody was 
getting that same $600 in that market. John Fielder is buying 
power from Hoover Dam at about 99 cents a megawatt-hour and 
selling it for the same amount absent some rules to keep him 
from doing that today.
    Mr. Barton. In your opinion, had the State of California 
created the power exchange like they did but instead of having 
a one price market clearing auction system to protect and 
encourage small producers, what would have happened if they 
would have had a different auction system similar to the New 
York Stock Exchange, where it is a ask bid and if you bid it 
and they say, yes, you sell it at that price instead of waiting 
to see what the clearing price is for the incremental marginal 
clearing cost? Would that have worked?
    Mr. Esposito. We have been advocating for that for years 
now, and obviously we advocate it because we believe it will 
work, and there are academics who will differ. We encourage the 
bilateral market where, as Mr. Levin was talking about earlier, 
we each have different needs and different capabilities, and if 
we can get together and match those needs and capabilities 
across the table from each other we can resolve the problems 
and come to prices that are reasonable from both sides.
    Mr. Barton. Mr. Rowe, you said in your testimony that 
natural gas fired generation is the one that most utilities 
have decided to build because it is the only easy kind of 
generation to build. What do you mean by easy to build?
    Mr. Rowe. You can build the plants much faster, much 
cheaper and you have much less difficult times with siting 
regulation, with not-in-my-backyard opposition, and in general 
with environmental rules. It is simpler and cheaper to build 
natural gas.
    Mr. Barton. There is less hassle and at least until 
recently the supply equation economics of it was a little bit 
better?
    Mr. Rowe. Exactly, sir. For the last 15 years gas has 
clearly been the economic option of choice for nearly all new 
generation, and we are now at a time when we have to question 
the continued validity of that assumption.
    Mr. Barton. Anybody here who has actually been in a 
decisionmaking capacity or at least advisory capacity to 
building a power plant in California, what is the average time 
it takes to site a plant? And Mr. Esposito, has your company 
tried to site a plant and, if so, how long did it take to get a 
decision on that?
    Mr. Esposito. Our choice was to buy an existing plant so we 
didn't have to go through that process. The averages we hear in 
the industry is about 3 years.
    Mr. Barton. About 3 years?
    Mr. Esposito. About 3 years.
    Mr. Barton. Compare that to the national average if there 
is one.
    Mr. Esposito. If I can compare it to siting a plant in Mr. 
Rowe's territory, we went from gleam in somebody's eyes to 
production in 9 months.
    Mr. Barton. In 9 months?
    Mr. Esposito. Nine months.
    Mr. Barton. That has got to be the exception to do it that 
quickly from the gleam in somebody's eye to production.
    Mr. Esposito. We saw a price signal in the Midwest. We were 
willing to spend extra money to get it on the ground so it 
would be operating next summer. So it is doable with the right 
set of circumstances. We had a willing utility who wanted to 
see us in their backyard.
    Mr. Barton. This is my last question. I am going to give 
Mr. Fielder a first crack at it, but anybody can answer it if 
you want to.
    Given that the State of California is apparently seriously 
contemplating becoming the power purchaser and power generator 
of a large portion of its State's baseload, what is the natural 
competitive advantage that any State government or specifically 
California's State government has as compared to the private 
sector?
    Mr. Fielder. Mr. Chairman, that is a loaded question. I 
think the only----
    Mr. Barton. I intended it to be loaded.
    Mr. Fielder. I think the only competitive advantage from my 
viewpoint is financing in the fact that they can borrow money 
at lower rates because it is not taxable. Tax exempt financing 
is the only advantage.
    Mr. Barton. And they have the taxpayers backing up the full 
faith and credit of their contract.
    Mr. Fielder. Yes.
    Mr. Barton. But in terms of management's intelligence, 
futuristic planning, experience, technology, knowledge, does 
any State government or California State government have a 
natural competitive advantage to people like you that are 
greedy capitalists that, you know, probably studied in business 
school or learned it in the marketplace the hard way?
    Mr. Fielder. In my opinion, no.
    Mr. Barton. Does anybody disagree with that?
    Mr. Moore. I don't disagree but I would refine it that it 
is not actually a cost savings. The fact is that if the State 
gets into the transmission business they can finance--they can 
use tax exempt debt more easily to finance new transmission.
    Mr. Barton. Their natural advantage is a credit advantage, 
there is no question.
    Mr. Moore. Right, but that just means it is lost tax 
revenue to the Federal Government. So as a citizen of the 
United States it doesn't gain me anything, but ultimately it 
doesn't affect my net loss.
    Mr. Barton. If we had advocates of State control, and let's 
assume that they do have a competitive advantage, who regulates 
the regulator if the State is running the system?
    Mr. Moore. Well, nobody does in that case. I mean, it would 
even be questionable what role FERC would have, you know, with 
a State run transmission system like that, and you know, if you 
look at--going back, you have mentioned data driven a number of 
times--if you look at costs, again, they have lower debt costs, 
but traditionally municipal utilities, publicly owned entities 
enjoy the same advantages, they don't pay taxes, they don't 
make profits and they have--there are some other smaller 
subsidies, their rates are slightly, very slightly lower in 
some cases than private utilities which do pay taxes and which 
do make profits. That difference in rates is nothing like the 
lesser amount, the lower debt cost, the lower prices. So the 
argument I am making is that in a net--on a net basis if 
transmission goes under State ownership, costs will go up in 
the long run.
    Mr. Barton. My time has expired. The gentleman from 
Virginia is recognized for 5 minutes.
    Mr. Boucher. Thank you very much, Mr. Chairman.
    Mr. Levin, as the representative of the Mercantile Exchange 
I know you have an interest in the reliability and 
predictability of markets for commodities, and I wonder if you 
could give us your opinion about whether the market for 
wholesale power transactions has the level of predictability 
and reliability that you deem desirable, and if it doesn't why 
doesn't it? Are there particularly any problems with regard to 
the predictability of transmission availability? Is that a 
concern?
    Mr. Levin. Yeah, I would like to answer that in a couple of 
different ways. I didn't mention it before, but before 
California actually embarked on this program NYMEX had two 
modestly but growing and healthy electricity futures contracts 
based in the West. We still do. In fact, I understand that the 
Palos Verdes today had some bids and offers, but it is far and 
few between. We were trading--these contracts were roughly 800 
megawatt-hours each. We were trading 1,000 to 1,500 of these a 
day. We had somewhere in the order, I think, about 15,000 
contracts, open interest. It was actually a vibrant market that 
existed out West.
    When California decided to dramatically tilt everything 
into its spot market, it changed things--well, it really 
eliminated the need for that or even the ability to use those 
sorts of instruments and the purposes of them, and it affected 
the entire West. It is a little bit more like maybe even a 
black hole, but I mean these are--Mr. Fielder's company and 
PG&E were big customers in that forward market beforehand, and 
when they were eliminated from being in it, that market 
disintegrated. In many ways it is still there, but very small, 
and that had impact.
    Now, transmissionwise, which you also talked to, on 
transmission you need to keep in mind not only the physics but 
commercially what benefit you can provide, and there are some 
issues out there right now. In fact, our only criticism of 
really the PJM system is that we think it has adapted a 
congestion management program that really makes it more 
confusing for commercial participants and it is confusing. 
Unless you ask I won't go into the details of how and why, but 
what it does is it introduces parties that they don't generally 
know, can't have full confidence what the cost of transmission 
will be ahead of time. That is what you need for people to have 
confidence. They need to be able to perform delivery. It is 
common sense once again. What will be the cost, is it a 
reasonable cost, and can I depend on that, and there is too 
much uncertainty in the pricing.
    Mr. Boucher. Mr. Levin, is there anything that we ought to 
be examining at the Federal level, either in Congress or at the 
FERC, that would provide better predictability with regard to 
pricing for wholesale power transactions for the transmission 
component?
    Mr. Levin. For the transmission component, I think that I 
would state that the goal should be to be supportive of the 
commercial efficiency. I mean, I think that actually needs to 
be there. I think it was in FERC's mandate, because it isn't. 
And I think then I would add something specific, there is a 
physical rights model for congestion pricing which we endorse, 
and other participants experiencing competitive markets have 
been big endorsers of. I would--and certainly getting firm 
transmission in place in a program that is usable by market 
participants, at a bare minimum.
    Mr. Boucher. Mr. Esposito, you have some comments in your 
testimony directed to this general subject. Would you care to 
comment on the extent to which, as a power generator, you have 
difficulties or perhaps don't have difficulties in getting the 
transmission that you need in order to deliver your product?
    Mr. Esposito. We have a lot of issues with getting 
transmission and, Congressman, I know we are trying to get you 
down to our trading floor so you will see some of that in 
person, I hope soon.
    There are issues all over the country. There are California 
issues. A lot of the problem is that people are measuring their 
capabilities differently from one area to the next.
    For instance, the PJM versus Virginia Power uses different 
wind speed assumptions which dramatically increase or decrease 
the amount of capability you might have on a line, and that 
could be used to commercial advantage. So you have those issues 
out there.
    We have been endorsing the RTO model for FERC, get the 
transmission out from under those who own generation; make that 
a business in and of itself that has a desire to serve 
customers and move more power and to expand when necessary to 
do so.
    Mr. Boucher. Do you believe that FERC has current authority 
to require participation at RTOs, or would FERC's authority 
have to be augmented before it could do that?
    Mr. Esposito. I think that is a real gray issue, 
Congressman, and I think it could use some clarification or 
affirmation from you all.
    Mr. Boucher. Okay. Finally, Mr. Moore, let me commend you 
for the acknowledgment that you made in your testimony that the 
Federal clean air standards are not the problem in California; 
that there is flexibility within the Federal clean air 
standards to accommodate the California problem and that, 
therefore, the example of the California problem should not be 
used as a reason for amending the Federal clean air law. I 
appreciate very much your candor in making that point.
    Mr. Chairman, that is all that I have. I yield back.
    Mr. Barton. We thank the gentleman from Virginia and 
welcome the gentleman from Oklahoma to question for 7 minutes.
    Mr. Largent. Thank you, Mr. Chairman.
    I wanted to get a reaction from the other members of this 
panel on Mr. Fielder's suggestion that California be granted 
some sort of temporary respite and just find out what your 
reaction is to that.
    Mr. Esposito. I will take that on first, if I may, 
Congressman.
    The California market has had 37 amendments in less than 36 
months so far trying to fix it and create what are probably 
little respites along the way. I don't think any of them have 
been successful. The one that is out there right now that has 
got the most traction, if you will, is a cost-plus paradigm 
which smacks, to me, of traditional rate making, which I think 
has gotten us here in the first place.
    What happens after we have this temporary respite, during 
which you have cut my price and my ability to bring back my 
capital costs, and all of a sudden the market goes down, all of 
a sudden, so long, you are on your own, we are going to be back 
there saying we want stranded costs.
    California--we have thrown around a lot of big numbers 
here. One of the numbers we haven't thrown around is $16.8 
billion in stranded costs collections from the last time we had 
cost plus rates. So if I haven't made myself clear, I don't 
think a respite is the answer.
    Mr. Rowe. Congressman, with great reluctance and speaking 
only for my own company and not for EEI, I think something of 
the respite nature must be done. FERC has found that this 
wholesale marketplace is broken, and the costs which are 
streaming into California are so overwhelming that they almost 
fracture any workable system.
    Price caps are, of course, inconsistent with the long-run 
functioning of a competitive market. You know it. Your 
colleagues know it. I know it equally well. But it seems to me 
that we don't have a fully competitive market in California at 
the moment, and for some short period you probably have to have 
caps as an element of a solution, but if those are to be 
adopted, they should be well in excess of the replacement costs 
of new capacity so that they do not intimidate the construction 
of new facilities or unfairly penalize people, like my 
colleagues from Dynergy who placed wagers on this market.
    In addition, they have to be accompanied by State 
mechanisms, such as suggested by SCE, to recover the existing 
expenditures that have been made, and also by some mechanisms 
to pass through on a current basis some of the going forward 
costs of power.
    In other words, you can't fix this by just sticking a price 
cap in. It takes a lot of other pieces at the same time, which 
are more forward looking, but we have price caps at a very high 
level, $1,000 a megawatt hour in the PJM pool, and that has not 
deterred new construction there.
    Mr. Largent. Okay. Mr. Levin.
    Mr. Levin. There are two elements of a respite that--and I 
will speak for me here, not necessarily--the New York 
Mercantile Exchange has no formal view as somebody who works in 
all of these energy markets. For me, I have problems with two 
aspects. One is there is potentially more than just an element 
of coercion there, and that doesn't seem to be the solution for 
their problems to now mandate behavior against the will of 
others in the marketplace. That is very troubling, and a 
respite is too open-ended.
    But the other aspect is, what is California doing to solve 
this problem? I mean, even if a respite comes into play, as Mr. 
Rowe suggested at the end of what he just said that, well, it 
needs to be in combination with other things, what are they 
doing? And it is not clear they are doing anything right now 
that is constructive, and that needs to be the first step. They 
need to start doing some constructive things and they need to 
start going to the entities that they are seeking this respite 
really from, people like Mr. Esposito's company. If they had a 
track record of having done that, material things to get this 
problem solved, not threatening to take over the grid or even 
to be--buying and selling--and, by the way, Mr. Chairman, I 
think it is a lot worse, the State doing it. I am sorry I am 
throwing that in, but it is worse, far worse.
    This is what we have done so far. They have not addressed 
in any meaningful way how to solve this, and to the best of our 
knowledge, they have not really tried to go to the sellers and 
say, let us sit down, let us solve this problem. At that point, 
I am not sure how I would feel, but we are not there and those 
are necessary first steps.
    Mr. Largent. Mr. Moore.
    Mr. Moore. Well, I would say that the kind of respite that 
is suggested is essentially equivalent to imposing blackouts. 
If you impose any kind of wholesale price controls, cost based 
or otherwise, you are going to reduce the supply in the market 
at a time when supply is already below demand, when there is 
nothing being put in place to constrain demand, and that means 
absolutely unequivocally more blackouts.
    So that is the first big and biggest problem.
    They haven't worked in the past. There have been several 
attempts to do different kinds of tweaks. The ISO, the 
independent system operator in California, tried to do 
wholesale price caps. They didn't work. They had to lift them 
because they reduced supply.
    And for 6 months, as this crisis was developing, up until 
the beginning of this year, the California State government 
leaders clove to the policy of trying to get the Federal 
Government to cap wholesale prices in some way and took no 
other action whatsoever during that time, because that was the 
peg they hung their hat on. It is my belief that if we were to 
come in at the Federal level and impose some kind of temporary 
controls like that, the pressure on the California legislature 
to do anything would immediately come off and they wouldn't do 
anything because they don't like any of the solutions they are 
facing, and we would be back to the same problem again this 
summer or the next fall, what have you.
    So in no way, shape or form is that a solution.
    But if you are going to throw that out, you do have to 
bring up alternative ways to address the utilities' financial 
problems, which are the fundamental reason for doing that in 
the first place.
    Mr. Largent. My time has expired. If I could ask a yes/no 
question from four of the panelists, from Mr. Rowe to my right, 
your left.
    Mr. Esposito said something about granting FERC power of 
eminent domain. Good idea, bad idea?
    Mr. Rowe. Good idea, but won't solve the problem.
    Mr. Levin. I am going to pass on this one.
    Mr. Moore. Bad idea.
    Mr. Fielder. Bad idea.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Barton. Okay. Thank you, Congressman.
    Mr. Strickland is recognized for 7 minutes. Let me say 
something on price caps, since there has been quite a bit said. 
The Chair has no intention of marking up either a stand-alone 
bill or a bill with price caps in it. Now, I just want that on 
the record. If we have folks that are hanging their hats that 
this subcommittee is going to pass a price cap relief bill, 
that is the wrong peg to hang it on because that is not going 
to happen.
    Mr. Strickland.
    Mr. Strickland. Thank you, Mr. Chairman.
    Mr. Esposito, my understanding is that Dynergy is 
constructing a facility in my district in Southern Ohio, and I 
just would like to say to you that I hope you find that a 
wonderful place to do business.
    Mr. Esposito. Thank you.
    Mr. Strickland. As I said in my opening statement, I am 
concerned about the ability of this country to maintain a 
reliable and economic supply of nuclear fuel, and to that end, 
Mr. Rowe, I would like to address a few questions to you, if I 
could. How many nuclear reactors does your company operate at 
this time?
    Mr. Rowe. We operate 17.
    Mr. Strickland. Is that a majority of your company's source 
of generation?
    Mr. Rowe. Indeed, it is. It is more than half of our 
capacity and substantially more than that in terms of energy 
production.
    Mr. Strickland. Okay. I am going to ask you a question that 
may have a self-evident answer, but is having a long-term 
stable source of domestic uranium enrichment services important 
to ensuring that your nuclear power generating business will 
remain viable into the future?
    Mr. Rowe. It is very important, sir.
    Mr. Strickland. Okay. As I am sure you know, over half of 
the fuel sold by the United States Enrichment Corporation is 
imported from blended-down nuclear warheads from Russia. Under 
this important nonproliferation agreement, USEC is now making 
an effort to import and broker commercially produced uranium 
enrichment services from Russia as well.
    I could be, you know, off a little bit when I say half or 
roughly half or slightly more than half, but a huge portion.
    Mr. Rowe, in your opinion, as the CEO of Exelon, is the 
trend toward USEC's reliance upon Russia for the majority of 
U.S. supplies of enrichment services good for our nuclear power 
industry?
    Mr. Rowe. It is my opinion that having diverse sources, 
including some that are domestic, is what our industry needs. I 
think the ability to import from abroad is important, but like 
you, I would question the wisdom of having that be the only 
source.
    Mr. Strickland. Are you or, to your knowledge, do others of 
your colleagues in the various corporations that you are aware 
of, which rely upon nuclear fuel, is there a concern that we 
may not be paying adequate attention to the stability, 
reliability of an economical domestic supply of nuclear fuel in 
this country?
    Mr. Rowe. Yes, sir.
    Mr. Strickland. Would you say that again?
    Mr. Rowe. Yes, sir.
    Mr. Strickland. I just----
    Mr. Rowe. I can say it very loudly and explain, but I think 
your question says it exactly right, sir.
    Mr. Strickland. The reason I wanted you to say it twice is 
that I reiterate what I have said before, Mr. Chairman. Over 20 
percent of all of the electricity generated in the United 
States of America comes from nuclear power plants, and we have 
an industry that needs our attention.
    Mr. Rowe, thank you. I thank all of you. You have been very 
patient with all of us today. All of us, I think, appreciate 
the fact that you have been patient with us and you have given 
us good information.
    Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Congressman.
    The gentleman from Illinois, Mr. Shimkus, is recognized for 
7 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman. The more we listen, I 
think, the more questions we continue to scribble down and I 
have got notes all over the place. So I am going to try to keep 
this organized in my mind somewhat.
    First, Mr. Moore, I have to ask you a question. Do you have 
any expertise on the Clean Air Act?
    Mr. Moore. Some. I have--I actually have staff that are 
experts. I have staff who are on advisory panels with 
international bodies.
    Mr. Shimkus. Why I asked that, I have your bio. You have a 
Masters in history and a Masters in economics.
    Mr. Moore. And a Ph.D. in economics.
    Mr. Shimkus. And a Ph.D. economics. I wanted to see what 
the scientific background is that you might have to make a 
claim on the impact of the Clean Air Act on power generation 
today.
    Mr. Moore. I don't have any expertise to comment on the 
scientific aspects. However, the impacts I commented on were 
the market impacts, the economic impacts, which fall under my 
expertise.
    Mr. Shimkus. Okay. But you have no expertise on the 
scientific aspects?
    Mr. Moore. No, I do not.
    Mr. Shimkus. Okay. Thank you very much.
    Mr. Barton. The Chair would point out that it is not a 
requirement that people have to back their opinions up with an 
educational or even an experimental background.
    Mr. Shimkus. I would say we are a perfect example of that.
    Mr. Barton. Exactly.
    Mr. Shimkus. Why I have to get that on the record is, 
historically with the advent of the Clean Air Act, our utility-
generating industry has changed and it has been kind of a 
ripple effect.
    I went back for--you all had to stay here. I went back 
after my first round of questioning to get some lunch and check 
some e-mail. On my e-mail, I have got an article from the 
Breeze Courier, it is a paper in Taylorville, Illinois, and the 
headline is High Gas Prices an Issue in Edinburg, a small 
community. Edinburg: With the gas expenses exceeding the income 
by about $44,600, the Edinburg Village board decided to borrow 
$20,000 from the general account to pay for the gas bill.
    Now, this is happening all over the midwest. The reason is, 
is because of the Clean Air Act and the siting--the ease of 
siting of natural gas generation has created a higher demand 
for that fuel because we are not using other fuels even for 
base loading to some extent, and that supply and demand 
equation is filtering down again now in the--and I think 
utilities are going to be questioning their market assumptions 
based upon the current high cost of natural gas with siting new 
natural gas generating facilities; and that is the way the 
market works.
    To say that the Clean Air Act has had no impact for those 
of us who are from southern Illinois, who have seen coal mines 
close yearly because of the impact of the Clean Air Act, 
obviously we can't leave that unchallenged.
    Can I ask a question for those who are in production of new 
generating facilities, there are two type--on the natural gas 
generating facilities we throw out the term peaker plants, 
which is supposed to be prepared for exceeding the baseload, 
and you fire them up and then you turn them off.
    Is that true anymore, or are these peaker plants running 
daily?
    Mr. Rowe. Congressman Shimkus, if I can at least try, it is 
our experience that they are running more often than would 
originally have been anticipated, but they are still running a 
fairly small percentage of the hours of the year, and I would 
be happy to get you some real data on that if I can.
    There are, in fact, two kinds, the gas-combined cycle 
plant, which is the cleanest and most efficient and is designed 
to run a great many hours of the year, and the peaking single-
cycle turbine, which is what you and I have seen built in 
Illinois.
    On an economic basis, it is the peaking capacity that is 
most needed in Illinois at the present time. While I am keenly 
sensitive to the point you just made about rising natural gas 
prices, here I would say that the peaks we have seen in 
Illinois in the last year, unpleasant though they are for my 
company as well as others, are almost a necessary antidote to 
the fact that the prices were too low for many years to 
encourage new drilling in pipelines.
    So I went out on a limb once today, but I am generally not 
a very big fan of price caps and wouldn't like to see us get 
trigger happy with them.
    Mr. Shimkus. Let me follow up. Mr. Esposito, you used the 
terminology that there were market signals demonstrated that 
caused you to reinvest in generating facilities in Illinois. I 
understand what that means but, for the record, what do you 
mean?
    Mr. Esposito. Well, we were seeing prices well north of a 
$1,000 a megawatt in--I think it was the summer of 1998. We 
came in--to answer your previous question, we came in, laid a 
plant down, ran it hard in 1999; it only ran 200 hours in 2000. 
So these plants can run hard, they can run not much.
    Our plants in California are running now in the--most of 
the units should be down for maintenance and they have been 
running now since October in that sort of situation. So it 
really varies on the location.
    Mr. Shimkus. Let me--I have limited time. So if we have 
caps, how are there any market signals? Are there any market 
signals if you cap?
    Mr. Esposito. Well, I mean, if you cap high enough, there 
could still be market signals below that cap, I suppose.
    Mr. Shimkus. Is it in the interest of California utilities 
to have a cap in place to help them get out of their financial 
mess but not too high to inspire reinvestment in the California 
market?
    Mr. Esposito. Internally, we have talked about does it make 
sense to have the $1,000 cap that we have in the east in the 
west? It hasn't been a disaster in the east yet. It may be. But 
then we look at some of our costs of production and we are 
looking at that maybe going to $1,000 in some cases with gas 
and emissions prices.
    Mr. Shimkus. Mr. Chairman, since I talked to Mr. Fielder, 
can I, since I referred to that?
    Mr. Barton. Sure.
    Mr. Shimkus. But before you answer that question, how can 
you not--explain why you are not supportive of FERC having 
eminent domain to site transmission powers when California is 
experiencing such a disaster? I mean, I would think that is an 
easy thing to say, we need to go and import more power.
    Mr. Fielder. Because in California the existing 
transmission owners already have the power of eminent domain so 
if a transmission line is needed----
    Mr. Shimkus. But you don't have it in the State of Nevada.
    Mr. Fielder. We don't have it in the State of Nevada.
    Mr. Shimkus. That is the whole point of that debate. How 
can we get across State lines? Yes, you can do it with--if you 
have limited generation ability right now, you siting more 
transmission lines may not, I don't see how----
    Mr. Barton. I do not think the problem is an interstate 
transmission line problem. I think the problem is an intrastate 
transmission line. Am I right or wrong on that?
    Mr. Fielder. In California, Mr. Chairman, we have a lot of 
intrastate problems.
    Mr. Barton. Intrastate?
    Mr. Fielder. Intrastate.
    Mr. Barton. Within the State?
    Mr. Fielder. Within the State.
    Mr. Barton. It is not necessarily getting it across the 
State boundaries.
    Mr. Shimkus. But it could be?
    Mr. Barton. Well, it could be, but in point of fact, it 
isn't. They haven't gotten out of the State yet in California. 
We will worry about interstate once we have solved the 
intrastate problem.
    Mr. Shimkus. But we are concerned about interstate.
    Mr. Barton. True. That is our Federal responsibility. You 
are absolutely right.
    Mr. Shimkus. I will stop while I am ahead and yield back 
the balance of my time.
    Mr. Moore. Mr. Chairman, may I respond to Congressman 
Shimkus?
    Mr. Barton. Very quickly.
    Mr. Moore. I think my comments were maybe misunderstood. 
What I am arguing is that we can solve the shortage crisis for 
electricity within California without changing the national air 
quality standard. Right now, the projections are with plants 
being built by 2003 we will have more electricity supply than 
demand underneath--under the current air quality standards. I 
agree that it has tremendous price effects, and I wasn't 
commenting on the price effects. Air quality standards drive up 
the price of electricity hands down, and that is an issue that 
there are many ways in which it needs to be addressed, but in 
order to satisfy California's shortage, we don't necessarily 
need to change the air quality standards. That was my only 
argument.
    Mr. Shimkus. Now you are speaking as an economist, not a 
scientist, and I appreciate that.
    Mr. Barton. Before I recognize Mr. Waxman, Mr. Esposito, is 
it not true that last year within the California power pool 
there was a limited timeframe in which they put wholesale price 
caps in effect?
    Mr. Esposito. There were wholesale price caps on and off 
now for probably 3 years in the California market, at varying 
levels and with varying different triggers.
    Mr. Barton. Is there any evidence that those price caps had 
anything other than a short-term effect in minimizing costs?
    Mr. Esposito. There is some line of reasoning, in fact, 
that they increased the costs.
    Mr. Barton. That they increased costs?
    Mr. Esposito. Yes, sir.
    Mr. Barton. Within that very specific market, when price 
caps were tried at the State level, they did not work, is that 
a fair statement?
    Mr. Esposito. That is a fair statement.
    Mr. Barton. Mr. Waxman, for 7 minutes.
    Mr. Waxman. Thank you very much, Mr. Chairman.
    First of all, I want to apologize to all of you. We have 
got so many things going on at the same time that I wasn't here 
to listen to your testimony, but I have had a chance to review 
some of it, and I will look at the record more carefully.
    Mr. Esposito, in your testimony, you state that 
California's clean air rules are going to require a 60 percent 
reduction in emissions from your plants in San Diego. You imply 
that this will require you to take 750 megawatts off line. We 
had hoped to have environmental regulators from California here 
today so that we could better understand these kinds of claims. 
Unfortunately, they did not receive sufficient notice to be 
able to attend.
    The Air Resources Board has stated that, quote, no 
essential electricity generation has been curtailed due to air 
emissions limitations. Additionally, the South Coast Air 
Quality Management District has issued several executive orders 
in order to ensure that generators can continue to operate in 
times of need, and I would like to enter three rule 118 
executive orders into the record so that the record will 
reflect the accommodations made by the South Coast Air Quality 
Management District.
    Mr. Barton. We would ask that the staffs be given a chance 
to look at it, but I have no objection once we have looked at 
the documents.
    Mr. Waxman. The Air Quality District has also announced 
that they will finalize changes to the NOX trading 
program in April or May of this year to help stabilize credit 
prices and reduce the cost of compliance. Reliant Energy is one 
of your competitors, and they have been quoted in the press as 
saying that the implication that environmental regulations have 
limited electricity generation is absolutely false. We are 
making every megawatt available on request. We factored the air 
quality regulations into our daily operating basis and they are 
not causing us to withhold power. That is the end of their 
quote.
    So given these facts, I want your claims to be clear on the 
record so that we can follow up with State regulators. I would 
also like to send you additional questions so that we can 
better understand your claims later. But for now, have clean 
air rules caused you to shut down your power plants or 
significantly limit your generation in California?
    Mr. Esposito. Congressman, we have got generation both in 
the South Coast District and in San Diego. In San Diego, which 
is what I referred to in my testimony, we have suffered a 
reduction in emissions from 1,100 tons to 419 in terms of 
allowances between 2000 and 2001. So far this year, we have 
used up in January alone 106 tons of that.
    Now, we have a request for relief into the San Diego Board. 
We are hopeful that we will get it, but in the meantime we 
would, as wise stewards of our assets, so to speak, we would 
have shut the plants down a week ago, except we got a court 
order telling us to keep them open.
    So while this stuff may not actually be happening--now, I 
am aware that AES shut down perhaps November and December. I 
don't know the exact dates. That was a 2,400 megawatt plant 
that was shut down last year because of lack of emissions 
allowances.
    Mr. Waxman. Is that one of your plants?
    Mr. Esposito. No, it wasn't.
    Mr. Waxman. But as far as your plants, power plants, are 
concerned, you haven't had to shut anything down or 
significantly limit your generation, except in San Diego?
    Mr. Esposito. What I am getting at, Congressman, is that we 
have got a level of uncertainty here that is growing. If we go 
at our present pace in San Diego and do not get relief, and it 
is not certain that we are going to get relief, we are done in 
May. We are looking at a summer that is going to be real tough.
    Mr. Waxman. Are you currently being told by State officials 
that clean air rules will limit your generation of electricity 
in the future during times of need?
    Mr. Esposito. The message we are getting, sort of sub rosa, 
Congressman, is go ahead and run and we will worry about what 
it costs later. That is not the way we want to do business. We 
are not about to break the law because somebody says, shh, go 
do it.
    So we are just in a tough position and we are looking for 
some relief.
    I am not here advocating that we have to change the Clean 
Air Act. I am just trying to alert you all to a situation that 
needs some attention.
    Mr. Waxman. Would it be possible to achieve the 60 percent 
reduction in emissions you mentioned through the installation 
of pollution control devices?
    Mr. Esposito. In fact, we have installed some pollution 
control devices on that facility, but you can't take them down 
to do it. It is a 6- to 9-month process. These are all very old 
units. The parts just don't come off a shelf. You have to go 
and order them and get them and get the time to shut the plant 
down to do it. We have $20 million that I am aware of that is 
budgeted for cleaning up our plants but, again, if the ISO says 
run, we are running.
    Mr. Waxman. Today I was told that your company agreed to 
additional reductions in emissions voluntarily in order to 
receive a variance for additional time to put pollution 
controls on. Is that true?
    Mr. Esposito. I am not aware of that one way or the other, 
Congressman.
    Mr. Waxman. Okay. Well, I think it is helpful to get these 
statements on the record. We will evaluate it. We want to 
understand the situation.
    Mr. Esposito. I would be glad to follow-up. We are looking 
to solve the problem.
    Mr. Barton. We are also going to do a specific hearing just 
on California which we can go into some of these.
    Mr. Waxman. That would be helpful, Mr. Chairman. We should 
go into these issues and we should sort through a lot of the 
claims that are made to find out what is accurate and what is 
not, what can be addressed in what way. Some things can be 
addressed administratively. Some things can be addressed by 
California. Some may require our action. I still maintain that 
a lot of what we need is an active involvement by the Federal 
Energy Regulatory Commission, because they have, I think, a 
clear responsibility, as I see it, to deal with this problem. 
But I appreciate your answer to these questions.
    Mr. Chairman, I yield back the balance of my time.
    Mr. Barton. I thank the gentleman from California, and we 
look forward to his continued presence. I think it is going to 
be very important, Congressman Waxman, that you be involved on 
this subcommittee this year because these are issues you know a 
lot about, and it is also in your State that some of the 
problems we are facing immediately.
    Mr. Waxman. I look forward to working with you, Mr. 
Chairman.
    Mr. Barton. Glad to have that.
    Last but not least, the gentleman from Nebraska, Mr. Terry, 
for the last 7 minutes of questioning.
    Mr. Terry. I feel the anticipation in the room.
    Mr. Esposito, let me ask you very quickly just kind of a 
friendly wrap-up question in regard to the issue that you were 
just having a colloquy on.
    My understanding is that in order to ease the pain right 
now that California, in regard to environmental regulations and 
requirements, whether it is a reclaim program or a flexibility 
on backup generators that, you know, these are all in flux 
right now. Do you know what you face in terms of these types of 
environmental regulations and requirements this summer?
    I mean, how can you plan? What do you expect?
    Mr. Esposito. Well, planning obviously is extremely 
difficult. Congressman Waxman a moment ago was talking about 
the South Coast Air Quality Management District proposal, and 
as I understand that proposal it basically says we can't go out 
in the market and buy credits anymore as of January 11. So we 
stopped doing that because we can't do it, and if we get them 
and we can't use them then we have paid for something we can't 
use. And there is a process that is going to take months in 
that district to figure out whether that is actually going to 
be adopted.
    My understanding, and perhaps Mr. Waxman knows better than 
I do, is then it has to go to the EPA because it is part of a 
State implementation plan. So you have got all this uncertainty 
revolving around just that marketplace to get the credits to be 
able to know you are going to run.
    You know, we are trying to enter into forward contracts 
with the State of California and with other parties, and if you 
don't know the costs of running it, it is very difficult to 
negotiate those contracts. Environmental is just one of a 
plethora of regulatory uncertainty problems that I think are 
plaguing the industry in California and across the Nation right 
now.
    Mr. Terry. One of the things that you need is certainty. Do 
you have any feelings that--or a clear understanding that there 
will be certainty in that area of environmental regulations 
this summer?
    Mr. Esposito. The last thing you are going to do is get a 
lawyer to say, yes, I have a clear understanding.
    Mr. Terry. Good point. Thank you.
    One wrap-up question for Mr. Fielder, and Mr. Levin. You 
had brought up the point of the call option and that triggered 
a thought in my mind. We have talked about how you were dumped 
into the spot market, weren't able to do long-term contracting. 
Were there other hedging opportunities or options out there 
that were available to you? None?
    Mr. Fielder. Well, Mr. Terry, let me answer it this way: 
The products that were available in the PX forward market were 
all firm energy. We have been trying to get bilateral authority 
to do the kind of products that Mr. Levin talked about, 
capacity products, call options, because you can't run an 
electric system with load variability with all firm products.
    In California, there hasn't been any kind of standard 
capacity products available for us to do.
    Mr. Terry. So there is just absolutely no hedging options 
available to you? I can't imagine.
    Mr. Fielder. Whatever options were available we took 
advantage of.
    Mr. Terry. What was available to you?
    Mr. Fielder. In the block forward market of the power 
exchange, we could buy out about through the end of 2001. We 
could buy 6 by 16, meaning 6 days a week, 16 hours a day, firm 
power, to help shape the load.
    Mr. Terry. Okay.
    Mr. Fielder. We did buy that up to the limits that the 
public utilities committee had placed on us. So we did buy 
through the summer, and they were worth about almost a billion 
dollars. So that is about it.
    Mr. Terry. I have to imagine it is still a small 
percentage.
    Mr. Fielder. A small percentage.
    Mr. Terry. All right. Thank you, Mr. Levin.
    Mr. Levin. Yes. I want to just add something. Last summer, 
at the beginning of the summer, I believe the CPUC voted, I 
don't know if it was unanimous, to allow the utilities, the 
jurisdiction of the utilities there, to participate in other, 
and it is called qualified exchanges. That was in the 
legislation. I don't know if it was ever really identified or 
defined what those were. And that got over to the legislature. 
We don't exactly know why, but in the consideration of that, 
they made a determination to study that for a year.
    So they put that off for a year before anybody would have 
been allowed to do it, and we know what ensued. In fact, it 
might have even been the spring when this happened. It was 
remarkable timing. This is really like rearranging the deck 
chairs on the Titanic and it prevented them from going out to 
anybody else.
    The last thing is, John, I do have to tell you that a 
couple of years ago when you guys did seek that approval, I 
haven't agreed with everything you said today but when you said 
everybody was in agreement with this or that, but you said 
nobody supported you. Actually we did try to support you. We 
even called your lawyers. I think because of our record of 
always being against the State there that they said why don't 
you keep a low profile, but we did support it.
    Mr. Fielder. I will stand corrected.
    Mr. Terry. Mr. Levin, let me leave you with the last word. 
Has the California crisis in any way affected the overall 
markets, Wall Street?
    Mr. Levin. Well, it has affected it, yes.
    Mr. Terry. In your opinion?
    Mr. Levin. I mean, no, we have talked to some of the 
bankers. The bankers are very concerned about what is going on 
there. They are wondering about what kind of interference we 
are going to see with other utilities. There could be some 
reverberation there.
    I would also say that it is--which is a very serious 
impact, and currently obviously that is operational in 
California. You have also--people say, and Peter said, well, 
the natural gas price rose and it helped raise electricity 
prices. We should not lose sight of the fact, going back to 
this structure in California, forcing everything into spot, the 
next day price in natural gas has reportedly reached as high as 
$60 per million BTU in California, what they call a California 
border. That means inside California. This is for gas that is 
costing maybe $10 or so on the other side of that pipeline. 
Certainly nowhere near $60. It was $40 a couple of days ago is 
what somebody in the industry told me.
    This is the direct result of the panic buying, because they 
are all now in this spot market. This isn't high gas prices 
leading electricity now. This is actually a panicked 
electricity marketing--and it is next day natural gas, and I 
want to differ between that and say the NYMEX where the price 
has been around, you know, Gulf Coast Louisiana, $6 per million 
BTU. So $40 next day inside the border of California in 
response.
    So it has had--its impact is spreading. This is very 
unfortunate and this is why, once again, commercial efficiency 
it really matters.
    Mr. Terry. Thank you, Mr. Chairman. I yield back, if there 
is any time.
    Mr. Barton. I think you used 2 seconds too long. That is 
not a bad record.
    Mr. Terry. That is still quick for today.
    Mr. Barton. The Chair wants to accept the unanimous consent 
request of the gentleman from California on the South Coast Air 
Quality Management District documents, and the Chair would ask 
unanimous consent that an editorial to The New York Times dated 
February 7, 2001, by Richard Wheatley, who is the director of 
corporate communications for Reliant Energy, also be allowed in 
the record at this point in time.
    Is there objection? Hearing none, so ordered.
    [The information referred to appears at pg. 146.]
    Mr. Barton. We want to thank this panel for your attendance 
today. I think we are learning. I have learned as chairman that 
one size doesn't fit all in the restructuring debate and the 
restructuring markets. We saw two States, three States today, 
where restructuring appears to be meeting the goal of lower 
prices and more competition.
    We have seen one State where, with the best of intentions, 
that goal has not been met.
    We will do a specific hearing on California. We will also 
probably do another hearing on or two or three or four on 
restructuring in general in the electricity markets, but it is 
obvious that decisions that could have been made several years 
ago that weren't made to address some of these problems are now 
coming home to roost.
    We thank you for your attendance. There will be additional 
written questions from both sides of the aisle for the record, 
and we would hope that you would respond expeditiously. This 
hearing is adjourned.
    [Whereupon, at 3:35 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:
        Prepared Statement of Electric Power Supply Association
                       California: The Real Story
     a situation analysis by the electric power supply association
    In recent months, much has been said about what happened to 
electricity prices in California this year and why. We urge customers, 
market participants, regulators, legislators, analysts and commentators 
to look at all of the facts before rushing to conclusions or judgments 
about what happened. No one is well served by a rush to judgment or by 
perpetuating the unfounded allegations that have been swirling in 
California. In truth, what transpired was what was predicted by many in 
the market prior to the summer of 2000.
    The solution lies in completing the transition to real competition 
as soon as possible. Implementing temporary ``fixes'' that continue to 
create uncertainty and distortions into the future only prolong the 
state's power-supply dilemma. To this end, the Electric Power Supply 
Association (EPSA) offers the following:
1. Supply and Demand
    As in any commodity market, prices go up when demand outstrips 
supply. California is facing rising electricity demand accompanied by a 
severe shortage of generating capacity and supply availability:

 From 1996 to 1999, peak demand increased by 2,690 megawatts, 
        while only 529 megawatts of net capacity was added.1
---------------------------------------------------------------------------
    \1\ California Energy Commission (CEC)
---------------------------------------------------------------------------
 Electricity demand in California has increased dramatically--
        approximately 2% each year since 1990, or an average increase 
        in demand of 1,000 megawatts a year.2
---------------------------------------------------------------------------
    \2\ California Energy Demand, 2000-2010, CEC
---------------------------------------------------------------------------
 California accounts for less than half of the demand in the 
        Western Systems Coordinating Council (WSCC), which is also 
        seeing significant load growth.3
---------------------------------------------------------------------------
    \3\ 2000 WSCC Information Summary
---------------------------------------------------------------------------
 Hydropower generation in June 2000 was approximately 6,000 
        megawatts less than June 1999.4
---------------------------------------------------------------------------
    \4\ Study of Western Power Market Prices, Summer 2000, Northwest 
Power Planning Council, October 11, 2000, page 3
---------------------------------------------------------------------------
 Unusually hot weather blanketed much of the West this summer, 
        with high temperatures seen simultaneously from Seattle to 
        Phoenix on some days, particularly when compared with last 
        summer, which was cooler than usual.5
---------------------------------------------------------------------------
    \5\ National Oceanographic and Atmospheric Administration
---------------------------------------------------------------------------
 Also during the summer, fires in the West knocked out some 
        transmission lines, further limiting the movement of power and 
        exacerbating the transmission constraints generally in 
        California. Constraints on Path 15 continue to limit power 
        transfers between northern and southern California.
    Generators also faced new and different operational challenges this 
year.

 By summer 2000, natural gas prices roughly doubled from 1999, 
        adding $25-$35 per megawatt hour to the cost of gas-fired 
        generation.6 By November, prices had increased 
        approximately 260% from November 1999.7
---------------------------------------------------------------------------
    \6\ Natural Gas Intelligence
    \7\ California ISO Market Analysis Report, December 20, 2000
---------------------------------------------------------------------------
 The cost of emission credits has risen from $2.50 to $4 per 
        pound in 1999 to $40 -$50 per pound this summer in the Los 
        Angeles basin, and fewer credits are available at any price. 
        The combined cost of fuel and nitrogen oxide (NOx) credits for 
        a natural gas-fueled peaking unit in the Los Angeles Basin is 
        now approximately $147 per megawatt hour.8
---------------------------------------------------------------------------
    \8\ Power Markets Week, August 21, 2000; Daily Environment Report, 
January 16, 2001. Recently, gas prices in California have reached 
$7.00/MMBtu. With a heat rate of 11,000 Btus per kilowatt hour, fuel 
costs per megawatt hour are $77. (At more typical fuel prices of $4 to 
$5 per MMBtu, the fuel price for gas generation is $44 to $55 per 
megawatt hour.) At $50 per pound for NOX emission credits, 
the average gas plant, which emits 1.4 pounds of NOx per megawatt hour, 
spends $70 for NOX credits to generate one megawatt hour.
---------------------------------------------------------------------------
 Sixty-one percent of the California generating fleet is more 
        than 30 years old, leading to a greater risk of forced outages 
        and require more maintenance than newer plants. In addition, 
        these older facilities have the potential for lower 
        availability factors.9
---------------------------------------------------------------------------
    \9\ 1999 & 2000 WSCC Information Summaries
---------------------------------------------------------------------------
2. New Investment: Getting It Done
    As of January 2001, more than 18,000 megawatts of new capacity have 
been announced in California.10 Since the state's 
restructuring in 1998, the California Energy Commission has approved 
nine major power plant projects with a combined generation capacity of 
6,278 MW. Of these, five power plants with a combined generation 
capacity of 3,988 MW are now under construction, with 2,368 MW expected 
to be online during 2001. In addition, another 14 electricity 
generating projects, totaling 7,736 MW, are currently being considered 
for licensing by the Commission.11
---------------------------------------------------------------------------
    \10\ EPSA Merchant Plant Matrix, January 2001
    \11\ Update on Energy Commission's Review of California Power 
Projects, CEC, January 12, 2001
---------------------------------------------------------------------------
    Clearly, though, price caps and regulatory impediments to siting 
will stifle additional investment. While some generation can 
successfully be built and operated under the caps, much-needed peaking 
units face a tougher situation. Units that operate only a few hours a 
year have to recover all of their fixed and operating costs over those 
limited hours of operation. From April 1999 to March 2000, generators 
supplying the last 10 percent of the California ISO's (Cal ISO) peak 
demand ran less than 33 hours. To recover just fixed and variable 
costs, with no earnings, the price would need to be more than $1,450 
per megawatt hour.12 Of course, these generation owners 
assume the risk that these peaking units will run during these 33 
hours, which may not be the case if sufficient new generation is built.
---------------------------------------------------------------------------
    \12\ Cal ISO Market Operations Report, Actual Loads from April 
1999-March 2000
---------------------------------------------------------------------------
    Price caps have other disruptive impacts in the market. In addition 
to dampening price signals for much needed investments, price caps also 
discourage demand-side response to higher prices, eliminating 
incentives customers might have to reduce load or switch suppliers to 
find a better deal. Price caps also introduce a measure of regulatory 
and political risk. Caps in California have plummeted from $750 to $500 
to $250 per megawatt hour, with calls for $100 per megawatt hour. 
Currently, a $150 ``soft cap'' is in place, requiring additional 
justification for prices above this ``break point.'' This approach 
sends signals to national energy infrastructure companies, and the 
lenders who finance their power plant projects, that investing outside 
California makes better business sense in terms of capital deployment, 
risk management and return on investment.
    Price caps reflect another problem: they are completely arbitrary 
and do not reflect either the sellers' cost or customers' value of 
electric power.13 Californians have been given an 
unrealistic expectation of what constitutes reasonable power prices 
during periods of scarcity. Indeed, under the old regulatory paradigm, 
utility prices were averaged, making actual costs less conspicuous.
---------------------------------------------------------------------------
    \13\ The average bid from customers in the demand program of the 
Cal ISO was $38,000 per megawatt month, which translates to 
approximately $1,200 per megawatt hour assuming the Cal ISO calls the 
maximum number of curtailment hours set forth in the program.
---------------------------------------------------------------------------
    The price of retail power for residential and small commercial 
customers has been capped for several years at a rate that reflected a 
10 percent discount. Thus, customers are expecting prices more 
compatible with pre-1996 prices. As noted above, natural gas prices and 
the cost of emissions credits, as well as the cost of basic power 
generation equipment, have risen significantly during that period. To 
base price expectations on past circumstances misrepresents reality. To 
whatever extent policy-makers insist on price caps, they should reflect 
tangible, reality-based metrics, not outdated assumptions.
    In addition to price caps, the regulatory environment in California 
makes building power plants an extremely difficult undertaking. The 
power plant siting procedures, organized by the California Energy 
Commission (CEC) as a ``one-stop'' process, actually involves 30 or so 
government agencies. The absence of time limits and an open-ended scope 
of investigation has precluded timely--let alone accelerated--siting 
decisions. While recent changes may improve these procedures, the 
siting process has unquestionably contributed to the shortfall of 
generation in California.
    Power plant development companies operate nationally, assessing 
development opportunities in numerous locations throughout the United 
States (and often internationally) simultaneously. In other states, 
some companies have successfully taken generation projects from 
conception to commercial operation in less than 12 months. In 
California, the multi-year siting process, community opposition, risk 
of litigation and regulatory price interventions (i.e., retroactive 
reductions of competitively determined prices) combine to suggest that 
prudent companies will take their turbine-generator equipment and 
invest elsewhere. Where companies choose to face the hurdles associated 
with developing California projects, the nationwide competition for 
capital and financing often drives investment to other markets or adds 
a risk premium for California development.
3. Market Structure Matters: The Wholesale Story
    There are two fundamental problems with the wholesale market in 
California: a structure that puts undue pressure on the more volatile 
short-term markets and the imposition of price restrictions on 
purchases of wholesale energy and ancillary services.
    The California wholesale market was designed to give an incentive 
to load participants to move much of their buying and selling activity 
into the day-ahead, day-of and real-time markets, particularly in the 
California Power Exchange (CalPX). In any commodity market, it is 
natural that shorter-term markets will be the most volatile. Contrary 
to popular belief, generators and marketers are not inveterate gamblers 
seeking creative strategies to game markets and drive up 
prices.14
---------------------------------------------------------------------------
    \14\ Between 1997 and 1998, a number of competitive power suppliers 
purchased the gas- and oil-fired generation assets of Pacific Gas & 
Electric, Southern California Edison (SCE) and San Diego Gas & Electric 
(SDG&E). The three utilities retained over 50% of the generating 
capacity in the state, and no new California generator owns more than 
9% of the generating assets.
---------------------------------------------------------------------------
    Rather, these companies have invested millions of dollars in 
California assets and prefer a strategy that permits most, if not all, 
of their risks to be hedged in forward markets. Thus, many generators 
sold power ahead of the summer. Data from the CalPX shows that from 
February to May 2000, forward contracts for June, July and August were 
available for $55 to $65 a megawatt hour. By August, 2000, forward 
prices for September were closer to $150, though these prices fell 
below $100 by the end of August. In that same month, forward prices for 
the first quarter of 2001 were $47. Daily prices in January averaged 
between $125 and $171.15
---------------------------------------------------------------------------
    \15\ CalPX Block Forwards Market Daily Trading Statistics, Power 
Markets Week. Of course, the closer to delivery day the more forward 
prices reflect the short-term markets.
---------------------------------------------------------------------------
    California's rules, however, initially limited the ability of 
utilities to access the hedging tools normally available to load-
serving entities. Utilities were permitted to buy only a limited 
portion of their load in the CalPX's block forwards market, which 
mitigates some risk, but until recently were not permitted to engage in 
forward bilateral contracts, options or other risk-mitigation tools in 
use in the wholesale market. With strict limitations on their use of 
forward markets and other risk management tools, the utilities were 
forced to purchase significant portions of their supply in the spot 
market.16
---------------------------------------------------------------------------
    \16\ In addition, the California Public Utilities Commission (CPUC) 
rules made forward market hedges subject to reasonableness reviews by 
state regulators, while spot market purchases were deemed per se 
reasonable. Accordingly, SCE, for example, hedged about 1,750 megawatts 
of its 2,200-megawatt limit in June and 3,000-3,500 of its 5,200-
megawatt limit for July-September. SDG&E bought none of its power in 
the forward market, relying solely on the day ahead and day of markets. 
See Cal ISO, Report on California Energy Market Issues and Performance: 
May-June 2000, Special Report issued August 10, 2000.
---------------------------------------------------------------------------
    Additionally, price caps have also created a problem in the Cal 
ISO's real-time balancing market, driving the load serving entities in 
California to under-schedule their power needs in the day-ahead markets 
as a means of achieving a lower overall energy rate. The balancing 
market price caps provide a free hedging product, allowing utilities to 
transfer purchases to the real-time market when the price in the day-
ahead market exceeds the cap set by the Cal ISO. The Cal ISO has 
determined that underscheduling has significant operational and 
reliability impacts; in some hours, the Cal ISO has met as much as 25 
percent of the system needs in the real-time market.17 
During summer 2000, the Cal ISO went out of market to purchase 159,098 
megawatt hours, compared to 3,158 megawatt hours in 1999.18
---------------------------------------------------------------------------
    \17\ California ISO ADR Committee, Extension of Price Cap Authority 
& Level of Price Caps After October 15, 2000.
    \18\ California ISO, Reliability Concerns in Underscheduling of 
Load, Memo to Board of Governors, August 25, 2000.
---------------------------------------------------------------------------
    Price caps have also discouraged demand-side responses and load-
reduction programs. And, with or without price caps, load reduction 
programs will face a greater challenge in 2001, when the supply and 
demand balance will be even tighter than it was in 2000.
4. Market Structure Matters: The Retail Story
    Wholesale and retail markets are two sides of the same coin. A 
healthy wholesale market is a critical component of a well-functioning 
retail market. If wholesale markets don't work, retail suppliers can't 
provide customers with products that meet their needs. On the other 
hand, poorly functioning retail markets disconnect load from price 
signals and deprive customers of the protection against wholesale price 
volatility afforded by risk-management products.
    While California got a great deal of attention a few years ago for 
being the first state to open its retail markets, in fact, 
restructuring in California has been largely at the wholesale level. 
While customer switching isn't the only measure of success, only about 
2 percent of California's customers (and only about 12.5 percent of 
total load) 19 have switched suppliers--almost exclusively 
to subsidized green products. When it adopted its restructuring plan, 
California's decision to freeze rates without establishing a ``shopping 
credit'' to facilitate customer choice was fatal to the development of 
its retail markets. In fact, California's effort to transition to 
competitive markets was doomed when it froze utility customer rates 
while tying the back-out rate for direct access customers to wholesale 
prices in the CalPX. Moreover, utilities were left with overwhelming 
competitive advantages over new market entrants, including their 
monopoly on default service.
---------------------------------------------------------------------------
    \19\ CPUC, Supplemental Direct Access Implementation Activities 
Report, August 15, 2000.
---------------------------------------------------------------------------
    As a result of this flawed market design, no new retail suppliers 
were positioned to serve San Diego's load last summer when the rate 
freeze temporarily ended. SDG&E was left as the default supplier with 
customers having limited access to alternative suppliers and the risk 
management products they could have provided. Consequently, retail 
customers were exposed to naturally occurring spot-market price 
volatility in supply-constrained real-time markets. Under a single 
default service rate, they are deprived of advance knowledge of their 
electricity prices and the opportunity to protect themselves from that 
price risk.
    Rather than correcting its flawed market and rate structure, 
California policy-makers reinstated a retail price freeze in San Diego 
and permitted only a temporary 1 cents/KWh rate increase for PG&E and 
Edison for 90 days. Here again, price caps will have a detrimental 
effect on the development of the retail market without an adequate 
shopping credit. Continual retail rate freezes discourage large and 
small customers from implementing load management programs or securing 
risk-management products from other energy service providers.
5. Progress and Additional Recommendations
    To help achieve a long-term solution, progress has been made to 
eliminate the CalPX's monopoly. All electricity purchasers (retail or 
wholesale) are now being allowed and encouraged to use all hedging 
tools available in the market (including bilateral contracts in forward 
markets), from any supplier.
    Through the creation of a so-called ``Green Team,'' the state is 
beginning to find creative solutions to existing environmental 
limitations on new power plant development.
    Finally, on the heels of a thorough investigation into allegations 
of market power abuse in California, the Federal Energy Regulatory 
Commission (FERC) is continuing to monitor the behavior of market 
participants.
    In addition, EPSA also offers the following suggestions:

 The siting and permitting process for new generation and 
        transmission facilities should continue to be streamlined to 
        meet growing electricity demands.
 Customers and suppliers must be able to see and respond to 
        accurate price signals so as to encourage investment in new 
        generation and allow demand responsiveness.
 Retail markets need to be redesigned to eliminate incumbency 
        advantages and assure market entry, customer choice and service 
        options.
 FERC needs to critically review and carefully consider the 
        congestion management reform/market redesign proposal being 
        developed by the Cal ISO when it is filed.
 If policymakers determine that California's market structure 
        requires the continuation of price caps, the limitations on 
        competitive activity and prices should be based on a rigorous 
        market analysis; further, the termination date for the caps 
        should be tied to a well-defined, achievable target (e.g., 
        sufficient capacity or reserve margins).
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