[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
THE CALIFORNIA ENERGY CRISIS:
IMPACTS, CAUSES, AND REMEDIES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
JUNE 20, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-26
U.S. GOVERNMENT PRINTING OFFICE
73-595 WASHINGTON : 2001
_______________________________________________________________________
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
C O N T E N T S
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Page
Hearing held on:
June 20, 2001................................................ 1
Appendix:
June 20, 2001................................................ 47
WITNESSES
Wednesday, June 20, 2001
Dobson, James L., CFA, Managing Director, Deutsche Banc Alex.
Brown.......................................................... 37
Ellig, Jerry, Ph.D., Senior Research Fellow, Mercatus Center,
George Mason University........................................ 33
Hunt, Hon. Isaac C. Jr., Commissioner, U.S. Securities and
Exchange
Commission..................................................... 14
Jackson, Hon. Alphonso, Deputy Secretary, U.S. Department of
Housing and Urban Development.................................. 16
Smith, Vernon L., Ph.D., Regent's Professor of Economics;
Director, Economic Science Laboratory, University of Arizona... 30
Wolak, Dr. Frank A., Professor of Economics, Stanford University;
Chairman, Market Surveillance Committee, California Independent
System Operator................................................ 35
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 48
Cantor, Hon. Eric............................................ 50
Miller, Hon. Gary G.......................................... 52
Waters, Hon. Maxine.......................................... 54
Dobson, James L.............................................. 152
Ellig, Dr. Jerry............................................. 109
Hunt, Hon. Isaac C. Jr....................................... 57
Jackson, Hon. Alphonso....................................... 67
Smith, Vernon L. (with attachments).......................... 73
Wolak, Dr. Frank A........................................... 136
Additional Material Submitted for the Record
Inslee, Hon. Jay:
Heidi Willis, Seattle City Council member, prepared statement 187
Paul L. Jaskow, Professor, MIT, prepared statement........... 169
Maloney, Hon. C.:
Letter to Federal Energy Regulatory Commission, May 9, 2001,
and response............................................... 167
THE CALIFORNIA ENERGY CRISIS:
IMPACTS, CAUSES, AND REMEDIES
----------
WEDNESDAY, JUNE 20, 2001,
U.S. House of Representatives,
Committee on Financial Services,
Washington, DC.
The committee met, pursuant to call, at 10:04 a.m., in room
2128, Rayburn House Office Building, Hon. Michael G. Oxley,
[chairman of the committee], presiding.
Present: Chairman Oxley; Representatives Barr, Kelly,
Weldon, Biggert, Green, Miller, Cantor, Hart, Capito, Tiberi,
LaFalce, Waters, Sanders, C. Maloney of New York, Watt,
Bentsen, J. Maloney of Connecticut, Lee, Mascara, Inslee,
Schakowsky, Moore, S. Jones of Ohio, Ford and Crowley.
Chairman Oxley. The hearing will come to order.
This hearing of the Committee on Financial Services is
beginning--and without objection, all Members' opening
statements will be made part of the record in order to permit
us to hear from our witnesses and engage in a meaningful
question and answer session. I'm encouraging all Members to
submit their statements for the record.
The Chair recognizes himself now for a brief opening
statement.
Our hearing today represents the Financial Services
Committee's continuing obligation to conduct oversight on the
state of the U.S. economy.
Today, we explore the impact and causes of the California
energy crisis, and discuss steps this committee can take to
help prevent it from being repeated.
The California energy crisis has the potential to become an
American economic crisis. Already in both California and
throughout the West, high prices, drought conditions, and lack
of investment in infrastructure have caused serious disruption
to the lives of American families and workers.
In the Pacific Northwest, aluminum mills have shut down
because they cannot afford the cost of electricity.
Predictably, this has led to a decline in U.S. aluminum
production.
According to the Silicon Valley Manufacturing Group, its'
nearly 200 members lost over $100 million in a single day of
rolling blackouts in June of last year.
The State of California accounts for over 16 percent of
U.S. commodity exports and nearly 25 percent of industrial
equipment and computers, electronics and instruments exports.
Declines in the ability of that State to manufacture and
trade these products will increase the U.S. trade deficit.
I could cite similar statistics, but they all have the same
point. The California energy crisis is not only bad for
California, it's bad for America.
There's no question that when a State must issue the
largest municipal bond offering in history in order to purchase
electricity, there is something seriously wrong with the
system.
Our hearing today will explore what went wrong and provide
insight into how to avoid such pitfalls in the future.
Part of the purpose of this hearing is also to remind
ourselves that this is not a new dilemma. The last major energy
crisis in the 1970s led to our becoming a much more energy
efficient country. Energy intensity, or the amount of energy
used to produce a dollar's worth of GDP, has declined some 42
percent, meaning that the U.S. has grown significantly more
energy efficient over the last two decades.
This has occurred despite the fact that personal energy use
has increased over that same period.
We'll hear today from the Department of Housing and Urban
Development on the steps they have taken to contribute to this
dramatic increase in energy efficiency, and what more there is
to be done.
It has been proven time and time again that truly
competitive markets, free from overly burdensome Government
intrusion, supply goods and services better than any of the
alternatives.
One securities law that has outworn its usefulness is the
Public Utility Holding Company Act of 1935. Though not
implicated in causing the current situation in California,
PUHCA has nevertheless proven to be an unnecessary burden to
creating a healthy electricity infrastructure.
We are honored to have with us today Commissioner Isaac
Hunt, Jr., to explain why the SEC has long called for the
repeal of this out-dated legislation.
This current crisis provides us an opportunity to confront
the mistakes of the past and remove barriers to building a
better future.
I look forward to hearing from all of our witnesses today
as this committee works to do its part to ensure that America's
energy infrastructure becomes increasingly healthy and
competitive.
That completes the Chair's opening statement.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 48 in the appendix.]
I now turn to our friend, the gentleman from New York, the
Ranking Member, Mr. LaFalce.
Mr. LaFalce. I thank you very much, Mr. Chairman, for
convening today's hearing.
The energy crisis, especially the crisis facing the Western
States, is truly a national concern, and it is appropriate that
we focus our committee's attention on it today.
And it's particularly fitting, since our committee has in
fact played a most significant role on energy issues in the
past, primarily through its jurisdiction over the Defense
Production Act and Loan Guarantee Authority.
Notably, our House Banking Committee played the central
role in the Economic Stabilization Act of 1970, which included
authorities governing energy prices.
Our committee also played a central role in the Energy
Security Act of 1980 that was created pursuant to the creation
of a special ad hoc Energy Task Force, chaired by a member of
our committee at the time, Mr. Ashley.
And that Act established the Synthetic Fuels Corporation as
well as a host of other energy production guarantees. So, our
committee has had a very, very important historical central
role on energy issues.
Today, I would like to comment briefly on three issues:
Reform of the Public Utility Holding Company Act, solutions to
the short-term crisis in the West, and the need for a long-term
energy plan.
I look forward to Commissioner Hunt's testimony on the
Public Utilities Holding Company Act, the PUHCA, which some
advocate raises difficult issues. Stand-alone repeal of PUHCA,
or even granting the SEC exemptive authority, arguably amounts
to a significant deregulation of the energy sector.
Yet, currently a deregulated marketplace appears to be
reeking havoc on the consumers and taxpayers of California and
other Western States. PUHCA may need to be revisited to reflect
the realities of today's marketplace. But PUHCA reform should
be a very careful effort and one that is highly sensitive to
maintaining protections for energy consumers as well as
investors.
More central to the current energy crisis in the West are
the actions of the Federal Energy Regulatory Commission. As
many of us see it, the FERC's most recent action to control
prices may be a step in the right direction.
Real price caps were desperately needed in the Western
States months ago, and are no less desperately needed today.
FERC's action on Monday moves us closer to effective price caps
and should help moderate the price spikes of the Western
markets.
However, the plan also maintains a fundamental weakness by
tying price controls to the production costs of the most
expensive producer.
I'll be interested in hearing the views of today's experts
on that issue.
If any good has come of the current energy crisis, it has
been to focus public attention on the need for an effective,
long-term national energy policy. The Administration has
offered its own long-term plan, but some of us are troubled in
that it appears, at least, to offer less to energy consumers
than to energy producers.
We surely need a serious bipartisan effort to address both
the short-term impact of the current energy crisis on consumers
while, at the same time, developing solutions to our Nation's
long-term energy problems.
And if we can make any contribution to such an effort here
today, I hope it will be one driven by desire for sound policy
and a balanced interest in protecting consumers, taxpayers, and
the environment, while allowing for fair industry profits.
I thank the Chair.
Chairman Oxley. The gentleman's time expires.
Are there further opening statements?
The gentlelady from California, Ms. Waters.
Ms. Waters. Thank you very much, Mr. Chairman, for calling
this hearing.
The issues surrounding the California energy crisis are
extremely important to me and my constituents and the entire
country, as well.
This is a very timely issue as a number of Californians are
expected to experience rolling blackouts today and throughout
this week as temperatures to continue to climb.
To highlight this issue, tomorrow's episode of the Tonight
Show will be dedicated to energy conversation. It will be taped
virtually in the dark without studio lights, TV monitors,
amplifiers or other power sources.
NBC says the idea came up when the network, like most other
businesses in California, was asked to turn off lights and
computers whenever possible.
I hope other businesses will follow this example. The
amount of power used on one episode of the ``Tonight Show''
equals a month's worth of power at a normal family home.
In 1999, California paid $7 billion for its energy
generation. Last year, even though demand was down due to
conservation, the price was $32.5 billion. This year the price
for approximately the same amount of electricity is estimated
to be $70 billion.
In the short space of 2 years, costs have increased
tenfold. California does not have a demand problem; in fact,
per capita, Californians use the lowest amount of power, and
recent conservation efforts have reduced consumption even
further.
What California has is an artificial supply problem, a
problem caused by power generators taking power generation off-
line for so-called maintenance. Over the past 6 months, the
number of turbines closed for maintenance has vastly exceeded
that of previous years.
For example, outage rates in March 2001 averaged almost
14,000 megawatts, four times higher than in March 2000.
In April 2000, the power generators took approximately
3,300 megawatts off-line for maintenance. In April 2001, they
took almost 15,000 megawatts off-line on an average day.
This practice is currently being investigated on the State
level and deserves Federal scrutiny as well. Finally, after
essentially ignoring the California crisis for months, the
Federal Energy Regulatory Commission--FERC--has responded to
the situation and their order goes into effect today.
However, their actions were akin to putting a butterfly
bandaid on a gushing wound. On Monday, FERC expanded its April
26th order to apply 24 hours a day throughout the West. The new
formula will be based on the cost of fuel plus an allowance for
profit. And these limits will remain in effect around the
clock, a step in the right direction. While the order does
close some loopholes in the April Order, such as prohibiting
generators from exporting energy to neighboring States and
importing it back at higher prices, there are still outstanding
issues.
The prices will be determined by the most inefficient,
highest cost generator. The nature of this order does nothing
to discourage generators from withholding power in order to
ensure that the least efficient unit sets the market clearing
price.
In addition, I am concerned that FERC has failed to order
refunds of the more than $6 billion in potentially illegal
overcharges. Instead, FERC has directed public utility buyers
and sellers to try and reach settlement with a FERC
Administrative Law Judge.
FERC is clearly abandoning its mandate to ensure that rates
are just and reasonable and to order refunds when rates do not
meet that standard.
This is why I'm a cosponsor of HR 1468, which was
introduced by my colleague, Jay Inslee. The Energy Price and
Economic Stability Act forces FERC to do its statutorily
mandated job of ensuring fair electricity rates. This
legislation directs FERC to establish cost-of-service-based
rates for electric energy and instructs FERC to order refunds
of illegal rates and charges.
I urge all of my colleagues to support this crucial
legislation. This crisis is having a major effect on some of my
constituents and consumers throughout the West, many of whom
who have seen their utility bills triple.
Some have bills of more than $1,000; others are scrimping
on food and medicine to keep their power on. And the Low Income
Heat and Energy Assistance Funds, even combined with another
$120 million from California, can only provide help for less
than 10 percent of the 2.1 million households who qualify for
energy assistance.
On the other hand, while consumers suffer, corporations are
just thriving. This crisis has proven to be a boon for some. A
number of executives at the largest power companies have
collected tens and even hundreds of millions of dollars through
stock sales driven up by the California energy crisis.
Enron Chair Kenneth Lane garnered $123 million in option
transactions last year, which was ten times what he made in
1998.
Jeffrey Skilling, Enron's chief executive, netted more than
$62 million in options gain last year.
Peter Cartwright, Chairman and CEO of Calpine, netted
almost $12 million through the exercise of options earlier this
year.
Many of these energy millionaires have found their way to
Washington. This Administration has an unprecedented number of
high level appointees with a background in the energy industry.
Besides the President and Vice President, even Condoleezza Rice
was on Chevron's board of directors for almost a decade.
Commerce Secretary Don Evans served as CEO of a Texas Oil
Company.
Chairman Oxley. Could the gentlelady sum up please.
Ms. Waters. Interior Secretary Gail Norton began her career
at a conservative think tank funded by a number of energy
companies.
Mr. Chairman, I do have more, but I'm anxious to hear from
our witnesses. I thank you for the opportunity to have this
opening statement, and I will yield back the balance of my
time.
[The prepared statement of Hon. Maxine Waters can be found
on page 54 in the appendix.]
Chairman Oxley. The gentlelady yields back.
The gentleman from Washington State, Mr. Inslee.
Mr. Inslee. Appreciate it, Mr. Chair.
I just want to say, I'm glad we're having this hearing,
because I think it's clear that the FERC action a couple of
days ago, although welcome in the sense that they finally threw
us a rope, they threw us a rope that's about half as long as
it's going to take to save us in the West.
And I want to point out that this is not a California
problem, this is a West Coast problem. In the State of
Washington, we could lose 43,000 jobs this year alone, because
of the 300, 500 percent price spikes that we've had in the
wholesale electrical markets.
And after studying the FERC order, it's very obvious that
it's going to come up short for two reasons.
Number one, in picking the highest priced electricity in
the West Coast, the least efficient plant, probably the
dirtiest plant, as being the bellwether for the price we're
going to set. Anybody would flunk economics 100 who would want
to use that incentive mechanism to the market for several
reasons.
Number one, it's like saying you want to control prices of
cars, but you pick the price of a Rolls Royce Silver Cloud as
your benchmark.
Second, it sends a signal to the markets to start up your
least efficient plants first.
Why should we send a signal from the U.S. Government to
generators to generate their most expensive electricity first?
It doesn't make sense.
Second, it has absolutely no action, meaningful action to
bring the refunds to the consumers who have lost billions, and
that's with a B, billions. California spent $7 billion a couple
of years ago in electricity. Next year they may spend $70
billion to give refunds to the consumers who are owed it.
And I just want to ask FERC--I wish they were going to be
here at this meeting--if these prices are wrong, if they are
unconscionable, if they're illegal in July, why weren't they in
January, February, March, April, May and June?
And if they were, why is the Federal Government doing
nothing to get refunds for the Americans that have them coming
to them?
So we think this FERC order is seriously deficient. We are
going to push efforts to the floor. I hope Members in this
committee will sign our discharge petition in the tone of
bipartisanship. Peter Farrow, the Peter, Paul and Mary singer,
sang both to the Republican caucus and to the Democratic caucus
this week. I think that should bring us together on this and
hopefully we'll get a vote on this.
So I just want to tell the committee we will continue to
push this issue.
I also want to put in the record, if I may, Mr. Chairman,
the unanimous consent to put in statements by MIT Professor Dr.
Paul Joskow who is in favor of a price mitigation strategy,
Seattle City Council member Heidi Wills, who has seen the
devastation these prices have caused the City of Seattle, and
Dr. Alfred Kahn, who also has a very important viewpoint on
price mitigation.
Thank you.
[The information referred to can be found on page 169 in
the appendix.]
Chairman Oxley. Without objection.
The gentleman's time has expired. Are there further opening
statements?
The gentleman from Vermont.
Mr. Sanders. Thank you, Mr. Chairman.
Let me just pick up on some of the points that Ms. Waters
and Mr. Inslee made. The bottom line is that the energy crisis
in California is not only a disaster for millions of people in
that State, it is a potential disaster for every single
American in terms of what it will do to our national economy
and our standard of living.
The bottom line is that at a time when corporate profits
are soaring, when, as Ms. Waters just read, there are obscene,
beyond belief, take-home pay for CEO executives of energy
companies at the same time as low-income people do not know how
they're going to pay their electric bills. The time is long
overdue for the United States Congress to begin to stand up for
ordinary people and have the guts to take on these large
companies, which have acted in an absolutely outrageous way
under deregulation, and have given the word ``greed'' a new
meaning.
It is no secret that this country does not have a serious
energy policy, and given all of the technology out there, all
of the wisdom out there, it is an absolute disgrace what we are
not doing to protect consumers and to protect our environment.
Let me just make some suggestions, which are incorporated
in legislation which I will be introducing that will lead us
into the right direction.
Number one. In my State, where the weather gets a lot
colder than it does in Los Angeles, we have thousands of homes
that are not adequately weatherized because the people don't
have the money to do that. Heat goes right out the door or
right out the windows.
We have got to significantly increase the weatherization
programs in this country. That's a very important national
investment.
Number two. We have got to significantly increase the Low-
Income Heating and Energy Assistance Program, because there are
millions of Americans today who cannot afford to pay their
energy bill. They need immediate help and they need that help
right now.
We need to provide a refundable tax credit to low-to-middle
income consumers, and non-refundable tax credit to small
businesses who purchase energy efficient appliances and homes
through the Energy Star program.
We've got to raise, and here is it an absolutely scandalous
what we have not done, the corporate average fuel economy, the
CAFE standards, to at least 45 miles per gallon for cars and 34
miles per gallon for light trucks over the next decade.
It is amazing to me that while Congress puts hundreds of
millions of dollars into Detroit, it is Toyota and Honda that
come up with the new cars. The technology is out there for cars
to get 60, 70, 80 miles to a gallon and millions of us are
driving cars that get 15 or 20 miles per gallon, wasting huge
amounts of fuel.
We have got to, in the immediate crisis, impose a windfall
profits tax on the oil, gas and electric industry to stop these
absolute ripoffs that Ms. Waters was just talking about a
moment ago.
We have got to require 20 percent of the Nation's
electricity to come from renewable sources of energy by 2020.
New wind energy being developed in Denmark, in France, in
Germany, and of course the United States is moving forward, but
not fast enough.
In fact, wind energy, to everybody's perhaps surprise, is
the fastest growing new source of energy online in the world.
And it is non-polluting.
We have got to require replacement tires to be as fuel
efficient as the original tires on new vehicles. We've got to
provide at least a $6,000 tax credit to Americans who buy
ultra-efficient cars made in the United States.
These are common sense approaches which will go a long way
to break our dependence on Middle East oil, develop new sources
of energy renewable means. I think we are long overdue in
moving in that direction.
I would yield back the balance of my time.
Chairman Oxley. The gentleman yields back.
The gentleman from California, Mr. Miller.
Mr. Miller. Thank you, Mr. Chairman.
I want to thank you for holding this hearing, and I really
look forward to listening to the witnesses today testifying
before the committee.
For the last 8 years, our Nation has failed to address our
energy's outlook with a cohesive and comprehensive national
policy. Instead of becoming more independent, we have increased
our reliance on foreign sources to provide oil for meeting our
everyday needs.
Oil imports rose from 32 percent in 1992 to 55 percent last
year alone. The previous Administration was put into the
unfortunate position of sending our Secretary of Energy to the
Middle East to beg for greater oil output from the very
countries we defended from Saddam Hussein just a decade ago.
Furthermore, special interests have seriously limited our
ability to meet the growing demand that an increasingly larger
population and the increased use of electronic information age
technology have created.
Radical environmentalists have lobbied for years to stop
the construction of any new power production facilities. They
protest the use of power generators that burn fossil fuel due
to the air quality standards. Furthermore, they attack the
nuclear plants for inadequate storage facilities for spent
fuel. They object to hydroelectric because of a presumed effect
on fish populations, wind turbine facilities because of the
potential hazard to birds, and solar energy generation because
of the amount of habitat that is replaced by power cells.
It seems no matter the source of power, these radical
environmentalists find some reason to oppose any type of
electric generation.
In the balance, they hold the public general welfare
hostage. In my home State of California, no new power plant has
been built for over 10 years. During the same period of time,
California's population has increased 11 percent to 33 million
people. As well, California's become the world's hub for e-
commerce which has created an even greater demand for electric
supply.
Now we're facing the reality of these failed policies as
Californians are forced to import energy from other States. The
problems in California are precursors to many of the problems
this Nation will face if a comprehensive policy is not put into
place.
New and more efficient plants with environmentally
sensitive technology would reduce the amount of fuel required
to run them while helping meet the needs of the new economy.
This, coupled with updating the infrastructure that would
transmit the power, would allow California and the country to
meet their energy challenges.
Recent electricity shortages have lured suppliers, while
reducing political obstruction, to construct new facilities.
Creating a new power surplus will drive rates down, will also
force suppliers to produce energy using the cheapest, most
efficient means available.
Moreover, price caps would not cap consumption into a major
problem. For example, California's been able to conserve 11
percent more energy in April when compared to the same month
last year, but still faces rolling blackouts. The problem is
energy shortages, not prices.
As we witnessed during the mid-1980s and mid-1990s, as
energy costs fall, our economy swells. I don't think we can
stress that point enough. A strong energy policy which includes
reliable, sustainable and cost-efficient electricity is a
backbone of a strong economy.
California has continued to be a driving force in America's
economy. We must make certain that the power is available to
our State in the future.
I've been involved in the building industry for over 30
years, and one thing I've found is, because of regulation and
the process we're put through to get entitlements to build
homes in the United States, we have artificially driven the
prices through the roof on housing; we've done the same thing
with energy.
We had a major recession in 1990 and in 1989. In 1990,
house prices in California were probably 20 percent above where
they should have been, not based on the market itself, but
based on the lack of adequate supplies being given to the
market to deal with the impact of the people.
We are having the same situation on energy with
electricity, and we need to resolve it with more, more
production.
Thank you.
[The prepared statement of Hon. Gary Miller can be found on
page 52 in the appendix.]
Chairman Oxley. The gentleman's time has expired.
Are there further opening statements?
The lady from Illinois, Ms. Schakowsky.
Ms. Schakowsky. Thank you, Mr. Chairman.
I appreciate that the committee agrees that California's
energy situation has implications for all of us, and that the
Federal Government has a role and a responsibility to
participate in the process to help California and to ensure the
energy problems of the West do not extend themselves to the
rest of the country.
That being said, Mr. Chairman, while it's appropriate for
this committee to examine the issues affecting California and
the West, I believe our discussion needs to be widened to
include problems facing consumers throughout the country.
As you know, the Midwest has also experienced severe energy
difficulties over the past year. This past winter, natural gas
prices for consumers in my district tripled, and for the second
summer in a row, consumers in the Midwest and especially
Chicago are paying way above the national average for gasoline.
Like the California crisis, these issues have been ongoing
for some time and discussion of ways to bring relief and
prevent future problems for the Midwest are also worthy of this
committee's attention.
I would like to say that I think to blame
environmentalists, who for years have been pushing for sound
alternative energy policies, and have met only with resistance
from a Republican-dominated Congress, is really a false
accusation, I believe.
And I hope now we can put these differences behind us and
move forward with a rational energy policy.
I understand that our HUD and SEC witnesses will discuss
the Public Utility Holding Company Act, PUHCA, as well as
energy conservation efforts.
I just want to make clear my strong view that any
discussion of a possible repeal or revision of PUHCA should
also include our colleagues in the Energy and Commerce
Committee and must include a bipartisan agreement that any
proposal for change to existing regulation should include, as a
priority, strong measures to ensure the utmost protection for
consumers.
I'm pleased that our HUD witness is here today. However, I
do not think we can have a complete discussion about
conservation efforts at HUD without first addressing the
serious budget shortfalls at the agency.
I have concerns that the Administration's overall request
for HUD is nearly $2 billion below last year's level and that
the capital improvement fund, from where conservation and
efficiency improvements would be funded, is down 25 percent or
$700 million below last year's level.
These shortfalls have serious ramifications for public
housing in particular, and I hope our witness can address these
concerns during the hearing.
Again, Mr. Chairman, I want to thank you for convening this
hearing and look forward to our witnesses' testimony.
Chairman Oxley. The gentlelady's time has expired.
The gentlelady from West Virginia is recognized for opening
statement.
Ms. Capito. Thank you, Mr. Chairman. I appreciate you
holding this hearing today and I want to thank our witnesses
for being here and providing us with their testimony.
The energy crisis in California has been devastating to
communities across the Western United States, but its effects
are being felt across many industries and throughout the rest
of the United States.
Our Nation has been blessed with an abundance of natural
resources from which energy can be produced. I feel that this
unfortunate situation in California is one that need not be
repeated, and we must to work to ensure this.
At a time when we have the technology to produce more
energy, particularly with coal, in a much cleaner more
efficient way, we need to devise the long-term solutions to
help prevent situations like this from reoccurring.
However, that does not address the continuing struggles in
the West. We are seeing the prices of services rise, and the
funds to pay for these services depleting.
Today, it costs more to operate businesses, drive our cars,
and cool our homes. Unfortunately, the demand for energy is not
decreasing. Companies are being forced to close and vital
members of our Nation's work force are losing their jobs.
With California's economy representing 13 percent of the
total U.S. gross domestic product, it cannot survive under
these conditions.
A poorly thought-out deregulation plan has severely damaged
the world's sixth largest economy, and I'm hopeful that
hearings such as these will provide us with some insight into
how we can avoid problems. I look forward to working with the
Members of this committee as well as members of our panels to
learn more about this situation.
Again, thank you, Mr. Chairman, for calling us here today.
I yield back the rest of my time.
Chairman Oxley. The gentlelady's time has expired.
The gentlelady from California, Ms. Lee.
Ms. Lee. Thank you, Mr. Chairman. I want to thank you and
our Ranking Member Mr. LaFalce for calling this important
hearing.
We know that the American economy, of course, is one of the
central concerns of this committee. And the West Coast energy
crisis has emerged as perhaps the most important economic issue
of the year.
California, of course, is the epicenter of the crisis and
it is one of the world's largest economies. Its economic well-
being is critical to the financial health of the Nation as a
whole.
Many consumers in California have been confronted with
skyrocketing bills that bore little relationship to the alleged
laws of supply and demand. The State itself, and therefore
California taxpayers have been forced to spend billions of
dollars to keep energy flowing into the State.
Now, when Minority leader Dick Gephardt and other Members
of Congress came to Oakland, California, to my District several
weeks ago, they saw the face of this crisis. They heard from
small business owners who face potential bankruptcy.
They heard from school administrators who have been forced
to divert money from much needed textbooks, teacher's salaries
and instructional supplies to pay energy costs.
They heard from persons with disabilities for whom
blackouts are really nightmares and rising bills are an
impossible expense.
They also heard from the people of California who have been
paying the price of this crisis for the last year.
Now, months ago, the Federal Energy Regulatory Commission
officially determined that Californians had been charged unjust
and unreasonable prices. It's only within the last week,
though, that the FERC has begun to impose price mitigation
measures. I think that's what they call it. And even these fall
short of the needed solution.
California's businesses and consumers have not only faced
escalating prices, they have experienced blackouts that
endanger health and safety and the regional economy.
We should be asking very hard questions about the causes of
these blackouts. Considerable evidence indicates that power
generators may have manipulated supply in order to increase
prices. This issue really does demand full investigation.
We need national wholesale price controls. We need rebates
immediately, rebates for consumers and institutions that have
been forced to pay these unjust and unreasonable rates. And we
need to spur our economy by investing renewable energy, and we
need innovation and not stagnation.
I want to thank you, Mr. Chairman, for these hearings, and
I look forward to hearing from our witnesses in terms of how
they view this crisis, which is devastating California, not
only California, as I said, it's the epicenter, but it's moving
to the rest of our country, as we know.
Chairman Oxley. The gentlelady's time has expired.
The gentleman from Georgia, Mr. Barr.
Mr. Barr. Thank you, Mr. Chairman.
Mr. Chairman, Washington really is a wonderful place. It
never ceases to amaze me. I have a news release here dated June
18 from the Federal Energy Regulatory Commission and the thing
is five pages long of single-spaced type, and it's just full of
all sorts of bureaucratic gobbledegook. But only in Washington,
only in the world of Washington can somebody--and I presume
that FERC put this thing out probably with a straight face--in
the first paragraph, they say they're instituting curbs on
prices, and then in the very next paragraph, they say this is a
market-oriented principle.
Well, it may be a market-oriented principle in a State-run
market economy, but not in an economy such as we have always
had in this country.
And then it goes on, it talks about attracting additional
investment. Well, it would be very interesting to see how you
attract any investment, much less additional investment, when
investors already have been beat up in California, because
there are no incentives for them to invest.
So, now we have additional curbs on prices or price
mitigation or whatever nonsense they call it, but it is price
caps, it is price control, and they think that this is going to
solve the problems in California.
It's not going to solve the problems in California. The
Governor of California has caused these problems and now he's
coming to the President and coming to the Congress and coming
to these other regulatory bodies to try and shift the blame
away from himself and away from his colleagues who, for year
after year after year, have taken away incentives for energy
investment, have put price caps on that are unrealistic, and
have placed all sorts of limitation on the development of
energy sources.
Now it's fine to talk about new energy sources and
alternative energy sources, but when you have limitations on
the development of known energy sources, it seems kind of
ludicrous to say, ``Well, let's forget about that, and let's go
on to talk about new energy sources.''
The problems that California is facing are immediate. They
are not of the Federal Government's making, they are the making
of the Government leaders in California, and I'm very sorry
that FERC is now getting involved in sort of a process of let's
share the misery rather than helping to really come to grips
with what California has done with regard to restrictions on
prices, restrictions on investment, restrictions on development
of energy sources.
So this really will be an interesting hearing to begin
getting into some of these issues, Mr. Chairman, and I
appreciate your taking the leadership on trying to at least get
some of the facts out.
Chairman Oxley. The gentleman's time has expired.
The gentleman from North Carolina, Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman. I appreciate the
Chairman calling the hearing.
I've been watching this situation from a distance with a
great deal of interest, because we are the United States, and
even if this only affects California and the West, it would be
a matter of extreme importance to us, but also because it could
have some important implications for the rest of the country
and could spread to the rest of the country.
One of the concerns I've had about this is if we don't do
something decisive to address the situation in the West, we
increase the likelihood of problems in the rest of the country
and increase the probability of it having implications in North
Carolina and in Georgia and other places.
One of the concerns with the FERC Order, therefore, is that
to enter an order that finds that there has been substantial
abuse, yet does not retroactively give people relief for the
abuse that has taken place before the order was entered, would
seem to me to encourage the same kind of activity possibly in
other parts of the country.
And so I'm extremely concerned that even if this order were
sufficient to solve the problem prospectively, what message
have we sent to folks who have abused, corporations that have
abused the system retrospectively.
I'm not a big supporter of price controls or Government
intervention, but I do know that there are some areas of
critical, essential public services and when I see the
President inject himself into the airline situations, I can't
imagine we would think that electricity would be less essential
than airline service.
There are some essential services where the Government has
a role and I think this is one of them, primarily because there
has been a long history of cost-of-service-based electricity
rates in California, and at least in part, the deregulation of
the industry has not been properly done, so you really kind of
need to step back to where you were, while you try to figure
out how you move forward to better solution.
So, I appreciate the Chairman calling the hearing and look
forward to any words of wisdom that our witnesses may have
about retrospective remedies for people who have already been
abused, and prospective solutions to this problem.
Thank you, Mr. Chairman.
Chairman Oxley. The gentleman's time has expired, and we'll
now turn to our panel of witnesses.
Appearing on the first panel is SEC Commissioner Isaac C.
Hunt, Jr. Commissioner Hunt was confirmed by the Senate on
January 26, 1996. Prior to being nominated to the Commission,
Commissioner Hunt was Dean and Professor of Law at the
University of Akron Law School, and he's also had experience
with the Carter and Reagan Administrations.
Joining Commissioner Hunt is Deputy Secretary Alphonso
Jackson, of the Department of Housing and Urban Development.
Secretary Jackson comes to the Department after serving most
recently as President of American Electric Power-TEXAS.
Mr. Jackson has also served as President and CEO of the
Housing Authority of Dallas, and Chairperson of the District of
Columbia Redevelopment Land Agency Board.
Thank you, gentlemen, for both appearing before the
committee today. And Commissioner Hunt, we'll begin with your
testimony.
STATEMENT OF HON. ISAAC C. HUNT JR., COMMISSIONER, U.S.
SECURITIES AND EXCHANGE COMMISSION
Mr. Hunt. Thank you, Mr. Chairman and Ranking Member
LaFalce and Members of the committee.
I am Commissioner Hunt of the U.S. Securities and Exchange
Commission. I'm pleased to have this opportunity to testify
before you on behalf of the SEC about the current energy
problems in California and the Public Utility Holding Company
Act of 1935.
As I will discuss, because neither of the holding companies
that own the major California utilities is registered under the
Act, and because the Act is not an impediment to the
construction of new generation facilities, the SEC's
administration of the 1935 Act has not had any direct impact on
the California situation.
Nevertheless, the SEC continues to support efforts to
repeal the 1935 Act and replace it with legislation that
preserves certain important consumer protections or to amend
the Act to grant the SEC broad exemptive authority.
Before discussing the current problems in California and
the SEC's position on repeal or amendment of the 1935 Act, it
is useful to review both the history that led Congress to enact
the Act in 1935, and the changes that have occurred in the
electric industry since then.
During the first quarter of the last century, misuse of the
holding company structure led to serious problems in the
electric and gas industries. Abuses arose including inadequate
disclosure of the financial position and earning power of
holding companies, unsound accounting practices, excessive debt
issuances and abusive affiliate transactions.
The 1935 Act was enacted to address these problems. In the
years following the passage of the Act, the SEC worked to
reorganize and simplify existing public utility holding
companies in order to eliminate the problems that Congress
identified.
By the early 1980s, the SEC concluded that the 1935 Act had
accomplished its basic purpose and that many aspects of it had
become redundant with other Federal and State regulations.
In addition, changes in the accounting profession and the
investment banking industry have provided investors and
consumers with a range of protections unforeseen in 1935.
Because of these changes, the SEC unanimously recommended
that Congress repeal the 1935 Act based on its conclusion that
it was no longer necessary to prevent the recurrence of the
abuses that led to the Act's enactment.
For a number of reasons, including the potential for abuse
through the use of a multi-State holding company structure,
related concerns about consumer protection, and the lack of a
consensus for change, repeal legislation was not enacted during
the early 1980s.
Because of continuing changes in the industry, however, the
SEC continued to look at ways to administer the statute more
flexibly.
In response to continuing changes in the utility industry
during the early 1990s, then-Chairman Arthur Levitt directed
the SEC staff in 1994 to undertake a study of the 1935 Act that
culminated in a June 1995 report.
The report again recommended repeal of the 1935 Act or
amendment of the Act to give the SEC broad exemptive authority
to administer the Act. The June 1995 report also outlined and
recommended that the Commission adopt a number of
administrative initiatives to streamline regulation under the
Act.
The SEC has implemented many of these initiatives. The
utility industry has continued to undergo rapid change since
publication of the report.
Congress facilitated some of these changes. Specifically,
the Energy Policy Act of 1992, through statutory exemptions to
the 1935 Act, allows holding companies to own exempt wholesale
generators and foreign utilities, and allows registered holding
companies to engage in a wide range of telecommunication
activities.
Today, the electricity shortages, price increases and
rolling blackouts in California represent one of the most
severe problems in the electric industry.
Specifically, in California, acute supply shortages,
opposition and legal impediments to new power plant
construction, and high natural gas prices have driven wholesale
electricity prices to extraordinary levels.
The two largest California utilities have not been allowed
to pass wholesale price increases through to consumers and, as
a result, are experiencing severe liquidity problems. One of
the utilities has declared bankruptcy; the other has stated
publicly that it may also.
Neither the 1935 Act nor the Commission's administration of
the Act has had any direct impact on the situation in
California. Although we have monitored the situation in
California, neither of the major utilities in the State is part
of a holding company system registered under the Act.
As a result, the SEC, under the 1935 Act, does not directly
regulate the two companies that have experienced the most
severe financial problems.
Additionally, and perhaps more importantly, a shortage of
supply in electricity is undoubtedly a significant contributor
to California's problems.
Since the passage of the Energy Policy Act of 1992, the
1935 Act has not been an impediment to investment in or
construction of generation facilities.
The Energy Policy Act facilitated the entry of new
companies and hence new sources of capital into the generating
business by permitting any person to acquire ``exempt wholesale
generators''--EWGs--without the need to apply for or receive
SEC approval.
However, a registered holding company may not finance its
EWG investments in a way that may have a substantial adverse
impact on the financial integrity of the holding company
system.
The Energy Policy Act gave the FERC the responsibility to
determine whether an entity may be classified as an EWG. After
obtaining EWG status, an EWG is not considered an electric
utility company under the 1935 Act and, in fact, is exempt from
all provisions of the Act.
Prior to passage of the Energy Policy Act, a generation
facility would have been a public utility----
Ms. Kelly: [Presiding]. Excuse me, Mr. Hunt. I'm going to
ask if you would please sum up. You are well over your time.
Mr. Hunt. Yes, ma'am.
Although the 1935 Act has not played a significant role in
California's energy problems, the SEC continues to recommend
that Congress repeal the 1935 Act subject to appropriate
safeguards.
And short of repeal, the SEC believes that amending the
1935 Act to provide the Agency with broad exemptive authority
will ensure that the goals of the Act can be achieved without
being an impediment to the development of the gas and electric
markets.
Thank you, Madam Chair.
[The prepared statement of Hon. Isaac C. Hunt, Jr. can be
found on page 57 in the appendix.]
Ms. Kelly. Thank you very much, Mr. Hunt.
We next go to Mr. Jackson.
Welcome, Mr. Jackson.
STATEMENT OF HON. ALPHONSO JACKSON, JR., DEPUTY
SECRETARY, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT.
Mr. Jackson. Chairman Oxley, Ranking Member LaFalce and
other distinguished Members of the Financial Services
Committee, thank you for the opportunity to appear before you
to discuss----
Ms. Kelly. Mr. Jackson, would you please pull that
microphone closer to you? It's difficult for some people to
hear.
Mr. Jackson. Can you hear me now?
Ms. Kelly. Yes. Much better. Thank you.
Mr. Jackson. Chairman Oxley, Ranking Member LaFalce and
other distinguished Members of the Financial Services
Committee, thank you for the opportunity to appear before you
to discuss the President's Energy Policy and specifically ways
the Department of Housing and Urban Development supports the
energy policy and conservation.
Housing policy and energy policy are inextricably linked.
No one knows this better than I do. I served as Executive
Director and Chief Executive Officer of three major public
housing authorities in this country, and lately I've served,
before coming here, as President of American Electric Power.
The President's energy policy is one that I believe takes
into consideration the importance of energy in this country.
HUD has already taken steps to respond to the rising energy
costs at HUD-assisted housing.
These include making $105 million in operating funds
available to lessen the impact of higher utility rates on
public housing authorities, raising payment standards for
Section 8 vouchers, and reimbursing owners for increased
utility costs and project-based Section 8 certificates.
The President's Energy Policy directs the Environmental
Protection Agency and the Department of Energy to promote the
increase of energy efficient technology in housing, especially
through increased promotion of the Energy Star initiative.
HUD will work closely with the Environmental Protection
Agency and the Department of Energy in implementing the
President's objectives of improving energy efficiency in
housing. This will not involve the establishment of any new
programs, but rather the better use of existing programs.
While there have been a variety of efforts over the years
to improve the energy efficiency of assisted housing, as well
as older unsubsidized housing, those efforts have lacked a
coherent framework and focus.
With the announcement of the President's Energy Policy, we
now have the necessary framework for promoting increased energy
efficiency in housing. HUD is committed to giving this issue
the priority attention it deserves, ensuring that we make
significant progress in conserving energy in housing.
HUD's effort to increase the energy efficiency of housing
will focus in four key areas: increasing energy efficiency in
HUD-assisted rental housing; expanding the use of energy
efficient mortgages; providing technical assistance to non-
profit, community-and faith-based organizations; and supporting
the use and development of new technology.
If I may, I would like to comment on the legislation.
HUD currently provides $28 million for capacity building by
organizations such as the Enterprise Foundation, LISC and
Habitat for Humanity.
Secretary Martinez and I both support local flexibility,
especially with Community Development Block Grant funds.
Funding under the public services cap can include childcare,
crime prevention and drug abuse funding.
Funding energy-efficient programs at the expense of other
worthwhile programs would be a difficult decision for local
communities. Increasing the cap at the discretion of local
communities to pay for energy efficiency programs, however, is
a good option and allows local communities to make
determination of funding priorities.
Our FHA mortgage incentive for energy efficient housing
proposal would implement a new type of energy efficient
mortgage by authorizing the Department to reduce the premium
for homes that are particularly energy efficient.
However, the Department already has an Energy Efficient
Mortgage program. Before authorizing a new efficient energy
mortgage program, it is vital that we examine what lessons we
can learn from the current one and carefully examine what the
administrative burden of the new program variant and whether it
is justified.
If the committee remains interested in this proposal, we
strongly recommend that before authorizing a new type of energy
mortgage, Congress and the Administration review our experience
with the current program and examine whether loans secured by
homes that exceed a particular threshold of energy efficient
standards are in fact less risky.
The proposed legislation for higher mortgage ceilings for
solar-energy properties would allow FHA to insure 30 percent
higher mortgages for both single family and multifamily
mortgages for property with solar power.
Currently, FHA has the authority to insure mortgages for
solar-enhanced property that are up to 20 percent higher than
other mortgages.
This increase, while not necessarily one that would be
widely used, could have a positive impact on properties whose
cost is significantly higher because of the inclusion of solar
technology.
We believe that the Policy Development and Research--PD&R--
that occurs in HUD is already active in research on building
technology and energy efficiency.
As HUD implements the President's Energy Policy, we will
reform these efforts.
We would be happy to work with the committee to determine
what demonstration of energy efficient technology would be
appropriate. At that time, we can opine more specifically as to
whether new legislation is needed to authorize such
demonstrations.
While including consideration of energy conservation and
projects restructured under the Multifamily Assisted Housing
Reform and the Affordability Act of 1997, is appropriate, the
Department is concerned that the inclusion of this provision
may require an appropriation in order to make the energy
improvement that might be necessary.
HUD's 5-year energy plan was first presented in 1992. It
has been updated several times.
We would be happy to provide the report and other
information to the committee. The additional information
requested by Congress under this proposed legislation would
include, among other things, clarification of energy issues
under programs created since 1990. The further requirement that
HUD publish an immediate update is consistent with the
requirements already made by the recent Executive Order.
Again, thank you for the opportunity to address you on this
important issue. I would be happy to answer questions by any
Member of the committee.
Thank you.
[The prepared statement of Hon. Alphonso Jackson, Jr. can
be found on page 67 in the appendix.]
Ms. Kelly. Thank you very much, Mr. Jackson, and we will be
happy to accept the report if you would like to bring it to the
committee.
We move now to some questions. And I have a couple of
questions for Mr. Hunt.
Mr. Hunt, in your testimony, you've stated that the--and
I'm going to use the acronym PUHCA, I'm just simply going to
call it PUHCA.
You've stated that the PUHCA is redundant and should be
repealed. It is unusual for a regulator to suggest that its
authority be ceded to some other regulator.
Why do you, at the SEC, support this reduction in that
regulatory turf?
Mr. Hunt. Several reasons, Madam Chair.
First, we think that the ills that PUHCA was enacted to
address have been essentially solved by action of the committee
under PUHCA.
Second, we believe with the advent of better State
regulation of utilities and with the enactment of the bill that
established the FERC, that adequate Federal and State level
regulation of utilities is essentially in place.
We would suggest some amendment of the power of FERC to
give them more adequate access to the books and records of
utility companies but, by and large, we think that because of
FERC, because of adequate State regulation, because of
improvements in accounting, because of improvements in
investment banking, because of improvements in disclosure of
all kinds of companies, including public utility companies
under our supervision, that the 1935 Act is simply no longer
necessary.
Ms. Kelly. Thank you.
I'm wondering about, as an alternative to the repeal of
PUHCA, you think that we should give the SEC that same general
exemptive authority that it has under the other Securities
laws.
Mr. Hunt. Yes, ma'am.
Ms. Kelly. Do you want to tell us how that authority is
administered under those laws currently so we can better
understand what you're talking about with regard to this
suggestion?
Mr. Hunt. Well, we try to use our exemptive authority
flexibly within the spirit of the statutes, and keeping in mind
always the primary view of protection of investors, and we
would hope to use the exemptive authority under the 1935 Act in
the same way.
Ms. Kelly. One final question, and then I'll move on.
I want to know why the SEC's current exemptive authority
under Section 3 of PUHCA is inadequate?
Mr. Hunt. Because of changes in the industry and our need
to interpret and administer the Act more flexibly with the
rapid changes in the industry, we think that a broader
exemptive authority is needed so that the 1935 Act does not
create impediments to the development of the utility industry.
We think we need either broader exemptive authority or that, as
we've testified several times before this committee, that the
Act should be repealed.
Ms. Kelly. Thank you.
Mr. Jackson, your biography indicates you've had
experiences as the CEO of three public housing authorities.
What efforts did you undertake in energy efficiency while you
were in those positions?
Mr. Jackson. It was belief that if we were going to
instrument and institute energy efficiency, that we had to do
it while we were developing new housing and/or renovating
housing. We had to also consider the energy efficient
facilities that we used, such as the washer and dryer system
and the electrical system.
And so we made every effort to make sure that the
installation that was done in each one of those respective new
or rehab developments was done at the highest energy efficiency
level that we could.
Ms. Kelly. Mr. Jackson, I just chaired a subcommittee
hearing down in New Orleans, and I understand that the Section
8 program provides an energy subsidy.
Can you tell me why the New Orleans Section 8 recipients
are suing HUD over the energy subsidy? Do you know about that?
Mr. Jackson. No, not at this time, but I will be happy to
get that for you.
Ms. Kelly. If you could get that information for me, I'd be
very interested in that.
We move next to Ms. Waters.
Ms. Waters. Thank you very much.
My question is for Mr. Hunt.
Mr. Hunt, you have given testimony that really supports the
SEC while the position for further deregulation in the form of
PUHCA repeal.
Now you don't have oversight in California at this time,
and you think the States should have more authority to regulate
rather than have you involved.
If that is so, California's precisely in that position.
California deregulated and we have a crisis. How do you support
deregulation in the form of PUHCA repeal, given the California
situation?
Mr. Hunt. Well, Madam Congressman, we think that adequate
supervision does exist through State regulation, and as I said,
through the Federal regulation in the form of the FERC.
I don't know all the details of the deregulation system in
California and how California got to this crisis. I have read
some matters about the deregulatory system there and of course
lack of generating power there, but I still don't think that
the SEC's role through PUHCA, given the fact that the principal
utilities are intra-state and non-regulated by us, I don't see
how the SEC's involvement through PUHCA could have changed the
landscape in California in any way.
Ms. Waters. Do you believe that FERC has sufficient
authority to intervene in some shape, form, or fashion, when
you have rolling blackouts and the situation could get worse,
given that we have come to appreciate reasonable cost energy in
this country, it's a way of life.
And we don't want to see a situation where the haves and
the have-nots, one can have energy and the other cannot,
because they can't afford to pay for it.
You heard some of the testimony today about energy bills
being as high as a thousand dollars for people on fixed incomes
and low-incomes and low wage jobs.
So what do we do to protect against that kind of harm and
that kind of risk?
Mr. Hunt. Well, first I think that the FERC, by and large,
has the authority to do what the SEC has done under the Public
Utility Holding Company Act of 1935 or PUHCA, which is to
review inter-system transactions between utility holding
companies and their utility operating subsidiaries.
That is our principal interaction with FERC and what FERC
does. In terms of the way FERC supervises the deregulatory
process in California or other States, and sees to it that
other generating power facilities are established, we have very
little to do with the FERC's activity in those areas.
Ms. Waters. Do you have access to the generating company's
records?
Mr. Hunt. Yes, ma'am, we do, of registered holding
companies, yes, ma'am.
Ms. Waters. Of the holding companies, that's right.
Are you able to see and make a real determination about
whether or not they are operating at full capacity?
Mr. Hunt. I don't think we can see that from the books and
records. What we can see from the books and records are such
things as, you know, inter-system loans, upstream loans, the
pass through of non-utility costs to consumers.
Ms. Waters. Who is best able to see and know definitely
whether or not these companies are operated at full capacity
and whether or not, when they go off-line for so-called
maintenance, it's really absolutely necessary?
Mr. Hunt. I would think it would be the State regulatory
authority and the Federal Energy Regulatory authority.
Ms. Waters. Thank you very much.
Mr. Miller. [Presiding.] Thank you, Ms. Waters.
Ms. Waters mentioned that California deregulated, and we
did that approximately 5 years ago, and she's absolutely
correct. But we only deregulated the delivery side of energy in
California. We never deregulated the production side.
Currently in California, the Governor has mentioned he has
signed permits for 10 or 13 power plants, but the problem with
that is that those power plants have all been in process for a
minimum of 4\1/2\ years, because you can't get a permit
approved through the State of California in less than 4\1/2\
years if it's fast-tracked, and 5 years under normal process.
In fact, I read in an article he had just signed
authorization for a plant to be built in San Jose, but that
plant was permitted, I believe, 3 years ago and local
municipalities would not allow the plant to be located in their
jurisdiction.
The problem we have in California is not only do you have
to deal with the process in Sacramento of getting a permit, but
once you've accomplished that and you've invested millions and
millions of dollars in getting that permit, then you have to go
beg the locals to allow you to locate that plant within their
jurisdiction. That's the problem in California.
Mr. Jackson, you mentioned some things that are very
important, I believe, and I just commend the Secretary on his
approach to the housing issues. And you talked about energy
efficiency and such.
Now, California has the most energy efficient program of
any State in the Nation. I mean, since the 1980s, we've had
Title 24 requirements which require a builder to go deal with
air infiltration, the type of windows--whether it's single-
glaze, dual-glaze, the actual floor coverings in a home,
material you put on a fireplace, where you draw the combustion
for a fireplace from.
You have to count the load of your air conditioners so you
provide the minimum requirement necessary to cool and to heat a
home.
I mean, we in California go far beyond any other State in
environmental policy and regulation, yet, as I stated earlier,
the problem in California, due to the high prices, is the
production site.
And the problem is, years ago in California, government
decided that local agencies had purview and oversight over
developers and builders when they came in for applications. So
we decided we would create the sequel which is the California
Environmental Quality Act, which applied only to government,
because we thought government needed somebody to oversee them
too on the environmental issues.
But what happened was radical environmental extremists
again sued in court and had CEQA applied to the private sector.
And as you know, prior to that occurring, subdivision map acts
said that local municipalities in government had to respond and
make a decision on a track map within 58 days, and if they
didn't 59 days later, it was approved by law.
Now with CEQA in California, you can drag it out to 15 or
20 years and yet never make a decision on provided housing in
California dealing with the demand.
We have done just the same thing with energy as we have
done with housing in California specifically.
Now, Mr. Hunt, because of PUHCA, exempt companies are
limited in where and how much they can invest in energy
production for fear of triggering PUHCA and basically having to
register.
For instance, Med-America Energy owned by Berkshire
Hathaway, which is Warren Buffet, would have invested, but
PUHCA was a concern, and they did not invest in energy in
California.
And, Mr. Hunt, you said PUHCA had no direct impact on
California, but it certainly had a chilling effect on
investment within California.
Can you address that?
Mr. Hunt. Well, I think that in the instance of the company
owned by Berkshire-Hathaway, which is outside of California, I
think the fear was that if that company had invested in one of
the utilities in California, it would have become a utility
holding company subject to the jurisdiction of the SEC under
the 1935 Act.
When that occurs, then the extent to which a registered
public utility holding company can invest in other non-utility
businesses is restricted by the provisions of the 1935 Act.
So indirectly, to the extent that some companies might have
wished to invest in the now-exempt California utilities, the
1935 Act certainly was an indirect impediment to that
investment.
Mr. Miller. Ms. Waters, you expressed your anger at the
prices in California for energy, and there's one thing that has
a greater impact on my life than anything else, and it's my
wife. And trust me. She pays our electricity bill and that is
one ticked-off woman right now.
And I'm as mad as anybody about the prices in California
for energy. What angers me more is the housing crisis we are
facing, Mr. Jackson, and the energy crisis we are into, Mr.
Hunt, are directly associated with Government mandates,
regulations, and processing.
And that's what I think we need to deal with that we have
yet to deal with that we're trying to put, once again, a
bandaid over the problem instead of curing the cause of the
need for a mandate.
Ms. Waters. Will the gentleman yield?
Mr. Miller. My time has expired.
Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman.
Mr. Hunt, you indicated in your testimony, I believe, that
while you supported repeal of PUHCA, you thought that in
connection with that, there needed to be some consumer
protections implemented.
Did I misunderstand you?
Mr. Hunt. No, sir. I think I said that in connection with
the repeal of PUHCA, there probably needs to be more power
given to the Federal Energy Regulatory Commission so that they
can have greater access to the books and records of intra-
interstate holding companies to make sure that nothing is going
on in that holding company with respect to inter-system
transactions that would harm consumers or ratepayers.
Mr. Watt. I'm not clear on whether I misunderstood what you
said. I thought you said that in connection with the repeal or
amendment, there needed to be further consumer protections of
some kind.
Mr. Hunt. Yes, sir. That's the access to the books and
records that we would suggest that FERC be given.
Mr. Watt. OK. That was the question I was going to ask,
what are those consumer protections, and you're saying----
Mr. Hunt. Access to the books and records of the utility
holding companies on the part of FERC.
Mr. Watt. OK. And would you recommend that, in conjunction
with that access, if some impropriety is found by FERC, that
they be given enforcement authority to enforce those consumer
protections if they find some impropriety?
Mr. Hunt. If they don't have it now, I would certainly
suggest that they be given it.
Mr. Watt. Do you think they have some enforcement authority
now?
Mr. Hunt. I really don't know that, Mr. Congressman, the
extent of their enforcement authority.
Mr. Watt. You heard my opening statement. One of the
concerns I expressed was that they had basically made a finding
that consumers were being taken advantage of.
Presumably, if that was the case now, it was the case for
at least several months leading up to now, would you think they
would have the authority, under current regulations, under
current law, to retroactively provide relief for the people who
have been taken advantage of up to this point?
Mr. Hunt. Mr. Congressman, I really would have to defer on
that.
Mr. Watt. You've got some people behind you. Are they on
your staff? They are shaking their heads yes. Maybe they're not
on your staff?
Mr. Hunt. No, they are, they are.
Mr. Watt. OK.
Mr. Hunt. We don't examine the FERC's enforcement
authority, but our staff people who work in the utility
regulatory system think that FERC does presently have the
authority to do that.
Mr. Watt. And if they don't have that authority, would you
think it would be appropriate if we, if PUHCA were repealed or
amended to give FERC that authority?
Mr. Hunt. If PUHCA were amended or especially if PUHCA were
repealed, and if FERC doesn't presently have that authority, I
would think it appropriate to give it to them.
Mr. Watt. OK.
Mr. Jackson, given the substantial increase in energy
costs, which I think we can kind of take legislative notice of
in California all across the country, do you think it would be
appropriate to increase in this supplemental appropriations
bill, Emergency Supplemental Appropriations Bill, funding for
LIHEAP?
Mr. Jackson. For which now? I'm sorry.
Mr. Watt. The Low Income Heating and Energy Assistance
Program.
Mr. Jackson. That is not a HUD program.
Mr. Watt. I didn't ask you that. I said, do you think it
would be appropriate to increase it, given the substantial
increases in energy costs that have taken place since the last
appropriation was done?
Mr. Jackson. Well, Congressman, we have addressed that
issue at HUD with our public housing authorities in the sense
that we have increased it by $105 million to address the----
Mr. Watt. Where'd you get the money from to do that, Mr.
Jackson?
Mr. Jackson. From the pay reprogram.
Mr. Miller. Your time has expired, Mr. Watt.
Mr. Watt. I'm sorry.
Mr. Jackson. We did reprogram the money.
Mr. Watt. It would be nice to know, if he doesn't have time
to answer it now, where that money came from.
Mr. Jackson. We reprogrammed it.
Mr. Watt. Reprogrammed it from where? That's what I'm
trying to find out.
Mr. Jackson. Unspent moneys at HUD.
Mr. Miller. We will try to come back, and I think we'll
have more time when the other Members have a chance.
Ms. Capito.
[No response.]
You have nothing?
Mr. Bentsen.
[No response.]
Ms. Schakowsky.
Ms. Schakowsky. Thank you.
Mr. Jackson, the President's budget only proposes a $150
million increase in the public housing operating budget, and
that money is supposed to go to addressing increased energy
costs.
Some estimate that it would take at least $300 million to
deal with high energy costs. What analysis has HUD done to
ensure that $150 million is going to be adequate?
Mr. Jackson. HUD basically bases its assumption on the
Department of Energy, and we are very clear that might occur.
But our position is that we have already allocated $105
million, and to date, just about half of that money has been
used.
So we're very, very sensitive to the need that if it
occurs, we will address that issue. But our assumptions are
based on the Department of Energy.
Ms. Schakowsky. Well, if I could have some documentation of
that, I would appreciate it.
In Chicago, the public housing authority may have to divert
money from their $1.5 billion, 10-year redevelopment program to
pay for higher energy costs.
I wonder if HUD has any proposal to help make up for that
lost funding?
Mr. Jackson. I think, Congresswoman, as I've said, we've
reprogrammed $105 million of our money to address higher energy
costs, and if we see that more are necessary, we will be very
sensitive to that.
Ms. Schakowsky. What does that mean?
Mr. Jackson. We will have to address the needs.
Ms. Schakowsky. And where will that come from?
Mr. Jackson. That has not occurred yet, so I'm not sure I
can answer that question for you.
Ms. Schakowsky. It would seem to me that one way that we
could help prevent future energy crises is to make public
housing more energy efficient.
The President, however, would cut the Public Housing
Capital Fund by $700 million, and that comes on top of a $22-
billion backlog in repairs that will prevent public housing
authorities from making much needed capital improvements.
In light of these cuts, what is HUD's plan to increase
public housing energy efficiency?
Mr. Jackson. Congresswoman, I would beg to differ with you.
I think that having ran three major housing authorities, I have
probably the best understanding of capital budgets and
comprehensive grants.
And if you remember some 8 years ago, Congress made the
decision to cut $500 million out of the Capital Grant budget,
and at that time it was called Comprehensive Grants.
What occurred was that the backlog was so far behind that
it served as an instrument to make sure that the housing
authorities began to spend their capital money.
We have the same problem with backlog today. We give them
18 months to spend the money. We have a tremendous backlog at
this point in time.
It would be my position, and the Secretary's position, that
if that money is expended within the next 18 months to 2 years,
we would have to come back to see you.
I seriously doubt that is going to occur, because other
than a few housing authorities in this country, we have a
number of major housing authorities in urban areas that are far
behind in the spending of their capital funds.
Ms. Schakowsky. So I can say to my people in Chicago that
they have plenty of money to make----
Mr. Jackson. I can tell your people in Chicago right now at
this point in time, the capital funds spending is behind, and
we're working with them to make sure that we do it in a very
efficient and effective manner.
Ms. Schakowsky. And so we have, in your view, completely
sufficient money to make the kind of capital improvements that
we need?
Mr. Jackson. Yes, we do. And if we don't, I'll be happy to
come back and discuss that with you.
Ms. Schakowsky. Well, I appreciate that.
Let me just ask Mr. Hunt. I was looking at your testimony,
which you were not able to complete and I know a number of
people have talked about consumer safeguards, and you talked
about appropriate safeguards.
If I could just ask this question, you've talked about how
FERC ought to have information about Federal oversight of
affiliate transactions, and so forth.
But I'm wondering if you feel that--then you say, however,
that the SEC would recommend either just a separate review of
PUHCA or larger energy reform legislation.
If you're saying on the one hand, we have to make sure that
FERC has adequate authority, and on the other hand, just a
straight repeal of PUHCA would be fine with you, how do you
reconcile those two things?
Mr. Hunt. Ma'am, I think what the testimony says is that we
favor the repeal of PUHCA and whether it is done on a stand
alone basis or done as a broad reform of the energy regulatory
system is a matter for the Congress to decide.
We also say that, so that's part of the equation.
The other part is that we do think if PUHCA is repealed,
that the FERC ought to be given additional authority to access
the books and records of utility holding companies.
Ms. Schakowsky. But even if it were, you would support
repeal?
Mr. Hunt. Yes, ma'am.
Chairman Oxley. Mr. Ford.
Mr. Ford. Thank you, Mr. Chairman.
Mr. Watt, did you want to--I guess Mr. Watt doesn't want
to, because he left.
As we speak--thank you, Mr. Chairman--as we speak, we all
know that Governor Davis is on the other side of the Hill
testifying before the Government Affairs Committee with Senator
Lieberman. And we all know what his request is.
And for those of us not from California, I hale from
Tennessee, Mr. Hunt and Secretary Jackson, we are all
concerned. As Congressman Watt mentioned, I'm certain that all
my colleagues on the committee as well as even those in the
committee room feel that if California, as Governor Davis says
so well, ``contracts pneumonia,'' the rest of us will get a
really bad cold.
In the effort of trying to avoid a really bad cold, perhaps
I don't understand the testimony. A lot of these energy issues
are new to all of us in the Congress. I don't have a wife like
my friend, Mr. Miller, but as the person who pays the bills in
my house, I get a little ticked off having to pay higher
utility bills as most Americans do.
Secretary Jackson, I understand that HUD doesn't play a
role in these issues, but you will certainly be confronted with
this challenge, and I appreciate the answer that you provided
to the Congresswoman.
But I would remind you that we also have a responsibility
to answer to those constituents, and as much as you and others
at the Department may be experts in housing matters and public
housing matters in particular, when constituents call us, we
are expected to at least be aware of the challenges and have
asked you those questions.
So I appreciate the passion in which you answered the
question, but I hope you would appreciate as well the we have
that charge, the same charge that you have, because we are
elected, not appointed, to serve the constituents and the
people of this country.
That being said, the imposition of price caps, Mr. Hunt,
and perhaps you've answered this in your remarks and I just
haven't heard it, but I take it you are opposed to price caps
in the form that Governor Davis is asking for?
Mr. Hunt. I didn't say anything in my testimony about price
caps, Congressman. That's in the purview of FERC. That's not
something that the SEC has anything to do with.
Mr. Ford. The SEC has no position or thoughts on the idea
of price caps as proposed by Governor Davis?
Mr. Hunt. We have not formulated an official SEC position
with respect to price caps on utility rates, no, sir.
Mr. Ford. To your knowledge, are you all in the process of
developing any position on the Governor's----
Mr. Hunt. No. We think that's not really within our purview
either under the Public Utility Company Act, and certainly not
under the other securities acts that we administer. We think
that's something for the State regulatory authorities and the
FERC on the Federal level to deal with.
Mr. Ford. I would assume that the Department of Housing and
Urban Development has not developed a response--would be the
Administration's response most likely you would adhere to,
Secretary Jackson.
I have no further questions, Mr. Oxley. Thank you.
Chairman Oxley. The gentleman yields back.
The gentleman from Texas, Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
Let me say at the outset, while I think PUHCA is probably
an outdated piece of legislation, I'm not quite sure I
understand the nexus between this and what's going on in
California.
And I think you laid that out subtley in your testimony,
Mr. Hunt.
But answer this for me, because I think it's interesting.
In your testimony, you talk about PUHCA and you also talk about
the Energy Policy Act of 1992, which allowed for exempt and
non-exempt companies to acquire exempt wholesale generators.
It's interesting to me, if I understand this correctly,
this would have been about the same time that then-California
Governor Wilson was pushing the California Energy Deregulation
Plan through the legislature. And if I understand that plan
correctly, they precluded State regulated holding companies
from having their own generating capacity and required them to
divest of generating capacity which, if I understand correctly,
is part of the problem that they have right now in California
is that the utilities themselves just became conduits for power
more so than conduits in generating entities.
I don't know if that's your understanding of what happened
there, but I think it is a little ironic.
Mr. Hunt. We think that your characterization is correct,
sir, yes.
Mr. Bentsen. And I mean again it has really nothing to do
with the SEC or the Public Utility Holding Company Act.
Mr. Hunt. That's right.
Mr. Bentsen. But it is rather ironic that Governor Wilson
would have been pursuing this, or whoever, the California
legislature at the time, was sort of going in the opposite
direction of where the Federal Government was going in
providing that.
And I think that tells a lot about the sort of mistake that
was made in part in the California deregulation scheme that
only deregulated part of the market and not the entire market.
Other than that, the issue of, in the footnotes you talk
about the issue of the potential for monopoly power, but I
guess the question of monopoly--well, even with the repeal of
the Public Utilities Holding Company Act, would the Securities
& Exchange Commission have some regulatory authority over
publicly held companies as it relates to their activities in
the capital markets?
Mr. Hunt. Oh, certainly, sir.
Mr. Bentsen. And FERC would have some control, and then
State regulators presumably would have some control. And then
with respect to monopoly concerns, I would presume that the
Justice Department and the Federal Trade Commission would have
some issues that they would have control.
Would that be your understanding?
Mr. Hunt. I think that's right. Clearly, we would have
control over the issuance of securities and their accounting
and their disclosure to their investors, as with any publicly-
held company, and I would assume that as to the monopoly
concerns that the agencies you mentioned would have that
traditional jurisdiction.
Mr. Bentsen. Mr. Chairman, I don't really have any other
questions, although I am glad to see my fellow Texan, Mr.
Jackson, is here, formally with the Dallas Housing Authority
and, years back, at Texas Southern University as well--I think
the Board of Trustees, Chairman of the Board of Trustees I
believe at one point, which is in Houston.
And I appreciate his testimony and I will say in looking at
your testimony, Mr. Jackson, that while there've been some
questions about the Administration's eagerness to pursue
conservation as a part of a long-range energy strategy, I do
see, at least in the HUD statement, that you all look for
energy efficiency in conservation, and I appreciate that.
With that, I yield back the balance of my time.
Chairman Oxley. The gentleman's time has expired.
The gentlelady from Ohio is recognized.
Ms. Jones. Thank you, Mr. Chairman. Mr. Chairman, Mr.
Ranking Member, thank you for putting this hearing together.
Like my colleagues though I'm not from California, it is an
issue that significantly impacts the area that I represent.
I would like to say hi to Mr. Hunt. I know him from another
life. He was the Dean of the Law School of the University of
Akron when I was judging back in Ohio. It's good to see you
again, Mr. Hunt.
Mr. Hunt. It's good to see you, ma'am.
Ms. Jones. Real quickly, I guess my initial questions
actually are going to go to you, Mr. Jackson. Additional
dollars for Section 8 housing. What about the people in public
housing operated under HUD auspices that don't receive Section
8 dollars, that are not in renovated housing that has been
adapted for energy efficiency?
What do we do for those folks?
Mr. Jackson. I think that's a very excellent question,
Congresswoman, because I think when you get to the Midwest and
the Northeast, you have that serious problem, because they have
not been renovated.
I don't think the problem exists so much in the Southwest/
Southeast because most of them are very new. I think what we
must do is go in, in the process, if they're not renovated,
when there are serious problems, to make sure that not only do
we correct those serious problems that are inside the units,
but we try to make them energy efficient at the same time.
That has not always been the case. I have to be very honest
with you. But I think now that many of the housing authorities
in the Midwest are seeing that, especially with the high
spiraling energy costs, that we must go in and not just service
the area that we are required, but to make the necessary
repairs around the doors, around the windows, to make sure that
they are sealed well and keep the heat out and keep the cold
out.
Ms. Jones. Because in reality, those are the situations
where you read the story about a family burns up in a house,
because they have a candle burnt sitting in the middle of the
hallway or they are using kerosene lamps or doing something in
order to be warm or to warm themselves when they really don't
have in place long-term solutions for energy in their homes.
Am I reading correctly that you do weatherization classes
for people in public housing or suggestions of energy
efficiency? Is that one of the President's proposals?
Mr. Jackson. Yes. I think that's very important. When I was
in Dallas, and in St. Louis, we did that. It might sound very
strange, but----
Ms. Jones. What was that thing that you provided a body
with hair spray and hair dryers?
Mr. Jackson. No. We are assuring them in many cases. For
example, in St. Louis, we did not have enough maintenance
people, so what we did was we took the resident counsels from
each one of those respective housing authorities and said,
``You can help us in this process if you would do this on a
Saturday morning,'' and we would send two maintenance or three
maintenance persons out. They would work with them and seal the
windows, especially of the senior citizens and the elderly.
Ms. Jones. You provide the supplies and the supervision
then?
Mr. Jackson. Yes.
Ms. Jones. OK. Let me back up again to Mr. Hunt.
Thank you, Mr. Jackson.
Mr. Hunt. Oh, I guess it was three, four, seven, I don't
know how many, maybe in the last 7 to 10 months, Mr. Hunt, it
was not electricity, but it was gasoline that was an issue in
the State of Ohio and then around Indiana, Kentucky,
Pennsylvania. All the gasoline was cheaper, but for in Ohio.
And the argument was that Ohio was imposing something upon
the way in which gas was produced or the like that caused Ohio
to be in this particular situation. I'm still waiting for the
response on why Ohio, Indiana, I mean Indiana and all these
other surrounding States, gas was cheaper than Ohio.
But let me impose what this suggestion upon the situation
with the electricity or this example upon the situation with
electricity in California.
Is it or is, if you know, electricity in the States
surrounding California much cheaper than California
electricity?
Mr. Hunt. Do we know that?
Ms. Jones. Anybody know that? Am I asking the wrong people.
Mr. Hunt. We think it's a region-wide problem in terms of
the Western part of the country.
Ms. Jones. Sure.
Mr. Hunt. But essentially in California.
We think that--our understanding is that the generating
facilities are most lacking in California.
Ms. Jones. My time is up, and if you'll forgive me, next
panel, for leaving. The issue in Cleveland right now is steel
and I have a steel meeting, so I've got to leave.
Thank you very much, Mr. Chairman. I yield.
Chairman Oxley. The gentlelady yields back.
Gentlemen, thank you for your testimony. We appreciate your
being here with us again. Thank you.
Could we have our second panel come forward.
Let me introduce our next panel, three professors and a
market analyst.
Professor Vernon Smith is a Ph.D. Economist from the
University of Arizona. With him are Dr. Jerry Ellig from George
Mason University's Mercatus Center, and Dr. Frank Wolak from
Stanford University. We are also pleased to have with us Mr.
James Dobson, Managing Director of Deutsche Banc Alex. Brown.
Gentlemen, thank you for appearing before the committee,
and Dr. Smith, please begin.
STATEMENT OF VERNON L. SMITH, Ph.D., REGENT'S PROFESSOR OF
ECONOMICS; DIRECTOR, ECONOMIC SCIENCE LABORATORY, UNIVERSITY OF
ARIZONA
Mr. Smith. Good morning.
First of all, Chairman Oxley, Congressman LaFalce and
Members of the committee, thank you for allowing me the
opportunity to address you on the impact and causes of the
California energy crisis.
My name is Vernon Smith. I'm currently the Regent's
Professor of Economics and Director of the University of
Arizona's Economic Science Laboratory. I will be employed there
for 4 more days.
Later next month, my colleagues and I will be moving to
Northern Virginia to become affiliated with George Mason
University and its Mercatus Center.
This statement is based largely on my joint work with
Stephen Rassenti and Bar Wilson, also of the Economic Science
Laboratory, but who could not be here today. They're back home
doing the work.
I think a brief way in which I can approach my response is
to have you begin by looking at Figure 1. I want to work from
the figures.
I want to first say that the energy crisis didn't begin in
California if, by the crisis, we mean price spikes. Those price
spikes began in the summer of 1988 in the Midwest, and the East
in the summer of 1999, 2000, and they are likely to come back
in the summer of 2001.
Although the earlier price spikes have, to some extent, of
course, attracted new capacity, and it's very hard to predict
what the effect of that increased capacity is.
In Figure 1, what we see here is the normal change in the
consumption of electric power over the daily cycle and over a
week. Notice that the peak consumption is about twice, or a
little over twice the off-peak consumption.
This graph is somewhat exaggerated by the fact that we do
not, at the retail level, price hourly. We do not price on a
time-and-day basis.
As a result, people do not have an incentive to conserve
on-peak, they don't have an incentive to shift to off-peak, and
that tends to exaggerate this cycle.
Now, in Figure 2, we see how the marginal cost of producing
power varies throughout the typical day and week. This is not a
recent graph. This is early 1980s. This is a hot August week in
Chicago and in the Midwest. But you can pull this graph out in
the 1970s or the 1960s or any time and also anywhere around the
world, and you'll see a similar pattern.
Now this is the wholesale cost. This is the cost that the
distributor is paying hourly throughout the day. That
distributor, back in the 1980s, and as is still true today, is
reselling that power at a constant rate throughout the day.
Now, in the early 1980s, the retail rate would have been in
the Midwest, I think, would have been around 6 to 7 cents a
kilowatt hour. About half that would be energy.
All right, now imagine in Figure 2, that you draw a line at
3 cents, a horizontal line at 3 cents. That is the price the
distributor is getting from the--the regulated price the
distributor is getting from the resale of that power.
That means all of those peaking costs that are above that
line, in effect, are peak consumption.
The off-peak, which is much below that, people are paying
more than it costs. In effect, you are taxing the off-peak
user. This, I want to argue, is the crux of the problem in
electric power not only in California, but in the rest of the
United States.
When you deregulate the wholesale market, you expect it,
you want it to reflect the variation in costs of producing
power, and that's what happened in wholesale markets. But we
did not deregulate the retail price and this in California
caught the utilities in a bind.
Figure 3 shows a very bad week in the week of June 26th,
2000 in California. These are the California PX prices, the
spot prices, and you see they are varying all the way from
about maybe $15 off-peak for megawatt hour--that's 1\1/2\
cents--up to $1100 a megawatt hour, that's a $1.10 per kilowatt
hour.
But they're reselling that power for around 12 cents. They
raised that now, I believe it's 13 cents on average.
And this gives you an idea of the extent to which peak
users are being subsidized and off-peak consumers are being
taxed implicitly.
Now the California prices were not always this high, and in
fact, if you look in April 1, 1998, you'll notice that the
pattern of prices varied from 25 cents per megawatt at 1:00
o'clock, zero at 2:00, 25 cents at 3:00 in the morning, and it
went up to $5 a megawatt, that's a half-a-cent per kilowatt and
so on, and peaked out around 25 cents.
Now why do we have these sharp changes in price? And as I
say, they are not unusual to California, they occur also in
Australia, New Zealand and other places around the world.
I and my colleagues were involved as consultants in the
move to decentralize the electric power industry in New Zealand
and in Australia.
Now I have here on Figure 5, a chart of the actual asking
prices submitted by generators in the Australian electricity
market, and notice the base load guys are coming in there at
zero. We actually proposed that the base load guys had the
opportunity to bid a negative amount.
And the reason is that the base load generators cannot be
shut off. They cannot be ramped up and down as demand varies.
And actually, if you have the supply of base load power
exceeding the demand, you've got to shut down somebody. And if
they are able to state how much they are willing to pay to the
system to stay on, you have a further opportunity there for
rationing among those base load units.
But notice here, this is targeting 8:00 p.m. at night, the
demand there is around 7800 megawatts and that yields a price
of $15 Australian per megawatt. If the demand were moved up to
around 8100, notice that the price would have jumped to $45. If
it goes up to around 8200, it goes to about $55 and $60 and so
on.
Chairman Oxley. Dr. Smith, could you sum up, please?
Mr. Smith. Yes. So this is a natural sort of way in which
these markets work.
All right. Now what we propose is more voluntary
interruption of demand at the retail level, and the pricing at
the retail level, the prices should reflect the true costs that
are coming in from--in normal times at least--from the
wholesale market.
Now we find that with only 16 percent of peak demand
interruptible to end users in our experiments, the time of day
prices can be substantially lowered and price peaks eliminated.
Basically what happens there is that whenever the asking
prices are high from the generator side, the buyers interrupt
how much of that demand they are going to take, and what they
have. They do this by having voluntary interruption contracts
with their customers.
By a rolling sort of selective voluntary power
interruptions, blackouts of whole neighborhoods can be avoided
except under extreme weather conditions when they are
unavoidable.
The California crisis is a direct consequence of a failure
to introduce time-of-day retail prices that reflect highly
variable time of day wholesale prices and generator costs.
What must change is the cultural mindset of local utility
managers and their customers, which has been inherited from
State regulation. This mindset is that all retail demand must
be served without regard to the differences in individual
consumers' willingness to pay for energy.
This mindset will change, we believe, with full cost time-
of-day pricing and have the effect of incentivizing customers
to prioritize their use of energy.
The effect of these changes will be to create a far more
efficient and smoothly functioning market that will not require
Government intervention.
It will enormously benefit the environment by reducing the
growth in demand for energy and transmission capacity, and
thereby reducing air pollution and unsightly power lines.
Thank you, Mr. Chairman. I look forward to answering
whatever questions you and your colleagues have.
[The prepared statement of Dr. Vernon Smith can be found on
page 73 in the appendix.]
Chairman Oxley. Thank you.
Dr. Ellig.
STATEMENT OF JERRY ELLIG, Ph.D., SENIOR RESEARCH FELLOW,
MERCATUS CENTER, GEORGE MASON UNIVERSITY
Dr. Ellig. Thank you. I'd like to thank the Chairman and
Congressman LaFalce for the opportunity to testify today.
My name is Jerry Ellig. I'm a research fellow at the
Mercatus Center at George Mason University, and I should
mention my views are only my own; I'm not speaking on behalf of
the University today.
As I read about what's happening in California and watch
the ensuing policy debate, it really hits home in a personal
way. And the reason it does is not just because I have family
in California, but also because I grew up in Ohio during the
natural gas shortages of the 1970s.
The school that I attended for high school in the winter of
1976-77, actually shut down for a couple of weeks, because
there wasn't enough natural gas to go around.
Then something bad happened. We went back to school, but
not in our school--in the area of a local department store that
had previously housed their Christmas merchandise. So customers
coming in, instead of seeing inflatable Santa Clauses and
tinsel, now saw a bunch of geeky high school kids talking to
the walls as we practiced for debate class.
Chairman Oxley. Where did this all take place?
Mr. Ellig. Excuse me?
Chairman Oxley. Where did this all take place?
Mr. Ellig. Oh, in Ohio, in Cincinnati.
Chairman Oxley. Oh, in Cincinnati. You were in high school
in 1976?
Mr. Ellig. That's right. I lost my hair after that.
[Laughter.]
Mr. Ellig. Now for us this was an adventure. For a lot of
families in Ohio where the principal wage earner was at home
because factories were also closing down, it wasn't funny, and
so I can attest to having some personal experience with the
disruption you have in people's lives when you have these types
of energy shortages, whether it's gas shortages or electricity
blackouts.
In the time I have left, I want to mention two things, make
two basic points.
First, I'll talk a little bit about the roots of the
California crisis and the California wholesale market.
And second, talk about what this tells us about retail
electricity restructuring and the wisdom of retail competition
in electricity.
In California, the big problem in California is an
imbalance between supply and demand. And on the demand side,
there are really two things to keep in mind.
The first is that the utilities' demand for power is
artificially inflexible. The reason it is artificially
inflexible is because utilities must supply as much power as
customers want at a regulated price, and it has the types of
effects that Vernon Smith so eloquently just explained.
The other thing you need to remember about demand in
California is that it has been steadily growing, not because
Californians are wasting energy, but because the California
economy has been growing, the population's been growing, and
when you get population growth, economic growth, you're going
to use more energy even if your State is leading the Nation in
conservation.
Now, over on the supply side, we have largely, in a lot of
ways, a fixed supply. You've probably heard the news reports.
California's built no new power plants in 10 years, no new
major transmission facilities in 10 years. Fixed supply,
gradually increasing demand, summer of 2000, gradually
increasing demand hits the fixed supply, you get price spikes.
Now some folks have said, wait a minute, the price spikes
are not just explained by natural supply and demand. There is
also artificial manipulation of the market going on because
generators are withholding capacity and shutting down plants,
claiming they are performing maintenance when really they're
just trying to reduce supply and increase price.
Given the nature, the amount of judgment involved in
maintenance decisions with power plants, I don't know if we
will ever know for sure what's going on. But I do think it is
worth noting that if a generating company wanted to manipulate
the market, the California wholesale market was set up in ways
that would be conducive to that kind of behavior and would
encourage it.
When you have artificially inflexible demand, the rewards
are greater if you can jack up the wholesale price a bit,
because demand is not going to drop off in response to the
price increase.
In addition, we have--well, a number of other problems that
I'll skip over, but are in my testimony.
Second issue. What does this tell us about the wisdom of
retail competition? I think the principal thing that the
California experience tells us about the wisdom of retail
competition or about retail competition in electricity is that
the devil is in the details and it is very easy to get it wrong
and fail to create retail competition even when that is your
goal.
I don't think that needs to discourage us and I don't think
the lesson is that retail competition is a bad idea. If we want
to see that California is the outlier, rather than the typical
example of retail competition, we need look no further than
Pennsylvania, which has had a very highly successful retail
electric restructuring where 20 percent of Pennsylvania retail
customers have opted for supplier rather than utility. In some
utility territories, you have as many as a third of the
customers who have switched suppliers, so it really is possible
to create effective retail competition without creating the
types of price spikes and blackouts that we've experienced in
California.
It's also the case that California looks especially
atypical if you compare it to our experience in other
industries where we've undergone regulatory reform and
deregulation, where again, generally the result we've gotten is
lower prices, expanded supply. We haven't had shortages, we
haven't had the price spikes.
So the bottom line is there are certainly problems in
California's market that can be dealt with through redesign of
the market, and we should not take California as a typical
example of what happens when you move to retail competition in
electricity.
[The prepared statement of Dr. Jerry Ellig can be found on
page 109 in the appendix.]
Chairman Oxley. Thank you, Dr. Ellig.
Dr. Wolak.
STATEMENT OF DR. FRANK A. WOLAK, PROFESSOR OF ECONOMICS,
STANFORD UNIVERSITY; CHAIRMAN, MARKET SURVEILLANCE COMMITTEE,
CALIFORNIA INDEPENDENT SYSTEM OPERATOR
Mr. Wolak. Thank you very much for the opportunity to
speak. I address three issues in my written testimony.
The first is the fundamental cause of the California crisis
and its implications for long-term regulatory oversight of
electricity markets.
The other is the likely effectiveness of FERC's recent
market power mitigation policy for California.
And the last is the need for a long-term Federal energy
policy.
I'll focus here just on the first two.
I think it's been well-documented that one of the major
problems in California is that the vast majority of its
purchases were on the day-ahead and shorter-term energy
markets.
And I think that this is an important change and I want to
explain the implications of this for the performance of the
market.
And in particular, what also happened in California when
the restructuring took place is that the assets of the
incumbent utilities, at least half of the assets, were sold off
without what are called ``vesting contracts.''
And what vesting contracts do is effectively give the
seller of the plant the right to purchase back a significant
fraction of the output of the plant that it sells at a
regulated price for a long-term period.
What this effectively does is creates a hedge on the
wholesale market, so that the firm that has a retail obligation
can purchase energy, at least that amount of energy, at a fixed
price.
And it is this fundamental lack of hedging that is, I
think, the fundamental cause of the California crisis. In
particular, one thing that I'll just go through is talk about
how the forward contract obligation of a firm can exert an
enormous influence on the bidding behavior in competitive
markets.
And a general result from virtually all markets around the
world is that in markets where generators have a lot of forward
contract cover, spot prices tend to be low and price volatility
tends to be low.
And in markets where generators are exposed to the spot
market, meaning they have no forward commitments to supply
electricity, average prices tend to be higher and price
volatility tends to be higher.
And the difference in performance of the market, when you
have a lack of contract cover, is certainly exacerbated by the
conditions that occurred in California in the summer of 2000
where roughly 2000 to 3000 megawatts of imports disappeared as
a result of hydro conditions in the Pacific Northwest.
So this only exacerbated both the level and volatility of
prices in California.
And this relationship between forward market positions and
spot market outcomes has essentially led to the creation of a
new segment of the electricity industry, and that's called
power marketers.
And what power marketers do is effectively sell commitments
to electricity which impact the incentives of their affiliated
generation to participate in the market.
And in the former regulated regime, the way you made money
in the industry was to effectively produce your product at a
lower cost and deliver it to consumers at a lower cost than the
regulated retail rate.
In this new regime, the way firms make money is effectively
trading on their expectations of the spot price of electricity
at the date of delivery. And moreover, because the firm owns
plants, it has the ability to influence the spot price that it
sold these forward commitments to clear against.
And moreover, to be a successful participant in this new
regime, you don't even need to own generation, you just need to
know how generators will behave, in other words, how they will
impact the spot price.
And a good example here is Enron, which has a very
profitable business in California despite the fact that it owns
no generation.
And so really what restructuring has done, if I was going
to say the one lesson I'd like to get across here, is that it's
changed the nature of the electricity industry to a standard
commodity market like pork bellies.
And as a consequence, I think that it should be regulated
in the same way as these markets. For example, the CF Commodity
Futures Trading Commission model I think is far more
appropriate, rather than a public utilities commission or the
FERC approach of essentially looking at the cost of production.
And this perspective, I think, also implies a way to fix
the California problem. The over-reliance of California on the
spot market, the cost-based bid caps that the FERC has
implemented create all the incentives that various of the
previous speakers have alluded to.
However, regulatory intervention on the forward market will
effectively set up the incentives for generators to participate
in the market and not withhold capacity from the market,
operate their plants in an efficient manner, and maintain their
facilities in top working order.
And moreover, because there's a large contract cover that's
available to consumers, they will be protected from spot price
risk and realize the full benefits of competition.
Thank you very much.
[The prepared statement of Dr. Frank Wolak can be found on
page 136 in the appendix.]
Chairman Oxley. Thank you, Dr. Wolak.
Mr. Dobson.
STATEMENT OF JAMES L. DOBSON, CFA, MANAGING DIRECTOR, DEUTSCHE
BANC ALEX. BROWN
Mr. Dobson. Mr. Chairman, Ranking Member and esteemed
Members of the committee, good afternoon and thank you for the
opportunity to testify before you on the California energy
crisis.
My name is Jay Dobson. I'm a research analyst responsible
for analyzing the U.S. electric power industry for Deutsche
Banc Alex. Brown.
High electricity prices have dominated the headlines in
many areas of the United States over the last 12 months, most
notably in California.
The energy crisis in California is the result of an
incomplete deregulation plan and extremely short generating
supply. The deregulation plan in California essentially
deregulated the wholesale market, but left the retail market
regulated with fixed electricity prices.
Further, the incumbent utilities were encouraged to sell
many of their electricity generating plants. This forced the
companies to purchase electricity in the wholesale market
without the ability to recover their costs from consumers.
This incomplete deregulation plan might have worked in a
market with adequate or excess generating supply. However, as a
result of the very poor hydroelectric conditions in the
Northwestern United States, and the fact that no material
amount of electricity generating capacity has been added in
California over the last 10 years, a shortage of supply has
developed, and wholesale electricity prices have materially
exceeded retail electricity prices.
This has caused a financial crisis for the incumbent
electric utilities in California, and caused retail electricity
prices to rise by 40 percent.
The long-term solution to this problem is the addition of
new generating supply. The recent high wholesale prices of
electricity have caused generators to announce almost 25,000
megawatts of new electricity generating capacity in California
between now and 2006.
This is a 45 percent addition to existing generating
capacity in the State and clearly indicates that the
competitive wholesale markets for electricity are working.
More than half of this capacity will be available by 2003.
Nationally, including California, electricity generation
developers have announced the addition of 370,000 megawatts of
new capacity over the next 5 years, a 49 percent addition to
the existing capacity.
Although some economic impact of rising electricity prices
is unavoidable, we believe that the focus should be on managing
the impact in the short-term, but encouraging supply additions
in the long-term.
This is an extremely precarious balance, though. The short-
term desire to control prices could derail the new supply
additions in certain areas of the United States. This could
support higher electricity prices in the intermediate term.
In our opinion, the most critical action State and Federal
legislators and regulators can take is to ensure the
development of a competitive market for electricity. Avoid the
temptation to cap electricity prices in the near term.
Actions to ensure the enforcement of current law should be
more than adequate to control price spikes.
Importantly, avoiding the near-term temptation to cap
electricity prices will deliver a much larger and longer term
benefit to consumers. The economic benefit associated with the
development of excess generating capacity in the United States
will drive electricity prices sustainably lower.
Further, as many of the new generating resources are
significantly cleaner and more efficient than existing
electricity generating capacity in the United States, an
environmental benefit will accrue to consumers and the Nation
in conjunction with lower prices.
California is among the more than 20 States in the United
States that have legislatively deregulated the electric power
industry. However, California is different in several critical
ways and the problems with deregulation appear most acute here.
We would point to the States of Pennsylvania and
Massachusetts, among others, as examples of where deregulation
of electricity markets has worked. The successes, coupled with
the prospect of declining electricity prices and more efficient
electricity-generating supply should keep the United States on
the road to fully deregulated electricity supply markets.
Consumers do not want many of the risks the previous
regulated electricity markets provided. The transition process
to a deregulated market has provided its own risks, as
evidenced in California.
However, full deregulation of the electricity markets will
allow the wholesale and retail markets to develop remedies to
these problems. The generators proposed addition of 370,000
megawatts of new generating supply in the United States over
the next 5 years convinces me of this.
In summary, we believe the Federal and State legislators
and regulators should continue to encourage the development of
a competitive electricity market and the addition of new
capital to the electricity industry. New electricity generating
capacity, as well as new electricity transmission capacity will
go a long way to delivering to consumers the benefit originally
promised to them in electricity deregulation; significantly
lower electric prices.
Thank you again for the opportunity to testify before you
on this critical energy issue.
I look forward to answering your questions.
[The prepared statement of James L. Dobson can be found on
page 152 in the appendix.]
Chairman Oxley. Thank you, and thank you all, gentlemen.
Let me ask all of you, from a layman's standpoint, I've had
some background in energy in the other committee I served on
for several years. And was involved in the Clean Air Act and
other energy issues and environmental issues at that time.
Let me start with you, Dr. Wolak. It's my understanding
that in the last several years, California's supply of electric
energy has actually decreased by 5 percent; at the same time
there's been a 24 percent increase in demand.
Is that correct?
Mr. Wolak. No. At most, demand has increased probably over
the past 3 years about 10 percent, and there have been some
supply additions coming online in the last 2 to 3 years. True,
no new large facilities, but certainly a lot of smaller
facilities have been coming on line.
Chairman Oxley. And how would you quantify that? What kind
of an increase have we seen in California in terms of electric
energy supply?
Mr. Wolak. The difficult part in California is the fact
that we are an integrated system and effectively historically
rely on between 20 and 25 percent of our consumption is
imports. So there's roughly a carrying capacity into the State
of on the order of 12,000 megawatts into the State, and so a
lot of the energy comes in through imports.
Chairman Oxley. Is that a policy decision made by the
political leaders of California?
Mr. Wolak. Well, it actually is just a good economic
decision in the sense that if you look in the surrounding areas
of California, California pays an average retail price, say in
1998, of on the order of 10 cents per kilowatt hour.
People to the North of us pay an average price of about
4\1/2\ cents. The Southwest pays an average price at that time
of about 7\1/2\ cents. So you live around cheap power and
they've got lots of it, so it makes sense to essentially buy
what you can from them.
Now the bad news is that when they grow, for example, like
Nevada on the order of 50 percent in a 10-year period, or
Arizona on the order of 20 percent in a 10-year period in
population, they tend to consume all the power and leave very
little for you to consume.
So in that sense, that's what got California into the
position that it was in, very few imports available to sell
into the State.
Chairman Oxley. Do any of the other panelists have a
different view of that discussion I just had with Dr. Wolak?
Mr. Ellig. I think part of the reason you hear somewhat
different figures is people are quoting different start years
and different end years, whether it's the past 3 years or the
past 10 years, but that's--I think we all pretty much agree on
the trend.
Chairman Oxley. Let me ask you, beginning with Mr. Dobson,
what would be the economic impact on investment if the Congress
were to enact price caps on energy costs in the State of
California?
Mr. Dobson. It would have a very negative impact. As I
pointed out in my testimony and my comments, about 25,000
megawatts of new additions have been announced. Now, as you
pointed out in some of your comments, these have not been sited
yet, and that remains the challenge. However, I would expect
more than half of that to be abandoned if, in fact, price caps
were legislated by the Congress.
Chairman Oxley. More than half would be abandoned?
Mr. Dobson. More than half would be abandoned.
Chairman Oxley. Dr. Smith.
Mr. Smith. There's not only the impact on investment, but
the price caps also are not going to help with the problem of
conservation at the consumer level. And that's why it's very
important, I think, to pass through the wholesale prices and
also allow retail competition, so that you'll get an adjustment
not only on the supply side, but also on the demand side.
Chairman Oxley. Dr. Ellig.
Mr. Ellig. Well, I know the last time we tried to do
wholesale price controls in the energy industry on the Federal
level, when I wasn't sitting on a department store floor trying
to go to school, I was sitting in my car waiting for gas at a
gas station. And in both cases, the regulated price was too
low.
You know, in theory, maybe you can find some price that's
lower than the current price, but high enough that it doesn't
discourage investment, but I'm not convinced we know enough to
figure out where that price is.
Chairman Oxley. And so you would suggest that the market
mechanism is the best way to determine that?
Mr. Ellig. Well, I think rather than focusing on the level
of prices and talking about how to cap them, we ought to be
asking what is it about the way the structure of the market is
set up that's led to these high prices, and then fix the market
structure rather than trying to overlay price controls on top
of a market structure that's messed up.
Chairman Oxley. Dr. Wolak.
Mr. Wolak. I guess there are several layers of the answer
to the question. But the first is that during the first 2 years
of the market, there was a price cap on the energy market on
the order of $250 per megawatt hour, and during that time,
roughly all the capacity that is alluded to came to the State
of California, and was wanting to be built.
So I think that a price cap set at a high level has almost
no effect whatsoever on investment behavior.
Then the next is that this sort of capping prices is in the
form of saying that I'm going to put you back to cost-of-
service regulation. I think it's also important to bear in mind
that under cost-of-service regulation, we have a long history
of gold-plating by utilities subject to cost-of-service
regulation. So if anything, there's an incentive to over-
invest, because of cost-of-service regulation, not an under-
incentive to invest because of cost-of-service regulation.
So, effectively, the final issue is just as I think all
economists would agree, capping a price at a level below the
point where competitive supply crosses competitive demand
certainly is going to result in a shortage. But capping a price
at a level that's above where competitive supply crosses
competitive demand should have no effect whatsoever on the
market.
Chairman Oxley. The gentleman's time has expired.
The gentlelady from New York, Mrs. Maloney.
Mrs. Maloney. I ask permission to put my opening statement
in the record, and also two letters that I wrote to the FERC on
the energy situation in New York.
Chairman Oxley. Without objection.
[The information referred to can be found on page 167 in
the appendix.]
Mrs. Maloney. I really would like to ask Mr. Wolak about
Vice President Cheney's comments when he said that energy
conservation amounts to a personal virtue, but is not
necessarily critical to a national energy strategy.
Would you comment on the economic impact of successful
conservation efforts? Doesn't conservation in the form of cars
that use less gas, and lights that burn longer with less power
centrally contributing to greater levels of economic
efficiency, and why are we really investing more in new
technologies to come up with other sources of energy so that
we're not so dependent on other countries.
Could you just comment on conservation and efforts in that
area and new technologies. We're not really looking at new
ideas of ways to conserve energy or create energy.
Mr. Wolak. I certainly completely agree.
I think that if energy was priced the same way that other
products were priced, we would find that there would be very
strong incentives of the form that Vernon Smith discussed of
firms wanting to move away from peak periods to reduce the
energy bill and effectively move their consumption to off-peak
periods to essentially keep the same level of energy
consumption.
And, I think, a good example of the potential for
conservation and just load shifting to really work to benefit
consumers is that if you take the total amount of energy that's
consumed in California during the year 2000, and you divide
that number by the total number of hours in the year, that
gives you an average number of megawatts of capacity that you
use. And that number is on the order of 27,000 megawatts.
I should also say that the amount of capacity that is
located in California is 45,000 megawatts, so if somehow we
could get consumers through these price signals and through
these conservation measures, to shift their loads, we wouldn't
need to build any new power plants in California. The only
reason to build them would be simply to replace the existing
plants that we have with more efficient technology.
So, there's lots of low-hanging fruit, I think, on the
conservation side, and, if you provide people with economic
incentives to do it, they will benefit and we will not have to
build as many power plants to serve us, and we will get the
proper incentives for renewables to develop.
Because, if I face high prices, then in peak periods I may
want to substitute with a renewable technology during those
periods.
Mr. Smith. May I speak to that question?
Mrs. Maloney. I would really like to request that anybody
that has any ideas of ways that we could have economic
incentives for people to conserve energy, if they would submit
it to the record.
But I want to get one more question to him before, and then
I'll just open it up to anyone else who would like to respond.
But, one of the things that frustrates me is that I don't
see any new ideas for new technologies, new conservation, a lot
of things that we can do. What he said, just with certain
incentives, we could have not even had this crisis.
But I want to get back to some of the FERC action. The
action that they took on Monday suggests that the FERC
Commissioners have at least partially gotten the message about
the need for price caps, yet they chose to maintain a price
control mechanism tied to the most expensive energy producer.
And could you, Mr. Wolak, explain the logic of this
approach, and will this approach effectively guard against
future price gouging.
And then anyone else who would like to comment.
But could you comment on that, Mr. Wolak?
Mr. Wolak. I certainly can't comment on the logic of the
approach since it doesn't make much sense to me.
But I certainly think that the same sorts of problems that
occurred during the spring and winter of 2001 can once again
occur because the mitigation measure also allows generators to
pass through any input cost increases that it can cost justify.
So, if they somehow managed to have increases in the price
of natural gas, through perhaps not prudently procuring their
natural gas supplies, generators have the ability to simply
pass that through in the prices that they bid into the energy
market and receive those prices.
So, the mitigation plan provides little incentive for
generators to wisely procure their natural gas. Moreover, it
provides little incentives for them to maintain their
facilities and particularly little incentive to maintain their
most efficient facilities, because those are the ones that are
cheap and they certainly wouldn't want those to be setting the
market clearing price; instead, they would prefer to have the
expensive facilities setting the market clearing price.
So in some sense, the incentive is to maintain the
inefficient facilities very well so they can set the price and
don't maintain the efficient facilities, because you don't want
them to set the price, which is a very peculiar set of
incentives to set up.
Chairman Oxley. The gentlelady's time has expired.
Mrs. Maloney. Thank you, Mr. Chairman.
Chairman Oxley. The gentlelady from California, Ms. Waters.
Ms. Waters. Thank you very much.
This may have been discussed prior to my returning to the
committee. While I understand there has been testimony in
opposition to so-called price controls, that it is not a good
idea, it prevents investment, that's not the way the
marketplace should work, all of that, all of that, I would like
to know at what point do you believe there is a crisis and
there should be intervention in order to protect the citizens
of California or any other place who experiences the kind of
crisis that we are experiencing now, protect them so that they
have the ability to have access to electricity, to energy, and
not have to suffer the huge increases or blackouts.
At what point would you consider Government should
intervene and place real price caps on if necessary?
Each one of you?
Mr. Dobson. I would argue, in response to the question, I
am simply not convinced price caps is the appropriate
intervention. The energy crisis, in my opinion, stems from a
supply problem, certainly at peak periods.
Absent near-term conservation, price caps are not going to
solve the problem.
Ms. Waters. OK, I got that point, and we only have so much
time. I don't want to be rude.
Do you know how the information, where the information is,
whether or not we have adequate information at the State level
to understand whether or not all of these plants are operating
at full capacity, and have you been able or has anybody been
able to determine whether or not the maintenance shutdowns are
absolutely necessary, or whether or not somehow they have been
created in order to force the whole question of supply as you
are describing it?
Mr. Dobson. I do believe that the Federal Energy Regulatory
Commission and the State regulatory bodies of each State,
including California, have the ability to acquire that
information.
And yes, I do believe that----
Ms. Waters. Is that public information?
Mr. Dobson. Yes, I believe it is.
Ms. Waters. Have you seen it?
Mr. Dobson. I've seen parts of it, not all of it.
Ms. Waters. Do you know how it is collected?
Mr. Dobson. It is collected from the generators themselves.
Ms. Waters. The generators supply us with that information?
Mr. Dobson. Yes.
Ms. Waters. I don't know a lot about how the grid works.
Can you tell me if the grid crosses State lines and in the
reporting, is that information in each State, is it available
to California, all of the information from the grid?
Mr. Dobson. I'm not aware if the grid information is
available. I was speaking specifically of the generators
availability and maintenance schedules.
Ms. Waters. Could anybody else help me with what I'm trying
to determine here about access to information that would
absolutely document the needed maintenance and/or whether or
not these plants are operating at full capacity and whether or
not we have access to all of the information to make a
determination about these things?
Mr. Wolak.
Mr. Wolak. I guess the thing that I would say is that the
analogy to a generating facility and a sick day is quite apt.
That, in other words, generating facilities are extremely
complex pieces of equipment. There's no way for anyone to know
if really a generating facility can run or not.
For the same reason that when you call in to your boss and
you say, ``I'm sick today,'' he knows whether you're really
sick or not, or if you are going to go to the beach. And
moreover, he doesn't send a doctor to your house because he
knows that if he does, the human body is a sufficiently complex
piece of equipment that you could fake some disease that the
doctor would have no way to ever learn is really, in fact, a
disease that prevents you from working.
Ms. Waters. Do we have inspectors or monitors?
Mr. Wolak. It's exactly the same thing with the generating
facilities. You send that independent engineer and these are
30-year-old facilities. Just think if you have a 30-year-old
house, which I have, everyday there's five things I could fix,
but I don't fix.
And moreover, if you run the facility--and you shouldn't be
running the facility; it could probably explode and create
health hazards--so for the same reason that you don't make the
worker work when he says he's sick, it's the same thing. You
don't make the generator work when he says he's sick.
Ms. Waters. We have to take their word for it?
Mr. Wolak. You have to take their word for it. So what you
do instead is the same thing that you would do in the case of
the worker. You say, ``Look, if you're going to take a sick
day, then you have to replace yourself with someone else.''
In other words, the risk of you calling a forced outage or
you calling a sick day is that you have to replace yourself,
and in the same sense that's the same way we can solve the
problem with the generators, is that if a generator says that
he's, ``sick'' today, or he's out today, then it is his
obligation to supply the power that you need. And he must
scramble, as opposed to the ISO scrambling, as is currently the
case.
And this is something that FERC is certainly aware of, but
has done nothing to solve. I mean, they still maintain that,
you know, there is no problem with a verifiable forced outage.
But my viewpoint certainly is, given the economic
incentives, if it's a good day to take a sick day and it allows
me to raise the price, I certainly will. I mean, that's simply
what I would do if I was a profit maximizing firm as certainly
these firms are.
Chairman Oxley. The gentlelady's time has expired.
The gentleman from New York, Mr. Crowley.
Ms. Crowley. Thank you, Mr. Chairman and thank you to the
panel.
When the President announced his energy plan through the
Vice President, there was a big thud that hit the table, and it
really hasn't moved since then. I think it was an embarrassment
to the Administration. Certainly the American people, I think,
were somewhat embarrassed by it as well.
Very little discussion of better management or conservation
or innovative fuel sources and more emphasis on the production
and consumption of fossil fuels and use of electricity and
other forms of the production of electricity.
In fact, Matthew Warburton of UBS Warburg told CNBC that
the energy service providers should benefit from President
Bush's energy plan while, at the same time, there were no
short-term winners.
That means the consumers back in New York and especially in
California, but in my home State of New York as well, the
seniors or those on fixed incomes are the short-term and long-
term losers, according to this plan.
The announcement from FERC on Monday that they have
determined that price fixing has taken place in California, do
you believe that one, the utilities that have been fixing the
prices and have been gouging their customers ought to be held
accountable and forced to send rebates to the consumers?
What is your position? I understand the FERC's position.
What is the position of the panel?
Does anyone want to chime in?
Mr. Dobson. It would certainly be my position that this
should be investigated, as I know the attorney general and
others are doing in the State of California. And if proven
that, in fact, these were unjust and unreasonable prices, and
the FERC has the authority to, in fact, force refunds, although
I have not seen the complete data set looking at the
information provided by some of the generation companies, none
of that appears evident to me.
Mr. Ellig. There are probably two things we need to keep in
mind when we talk about this, because first off, when we talk
about refunds, some of the power producers who might have to
give refunds are sitting there saying, ``What refunds? We
haven't been paid yet.''
Second, I think we also ought to keep in mind, when we're
talking about price gouging, just and reasonable prices, that
there are a lot of different ways of trying to figure out what
is a just and reasonable price.
And FERC has one way, and if you go Professor Wolak's
website and look at some of his research papers, there are
other ways of doing it, and the figures don't always agree.
So I guess before going to the refund issue, I'd want to
raise my hand and say, well, wait a minute, I'm a little bit
reluctant to accept somebody, either FERC's or somebody else's
determination as to exactly what's just and reasonable and what
is not, as a matter of economic analysis, trying to figure out
what's going on in the market.
I realize as a matter of law what they say goes, but in
really trying to figure out what's going on and whether refunds
or whatever are justified, I'm skeptical that the methods that
they're using to calculate it make sense.
Ms. Crowley. Welcome to the free market and energy sector.
We have limited time.
We've seen what the market has done in respect to
prescription drugs to seniors, and unfortunately see the same
thing happening in the energy sector.
In New York, we had a real problem when home heating oil
just rocketed not last winter, but the winter before, and
seniors in my district were forced to make decisions as to
whether they were going to pay their rent, purchase their
foods, or purchase their prescription drugs, or pay their home
heating oil bill. It was a real crisis.
I support the opening this was a short term solution to
help drive the market.
I'd also like to hear what your positions are on that
issue, as well as the fully funding and establishing a
Northeast home heating oil reserve, and what affect that could
have on the market, particularly in the Northeast and other
regions of the country that experience potential price hikes
during the winter months of home heating oil.
Mr. Wolak. I would just like to comment on your previous
question in a sense that just to tell you that FERC has no
standard for determining whether rates are just and reasonable,
so it's a moot point. That's sort of the fundamental problem
with the electricity market, that they sort of pushed people
out of the airplane without a parachute, that we'll sort of
tell you when we've seen them, but we won't tell you how we see
them, see that they are.
So I think the first step would be for Government Oversight
to say, ``Look, you at least must specify a methodology for
determining whether rates are just and reasonable,'' so that
the monitors, such as myself, who is on one of the market
monitoring committees for the California ISO, can essentially
say, ``Look, we've applied your methodology and here's what it
yields,'' and so that also market participants can know what
sorts of prices may be worthy of refunds at the start.
But, the sort of current plan of saying we don't specify
any methodology nor do we tell you what the exercise of market
power is in a market that would constitute unjust and
unreasonable rates, it makes trying to find it impossible,
because you don't know what it is.
Ms. Crowley. No positions on a Northeast home heating oil
reserve?
Chairman Oxley. The gentleman's time has expired, and we
want to bring this to a close.
Gentlemen, thank you for your testimony. It's good to have
you all here and the hearing is adjourned.
[Whereupon, at 12:30 p.m., the hearing was adjourned.]
A P P E N D I X
June 20, 2001
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