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




                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION


             HEARING HELD IN WASHINGTON, DC, JUNE 20, 2001


                           Serial No. 107-11


           Printed for the use of the Committee on the Budget

  Available on the Internet: http://www.access.gpo.gov/congress/house/


70-913                     WASHINGTON : 2001

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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire        JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
PETER HOEKSTRA, Michigan               Ranking Minority Member
  Vice Chairman                      JIM McDERMOTT, Washington
CHARLES F. BASS, New Hampshire       BENNIE G. THOMPSON, Mississippi
GIL GUTKNECHT, Minnesota             KEN BENTSEN, Texas
VAN HILLEARY, Tennessee              JIM DAVIS, Florida
MAC THORNBERRY, Texas                EVA M. CLAYTON, North Carolina
JIM RYUN, Kansas                     DAVID E. PRICE, North Carolina
MAC COLLINS, Georgia                 GERALD D. KLECZKA, Wisconsin
ERNIE FLETCHER, Kentucky             BOB CLEMENT, Tennessee
GARY G. MILLER, California           JAMES P. MORAN, Virginia
PAT TOOMEY, Pennsylvania             DARLENE HOOLEY, Oregon
WES WATKINS, Oklahoma                TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington             CAROLYN McCARTHY, New York
JOHN T. DOOLITTLE, California        DENNIS MOORE, Kansas
ROB PORTMAN, Ohio                    MICHAEL E. CAPUANO, Massachusetts
RAY LaHOOD, Illinois                 MICHAEL M. HONDA, California
KAY GRANGER, Texas                   JOSEPH M. HOEFFEL III, 
EDWARD SCHROCK, Virginia                 Pennsylvania
JOHN CULBERSON, Texas                RUSH D. HOLT, New Jersey
HENRY E. BROWN, Jr., South Carolina  JIM MATHESON, Utah
MARK KIRK, Illinois

                           Professional Staff

                       Rich Meade, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel

                            C O N T E N T S

Hearing held in Washington, DC, June 20, 2001....................     1
Statement of:
    Francis S. Blake, Deputy Secretary, U.S. Department of Energy     3
    Hon. Bob Filner, a Representative in Congress from the State 
      of California..............................................    31
    R. Glenn Hubbard, Chairman, Council of Economic Advisers.....    39
    John Hanger, President, Citizens for Pennsylvania's Future...    47
    Sandy Liddy Bourne, American Legislative Exchange Council....    56
    David Bradley, Executive Director, National Community Action 
      Foundation.................................................    78
    William W. Beach, Director, Center for Data Analysis, the 
      Heritage Foundation........................................    83
    Justin D. Bradley, Energy Project Manager, Silicon Valley 
      Manufacturing Association..................................    89
Prepared statements, additional submissions of:
    Hon. Jim Matheson, a Representative in Congress from the 
      State of Utah..............................................     3
    Mr. Blake:
        Prepared statement.......................................     6
        Reply to Mr. Capuano's question about BTU exports........    17
        Reply to Mr. Capuano's question about the Alaskan 
          Pipeline...............................................    19
        Reply to Mr. Capuano's question about an Alaskan gas 
          pipeline...............................................    20
        Reply to Ms. Hooley's question about energy costs' impact 
          on schools.............................................    22
        Reply to Mr. Honda's question about natural gas 
          consumption............................................    24
        Reply to Mr. Honda's question about FERC order dates.....    26
    Mr. Filner...................................................    34
    Mr. Hubbard..................................................    41
    Mr. Hanger...................................................    51
    Ms. Bourne...................................................    61
    Mr. David Bradley
        Prepared statement.......................................    81
        Reply to Mr. Spratt's question about low-income 
          consumers' delinquent accounts with utility firms......    97
        Reply to Mr. Honda's question about the affordable 
          housing portion that is HUD's responsibility...........    98
    Mr. Beach....................................................    85
    Mr. Justin D. Bradley........................................    92



                        WEDNESDAY, JUNE 20, 2001

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10 a.m. in room 
210, Cannon House Office Building, Hon. Jim R. Nussle (chairman 
of the committee) presiding.
    Members present: Representatives Nussle, Hoekstra, Collins, 
Watkins, Hastings, Culberson, Brown, Kirk, Spratt, Clement, 
Hooley, McCarthy, Moore, Capuano, Honda and Matheson.
    Chairman Nussle. Good morning. The full committee hearing 
today, the subject of which is the economic and budgetary 
effects of the national energy policy and its impact on the 
Federal budget. Underlying the current debate over the national 
energy policy here in Washington is the assumption that energy 
supplies and prices are a significant factor in economic growth 
and, of course, the Federal budget. But both areas are really 
not that well understood, or understood only superficially.
    Examples that have been given to me are it is reasonable to 
expect that rising energy prices tend to slow economic growth. 
Most people would assume that to be the case. But sharp 
fluctuations in price by themselves can also have a similar 
effect, partly because of the uncertainties they create for 
businesses and consumers. Likewise, energy prices have obvious 
direct effects on the government's fuel and utility costs, but 
these prices also contribute to the growth in the Consumer 
Price Index, which forms the foundation for cost-of-living 
adjustments and many government entitlement programs.
    In short, energy supplies and prices contribute in various 
ways to the economy and to our budget, making them an important 
factor in evaluating the long-term economic and budgetary 
issues that we face here at this committee. Further, Congress' 
ability to maintain consistent tax surpluses allowing for tax 
reduction as a regular practice or spending increases depends 
on reliable economic growth and spending control. Hence, the 
development of a long-term energy policy is fundamentally 
important to the Budget Committee apart from any particular 
spending commitments such a policy might entail.
    Part of the solution for the national energy crisis is 
going to be taken up in many other committees of jurisdiction, 
but the results will be felt here in large measure within the 
budget. A long-term energy policy is desired in this country. 
It has taken us many years to get into the problems and 
challenges that we face. Short-term, quick-fix, Band-Aid, 
political, get-it-done-before-the-next-election kind of 
solutions, while attractive to some, have gotten us arguably to 
where we find ourselves today. And a long-term energy strategy 
is desired at this point in order to stabilize the economy and 
to keep our economic growth in the positive range so that the 
impacts on the budget are not only acceptable, but predictable.
    This hearing is intended, therefore, to illuminate the 
economic and budgetary factors related to energy policy. This 
hearing will consist of three panels. The first panel will take 
a look at the national economic impact of energy policy. We 
have two very distinguished witnesses. The first witness that 
we will be hearing from today is Francis S. Blake, Deputy 
Secretary, Department of Energy, to review the findings of the 
Energy Information Administration in a report titled ``Energy 
Price Impacts on the U.S. Economy.'' He will be joined shortly 
by Dr. Hubbard, Robert Glenn Hubbard, Chairman of the Council 
of Economic Advisers, to discuss the effects of the energy 
supplies and prices on gross domestic product and inflation.
    The second panel will discuss the State policies and 
experience that are out there. Congressman Bob Filner of 
California will be with us to describe the impact of 
California's energy crisis on his district in San Diego. John 
Hanger, president of the Citizens for Pennsylvania's Future and 
the former commissioner of the Pennsylvania Public Utility 
Commission, will discuss the State's approach to energy policy. 
And Sandy Liddy Bourne, director of the Energy, Environment and 
Natural Resources, and Agriculture task force at the American 
Legislative Exchange Council, will describe various State 
approaches to energy policy and deregulation.
    The last panel, panel 3, will discuss private sector 
perspectives: Justin Bradley, energy project manager from the 
Silicon Valley Manufacturing Association, also from California, 
who will discuss effects of energy prices and supplies on the 
private sector businesses; William Beach, director of the 
Center for Data Analysis at the Heritage Foundation, will 
describe the economic impact analysis of the President's energy 
proposal currently being conducted at the center; and David 
Bradley to discuss the impact of poor energy policy on low-
income Americans.
    With that, we have Secretary Blake with us until 11 a.m. 
And so, we will begin here shortly. At this point I would like 
to turn over to John Spratt of South Carolina, the ranking 
member, for any comments that he would like to make.
    Mr. Spratt. Let me simply say this is a highly relevant and 
highly important topic at a timely point in our economy's 
history and has a lot to do with the budget. I appreciate your 
calling the hearing. I appreciate our witnesses for 
participating. And in the interest of time, let's get on with 
the hearing.
    Chairman Nussle. I would ask unanimous consent that members 
have an opportunity to place statements in the record at this 
point. So ordered.
    [The prepared statement of Congressman Matheson follows:]

 Prepared Statement of Hon. Jim Matheson, a Representative in Congress 
                         From the State of Utah

    Mr. Chairman, I would like to thank you and Ranking Member Spratt 
for holding this hearing today to examine the impact of energy prices 
on the economy, the stability of energy markets, and the relationship 
between energy policy and the Federal budget. I appreciate the 
Committee's timely attention to this critical issue.
    Having worked in the energy business for thirteen years, both in 
the development of new power generation and working with large 
consumers of energy to better manage their options in a deregulated 
marketplace, I have a strong appreciation for the impact of Federal 
energy policy on the economy, consumers, and the energy industry. As 
Congress considers proposals to implement new national energy policy, 
it is important that we do so in a forward-thinking, deliberative 
fashion so that the policies enacted address short-term and long-term 
issues of supply and demand and provide a predictable policy 
environment so that the energy sector can make rational, long-term 
decisions on investment in new generation, technologies, and 
    As this hearing today is focused on the economic impact of energy 
pricing and policy, I would like to share some of the challenges Utahns 
are currently facing. I have convened a cross-section of individuals in 
Utah to examine the appropriate role of Federal energy policy. This 
group includes a wide spectrum of energy interests including large 
industrial consumers, the research community, investor-owned utilities, 
municipal utilities, rural electric cooperatives, state regulators, 
low-income energy advocates, and other interested parties. I would like 
to share with the Committee some of the common concerns and serious 
interests of these experts regarding national energy policy 
    The current energy supply-demand imbalance in the West has created 
serious hardships for individual residents, small businesses, and large 
industrial consumers of energy. Residential consumers and small 
businesses are seeing significant increases in their power bills. The 
Utah Manufacturing Association has indicated that they regularly 
receive calls from their membership regarding rising energy costs and 
reliability, and that energy costs are one of their top concerns. 
Increasing energy costs can lead to laying off personnel, and any 
reliability problems within the transmission system can have serious 
repercussions on some of the high tech industries in Utah.
    Let me just mention a few examples of the impact of recent electric 
rate increases in Utah. State regulators approved an interim rate 
increase of around 10 percent earlier this year, and the utility has 
recently asked for a rate case for a second increase of around 10 
percent based on their wholesale market cost increases. Say an average 
medium-sized company, like some of the refineries in Utah, uses 100,000 
megawatt hours per year. Based on the rate schedules a company this 
size would be under, their average cost would be about $35 per megawatt 
hour. The increased costs for the initial rate increase alone would be 
around $350,000.
    Consider the impact of increased costs on a very large, energy-
intensive industry like steel. Large industries which use a lot of 
energy for their production could use as many as 850,000 megawatt hours 
annually and spend around $2 million per month on energy costs. It 
doesn't take a lot of thought to see how expensive a 10-percent 
increase in energy costs could be for a company this size.
    These are just a few of the examples of the impact of energy 
pricing on large consumers of electricity. Significant increases in 
costs can result in hardships for individual consumers and the 
potential for personnel cuts for small businesses and large industrial 
companies. Obviously these problems can and do have an impact on our 
nation's economy. We must consider these economic implications as 
energy policy is developed.
    Again, I appreciate the opportunity to have this hearing today and 
I look forward to hearing the perspectives of these witnesses. I look 
forward to working with my colleagues to enact comprehensive, balanced 
energy legislation that increases energy supplies, promotes greater 
energy efficiency, and provides a predictable policy process.

    Chairman Nussle. Secretary Blake, we welcome you to the 
committee, and we would invite you for your testimony at this 

                      DEPARTMENT OF ENERGY

    Mr. Blake. Good morning, Mr. Chairman, Congressman Spratt, 
members of the committee. Thank you very much for inviting me 
here this morning to address what is truly both an important 
and timely topic, the impact of energy on the Nation's economy. 
What I would like to do is submit my testimony for the record 
and then proceed through a few charts in an overview.
    Chairman Nussle. We will place your entire testimony in the 
record. You can summarize as you would like.
    Mr. Blake. Thank you very much.
    Beth Quinn, who works with EIA at the Department of Energy, 
will help me as we go through these charts.
    The first chart here shows some general numbers on the 
country's energy consumption. In 2000, we consumed 
approximately 100 quadrillion BTU of energy. We produced about 
72, and the remainder we made up through imports. If we keep at 
the projected demand growth of about 1.3 percent a year, we 
would be consuming nearly 180 quads in the year 2020, but 
because of our energy efficiency program, structural changes in 
the economy and the like, we anticipate that that number is 
going to be more like 127 quads as shown on the chart, which 
continues the 58 percent decline in what we call the energy 
intensity of the economy.
    We go to the second chart. The point of this chart is that 
electricity represents an increasing share of our total energy 
consumption. As you see, the green line that is declining shows 
consumption per unit of GDP, and that has been declining 
consistently, while electricity sales, spiking as the country 
as a whole got access to electricity, has actually been stable 
over the last several years.
    If we go to chart 3, we now get to one of the fundamental 
changes that is occurring in energy production in the country, 
and that is the fuel that is used for electricity generation. 
As you can see from this chart, now and projected into the 
future, coal remains an important source of fuel for our 
electricity generation. But what is notable on the chart is the 
role of natural gas. Natural gas, which was really a modest 
component of our fuel generation in the 1970's and 1980's, has 
increased substantially over the last several years and into 
the year 2020, as you can see, is projected to grow 
    If we go to the next chart, there are a number of reasons 
for this. I think you are all aware of the environmental 
constraints on new coal-fired capacity, the difficulty in 
siting nuclear plants and the like. But part of the change may 
be attributed to how we have deregulated electricity generation 
and the emphasis that competition puts on technologies that 
have lower capital costs, particularly when producers are not 
assured of the recovery of their capital costs. This chart 
breaks out for the different technologies, coal, combined cycle 
natural gas, wind, and nuclear, what their projected costs are, 
divided capital O and M and fuel in the future. And you will 
see there is an economic driver, as well as an environmental 
driver for why natural gas represents an increasing share of 
our fuel for electricity production in the United States.
    The next chart gets to some of the practical issues that we 
face as we shift and add generation on our current 
infrastructure. This challenge is one of the major issues 
addressed in the national energy policy. A similar chart could 
be drawn showing constraints on the natural gas pipeline 
infrastructure and showing the additional pipelines that we are 
going to need to supply all of this natural gas for power 
generation. This chart is showing what is called transmission 
load relief logs. It is really a way of determining when 
transmission systems are stressed and under constraint. It goes 
month by month, with the different years, and you can see last 
year a dramatic increase in constraints on our transmission 
systems, and this year we have had the data through May and 
obviously a significant increase there as well. We have yet to 
determine what the numbers will be for the rest of this year.
    The next chart shows where we are in terms of capacity 
additions across the country. To fully understand this, as a 
reference point, we have about 780 gigawatts of capacity in our 
national system. You can see very small replacement rates over 
the last several years as the industry is faced with the 
uncertainty of deregulation in cost recoveries, including 
actual net removals of capacity in 1998. Now we are starting to 
see substantial pickup in capacity additions with increases in 
1999, 2000 and projected to increases in 2001 and 2002.
    Now, that is the last of the overview charts. How do you 
translate all of this into the economic impacts, and what does 
our national energy policy have to do with this? Dr. Hubbard, 
who is unfortunately detained, in his testimony outlines the 
broad macroeconomic impacts of this on GDP, inflation, 
downstream industries, the residential consumer, and across the 
    As you reference, Mr. Chairman, in your introduction, EIA, 
which is an independent statistical analytical arm of DOE, has 
done a study of what the impacts of increased prices of fuel as 
well as fuel price volatility will be on our overall economy. 
Their study suggests that if we had a steady path of energy 
prices from 1997 to 2001, instead of the volatility that we in 
fact saw, GDP could have been boosted by two-tenths of a point 
from 4.1 percent to 4.3 percent. That is a substantial impact 
on the economy just from a reduction in the volatility. That 
doesn't even address the question of removing some of the 
pressure on the increased price and how that would effect GDP.
    There are obviously as some more qualitative impacts of 
fuel price volatility and high prices. They impact business 
decisions on plant siting and investment decisions. I would 
also point to another, a fourth impact, that I think we are 
only beginning to understand, which is the extent to which our 
economy is increasingly dependent on electricity.
    We talk about our economy as entering the information age. 
It is worth remembering that to move a bit of information, the 
technical computer term ``bit of information,'' you need an 
electron. An interesting example of this is found if you look 
at the energy usage--I was just looking at a study this morning 
that looked at the energy usage of a plain telephone. The 
energy usage of just the normal telephone is about 40 kilowatt 
hours per year. The wireless phone that we all carry around 
everywhere and see everywhere is 140 kilowatt hours a year when 
you take into account the power used for recharging and the 
power used for the various wireless towers, and the entire 
infrastructure required with those phones.
    In addition to the increase in the usage of electricity, 
the need for reliability of that electricity grid has 
increased, and there have been a number of studies on 
industries, particularly our high-tech industries, that require 
what is called nine 9's or six 9's of power. A higher amount of 
power than you would have, rather than what we see on our 
transmissions grid.
    Turning just briefly, and I won't go through all the 
recommendations in the national energy policy, but just 
summarizing them, it is, we believe, a comprehensive approach. 
It looks at energy efficiency, conservation renewables and the 
role that they need to play going forward. It looks at our 
supply side of the equation and constrained supply and how we 
address that. And it also looks at stressed infrastructure, the 
issues on our transmission system, our pipeline system and the 
like, and how we address those.
    Just from my own perspective, coming to DOE from industry 
just the last 2 weeks, the comment that I would make is a lot 
of it seems to me to be very sound common sense. If you know, 
as you can see in the charts I put up previously, that you are 
going to start adding large numbers of power plants to the 
transmission grid in the United States, you need to turn and 
say, what are we doing from a policy perspective to ensure that 
the grid can handle that additional power generation? 
Similarly, if you know, as outlined, that natural gas is going 
to play an increasingly large role, what are we doing to ensure 
that we get the adequate supply and adequate transmission so 
that we don't see these tremendous spikes in prices and 
    In summary, the policy sets forth a balanced and valuable 
blueprint for where the country needs to move. I think the 
purpose of this hearing could not be better timed in terms of a 
fuller understanding of the economic impacts that our energy 
infrastructure has on the country. And again, thank you very 
much for inviting me to be here this morning.
    Chairman Nussle. Thank you, Mr. Secretary.
    [The prepared statement of Francis S. Blake follows:]

    Prepared Statement of Francis S. Blake, Deputy Secretary, U.S. 
                          Department of Energy

    Mr. Chairman, Congressman Spratt and Members of the Committee, I 
want to thank you for the opportunity to testify before you today on 
the economic effects of energy policy.
                      trends in the energy markets
    I will begin my testimony by discussing some of the major trends in 
energy markets and changing patterns in US energy consumption. In 2000, 
America consumed 99 quadrillion British thermal units (or quads) a year 
in all forms of energy, while our domestic production was only 72 
quads. This imbalance between energy demand and domestic energy 
production is made up with imports. Between now and 2020 our energy 
demand is projected to rise at a rate of 1.3 percent a year. If the 
energy intensity of the U.S. economy--the amount of energy needed to 
generate a dollar of GDP--remained constant, our energy demand would 
reach 179 quads in 2020. Under current policies, improved energy 
efficiency and structural changes in the economy suggest that 
forecasted energy demand in 2020 can be lowered to 127 quads. This 
would continue the decline of 58 percent in US energy intensity since 

    Another important trend relates to energy consumption and the 
electricity generation mix. Electricity represents an increasingly 
larger share of total energy consumption.

This trend will likely continue as our high technology economy becomes 
more dependent on electricity to power everything from our computers, 
to our cell phones and palm pilots. At the same time, the mix of fuels 
we use to generate electricity has changed and will continue to do so 
over the next 20 years, with natural gas predicted to be the fuel 
choice for most new power plants.

    Increasing competition has also spurred significant change in the 
structure of our energy industry. To better understand the changing mix 
of electricity generation resources, it is helpful to look at both 
capital and fuel costs for different types of power plants. In a 
deregulated environment in which recovery of capital costs is no longer 
guaranteed to power plant developers, firms are less likely to commit 
the massive capital investments required to construct large nuclear and 
coal base load facilities. Instead, they are attracted to the 
relatively lower capital cost of smaller and more modular new natural 
gas fired facilities, despite higher fuel costs.

    Increased demand for natural gas has strained both production 
capabilities and the pipeline delivery system. Bottlenecks and capacity 
constraints have restricted this new dynamic industry, resulting in 
soaring commodity price volatility. Similarly, our electricity system 
is strained. Investment has not kept pace with demand, with the result 
that system overloads are occurring with increasing frequency.

These infrastructure limitations exacerbate problems of supply and 
demand in areas like California.
    Increased volatility adds risk for energy dependent businesses, 
including producers and consumers. Accompanying this increased price 
risk has been the added regulatory uncertainty associated with an 
industry in transition and an outmoded set of rules and regulations 
that often restrict or delay new investment and can result in 
investment dollars being allocated inefficiently. An example of the 
effect of regulatory uncertainty can be seen in the slow pace of 
investment in new power generation throughout most of the 1990's when 
the rules of the newly competitive generation market were still being 
developed in many States. This in turn has been followed by a 
significant acceleration in investment over the last couple of years as 
competitive wholesale markets have taken hold.


    Chapter Two of the Report of the National Energy Policy Development 
Group (NEPDG) is entitled ``Striking Home'' and addresses the impacts 
of high energy prices on families, communities and businesses. The 
Report points to a nearly 20-year decline in the share of household 
income devoted to energy needs. But importantly, the Report notes that 
between 1998 and the end of last year, that share has risen by almost 
26 percent from 3.8 to 4.8 percent of after-tax income.

The Report also cites higher fuel and oil prices as representing one-
third of the increase in farm production costs in 2000.
    On March 7, 2001, the Federal Reserve reported that businesses 
across the country experienced high fuel and other energy costs in 
February 2001 but were unwilling or unable to pass these costs on to 
consumers. This absorption of increased energy cost decreased the 
profit margins of many businesses. About one quarter of the increase in 
total unit costs of non-financial, non-energy corporations in the final 
quarter of last year reflected a rise in energy costs. Beyond the costs 
associated with higher energy prices for families, agriculture and 
businesses, there is also a broader macroeconomic impact of energy 
price increases as set out in Dr. Hubbard's testimony.
    With an energy industry in transition and an economy that has been 
negatively affected by recent high energy prices, it is important that 
we develop the tools to more critically evaluate the effects of energy 
policies on the economy. Earlier this year the Energy Information 
Administration (EIA), the independent statistical and analysis arm of 
the Department of Energy, released a report entitled ``Energy Price 
Impacts on the U.S. Economy.'' The report concluded that both the level 
of prices and the level of price volatility may hinder economic growth 
and lead to inappropriate investment decisions. The report also 
suggested that over the entire 4-year period 1997 through 2001, a 
steady path of energy prices throughout could have boosted GDP growth 
by 0.2 percentage points, to a rate of 4.3 percent rather than its 
actual 4.1 percent. As we look to implement the recommendations of the 
NEPDG and develop long-term solutions to our energy challenges, we will 
need to build on the analytical capabilities of groups like EIA to 
undertake further work of this kind.
    As we study the effects of energy on the economy, it is important 
to note the need for improved transparency in competitive energy 
markets. Price volatility has spurred increased use of energy risk 
management tools ranging from long-term contracts, to futures and 
options and complex energy derivatives. These tools are of growing 
importance to businesses for the mitigation of energy price risk. In 
order for these markets to thrive and provide energy producers and 
consumers with a forum to manage risk, there must be a level of 
information symmetry. Transparency provides consumers with the 
information to make rational decisions on energy consumption, and we 
need reliable, independent information to provide transparency to our 
competitive energy markets.

                         NATIONAL ENERGY POLICY

    The Report of the NEPDG recommends a comprehensive approach to 
challenges that are long-term in nature. The recommendations are 
balanced, with a number of proposals addressing energy efficiency to 
ensure that the improvements made in lowering the level of energy 
intensity over the last 30 years continue into the next two decades. At 
the same time, the report recognizes the changing nature of the energy 
industry and the need to address issues of constrained supply and 
infrastructure to meet our energy needs in the future.
    The Report addresses the need to expand and diversify our energy 
resource base by increasing domestic production while looking to expand 
global markets through cooperation within our own hemisphere and 
encouraging increasing energy resource development abroad. Removing 
transmission bottlenecks, expanding refinery capacity and encouraging 
the expansion of our pipeline network will further decrease the 
likelihood for future price spikes caused by supply limitations or 
disruptions. The Report also recognizes the important role of renewable 
fuels and promotes environmentally sound increases in energy supply.
    The Report further addresses regulatory barriers and regulatory 
complexity. Working to limit regulatory uncertainty will create a more 
robust investment environment; allowing refiners, electricity 
generators, and other energy providers to make the appropriate 
investment decisions to improve the efficiency of existing facilities, 
while simultaneously, looking to new projects to better serve the 
energy consumer. The Report also requires EPA to study opportunities to 
maintain or improve environmental benefits of state and local 
``boutique'' clean fuel programs while exploring ways to increase the 
flexibility of the fuels distribution infrastructure, improve 
fungibility, and provide added gasoline market liquidity.
    Finally, the Report advocates protecting lower income consumers 
from the effects of high energy prices by strengthening the Low Income 
Home Energy Assistance Program (LIHEAP). Additionally, the President 
recently requested $150 million in FY2001 supplemental funding for 
LIHEAP. The NEPDG also recommends further funding of $1.2 billion over 
the next 10 years for the Department of Energy's Weatherization 
Assistance Program, which concentrates on making homes more energy 
efficient. This increase nearly doubles the funds dedicated to this 
program over the next decade.


    Today, there is little question that the effects of energy on the 
economy are significant. Recognizing this fact, the NEPDG has provided 
a valuable and balanced blueprint to address the energy needs of the 
American economy through increased energy supply, improved 
infrastructure and more efficient use of our energy resources. Meeting 
our energy challenges is critical to maintaining a healthy economy and 
while we recognize that additional work needs to be done to quantify 
the relationship between the energy and the economy, we must act now to 
ensure that supply limitations and price volatility do not limit 
economic growth.
    I again thank the Committee for the opportunity to testify today 
and look forward to answering any of your questions.

    Chairman Nussle. When I was home in my district over the 
recess here for Memorial Day, I had the opportunity, as I know 
many Members did just from conversations I had with people on 
the way back, where we took the opportunity to visit a number 
of different energy kinds of examples in my district, 
everything from nuclear, coal, and natural gas. We have many 
others out in my State as there is a variety throughout the 
Nation such as wind and methane. We obviously have biodiesel 
and ethanol, but we also have ag lubricants. We are now making 
lubricants and transformer box oils and things out of all sorts 
of different renewable resources.
    I noticed on your chart that renewables--and I have noted 
in the report and the recommendations that renewables and many 
different types of energy are important to the solution. To 
start with, I just wanted to get your impression.
    It has been my impression of what the Vice President has 
said, and others from the administration have indicated, that 
while they are part of the solution, we can't do enough in 
renewables and we can't do enough in conservation in order to 
solve the problem in and of itself. I am concerned about that 
to some extent because I think that part of the beauty of our 
economy is the fact that people will step up to the plate and 
solve a problem. It is as much as whether it is solving a 
problem, coming up with new ideas, using manure for methane, 
which is a very unseemly kind of thing for maybe some to 
consider, but out in Iowa we have a lot of it, and, therefore, 
that may be part of the solution. We also have a lot of wind, 
and not only when I am there, but throughout the year. There 
are many other opportunities. How important are these two 
areas, conservation and renewables, to the overall solution to 
the energy strategy that the administration has put forth?
    Mr. Blake. I think they are tremendously important. You 
have outlined some of the really interesting technological 
advances, just the ingenuity people are now applying to what we 
can do with the resources that we have. It obviously happens to 
be an important issue because whether using your manure or wind 
or ethanol, whatever it is, they are going to be local U.S. 
sources. Conservation by definition is largely local. So it all 
has a very important role, and I think maybe that has been 
somewhat misunderstood in terms of the importance of the role. 
The administration and the Vice President's group recognize 
    The only point that still needs to be made though, is that 
this is not a set of issues that will go away through 
conservation and renewables. Just, again, with the data on 
where we are now, we already have issues with our transmission 
system. Those issues will remain whether that new power plant 
is run on biomass or natural gas. We are going to be putting 
more natural gas-fired turbines on the system. That is going to 
put a stress on our pipeline structure. It is going to require 
some additional activity in terms of supply.
    Your basic point is exactly right. These are very important 
sources of energy. They are recognized as very important. The 
only thing to remember is that they don't supply the entire 
    Chairman Nussle. Again, as we concern ourselves with the 
volatility of energy prices and what that means to overall 
economic growth and its impact on the budget, you indicated 
that the Energy Information Agency has done a report, and I am 
interested in some of its conclusions. Growing up, as I am sure 
we all have, with a father or mother that constantly, maybe 
more so for me than others, who constantly said, you know, shut 
the door when the air conditioning is on; what were you born 
in, a barn? Turn the lights off, what, are you paying the 
bills; every one of us in the room has had that experience. So 
there is a mindset that we have that if the prices go up, that 
is bad, and if the prices come down, that is good. But what you 
are telling us is that the volatility in those prices can be 
just as bad; is that true?
    In other words, is volatility worse than steadily 
increasing prices? Can the economy still grow with steadily 
increasing prices if it is predictable, or is one worse than 
the other, volatility versus steadily increasing prices? What 
did the report indicate?
    Mr. Blake. The report was not trying to indicate that 
volatility is worse than steadily increasing prices. The 
economy is better off on the main to the extent you have a good 
balance of supply and demand and prices are declining. The 
point of the report was that volatility itself has an effect on 
the economy that is negative.
    As we think as a country what we can do to tamp down some 
of that volatility, helps the overall economy as we think as a 
country of our policy decisions. It helps investment decisions. 
It helps people react in a more timely way. As you know, on the 
west coast some businesses have looked at dramatically 
increased prices and have found continued production extremely 
    Chairman Nussle. I think the two go hand in hand. The more 
options that we have out there, the more alternative energy 
supplies that we have that are producing energy for us, I think 
the better the marketplace will be. So I appreciate those parts 
of the energy strategy that diversify so that it can help keep 
volatility to a minimum.
    Mr. Spratt.
    Mr. Spratt. Thank you very much for your testimony. It was 
very useful.
    Let me ask you this: In the 1970's, we prioritized the use 
of natural gas, preferring human needs customers over boiler 
heat customers, and even over process users of natural gas. In 
the late 1980's, we removed most of those restrictions and 
allowed gas to be used once again extensively for electric 
generation. When we did that, did we see or foresee or explore 
the consequences for human needs use? Did we have reason to see 
that this was going to create a demand for gas that would run 
the price up before the supply would be there to meet the 
    Mr. Blake. Not having been part of the planning process in 
the 1980's, I don't know that I can directly address that. I 
could say, though, that as you said, in the late 1970's with 
the Fuel Use Act, the use of natural gas for generation was 
actually prohibited in large parts of the country; that I think 
an objective look at that would be that that had, and a number 
of the other energy control programs in the late 1970's 
actually had, a negative impact on supply. It wasn't well 
calibrated to the needs of the country for clean generation, 
which natural gas provides. I think every estimate that I have 
seen is what we are going through now is a market perturbation 
that needs to be addressed in terms of making sure that we have 
the right infrastructure.
    Mr. Spratt. One of your charts showed the demand for 
natural gas continued to rise steeply and steadily right on to 
2020 to the far end of the chart. Do prices have to stay where 
they are for new gas to come on to meet that kind of demand 
level, or can gas come back down to affordable levels and still 
have the exploration and development of new gas needed to 
supply that curve?
    Mr. Blake. I think you are already seeing natural gas 
prices come down. When I checked this morning, I think the 
price is now slightly down below $4. I can't remember exactly 
what the forward pricing is, but that is also going down. So 
the markets would say, yes, it is possible to supply this 
demand for power generation and maintain reasonable costs for 
    Mr. Spratt. If we allow electric generation fuel by natural 
gas, which is very efficient and very cost-efficient in 
particular, what happens to other alternatives like nuclear 
production which has a high front-end capital cost? Does it 
discourage the use of other alternatives, resort to other 
    Mr. Blake. I think, and the Vice President's group 
addressed the use of nuclear power. Nuclear power has a very 
important role to play for the Nation's overall energy picture 
in terms of the existing plants that are now online, and how to 
make sure that they have a full, useful life, including 
extending the licensing. Building new nuclear plants, in my 
experience at least, is a different issue. There private sector 
would say that the capital cost issue may be secondary to some 
of the regulatory uncertainty issues. They are capital-
intensive, as you suggested, and as you make your investments, 
you need some regulatory certainty.
    Mr. Spratt. Still the capital cost on the front end and the 
time it takes to begin and carry out a plan on your books 
before you get any return is a significant hurdle to cross. And 
if you have natural gas out there as an easy alternative, 
aren't most utilities going for the easy alternative?
    Mr. Blake. I think what you see now is exactly that, 
although, as I said, I would say that the issues with nuclear 
are that the capital issue and capital cost recovery is 
probably secondary in the case of nuclear to other issues.
    Mr. Spratt. You mentioned the need for transmission lines. 
One component of the President's recommendations, I believe, is 
that utilities engaged at least in wholesale sale of power 
would have Federal condemnation rights. Is that truly needed? I 
mean, the State utilities seem to have all the authority they 
need to run transmission lines about anywhere they want. I say 
that as someone who owns a farm, and I have a 505-foot right of 
way through my farm. The power company didn't have any trouble 
at all acquiring it. When I tried to get them to move it, they 
wouldn't think of it. So why do we need to give them the 
additional authority of Federal prescription for doing that?
    Mr. Blake. It is an option that is being considered. It 
matches the authority FERC has on natural gas.
    The interesting thing, and I don't know the specific laws 
in your State, but I think actually over half of the States for 
their standing laws actually don't allow consideration of 
benefits that are external to the State. The issue transmission 
is that we are now increasingly a regional system rather than a 
State-by-State system. So one of the issues is how do you open 
up the consideration of benefits? If the line going through 
Connecticut, for example, as there was a recent incident along 
these lines, is to benefit Long Island, how does Connecticut 
take that into account? Right now the Connecticut structure 
would not allow that to be taken into account, or that is my 
understanding of the Connecticut regulations.
    Chairman Nussle. Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman.
    I think we can all agree that the changes in energy prices, 
whether it be gasoline or electricity or natural gas or 
whatever, has a real impact on our economy from the standpoint 
that it has forced families to change the cash flow of their 
own home budget. Many of you have experienced in the past the 
opportunity to buy other products or other items, things that 
they would like to have for their families, now having to shift 
that cash flow to provide a necessity for the families. So it 
has had a tremendous impact.
    In Georgia about 3 or 4 years ago, we had a deregulation of 
the natural gas industry. I believe that deregulation has 
probably slowed down if not completely halted the deregulation 
of electricity. At least I hope it has, because natural gas 
prices in Georgia increased dramatically, and one of the 
reasons, I believe, was the fact that we created another profit 
center. When you deregulated natural gas, you left in place a 
company that owned the transport lines, and then you created 
other entities that actually sold the gas, but had to use the 
transport lines. So instead of one profit center, we then had 
two profit centers. The gas people themselves are creating 
another profit center. So that, I think, has had a lot to do 
with the increase in price of natural gas which consumers of 
natural gas have to pay.
    Prior to deregulation in California, because that has been 
the focus of this whole problem as far as the part of this 
problem, part of the deregulation of electricity in California. 
Were the utilities companies profitable?
    Mr. Blake. I am sure they were. As regulated utilities they 
would have had a regular rate of return that would have 
included an equity return.
    Mr. Collins. It is questionable to me. I am having a 
problem understanding, then, after deregulation, creating a 
wholesale market and entity to handle those wholesale prices or 
the wholesale sales of that electricity, why the rates had to 
increase so when the plants were producing the same power, and 
the lines were transporting the same current? Why did we have 
such a drastic increase in rates?
    Mr. Blake. The California situation is rooted in the 
structure of their deregulation plan. They couldn't have had a 
worse plan for a situation where you have constrained supply 
and unconstrained demand. The way they did their deregulation--
their retail rates were not reflective of the charges that they 
were seeing at the wholesale level. The utilities were told to 
buy spot market rather than long-term bilateral contracts, and 
they didn't build anything.
    Mr. Collins. I understand that, but I am talking about the 
wholesale rate. Why did the wholesale rate in some instances 
increase tenfold?
    Mr. Blake. The way they structured their deregulation, the 
price of electricity, wholesale electricity, is determined at 
the margin by the last unit that was dispatched or the last 
price in. So take the least efficient, old gas turbine, say, 
for an example.
    Mr. Collins. I understand that. But your first answer was 
they were profitable before deregulation, and yet when you 
deregulated, wholesale price coming from the same plants, 
carried over the same transmission lines in some instances 
increased tenfold. I don't follow that scenario. I know supply 
and demand. I have been in the marketplace for 30 something 
years, almost 40 years. I know what supply and demand does. But 
I also have a little bit of understanding and feeling when 
somebody is just a little bit dadgum greedy.
    Mr. Blake. If in 1997 or 1996 to 2001, the 5 years they had 
remained totally regulated, and they still hadn't built these 
plants, they would be in the same position.
    Mr. Collins. Maybe some folks would be sitting in the dark. 
I mean, that is just natural. I mean, I can take my house, and 
I can put in enough appliances that my switch box won't carry. 
My circuit breakers will go to tripping left and right. But the 
power company is still putting the same amount of power at my 
house. If the power companies were still pulling the same 
amount of power from those plants through those transmission 
lines, then why did it increase tenfold?
    Mr. Blake. Again----
    Mr. Collins. I don't understand this. Don't use the words 
that the natural gas prices went up considerably. Did it cost 
more to get the natural gas out of the well because of this 
fact? I go back, I understand supply and demand, but I also 
understand just plain greed and gouge, and I am afraid we have 
had a little bit of all of this as we have tried to justify 
supply and demand. Prices have been just accelerating too much.
    Mr. Blake. FERC has authority on unjust and unreasonable 
rates. They have ordered rebates in California. I think the 
fundamental question, though, remains that if you don't build 
supply, and your demand continues to increase, something has to 
    Mr. Collins. I understand that, too. I think you have to 
have profits in order to be able to encourage investments, and 
that must happen. We have got to have the investments of the 
invested utilities to build these plants, and we need some 
changes in the government regulations that has hindered this 
from taking place as well. But we also need to be very 
conscious of what is happening in the power structure.
    Chairman Nussle. The gentleman's time has expired. If you 
have a response, we will take it. Otherwise--do you have a 
response to that question? Statement?
    Mr. Blake. No, I understand the point. Again, the 
structuring of the market in California was not well thought 
out, and that has created the pricing problem that they have 
    Chairman Nussle. Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Blake, I just have a few questions on some of the 
numbers. Your first page of written testimony you talk about 99 
quadrillion BTUs versus 72 that we produced. I am just curious. 
Of that 72, is that any of the energy resources that we 
exported to other countries?
    Mr. Blake. Yes.
    Mr. Capuano. So, that is already taken into account. So if 
we hadn't exported any energy anywhere, that 72 would have been 
a higher number?
    Mr. Blake. Well, I will have to check on that.

     Mr. Blake's Reply to Mr. Capuano's Question About BTU Exports

    Yes, of the 72 quadrillion BTUs that we produced, 4 
quadrillion BTUs were exported to other countries.

    Mr. Capuano. If you could, because I am not sure. I think 
the answer is no. I think that is not taken into account. So I 
would suggest that if we are really interested in increasing 
our production, that the very first thing we should do is tell 
those companies that have paid this government and the American 
people that they should stop exporting immediately if they are 
really concerned about what is happening in America. But, 
again, I will wait to hear that answer.
    I guess the other question I have for you is relative to 
increasing production. I don't think you are going to find too 
much disagreement. There may be some differences of priorities, 
but I don't think you find too much disagreement that an 
increase in production is necessary. But I guess I would like 
to be clear, and are you suggesting that increased production 
is all we need to do?
    Mr. Blake. No.
    Mr. Capuano. I didn't think so, but I didn't hear the 
words. Because I don't think that is possible. I mean, I think 
we should increase production on certain levels, but at the 
same time I don't think it is possible at any level that 
increased production is going to solve problems that we have 
today or will have tomorrow. I am glad to hear that you feel 
the same way. I also hope that it is fully understood within 
the entire administration, it is not just you speaking. I 
presume that when you speak, the administration understands 
that as well.
    I guess I have some concerns again in your written 
testimony, as I was trying to read quickly, I didn't see the 
word ``conservation'' or ``conserve'' anywhere. Now, maybe it 
is there and I missed it, but I didn't see it. I saw a whole 
bunch of things about national energy policy, talking about 
increased production, but the word ``conservation'' wasn't 
there with the exception of a little talk about weatherization, 
which is a good thing. But I didn't see anything else there. I 
didn't see anything there relative to research and development, 
because unless I am mistaken, I don't think you will find too 
many people, again, unless you disagree, that would say that 
the current technology that we have available is going to be 
capable, even if fully implemented right now and fully 
dispersed--the economy right now would actually get us to where 
we want to be as far as energy efficiency standards. So that 
being the case, I wonder, first of all, if you agree with that; 
and second of all, if you do, then why did the President cut 
research and development into energy issues in his budget 
    Mr. Blake. Let me respond in two parts. First, nothing in 
my testimony was intended to reflect that conservation is not 
an important priority.
    Mr. Capuano. But it is not mentioned there. I thought 
important priorities might be mentioned.
    Mr. Blake. This was a summary, and I don't know if you were 
here as I summarized.
    Mr. Capuano. Yes. I didn't hear the word until the chairman 
asked the question, which was a good question and a good 
answer. But I didn't hear the word prior to that, but that is 
    Mr. Blake. And I think on the research and development 
front, the administration is putting significant funds in 
research and development both on conservation and renewables 
and on clean coal technologies. I think the commitment is 
something like $2 billion.
    Mr. Capuano. I would like to see those numbers because the 
last numbers I saw, were still significantly below last year's. 
And the last I heard, it was actually the House Appropriations 
Committee that was increasing those numbers, not the 
administration. Again, if I am wrong, I am happy to be educated 
and clarified on that.
    Because I said before during the budget discussions here, 
and I will say it again, that I think that the only way this 
country is really going to be ahead of the curve is not through 
production. I mean, production is part of it, I don't disagree. 
But it is not through production. That is not going to put us 
ahead unless we want to significantly cut out consumption, 
which I don't think we will. So that leaves us only with 
research and development to provide more energy-efficient 
    Talk about the cell phones, you know as well as I do that 
cell phones run for several hours on the same amount of energy 
that it used to take for about 30 minutes. And we all have the 
same thing. It can go further and further and further, as it 
should, all research and development, not done out of thin air, 
not done by the government, done by private enterprise with the 
help of government assistance.
    And I can't argue strongly enough if we really want to look 
long term, past this election, past this decade, it is only 
going to be research that gets us out of it unless somebody 
comes up with new natural gas fields or whatever.
    I would also like to shift a little bit again to 
production. It amazes me, absolutely amazes me, that we are 
sitting here talking about natural gas, and that is all well 
and good. We had a humongous natural gas reserve that is in the 
ground, put back into the ground, taken out and put back into 
the ground in Alaska in existing fields; not new fields, 
existing fields. This government, before I was here, gave the 
authority to build a natural gas pipeline alongside the oil 
pipeline. That wasn't taken. Has anybody started pushing, 
demanding, insisting that that natural gas pipeline be built as 
soon as possible? If those reserves are there, California would 
not have a productivity problem at this point in time. They 
still have some problems with power plants, but there would be 
no problem with energy supply.
    Mr. Blake. I don't know what percentage of contribution 
that could make to California, but I take your point and will 
give you a response on it.

 Mr. Blake's Reply to Mr. Capuano's Question About the Alaskan Pipeline

    The Alaska North Slope gas producers currently are 
reviewing whether projected market conditions will support 
construction of a pipeline to deliver Arctic gas to the lower 
48 States. Alaska's known gas reserves, which are estimated to 
be over 35 Tcf, could have a significant impact on the natural 
gas supplies for the United States. For over a decade the gas 
has helped pressurize the oil reservoirs on the North Slope, 
which have produced over 13 billion barrels since 1977. The 
need to reinject gas has diminished at a time when domestic gas 
transmission capacity is considered insufficient to meet 
projected demand.
    There are a number of Alaska gas pipeline proposals, 
including the transportation system approved in 1977. While the 
U.S. Government remains project neutral, the President's 
National Energy Policy recommends the Government coordinate its 
activities to expedite the construction of a gas pipeline to 
the lower 48. We have created an interagency working group that 
will smooth the way for the approval and construction of a 
pipeline, whenever private industry determines to begin the 

    Mr. Capuano. I guess I have to wait for a couple of 
responses, because, honestly, I appreciate you being here 
today. I could have gotten no answers by not coming here as 
well. I kind of wonder why we are doing this if thus far I 
haven't heard any real new insight except to hear that the 
administration is for more production. I saw that in the news a 
couple weeks ago. I appreciate you coming, but I already knew 
that, and I would like to know what we are going to do now we 
have problems.
    I know that FERC did a little top spin and finally came 
around to a little bit of something is better than nothing, but 
I would really like the administration to try to put together 
something that is comprehensive and answers the questions that 
we have. I don't mean to be disrespectful, but you didn't 
answer any questions of mine, you didn't answer many of Mr. 
Collins', and my guess is you are not going to be able to 
answer many of the questions you are going to get for the rest 
of the day. But I appreciate you coming.
    Chairman Nussle. Mr. Culberson.
    Mr. Culberson. Thank you, Mr. Chairman.
    Mr. Blake, when did California cease the construction of 
new power plants?
    Mr. Blake. There was not a formal policy decision not to 
construct new plants. It is something that has occurred over 
the last 5 to 7 years. We really haven't seen net plan 
additions in the State.
    Mr. Culberson. By not building those new plants, clearly 
that had an impact, wouldn't you agree, on the profitability of 
the California energy industry, the utilities out there?
    Mr. Blake. For quite a while their prices remained very 
reasonable because they had reserve capacity so that for a 
number of years they were eating into their reserve capacity 
without building the new facilities. But as demand continued to 
grow, they crossed over the point, and that is where they are 
    Mr. Culberson. Now, from what I have seen of the national 
power grid, I know that for example in Texas--we are blessed 
with an excess of electricity where we are doing well with 
electric generation but can't transmit a lot of that power 
outside of the Southwest and get it out to the West. Could you 
talk to someone about what is being done? What can be done to 
get power from regions like Texas where we do have some excess 
out to portions of the country like California that might need 
    Mr. Blake. That is an absolutely critical issue. The plan 
is to do a comprehensive study of our transmission grid, 
identify the key bottlenecks across the country, know where 
some of them are that prevent power from moving efficiently 
from one region that has the power generation sources to 
another region that has the demand. You see that problem just 
within California where they have transmission constraints 
preventing power from southern California from moving to 
northern California. An additional thing that needs to be 
addressed is the rate structure, how people build these 
transmission lines so that they have the incentives to put them 
in the right place.
    Mr. Culberson. From what you have seen, what led to this 
virtual stoppage of construction of new power plants in 
California? What sort of factors led that State to decide to 
quit building new plants?
    Mr. Blake. I think you had a number of permitting and site 
issues. I think probably given a choice, a lot of localities 
would choose not to have a power plant in their area. If you 
multiply that decision by locality after locality, you don't 
build new plants.
    Mr. Culberson. So from the evidence you have seen, it was 
principally, when you say permitting issues, environmental 
concerns, not in my backyard, we don't want the power plant 
here, and that just magnified and snowballled across the State 
to the point where they are today?
    Mr. Blake. That was definitely part of the problem of the 
``Not In My Backyard'' phenomenon. Other people have talked 
about a BANANA phenomenon: Build absolutely nothing anywhere 
near anything.
    Mr. Culberson. Mr. Capuano asked an interesting question 
about the failure to build a natural gas pipeline across 
Alaska, which would be terrific if it were there. Marketplace 
forces, what effect would that have on the price of natural 
gas? Would the price of natural gas support the construction of 
such a pipeline? What led, in your opinion, and from the 
evidence you have seen, to the failure to build such a 
    Mr. Blake. I have to apologize on that to Congressman 
Capuano. I have been on the job 2 weeks. I am really not 
familiar with that. I am just not familiar enough with the 
dynamics of that pipeline to be able to address it, but I will 
get a response to it.

   Mr. Blake's Reply to Mr. Capuano's Question About an Alaskan Gas 

    The original proposal to build a gas pipeline from the 
North Slope of Alaska to the lower 48 States relied on a number 
of factors all coming together at the right time. At the time 
the pipeline was proposed the national was facing severe energy 
shortages. There was a belief that the United States was 
running out of natural gas. There were a few major new finds of 
natural gas at the time and the Alaskan reserves seemed to be 
the obvious answer. With the anticipated shortfall in supply, 
gas prices were expected to rise dramatically. Finally, in the 
beginning of oil production there was no obvious need for the 
natural gas on the North Slope.
    The market place changed. Additional natural gas deposits 
were found in the U.S., Canaca, and off shore in the Gulf of 
Mexico. Price increases never materialized and in fact prices 
actually declined. The producers on the North Slope found that 
the highest and best value for gas was to reinject it to boost 
oil production, since oil was marketable because the Trans-
Alaska Pipeline System was already operational. As a result, 
the gas pipeline sponsors decided that the construction of the 
pipeline system necessary to bring the North Slope gas to the 
lower 48 States' market was not economic at that time.

    Mr. Culberson. Thank you, sir.
    Chairman Nussle. Ms. Hooley.
    Ms. Hooley. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for being here today. Actually I 
have several questions, but I will try to limit those 
questions. What I have a problem with is when you look at the 
proposed energy plan over the next 20 years, there are some 
things that I have a difficult time trying to reconcile. For 
example, the President proposed 48 percent reduction in 
research on solar, wind and geothermal energy, 46 percent 
reduction in research and development on energy efficiency. So 
while those are being reduced, at the same time the Department 
of Energy put out a report that says with increased efficiency 
in renewable energy, that we can meet 60 percent of the 
Nation's need for new electric power plants over the next 20 
years. So you have a report coming out of the Department of 
Energy saying we can do this, and yet you have cuts going on in 
the budget for renewable and energy efficiency. I have a 
problem with that, trying to reconcile those two things.
    The other thing I have a problem with is, again, I think in 
the energy policy it calls for some kind of a study to raise 
the gas mileage standards for light trucks and vans, and yet we 
know the technology is there to do that. And it would save us 
millions of barrels of oil if we just did that one simple 
thing, just to raise the CAFE standards. But I have--and you 
can comment on those, but I want to make sure I get all my 
questions in really quickly.
    The third issue that I have, and I would like to spend some 
time discussing this, is--and I am from the State of Oregon. We 
are impacted by the deregulation in California but we also have 
a drought. Little did we think both of those things would 
happen in the same year. I have talked to a lot of school 
districts. The State board of education just did a survey with 
all of our schools, and what they found is those increases in 
electric prices are just skyrocketing. And we have not only 
have that increase right now by anywhere from 30 percent to 200 
percent, but we anticipate in October there is going to be 
another jump in prices. One of my school districts, one of my 
larger school districts, they have budgeted an additional 
$850,000 for increase in energy costs, and what that means is 
they are going to spend less money on hiring teachers. The 
money has to come from someplace. And that could hire 24 new 
teachers. That impacts class size. That impacts the learning of 
    My question is does the administration or does the 
Department have any intention of recommending some kind of a 
program for schools that have all of a sudden these very high 
increase in energy costs? I can understand trying it with you 
has to decrease your need for or you have to become more 
efficient, but you know we have a program for low-income 
people, but all of a sudden our schools are going to be 
tremendously impacted by this. I would really like to know if 
you think you could go back and look at some kind of a program 
or plan to help these schools out. Hopefully this is temporary.
    Mr. Blake. Congresswoman, that is a good question. We 
should take a look at what the impacts are in schools and in 
other areas. In Oregon I know because of Bonneville that 
Bonneville Power has gone out and done, what I think is, a very 
forward-thinking thing to address the issue. They are buying 
down demand, and by doing that I think they have reduced the 
amount of the rate increase that might otherwise hit by two or 
three times.
    Ms. Hooley. Correct.
    Mr. Blake. Again, if you look at the situation in Oregon, 
there are pending new generation plants that will start coming 
online, some for this year and many more for next year.
    Ms. Hooley. Right.
    Mr. Blake. But I will take your question on the impacts and 
on the schools as a question to follow up on.

 Mr. Blake's Reply to Ms. Hooley's Question About Energy Costs' Impact 
                               on Schools

    From 1978 through 1995, the Congressionally established 
Institutional Conservation Program (ICP), with annual 
appropriations ranging from under $20 million to over $100 
million, enabled the Department of Energy (DOE) to provide 
grants for energy-efficiency improvements in approximately 
69,000 schools and hospital buildings. Since 1995, the ICP has 
been merged with the State Energy Program (SEP), to maximize 
States' flexibility in the use of energy grant program funds. 
Although total funding was concurrently cut nearly in half, 
many States have been allocating part of their SEP resources 
for energy efficiency improvement in schools. From program 
inception to the merger of ICP with the SEP, cumulative cost 
savings of $5.7 billion (FY95 dollars) and cumulative energy 
savings of 930 MMBtus were realized.
    In 1998, DOE launched its EnergySmart Schools Campaign as a 
national initiative focused on reducing energy consumption and 
costs, and increasing use of clean energy technologies in K-12 
schools nationwide. This initiative is part of DOE's Rebuild 
America program. Since its inception, EnergySmart Schools has 
helped communities complete energy improvements in 70 million 
square feet of schools with estimated energy savings of $51 
million per year or 3.1 MMBtus. This represents a 23 percent 
return on investment since total private energy efficiency 
investments generated in K-12 schools by the Rebuild America 
program currently total nearly $220 million.
    Over the next 3 years (2001-2003), more than $79 billion in 
school projects will be completed nationwide with the majority 
involving new construction and/or renovation of existing school 
facilities. DOE estimates this nation's 112,000 existing 
schools could easily save 25 percent of their energy costs, or 
approximately $1.5 billion per year, through better building 
design, energy saving capital improvements, and renewable 
energy technologies. Through the Department's Office of 
Building Technology, State and Community Programs, we expect to 
continue offering a variety of technical and financial 
assistance to help achieve this potential.

    Ms. Hooley. OK.
    Mr. Blake. On CAFE standards, as you know, that is an item 
that the Vice President's group recommended be studied. There 
are a number of factors, safety being an important one, that 
also must to be part of the consideration on what you do with 
the CAFE standards. And on renewables, the answer is, yes, it 
is very important. We are trying to address that as best we 
can. It doesn't solve all the problems, but it is an important 
    Ms. Hooley. I understand it doesn't solve all the problems, 
but I just have a hard time reconciling how they can cut it by 
50 percent and yet your own Department says this is going to 
make up 60 percent of demand in the next 20 years.
    Mr. Blake. And there were some budgetary increases proposed 
as well in the plan.
    Ms. Hooley. Thank you.
    Chairman Nussle. Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman.
    Mr. Blake, thank you for coming today; and I know, as we 
look at the report and certainly hear some questions, a great 
deal of attention of the folks on the other side of the aisle 
that this probably just didn't happen yesterday. I just got up 
here in January myself, but this energy problem has been coming 
for a long time, and I think we need to all accept some 
responsibility for it instead of trying to plug holes in what 
you are trying to do.
    In fact, I read in your report, in your conclusory remarks, 
it says, the blueprint to address the energy needs of the 
American economy through increased energy supply, improved 
infrastructure and more efficient use of our energy resources. 
I think that certainly answers the question the gentleman just 
asked a while ago that it doesn't have any efficiencies in this 
particular proposal; and certainly I think we are all cognizant 
of, whether they are closing the barn door or cutting off the 
lights, we all have a part in making that work.
    Being from South Carolina, we have got a great energy 
policy there. I think each State should have their own energy 
policy. I don't know why they are looking to the Federal 
Government for a bailout or handout. We have done well, but we 
have had a great mix between hydropower, between coal, oil and 
natural gas. And it concerns me as we move to the future with 
the price fluctuation where we have it, how are we going to 
determine a good mix between public power, the private power to 
make a good energy plan that is going to work for everybody?
    Mr. Blake. I thank you, Congressman.
    First, I appreciate those comments; and the point of a 
balanced usage of fuels is in one of the charts I showed. That 
is critical. We need to understand as we put more reliance on 
natural gas both what that does on our infrastructure--but also 
perhaps that we need to look at other resources, how we get 
more clean-burning coal, how we use the nuclear resources that 
we have in place and the hydroresources that you have in place. 
The policy actually addresses each one of those fuels as well 
as renewable fuels in conservation. It is a balanced plan. 
States need to work toward balanced plans, and the Federal 
Government needs to work toward a balanced plan.
    Chairman Nussle. Mr. Honda.
    Mr. Honda. Thank you, Mr. Chairman; and thank you, Mr. 
Blake, for being here.
    I took particular interest in Mr. Collins' comments in 
asking what the differences were between pre- and post-
deregulation, and I guess the query for him was why there is 
such a great increase in rates. Your response was, if I 
remember correctly, was that it was an issue of increased 
demand versus the supplies. Can you tell me what in that time 
frame, what the increase in demand was?
    Mr. Blake. I don't have the exact numbers, but I can get 
that for you.
    [The information referred to follows:]

Mr. Blake's Reply to Mr. Honda's Question About Natural Gas Consumption

    Demand for natural gas used in electricity generation is 
reflected in utility and non-utility consumption data. The 
Energy Information Administration (EIA) has statistics on total 
consumption of natural gas for electricity generation during 
the years pre- and post-electricity deregulation (approximately 
1991-2000) in California. Electricity is generated by both 
regulated utilities and non-utility generators. As the 
electricity industry adjusted to regulatory reform, increasing 
quantities of electric power were provided by non-utility power 
generators, including industrial firms who were co-generators 
of electricity and steam. Over this period the use of natural 
gas for total electricity generation has varied from year to 
year and has not shown a clear trend.

                                              UTILITIES, 1991-2000
                            [Million cubic feet and dollars per thousand cubic feet]
                         California                                     Consumption (MMcf)            Prices ($/
----------------------------------------------------------------------------------------------------     Mcf)
                                                              Non-utility                           ------------
                            Year                              and utility  Non-utility    Utility      Utility
                                                               generators   generators   generators   generators
1991........................................................      787,596      338,582      449,014        $2.95
1992........................................................      922,630      358,198      564,432        $2.81
1993........................................................      892,550      426,489      466,061        $3.05
1994........................................................      980,428      379,138      601,290        $2.56
1995........................................................      787,974      393,276      394,698        $2.28
1996........................................................      708,632      390,607      318,025        $2.75
1997........................................................      751,666      373,719      377,947        $3.08
1998........................................................      831,370      560,216      271,154        $2.79
1999........................................................      918,035      773,380      144,655        $2.76
2000 (preliminary)..........................................    1,083,801      954,052      129,749        $6.04
Note: Non-utility use excludes coke-oven, refinery, blast furnate gas, and landfill gas.

Sources: For 1991-1999 consumption--Form EIA-759, ``Monthly Power Plant Report''; Form EIA-860B, ``Annual
  Electric Generator Report--Nonutility'' (data for 1997 and prior from Form EIA-867, ``Annual Nonutility Power
  Producer Report''); for preliminary 2000 consumption--Form EIA-906, ``Power Plant Report''; for 1991-2000
  prices--Form FERC-423, ``Monthly Report of Cost and Quality of Fuels for Electric Plants.''

    Mr. Honda. My understanding, it was 5 percent.
    Mr. Blake. Yes.
    Mr. Honda.Then the increase in the rates was about what? He 
said 10 times.
    Mr. Blake. Well, I think he's looking at the marginal cost, 
the marginal rate rather than----
    Mr. Honda. I think he was talking about the cost of natural 
gas. You were talking about how the bidding goes, and there is 
a big gap between the cost of transport of natural gas and the 
price of natural gas to California and that there is a bunch of 
steps between that and the bidding.
    I agree that the bidding process is kind of strange, but I 
think that there is probably a lot of questions of what goes on 
between those steps, and it is probably a wonderful area for 
    My other question is, if you said that the structure was 
faulty, in the process of deregulation does not the plan have 
to go before the Federal Energy Regulatory Commission before it 
is completed?
    Mr. Blake. My memory is that it would have gone before 
    Mr. Honda. And if it went before them, why was not the 
faults at least questioned at that point?
    Mr. Blake. I wasn't in government at the time. I don't know 
what was in the record at that time.
    Mr. Honda. But you are criticizing it right now.
    Mr. Blake. I know what people from the outside were saying, 
disconnecting the wholesale rate from the retail rate, relying 
wholly on the spot market would create an issue; and whether 
those comments were made by FERC at the time, I honestly don't 
    Mr. Honda. But it did go through the process.
    Mr. Blake. Yes.
    Mr. Honda. And the function of FERC is to make sure that 
they have oversight over unreasonable, unjust rate increases. 
So the process was in place. So, like Mr. Brown says, there is 
probably enough fault to go around for everybody.
    Mr. Blake. Yes, including the Federal level outside of 
    Mr. Honda. The question of supply before deregulation, did 
the State of California receive power and negotiate power from 
outside of California also?
    Mr. Blake. Before?
    Mr. Honda. Deregulation.
    Mr. Blake. Yes.
    Mr. Honda. OK. So the reliance on supplies didn't necessary 
happen in the boundaries of California.
    Mr. Blake. No, and I think that is a good point.
    And to the point on the original design of the system, the 
deregulated system, if you maintained a structure where you had 
more supply than demand, I think that what they had structured 
might well have worked. When you shifted to where you have more 
demand than supply, there becomes a problem----
    Mr. Honda. Demand has only 5 percent. We had supplies that 
we relied upon and negotiated from without the State, so the 
real issue about energy and the crisis that we face today was 
precipitated by a faulty deregulation plan. And perhaps there 
could have been some, I guess, it is not my word, ``gaming'' 
the market.
    So, you know, when there is terminology, there must be 
behavior; and if there is behavior, then somebody is doing it. 
So, you know, I am kind of concerned about gaming the market.
    Does the Department of Energy get into those kinds of 
    Mr. Blake. That is the direct responsibility of FERC. It 
does have oversight on unreasonable rates.
    And just to pick up on another point that you made----
    Mr. Honda. Well, let me continue. Then if you say that is 
FERC, does the Department of Energy have any responsibility in 
encouraging FERC to pursue the responsibility? If they in fact 
had determined that there was something that was unjust and 
unreasonable, is there a responsibility on the part of the 
Department of Energy to pursue this or encourage them?
    Mr. Blake. Well, I think the President, not just the 
Department of Energy, has called on FERC to exercise that 
responsibility. FERC actually has ordered rebates under this 
administration, which was not the case previously.
    Mr. Honda. When did this happen?
    Mr. Blake. I think they ordered it January, is my memory, 
but I can double-check on that.

    Mr. Blake's Reply to Mr. Honda's Question About FERC Order Dates

    FERC issued orders on March 9 and March 16, 2001, requiring 
that various suppliers of wholesale electricity to California 
make refunds for certain sales in January-February 2001 or 
provide the Commission with a justification of the pricing of 
such sales.

    Mr. Honda. And then they stop; and since then we have been 
asking for, in their terms, market mitigation measures to look 
at the increased rates, because it was still unfair and unjust.
    I think the other area I am a little concerned about is the 
budgetary actions. The budget is a reflection of our 
priorities, and I understand that the Department of Energy's 
budget is less than it was last year or in the previous 
administration. Is that a concern of yours?
    If we are looking at increasing our activities in the area 
of conservation, which you said, increasing our activities in 
research, and your own laboratories have said that if we pursue 
conservation and alternative research that we can be less 
dependent by something like 47 percent, is that a direction 
that the Department of Energy will be pursuing based upon the 
laboratories that are under your Department, based upon their 
    Mr. Blake. The labs play an important role in the research 
and development efforts of the Department. The Department is 
pursuing energy conservation, and renewable energy. Those are 
part of the budgetary requests. There have been some 
supplemental requests that address that.
    The Department's budget obviously addresses a number of 
other things as well, and you know there is a balance in the 
programmatic increases and decreases there. I don't think you 
would look just at the energy, what the Department does related 
to the energy plan for the budgetary impacts and what the 
budget submission was.
    Chairman Nussle. Mr. Hoekstra.
    Mr. Hoekstra. Thank you, Mr. Chairman.
    Mr. Blake, good morning and thank you for being here.
    I think the question that I have, Bill's offered the same 
kinds of questions that Mr. Collins had, is that what is going 
on in energy?
    And you talked about natural gas prices in California, the 
tenfold increase in prices there for electricity. I know that 
when I go home and I talk to my constituents they have a hard 
time understanding what this deregulation and these prices, 
price fluctuations. They simply ask a very matter of fact 
question: Who is getting the extra profit?
    We had a situation where in one day gas prices went up by 
20 percent, and all the gas stations did it at like 11 o'clock 
in the morning. So gas went up by 30 cents a gallon. And, you 
know, they don't see any problems in the Mideast. They don't 
see any fluctuations in the price per barrel. They don't read 
about a refinery going down. Refineries are running at high 
    So the question they come back with is, hey, Pete, who got 
the 30 cents? You know, who is getting the extra 30 cents this 
afternoon and what is it being used for?
    I hope that the Department of Energy does an analysis of 
where this extra income is going and what is driving these 
costs factors. Because with a lack of a clear explanation, what 
is happening with consumers is there is a distrust of market 
forces. There is a distrust of deregulation. There is a 
distrust of the consolidations and the mergers that are going 
on in the industry and the basic conclusion that perhaps it is 
time for more regulation rather than less regulation.
    If we don't come up with some specific answers and 
explanations that actually make sense, as well as a strategy 
that says, you know, here is what market forces will work in 
the long run and why they may not be working in the short term. 
I don't know if you have got any comments or response to that 
statement or not.
    Mr. Blake. A couple of quick comments.
    First, on the pricing, and, you know, there has been this 
long-standing debate on price caps and whether price caps are 
an appropriate response to what is happening in the market and 
some notion of improper profits. It is worth just pausing and 
remembering that if you have got an essential problem of supply 
and demand, a price cap addresses neither. It doesn't improve 
your future supply, and it doesn't affect your current demand. 
If anything, it makes your future supply more difficult to get 
on line and increases your current demand. It is a general 
    On the oil and gas and pricing, there are constrained 
refineries. One of the things that the policy points out is 
that we haven't kept up in terms of building new refineries. 
And I note that as I came here this morning I asked what was 
the price of regular gasoline, and it is $1.60, which is 8 
cents lower than it was this time last year.
    One of the things that has happened is we saw an increase 
earlier than usual; and that, along with all of the other 
discussion, I think has created some of the issues that you 
raised. But it is worth bearing that in mind.
    Mr. Hoekstra. We are going to need more help in 
understanding exactly why those prices come in, you know, 
because, my consumers, they understand supply and demand. What 
they are also facing in electricity, in natural gas and these 
types of other areas, they are coming out of a regulated market 
where for a long time demand was not a problem, supply was not 
a problem, and prices weren't a problem. We had basically 
relatively inexpensive sources of electricity and natural gas. 
And what they are now seeing is they are seeing deregulation in 
these areas, and the end result they see is now, all of a 
sudden, we have got a problem with supply, we have got a 
problem with demand, and the only benefit I am getting as a 
consumer is I am getting to pay these folks more money.
    So tell me where the benefit of deregulating the market in 
these areas is. That is a question that we face when we go 
home, and it is a question that I ask, that says, you know, do 
market forces really necessarily work in these types of 
industries the way that we expect them to work in other 
    Mr. Blake. Those are very legitimate questions, and we need 
to do a better job in education.
    Because if you go back and you look at the concept of these 
regulated markets with cost of service regulations, what the 
utilities did was basically add up their costs and put a return 
on equity. If you look at the debates that existed in the 
1970's and 1980's of utilities building enormous plants that 
people argued weren't necessary, the debate that I am sure you 
are familiar with not that many years ago on stranded 
investments, investments that were made in a regulated 
structure, where people said, we don't need this. What is all 
this capacity for? It is far too expensive.
    The basic concept was, and I think it is proven out in a 
well-designed structure, the market is going to do a better job 
of allocating investment dollars and we will see reduced costs. 
You can look to a number of markets around the country where 
that is happening.
    But your very questions emphasize the extent to which we 
have got to do a better job of education.
    Mr. Hoekstra. Thank you.
    Chairman Nussle. Mr. McDermott.
    Mr. McDermott. Thank you, Mr. Chairman. I appreciate your 
bringing the author of the fossil fuel study to the committee. 
I assume you wrote this. That is why they sent you up here as 
the spokesman.
    Mr. Blake. No.
    Mr. McDermott. Who did?
    Mr. Blake. There were two individuals employed at EIA, at 
    Mr. McDermott. At EIA?
    Mr. Blake. EIA is the Energy Information Administration.
    Mr. McDermott. And who are those individuals?
    Mr. Blake. Ron Early is one name, and Kay Smith is the 
other name.
    Mr. McDermott. Kay Smith. Thank you very much.
    I would point out to Mr. Brown that South Carolina may 
stand alone. They may have a wonderful energy process, but you 
would do a service to the country if you stopped calling this a 
California problem. Because those of us who are further up the 
west coast, the decisions made by FERC made it much worse for 
us when they said Bonneville had to ship electricity down to 
California and force them to do it. We wound up having our dams 
drawn down in a drought year. We are going to have salmon 
problems. We are going to have all kinds of problems. So this 
is a regional issue and people better get it clear in their 
heads that no State is going to stand alone and be able to do 
it all by themselves.
    As the pressure that you see on the west coast comes on, it 
is going to come across the country. That is the view of the 
Department of Energy, isn't it? Or do you think this is just a 
California problem?
    Mr. Blake. It is not just a California problem.
    Mr. McDermott. Is it just a west coast problem?
    Mr. Blake. It is not just a west coast problem.
    Mr. McDermott. How far does it come?
    Mr. Blake. Well, there are transmission issues that exist 
around the country. The bottlenecks are not just on the west 
coast. There are bottlenecks in the Midwest, Southeast, and 
Northeast. So you are right in saying that the issue is not 
just in California.
    Mr. McDermott. We were the first to get it is what you are 
saying, basically.
    Mr. Blake. The combination of the drought, the supply and 
    Mr. McDermott. All the things that happened----
    Mr. Blake. Yeah.
    Mr. McDermott [continuing]. Happened on the west coast 
first, but the rest of the country is going to get it.
    Second thing is, people have asked the question here, and I 
want to put a finer point on it. Mr. Collins kind of walked 
around it, and I keep dropping a bill in the Ways and Means 
Committee on an excess profits tax. Do you think 20 percent 
profit on your investment is adequate? I mean, you are a free 
enterpriser, right?
    Mr. Blake. It depends on the investment and the risks and 
the return. I mean, what is the return?
    Mr. McDermott. Energy would be a pretty solid return, 
wouldn't it?
    Mr. Blake. Here is the reason why that is, what is the 
period of time over which you are going to recover your 
investment? What are the risks associated with the investment?
    Mr. McDermott. Utilities commissions have been giving out 
10, 12, 14 percent for years; and everybody's been buying 
Florida Gas, Electric and Commonwealth Edison and everybody 
else, right?
    Mr. Blake. When you are a utility, you know that on the 
rate structure, if it is used and useful, you get a recovery on 
it. When you are developing as a merchant power plant 
developer, the fact that you built a plant doesn't mean that 
you will get a return. They are very different economic 
    Mr. McDermott. So in this period what you are suggesting is 
that Enron and all these companies should make as much as they 
possibly can at the moment because there will be a dry period 
someplace, right?
    Mr. Blake. No, I wasn't suggesting that.
    Mr. McDermott. You don't think there should be any limit on 
them, do you, in how much they take out of the people?
    Mr. Blake. I don't think price caps work.
    Mr. McDermott. I didn't ask you about price caps. I asked 
you, as a public policy, do you think there should be any limit 
whatsoever on how much an industry takes out of an essential 
for living? In this country, you cannot live without 
    Mr. Blake. On the electricity structure, there is now a 
regulatory process where FERC ensures the wholesale rates are 
just and reasonable. So the answer to your question----
    Mr. McDermott. Okay, that is good. I like that. FERC was 
just and reasonable. Do you say that the rates in California 
were just and reasonable?
    Mr. Blake. I think FERC has already made some decisions 
that have required rebates on rates where they said they were 
not just and reasonable.
    Mr. McDermott. Where have they given these rebates?
    Mr. Blake. I mean, they apply to the wholesale market in 
California. I assume they go to whoever was on the other side 
of the transaction.
    Mr. McDermott. So the rebates go to Southern California Gas 
and Electric. Does it flow on then down to the users?
    Mr. Blake. I don't know in those instances who were the 
buyers that got the benefit of the rebates and how it flowed 
    Mr. McDermott. But it is your testimony that the FERC has 
set in motion a plan that guarantees rebates to California 
    Mr. Blake. Producers?
    Mr. McDermott. Of electricity.
    Mr. Blake. They have jurisdiction over wholesale rates. 
They have jurisdiction to assure that the wholesale rates are 
just and reasonable. They have made some conclusions that they 
aren't. I would think the rebates in that case would go to the 
buyers of that wholesale power, whoever those might be. It 
might be a municipality. It might be an investor-owned utility. 
It might be the State. I don't know enough about it.
    Mr. McDermott. I will check that, because I don't think 
there have been any rebates. At least I am not aware of them.
    Mr. Blake. I think they have been ordered and been found 
but where the actual cash transaction is, I don't know.
    Mr. McDermott. The next question I have and Mr. Honda has 
suggested that the budget sets the priorities. And when you 
have the kind of cuts that are in this budget, in solar 
particularly, which is one that really troubles me. Because 
with solar energy, there is seven times the energy that 
California uses in a given day falls on California, and I 
wonder why I see nothing creative in this proposal that came 
out of the Department of Energy on how to use the solar energy.
    I have a bill in the House Ways and Means Committee on 
granting the abilities to sell bonds to utilities so that they 
can put solar panels on people's houses interest free and let 
them pay them back in the rates. This is an enormous source of 
energy that is simply not talked about and certainly no money 
is put into it, in this budget. I can't understand who set 
those priorities except people who are interested in gas, oil 
and coal. That is the only thing I see.
    Mr. Blake. No, I think the budget actually reflects sums to 
renewable energy sources. I don't know the specifics on the 
    Mr. McDermott. It reduced it by 53 percent. The only 
increase was in the weatherization program. That is the only 
one they increased.
    Thank you, Mr. Chairman.
    Chairman Nussle. Thank you.
    Thank you very much, Secretary Blake.
    There is no question that this is not merely a California 
problem or a west coast problem or west of the Mississippi 
problem. This is a national concern, and that is why we are 
here today, because of its impact on the overall economy and 
therefore its impact on our budget. The purpose of this hearing 
today is to examine that and to get a handle on why we need, 
after many years of neglect, a national energy strategy so that 
we can put some predictability into the system.
    I appreciate your testimony today. I applaud the 
administration for putting a product on the table for 
discussion and debate.
    Other committees of jurisdiction are now engaged in 
debating that, coming up with ideas and proposals. We have many 
members who have ideas as Mr. McDermott suggested. I have some. 
Many other members of the committee have alternatives and 
ideas, and that is where the debate needs to happen.
    But it is clear from this hearing that it needs to be done 
now. We have to begin the process because it will have a short-
term, medium-term and long-term effect on this budget; and we 
have got to get our arms around it immediately.
    We appreciate your testimony here today and the fact that 
the administration would at least start this process. Thank you 
very much.
    Mr. Blake. Thank you very much. Congressman Spratt, 
members, thank you.
    Chairman Nussle. At this point in time, we invite to the 
witness table a colleague from California, Congressman Bob 
Filner, who represents the 50th District. Have I got that 
right, Bob?
    Mr. Filner. Yes, sir.
    Mr. Nussle. You see, when you come from a State like Iowa 
and you have only have five, 50 is a big number. That is why I 
just want to make sure. The 50th District of California, which 
encompasses San Diego, the southern half of the City of San 
    Representative Filner was elected in 1992, as I understand, 
and serves on the Transportation and Infrastructure Committee 
and Veterans Affairs Committee, is that correct? Any other 
committees you serve on?
    Mr. Filner. No, that is enough.
    Chairman Nussle. That is enough for now.
    Well, all right, while we appreciate that you would come 
and give us your reflection on what has been happening out in 
your State, while we heard from Mr. McDermott this is not just 
a California problem, certainly there are some issues that 
California is going through, and we would enjoy hearing that 
and its impact on the overall economy. So we would invite you 
at this point to provide your testimony.


    Mr. Filner. Thank you, Mr. Chairman; and I thank you for 
this opportunity. Your statement that you just concluded the 
previous panel with is something I think we all agree with. 
This hearing is necessary, action is necessary, because our 
economy is at risk. And I do want to point out that the west 
coast economy, California's economy is at risk. We have had 
some good news in the last week or so, but we are at risk, and 
the economy is teetering, and that means the national economy 
is at risk and a recession perhaps is possible.
    The disaster is overwhelming right now, Mr. Chairman. If 
this were a natural disaster such as an earthquake, a flood, 
fire; FEMA, the President and everybody would be in there 
dealing with it. This is man-made disaster that is equal to 
many of those natural disasters, and yet we don't see any 
Federal help.
    Let me just give you two statistics to measure that impact.
    In my County of San Diego, which was ground zero, by the 
way, in this whole crisis we have been dealing with it now for 
a year. In a study by our Chamber of Commerce, 65 percent, 
think of that statistic, 65 percent of our small businesses 
face bankruptcy this year because of the prices of electricity. 
If that is not a disaster, you have to tell me what is.
    Businesses by the score have already closed. Businesses are 
not just affected by the prices but by the availability of 
electricity. As you know, if you are in business you need a 
reliable source. Even an hour of blackout to some businesses 
means millions, even tens of millions of lost production.
    The third biggest employer in my District, a textile plant, 
is going to shut down not so much of the prices, although that 
is a problem, but because potential blackouts mean they cannot 
keep up a uniform production.
    Now the solution of these issues is obviously wide ranging 
and comprehensive. Various plans have been put forward that is 
a balanced approach between new capacity for our Nation, and I 
would echo Mr. McDermott's earlier comments that renewables 
ought to be a basic concentration of that. We obviously need 
more conservation, and California is now the leading per capita 
conservation State in the Nation. So we are doing our job.
    But I want to concentrate today on the price structure and 
the prices that are really killing us.
    I have heard various comments and questions, and I heard 
the testimony of the Secretary. There seems to be an assumption 
here that comes from economics 101 that if you don't have 
enough supply, and you increase demand you are going to have 
problems with prices. Well, when you get to economics 102 you 
figure out that when you have a monopoly or oligopoly or cartel 
or a manipulated market, there are no supply and demand curves 
that you can talk about with any reality. The market is not 
free. The price is not set by the market. The price is set by 
the cartel or the oligopolies or the monopoly, and that is what 
occurred and is occurring in California and soon the rest of 
the Nation.
    I will tell you we are being bled to death by this 
manipulated market. Whereas we have paid $7 billion, our whole 
State, for electricity 2 years ago, we paid $27 billion last 
year, and we have been paying anywhere from between $50 and $70 
billion this year, and that is without any big increase in 
demand. We have conserved, and the cost of production, except 
for natural gas, which is another area also capable of being 
manipulated, there has been no appreciable rise in the cost of 
production. So you can't account in traditional economics 101 
terms for the price increases or increased demand or decreased 
    We do have tight supplies, and we are dealing with that. 
The Governor of California has approved plans for a dozen new 
plants. We are conserving, as I said, but only the Federal 
Government can deal with the price structure of the wholesale 
market, and the Federal Government has not acted, and we are 
facing, as I said, disaster.
    When my constituents a year ago opened their bills, and we 
were the first probably in the whole Nation to face full 
deregulation, not partial. We had deregulation of our retail 
prices and our wholesale prices. Within 30 days, the first bill 
was opened up, everybody's prices doubled. Thirty days later, 
they tripled.
    Now you imagine, Mr. Chairman, a small business, a 
restaurant, running on very tight margins had an $800 bill, 
went up to $1,500, $1,600, then to $3,000 with no end in sight. 
How can you survive? Many did not.
    If you are a family on a fixed income, you went from fifty 
bucks to 125 to 200 in 2 months, even those that were not on a 
fixed income were hit very hard.
    Virtual revolution broke out in San Diego, Mr. Chairman. 
And I can tell you there is a revolution when Congressman 
Hunter, who is in my adjacent district, and I agree on 
anything, you know there is a crisis. And the State moved in 
because you had a very conservative community in rebellion. 
People tore up their utility bills. They burned them in public. 
Conservative city councils and school boards refused to pay 
their electricity bill.
    Everybody in San Diego knew, because there was not a hotter 
summer and no increased cost, that these prices were a result 
of a manipulated market; and the State acted and gave us a 
temporary reprieve through a price cap.
    But I will tell you that the call for price controls and in 
fact public power in San Diego is completely bipartisan and 
almost unanimous as a result of this situation. When Duncan 
Hunter, Duke Cunningham, former Representatives Bilbray and 
Packard and Bob Filner are all together on price controls and 
public power, you know there is a disaster in our county.
    We presented our evidence, by the way, of a manipulated 
market, of withholding of supply, of falsifying data, of 
laundering electrons, to FERC, our Federal Energy Regulatory 
Commission. They investigated on our evidence, and they said, 
yes, indeed, the prices come from a manipulated market. They 
are unjust and unreasonable.
    This finding was made by FERC last November and December. 
The prices under the Federal Power Act were illegal and are 
illegal, and yet FERC did nothing at the time. I think it is 
because of that FERC inaction and administration inaction, I am 
talking about a Democratic administration then and I am talking 
about a Republican administration now, but administration 
inaction led to the market saying, hey, we can steal the State 
blind; and that is exactly what they have done.
    We have an integrated market in the Western grid, so those 
prices hit Oregon and Washington, New Mexico, Wyoming, Montana. 
So FERC found a manipulated market, had no action. We are where 
we are now because of that.
    Now I have been told and I have heard on this committee 
that price controls, and I use that word although that is not 
what we call for in our legislation, do not produce one 
kilowatt of electricity. I think I could prove right away 
otherwise, but let me just say we have a balanced approach in 
California and the West. We are putting new capacity on, and we 
are conserving. Price controls, the cap, market-based rates as 
they were under regulation is what is needed, because the 
prices are killing us.
    If I can coin a phrase from a recent election, it is the 
prices, stupid. That is what is killing us. That is what is 
driving people out of business, and that is what is wrecking 
the State economy and maybe the national economy.
    Price controls do not produce a kilowatt of electricity, 
although I will tell you in a manipulated market, you get 
higher prices by withholding capacity. And if you had a stable 
market, with a market-based rate, there would be no incentive 
for the withholding capacity. We would get more capacity out of 
that. So we have structural deficiencies in our market.
    FERC has not acted. FERC must act. And I will tell this 
committee and I will be telling the Congress as we move forward 
with the national energy policy, yes, we deal with production 
and new capacity, yes, we deal with conservation, but we also 
deal with this manipulated market that is producing prices that 
are just horrendous.
    Mr. Chairman, if you took 2 cents to produce a commodity 
like electricity and you were selling it for 3 or 4 cents, as 
was the case, you made a hell of a profit. But now they are 
selling it for the relatively same cost of proconduction at 20 
cents, at 50 cents, a buck. It went up to $4 at times. That is 
not a working market. There is no competition. That is a 
manipulated market, and only the Federal Government can 
intervene and bring back the stability that is so needed.
    So as you move forward with a balanced energy policy, look 
at the market and we need a windfall profits tax, as Mr. 
McDermott had said earlier.
    We in San Diego, again a very conservative community, are 
unanimously moving toward public power so we are not subject to 
this cartel any longer. We are going to build our own capacity 
as a public utility, and that is a tremendous change in the 
thinking of people in San Diego.
    So look at the structure of the market, please. Realize 
that there is not a free market at work. There is no supply and 
demand curve that you have got to take into account, and you 
need to get us out of this situation by reforming that market, 
whether it is a regulated price based on cost or whether it is 
a move toward public power. The government can make that easier 
for municipalities. We have to look at that, because there is 
not a free market at work.
    I thank the chairman.
    Chairman Nussle. I thank you, Mr. Filner, for your 
    [The prepared statement of Congressman Filner follows:]

  Prepared Statement of Hon. Bob Filner, a Representative in Congress 
                      From the State of California

    Mr. Chairman and colleagues, I appreciate this opportunity to 
address you on the most pressing threat to the economy in the western 
United States-the energy crisis.
    I live in San Diego County, which I have often referred to as 
``Ground Zero'' because it was the first community in the western 
United States to experience the effects of this failed policy of 
deregulation of the electricity industry. We were the first to 
experience the disaster--skyrocketing prices and business closings. 
Last summer our electricity bills doubled in 1 month and tripled the 
next month until the State Legislature adopted a retail price cap of 
6.5 cents per kilowatt hour for residential users and deferred the 
remainder of the cost in a so-called balancing account. This provided 
some measure of relief for our citizens, although it raised concerns 
about payment of a huge debt--and it provided no relief for our 
    At that time, I said this was not simply a supply and demand 
crisis. I said that this crisis was caused by market manipulation by 
the wholesale power generators, operating like a cartel--American 
companies withholding supply and ``gaming'' the market to artificially 
inflate prices.
    This has been proven. The evidence has been rolling in over the 
past few months--the California Independent System Operator (Cal-ISO), 
the California Public Utilities Commission (CPUC), even the Federal 
Energy Regulatory Commission (FERC) have all issued reports citing 
``unreasonable and unjust''--therefore illegal--wholesale electricity 
rates. These agencies have all found that price gouging and market 
manipulation did, in fact, occur and have agreed that some refunds are 
due to the public. What they have not agreed on is the amount of 
refunds due nor the solution to this problem.
    The State of California has identified over $6 billion in 
overcharges. The FERC has ordered $124 million in refunds due to 
overcharges. According to Governor Gray Davis, California has yet to 
receive one cent of these refunds.
    California has requested that cost-based rates be set, even if they 
are only temporary. The FERC first responded with soft price caps 
during energy alerts that had so many loopholes they were useless. 
Finally, just a couple of days ago, the FERC set price caps--now called 
price mitigation--in the entire 11-state, western United States. While 
these soft price caps are a small step forward, the fact that caps are 
necessary is a significant acknowledgement about the breadth and depth 
of this issue. It also recognizes that previous actions--or inaction--
by the FERC have been ineffective in dealing with this crisis.
    There are two key problems with the recent FERC action. First, the 
maximum price caps are soft. This means that a generator may charge 
more for electricity, it simply has to ``justify'' its pricing to the 
FERC. Secondly, and more importantly, it sets the maximum wholesale 
price for every generator based on the costliest and least-efficient 
generating plant. Let's get this straight, we find the most inefficient 
and ineffective plant with the highest cost of production, add to its 
cost a profit and then pay this price to every other electricity 
producer. This is not a solution--it is preposterous. FERC is simply 
continuing to reward the energy cartel with windfall profits for 
gouging consumers in California and the West.
    Similarly, the Administration has refused to act on this crisis. It 
has repeatedly refused to set price caps because ``it would be 
counterproductive. Price caps would discourage conservation and new 
plant construction.'' These reasons demonstrate a complete lack of 
understanding of the situation. When this crisis began, California was 
second in per capita energy consumption. As a result of this crisis, 
Californians now use less energy per capita than any other state.
    But this energy conservation was not due to the high price of 
electricity. Municipal utility districts serve Sacramento and Los 
Angeles, and public power has protected them from volatile electricity 
prices. Californians in areas served by Pacific Gas & Electric and 
Southern California Edison continue to have retail rates set by the 
    Only San Diego experienced the full brunt of deregulated prices 
last summer, and even here the State Legislature imposed retail rate 
caps to protect consumers. So contrary to what the Administration would 
have you believe, California has improved its energy conservation 
despite retail price caps.
    California has also approved 16 generating plants in the past year. 
Some of these plants will start producing electricity this year, some 
next, and some the year after that. This will help increase the supply 
of electricity, and it is disingenuous at best to believe that 
construction will be halted simply because the FERC establishes cost-
based rates. After all, cost-based rates have been the rule for more 
than one hundred years, and utilities have always been among the most 
profitable sectors of our economy.
    I have introduced legislation, HR 268, that would direct the FERC 
to set cost-based wholesale rates if it finds that wholesale rates are 
unjust and unreasonable. Cost-based rates, rates that take into account 
the cost to produce electricity and provide a reasonable rate of 
return, are the only answer to the situation in the West. Cost-based 
rates remove the incentive to ``game'' or manipulate the market. Cost-
based rates remove the incentive to withhold power. Cost-based rates 
provide power producers with a reasonable rate of return. Cost-based 
rates will protect our consumers and our economy.
    Thank you for the opportunity to provide this testimony.

    Chairman Nussle. There is no question that you have been in 
the eye of the hurricane, as they say. I appreciate the 
perspective that you bring to this, and you need to advocate 
what you advocate, how you are advocating it at this point in 
    The rest of us from around the country are trying the best 
we can to learn a couple of different things.
    First of all, what you have just gone through, when did it 
start? How did it start? How do we stop it? How do we prevent 
the rest of the country from going through what you have had to 
go through and endure in San Diego?
    Secondly, how do we come up with a long-term strategy so 
that the rest of the Nation can provide some stability in 
energy overall?
    And, finally, what can we do in the short term to deal with 
your situation?
    There are other committees that are going to be doing that. 
The purpose of our committee hearing today is to understand, 
first and foremost, that it has an impact on the long-term 
stability of our economy and on the long-term impact on the 
budget. And clearly, with your very first statistic that you 
cited where 65 percent of the businesses are at least facing 
some economic disaster this year, possibly even as far as 
bankruptcy, is certainly proof enough to me that this is going 
to have long-term impact.
    It is the price, stupid, you know, in San Diego might be 
true right now, and I do not take anything away from what you 
said. Unfortunately, for many of us in other parts of the 
country, when the prices go back down we forget about the 
problem. We saw that since the Gulf war.
    I remember--but you weren't here then--it was my very first 
vote as a brand new Member, was whether or not to use force in 
the Gulf war. Everybody that day on the floor made promises up 
one side and down the other, the administration at that time--
the new incoming administration at that time, everybody made 
promises that we would never go through this again because we 
didn't want to be dependent on foreign sources of energy and 
that we had to do something for a long-term strategy. And, boy, 
we made all sorts of promises to one another and the Nation 
made promises to one another.
    All of a sudden the Gulf war ended, prices went back down, 
and everybody buried their heads in the sand. Congress, the 
administration, everybody, buried their heads in the sand, and 
nothing has been done. And now all of a sudden we face this 
crisis again because the prices went back up, and everybody 
says, oh, my God, now we have got to have a long-term energy 
    My point is that, while I certainly respect your 
perspective from San Diego that it currently is the price that 
is stupid, I would suggest to you that, at least from my 
perspective, and this isn't to contradict yours, but it is the 
long-term energy strategy that is stupid as far as I am 
concerned. Because we can come up with all sorts of short-term 
figures, and you need one maybe right now, but for the rest of 
us we can't afford to go through the roller coaster that you 
just went through.
    I would be very interested in you showing us, whether it is 
me or anybody else, how price controls produce one kilowatt 
hour of energy or one more gallon of gas or one more BTU, 
whatever unit you want to use. I would be very interested in 
somebody proving to anybody that that produces more. I would be 
happy to----
    Mr. Filner. If I may, Mr. Chairman, your opening statement 
of the problem is exactly right. You pose the right questions 
on what this Congress has to deal with and this administration 
or any administration should have dealt with. And your 
historical point is well taken. You can extend it back to the 
gasoline crisis of 1974.
    But I will tell you, my major point was that it is not the 
just the prices, it is the structure of the market that has to 
be looked at. And it was the structure of the market that made 
sure that all the steps we took after 1974 and after the Gulf 
crisis went for naught. That is, the utilities bought up all 
the cogeneration and stopped all the renewable energy kinds of 
research that was being done, and the car companies stopped the 
stuff that dealt with increasing the fuel efficiency and on and 
on. So it is the structure of the market that I think you have 
to look at.
    But in answer specifically to your question, we are not 
claiming that price controls produces one kilowatt of 
electricity, although I think I can prove that. We are saying 
that, while we are increasing supply, we have got 12 plants on 
line, and while we are urging Californians to conserve even 
more and we are the leaders of the Nation now, it is the prices 
that are killing the economy, literally killing it. I mean, you 
have got scores of businesses in my District that have gone out 
of business. A quarter of a million jobs apparently are 
threatened in the Northwest just by the prices.
    So you have to deal with it as part of an overall policy. 
It is not just, quote, price controls.
    In the market that exists, there is an incentive for 
withholding capacity because the prices spike enormously as a 
result. So it is the lack of price controls that is hurting our 
supply. And because the utilities in our State have gone 
bankrupt, supply was taken out because nobody was being paid 
for their production. So it was the lack of control that 
reduced our capacity, and it was the rush toward regulation 
without really thinking it through in our situation and 
probably the national situation that led to this. We too 
quickly bought the economic benefits of deregulation.
    Especially when you are dealing with, as you earlier said, 
with a basic commodity such as electricity, and I will just end 
with a quote from my Republican colleague, Mr. Hunter. He and I 
have had hearings all through San Diego and Washington. His 
explanation, his description of the problem, I think it serves 
us well: if you are going into a hospital for a 3 p.m. life-
and-death operation, and the hospital administrator came to you 
at 5 minutes to 3 p.m. and says, now what were you going to pay 
for the oxygen? The issue is not supply, it is not cost, the 
issue is control of a basic commodity at the time that you need 
it. That is what is occurring, and therefore the price can be 
anything you want to charge. It has nothing to do with any 
other thing but control of the market at that moment.
    And we will get increased supply, I will tell you, with 
some stability in the marketplace. Nobody is entering the 
market now. You can't.
    Chairman Nussle. Your point is well taken. As I say, you 
are in the eye of the hurricane, and I am not. I don't take 
anything away from what you are suggesting.
    I just want to make sure and for the point of this hearing 
which is to make sure that we do what we can do in order to 
protect our economy nationwide, certainly California being an 
integral part of that. That because of its impact on the budget 
that we don't, as you just counselled us, rush into some buying 
some quick fix or buying some easy answer.
    As you say, we too easily bought deregulation. We too 
easily were lulled to sleep by some particular issue. I don't 
want us to do that from our Iowa perspective, from wherever you 
are from in the country.
    We don't want to go through what California is going 
through, and we don't want to buy what California has had to 
endure. Therefore, as we go through this, we need a long-term 
strategy. We shouldn't buy some quick fix is my only point, and 
I appreciate the fact that you would come today and give us a 
taste of what you have been through, because it clearly has an 
impact on our economy overall and, therefore, on our budget.
    Mr. Spratt.
    Mr. Spratt. Bob, just one question. Thank you for your 
testimony, first of all. It was very grabbing, very effective.
    Do you see any way out for California without an assertive 
role by FERC?
    Mr. Filner. Mr. Spratt, I thank you for your question and 
interest and your leadership. The chairman's statements I think 
are very well on point, and I hope the Congress adopts them as 
the way we approach this.
    We are bringing capacity on line. There are a dozen plants 
on line. We are conserving more than any other State. That is 
what the State has done. Only the Feds through FERC or through 
Congress or through the administration can deal with the 
wholesale prices. That is the only level that has the authority 
to do this. So--FERC must go beyond what it did yesterday. It 
is not sufficient.
    And we are still suffering, by the way. If these prices 
have been illegal since last June, what of all the financial 
hardship that has been wreaked since then? When you have ill-
gotten gains that have been estimated anywhere between $8 and 
$20 billion, that is a lot of money from one State. Those ill-
gotten gains ought to be returned to those who were robbed.
    There was an earlier debate in the colloquy between Mr. 
McDermott and the Secretary. The fact is, not one cent of 
rebate or overcharge has in fact been paid up to this moment.
    Chairman Nussle. Are there any other questions for Mr. 
Filner? Otherwise, I know you have a time constraint.
    We appreciate you coming today and providing your 
testimony. I know it is very near and dear to you and you live 
there. You pay the prices and your constituents do. We 
appreciate the fact that you took time and shared that with us.
    Mr. Filner. I thank you for the comprehensive approach that 
you are taking, Mr. Nussle.
    Chairman Nussle. Thank you very much.
    Now we have the opportunity to hear from three additional 
    First, we have Dr. Glenn Hubbard, who is the chairman of 
the Council of Economic Advisers. We also have with us John 
Hanger, who is the President of Citizens for Pennsylvania's 
Future; and Alexandra Liddy Bourne. I hear it is Sandy, is that 
    Ms. Bourne. Yes.
    Chairman Nussle. I am not sure how you get Sandy out of 
    Ms. Bourne. Out of Alexandra.
    Chairman Nussle. Okay. Your mom gave you that, right? See? 
We all have that.
    Sandy Bourne, who is here. She is the director of the 
Energy, Environment, Natural Resources and Agriculture Task 
Force for the American Legislative Exchange Council.
    All of your testimony will be provided for the record, and 
you may summarize with the time that you have.


    Chairman Nussle. Dr. Hubbard.


    Mr. Hubbard. Thank you very much, Mr. Chairman and 
Congressman Spratt.
    I would like to, first, thank you for holding a hearing 
like this. I think this is a very important issue for the 
economy and for the budget, and I commend you for doing this. I 
apologize that a shift in the President's schedule made me late 
for the first panel.
    Chairman Nussle. You name-dropper you. Thank you for 
    Mr. Hubbard. Let me just go through, if I might, some 
developments in energy markets that have brought us here, talk 
just a little bit about energy prices in the economy, and then 
the administration's view toward a national energy policy.
    I think it is fair to say that much of the higher recent 
energy prices that we have seen have reflected economic growth, 
that is, demand pressures. As in many markets, energy supply 
and demand take time to adjust. While none of us as a consumer 
likes high prices, high prices provide very important 
incentives for changes in producer behavior, including 
increasing supply, and changes in consumer behavior, changing 
habits or conservation.
    With the aid of thoughtful policy, I think most economists 
would tell you that market adjustments will bring forth the 
right amount of adjustment on both of those margins.
    In my testimony I outline current conditions in key energy 
    Just to hit the high points, I think it is fair to say in 
the petroleum market that oil prices are expected to remain 
high through 2002, putting pressure on oil-using sectors.
    In the gasoline market, we have seen recent pressures, but 
market responses including imports of gasoline and increased 
production are helping mitigate.
    We are seeing some regional problems having to do with 
boutique fuels, the fact that refiners face additional 
challenges as a result of various State and local clean fuel 
    In the natural gas market, we have seen significant 
wellhead price increases last winter that have since declined, 
a trend that is expected to continue but declines are expected 
over the next year.
    Electricity, of course, was just touched on in the previous 
testimony. We can come back to it, if you wish.
    The import of all this, I think, for the hearing that you 
are having today, Mr. Chairman, is that these developments in 
energy markets are occurring at a time when we are experiencing 
concern about the economy's strength; and indeed energy price 
increases are one factor in the growth slowdown that we are 
seeing. But why is this?
    Energy price increases have several channels through which 
they can reduce real output in the economy. First, on the 
supply side, by increasing the cost of inputs and leading to 
lower profits, output and capital formation; on the demand 
side, by lowering consumer incomes and consumer spending; by 
reducing real money balances and consumer wealth; by increasing 
imports in some markets, like oil, where imports are at the 
margin, thereby reducing GDP; and if changes in these relative 
energy prices are long lasting, they can trigger quite costly 
adjustments in the economy.
    So on the output side, there are several ways in which 
higher energy prices can be bad news.
    Insofar as inflation is concerned, 7.2 percent increase in 
the CPI over the 1997 to 2000 would have been smaller had it 
not been for the direct contribution from the 11.6 percent 
increase in energy prices over that period. There are also a 
variety of indirect effects of energy price increases in the 
overall CPI, just a longhand way of saying that's a big deal.
    What is the macroeconomic impact of this? Well, the 
International Monetary Fund has done a set of studies on 
effects of oil price shocks on the economy. One summary 
conclusion for you is that a shock of the size that we saw in 
the 1998 to 2000 period could be expected, in and of itself, to 
reduce GDP by just under half a percentage point by the second 
year after a shock and raise core inflation for 4 years after 
the shock.
    In the natural gas market, increases in natural gas prices 
are reflected in overall energy costs and inflation. I think it 
is important though to raise the point that much of what we 
have seen in the debate and experienced in the natural gas 
market has been differential prices for natural gas across 
regions, and this is largely because of infrastructure 
difficulties and I think buttresses the administration's 
argument that substantially more resources need to be devoted 
to enhancing the natural gas delivery infrastructure.
    California electricity also has potential macroeconomic 
implications. There is some concern, although to be candid it 
is modest, on effects on the national GDP, but quite 
significant problems in California. That is, California could 
suffer in terms of current gross state product and, by creating 
a climate that is not particularly friendly for new business 
location, long-term State output effects as well.
    Your interest, of course, is principally in budget effects 
of these energy price changes. On the receipt side, the linkage 
is actually quite straightforward. As energy prices affect 
national incomes and its components, they automatically affect 
receipts. So as an important factor in the growth slowdown as 
energy prices have been, they also are important in affecting 
    On the outlay side, the principal effect would be through 
cost-of-living adjustments, or COLAs. Recall I said that some 
of the run-up in CPI inflation that we saw in the 1997-2000 
period came directly from energy. Some quite significant 
programs, the OASI, Social Security Retirement Program, 
Disability Insurance, Civil Service Retirement, Military 
Retirement, SSI and so on, have COLAs, and hence the energy 
price increases would have a direct effect on the budget.
    In terms of overall energy policy, I think it is important 
to focus on the economic contributions of the President's 
National Energy Policy. Insofar as the subject of your hearing 
is on the level and volatility of prices, I think the energy 
policy report highlights the positive role of markets in 
mitigating price spikes and price volatility.
    The report also highlights the need to repair and expand 
energy infrastructure so that we can enhance the geographic 
scope of supply sources that can respond to market signals. An 
intelligent policy energy mix should be a very important 
component of an overall policy mix to promote productivity, 
growth and higher living standards which is, after all, our 
ultimate goal of economic policy. Bottom line for you, changes 
in energy prices can have a very potent effect on the economy's 
actual potential output and on inflation.
    Those influences carry over to Federal receipts and the 
budget outlays as well. Managing the economic and budget 
impacts of energy price changes is made easier by a sound 
energy policy that enhances the role of markets and market 
    Thank you very much, Mr. Chairman. I look forward to 
answering your questions.
    Chairman Nussle. Thank you very much.
    [The prepared statement of R. Glenn Hubbard follows:]

 Prepared Statement of R. Glenn Hubbard, Chairman, Council of Economic 

    Mr. Chairman, Congressman Spratt, and members of the committee, I 
welcome the opportunity to comment on the effects of energy policy on 
growth of the United States' economy, and to present my views of energy 
policy challenges facing the Nation.


    Before discussing the links between energy policy, economic policy, 
and economic performance, let me sketch briefly the current state and 
future prospects of the energy market. Higher recent energy prices 
reflect, in part, the rapid pace of economic growth we have witnessed 
over the past decade. As in most markets, energy supply and demand take 
time to adjust. Although no consumer likes high energy prices, higher 
prices do serve the useful function of signaling the need for 
exploration, development, and production by producers and changes in 
consumption by consumers. With the aid of thoughtful policy, market 
adjustments will bring forth additional supplies and improve efficiency 
in consumption. For example, improved technologies would enable us to 
increase supply cleanly, while efficient consumption would improve the 
environment. Distorted market signals can lead to shortages, high 
prices, and pollution.
    Oil is a vital input to our economy. The Energy Information 
Administration (EIA) expects oil prices to remain high through 2002, 
affecting the cost of transportation, heating, electricity generation, 
and industrial production. High oil prices mean high prices for 
petroleum products, such as gasoline, diesel fuel, heating oil, jet 
fuel, and propane. In May, the U.S. benchmark West Texas Intermediate 
crude oil price averaged about $29 per barrel. The tight gasoline 
market helped increase demand for crude oil, thereby pushing its price 
higher as concerns grew that the approaching summer driving season 
would face price instability similar to that in 2000. The EIA projects 
that oil prices will rise this summer by another $2 to $3 per barrel 
from their May levels. These higher prices are expected to be 
maintained for the rest of the year, in part because OPEC members have 
announced that their production quotas will not increase this summer. 
The recent decision by Iraq to halt oil exports, which were about 2 
million barrels per day, was slow to elicit a response in spot and 
futures markets for oil. This may have been due to initial questions 
about the credibility of Iraq's statement and/or market expectations 
that OPEC members may change their supplies. Perhaps due to changes in 
these market perceptions, spot and futures prices have since risen.
    The rapid increase in wholesale gasoline prices led to widespread 
increases in U.S. pump prices. It also generated record spreads in 
April of spot gasoline price over crude oil cost. Relatively low levels 
of gasoline inventories until May of this year may have contributed to 
the duration of the recent price increase. These increases in spreads 
have, however, encouraged suppliers to accelerate production and 
increase imports to take care of existing or expected shortfalls in 
product availability. Consequently, retail gasoline prices have fallen 
from their peak, and total stocks have since risen substantially--to 
levels above those at this time last year. Refiners face additional 
challenges as a result of various state and local clean fuel 
requirements for distinct gasoline blends (``boutique fuels''). These 
different requirements sometimes make it difficult, if not impossible, 
for regions to draw on gasoline supplies from nearby areas or states 
when the local supply is disrupted. When there is a shortfall of supply 
relative to demand, prices will increase until supply increases and/or 
demand falls enough to regain balance between the two. Therefore, to 
the extent that the existence of ``boutique fuels'' limits potential 
sources of additional supply when prices rise, price spikes will be 
greater than they would be if gasoline blends across geographic regions 
were more similar, or were given greater flexibility to be used as 
substitutes for each other.
    Between October 2000 and March 2001, natural gas prices at the 
wellhead averaged $5.74 per thousand cubic feet, more than double the 
price over the same period 1 year earlier. Natural gas prices began 
climbing last summer primarily in response to consumption increases 
coupled with tightened supplies, including low levels of underground 
gas storage that would be available for the heating season. Following 
the largest winter withdrawals since the 1995-1996 season gas storage 
levels ended the heating season 36 percent lower than last year. As a 
result of record injections since the beginning of the refill season, 
as of June 8 gas storage levels were less than 1 percent below the 6-
year average level. In 2001, the annual average wellhead price is 
projected by EIA to be $4.75 per thousand cubic feet. Next year, EIA 
expects a dip in the average annual wellhead price to $4.24 as 
increases in production and imports needed to keep pace with the 
rapidly growing demand will be furnished, for the time being, by 
relatively expensive supplies for gas due to rising marginal production 
    Spot prices for electricity and natural gas have been high in 
California compared to the rest of the country. Spot prices for 
electricity in the California-Oregon border market have recently been 
about four times higher than spot prices prevailing in the 
Pennsylvania-New Jersey-Maryland market.
    Electricity reserve margins remain quite slim in the California 
system as a whole. In their summer assessment report published in late 
March, the California Independent System Operator (CAISO) estimated 
that almost 3,400 MW of new generating capacity will come online by 
September. However, the new capacity will not be able to satisfy the 
growing demand for electricity. The CAISO estimated that capacity 
deficiency, inclusive of imports, will range from over 3,600 MW in June 
to 700 MW in September. Given this forecast, the CAISO expects that 
load curtailments (blackouts) will occur this summer.


    These developments in energy markets are occurring at a time in 
which we are experiencing concern about the strength of the economy. 
Beginning in the fourth quarter of 2000, GDP growth declined from the 
unsustainably high rate of 4.2 percent recorded in the first three 
quarters. Real GDP growth slowed to 1 percent in the fourth quarter, 
and 1.3 percent in the first quarter of 2001. The Conference Board's 
index of coincident indicators peaked last September at 116.6, dipped 
to 116.3 in November, and has since risen to 116.5 in April.
    The slowdown in the pace of economic growth reflects myriad 
factors. Consumption, which accounts for approximately two-thirds of 
aggregate demand, has held up relatively well during the recent growth 
slowdown despite the reduction in wealth that has accompanied the 
decline in equity prices. However, business fixed investment spending 
overall has stagnated over the past two quarters. Equipment and 
software growth declined noticeably in the fourth and the first 
quarters. In contrast, investment in nonresidential construction is up 
sharply, with first-quarter real investment 10 percentage points above 
its level a year ago. This growth is being led by construction in 
energy extraction industries, and is likely to continue as more 
electricity generating plants are built.
    Also, the rising cost of energy over the past 2 years has acted as 
a kind of tax on both consumers and those firms that are not energy 
    Despite the deceleration, it is unlikely that the U.S. economy is 
in a recession, as real growth has been and is anticipated to remain 
positive. The June Blue Chip consensus of economic forecasters foresees 
real GDP to grow 1.8 percent during the four quarters of 2001, and 3.4 
percent during 2002. Nevertheless, there are some factors that threaten 
to delay a full recovery in growth.


    As noted earlier, one area of concern is the impact of high energy 
prices. Although the share of households' budgets devoted to energy 
needs are not at historical highs, the elevation of relative prices 
comes at a time when the economy is fragile. Firms face increased 
energy costs in a period of slackening demand. The sharp rise in energy 
costs reduced profit margins for nonfinancial, nonenergy corporations 
in the fourth quarter. A substantial portion of the rise in total costs 
of nonfinancial, nonenergy corporations between the second quarter of 
last year and the first quarter of this year reflected the increase in 
energy costs. Before discussing specifics of how developments in each 
energy market may affect the economy, it is useful to review briefly 
the broad mechanisms by which changes in energy prices affect two key 
measures of economic performance: GDP growth and inflation.
    As with price increases in any other market, an increase in the 
price of energy goods may reduce real GDP growth through six channels:
     Increasing the cost of production inputs, thus leading to 
lower profits, output, and capital formation
     Lowering the real income of consumers, thereby dampening 
consumer spending
     Lowering the level of real money balances (money supply 
divided by price level) by raising aggregate price levels. If the money 
supply were to remain constant, interest rates would rise in order to 
maintain equilibrium between money demand and supply. This, in turn, 
would have a depressing effect on investment holding all else constant.
     In the case of oil, as with any other product of which the 
United States is a net importer, increased prices affect the purchasing 
power of our national income through their impact on our terms of 
trade. The increased price of imported oil forces us to devote more 
production to exports as opposed to satisfying domestic consumption of 
goods and services, even if we consume the same physical quantity of 
foreign oil as before.
     There is also an indirect impact upon U.S. growth through 
third-country effects. If an oil price increase negatively affects 
growth in other countries, they will consume less. This could lower 
demand for imports from the United States.
     If changes in the price of energy relative to other goods 
are expected to be long-lasting, these changes will trigger adjustments 
in the economy--shifts of resources among sectors--that entail real 
adjustment costs.
    Both directly and indirectly, energy price increases may also bring 
about changes in the aggregate price level (inflation). As of December 
2000, the prices of refined oil products, natural gas, and electricity 
contributed 3.8 percent, 1.4 percent, and 2.5 percent respectively to 
the Consumer Price Index for all Urban Consumers (CPI-U). In sum, 
energy products contributed 7.7 percent to the CPI-U level. Thus 
changes in energy prices have the potential to directly affect the CPI-
U level.
    Energy is, of course, an important input in many goods and services 
provided in our economy. Its price also contributes to individuals' 
perception of their cost of living--thereby affecting efforts by some 
to gain wage concessions. As a result, an increase in energy costs can 
filter through to raise the price of other goods and services, 
indirectly putting upward pressure on the CPI-U. The strength of these 
effects varies depending on certain characteristics of the economy. One 
key determinant is how competitive markets are in those sectors in 
which energy products constitute an important input. Second, the 
inflationary impact of higher energy prices can vary across countries 
depending on the bargaining power of labor, relative to management. 
Finally, reactions of monetary policy to energy price changes will also 
influence the response of consumer prices to higher energy prices.
    While the historic direct contribution of energy price changes to 
changes in the CPI-U can be determined by examining data, the 
mitigating factors cited above make a determination of the overall 
effect of energy price increases on the price level difficult.


    I would now like to address the impact of developments in each of 
the key energy markets: petroleum, natural gas, and electricity.
    Petroleum. From 1998 to 2000, the prices of many energy products 
rose sharply from their low levels--crude oil cost as little as $11 per 
barrel in December 1998, when it had cost $20 per barrel for much of 
1997. To assess the effect of this price increase on the economy, it is 
important to make the distinction between permanent and temporary 
energy price increases. To the extent that it is unlikely that the oil 
prices in 1998 were long-term equilibrium prices, it may be more 
reasonable to use the $20 price as a baseline. Evaluated from this 
perspective, the relevant price increase experienced since 1997 (that 
might be expected to persist for some years) was about $10 a barrel or 
approximately 50 percent (the price of West Texas Intermediate has 
recently been approximately $29 per barrel).
    A recent International Monetary Fund (IMF) analysis\1\ of oil price 
shocks on the US economy determined that a price shock of this 
magnitude results in a 0.2 percentage point reduction in output below 
what it otherwise would have been in the first year after the shock, 
and a 0.4 percentage point reduction in the second year, with the 
effect diminishing thereafter. The shock adds 0.2, 0.7, and 0.5 
percentage points, respectively, to core inflation in the 3 years after 
the shock (overall inflation, which incorporates energy prices, will be 
much higher the first year after the shock). Another macroeconometric 
model suggests that an increase of $10 per barrel yields a 0.4 percent 
reduction in output relative to baseline in the first year. While the 
models differ in their exact predictions, they yield effects of similar 
magnitude. Given relative stability in oil prices since their peak in 
the latter part of 2000, barring future shocks, we anticipate the 
effects of the oil price increase should dissipate over the next year.
    \1\ Benjamin Hunt, Peter Isard and Douglas Laxton, 2001, ``The 
Macroeconomic Effects of Higher Oil Prices,'' IMF Working Paper WP/01/
    The most recent price pressures in the petroleum market have been 
in gasoline prices, which brought about concerns with respect to 
possible effects on consumer spending, and thereby on the overall 
economy. A rise in these prices acts as a tax on households' incomes 
and spending. The surge in wholesale and retail gasoline prices in 
recent months has been attributed less to changes in crude oil prices 
than to, among other factors, low gasoline inventories earlier this 
spring and a shortage of refinery operating capacity in the United 
States. Thus the economic effect of recent increases in gasoline prices 
(and natural gas prices--see below) has been mostly redistributive 
within the United States. The resulting increased margins--or scarcity 
rents--for suppliers of refined products provide important signals to 
potential suppliers, eliciting responses (both increased imports and 
domestic production) that have already resulted in greater available 
supply and reduced prices. Furthermore, higher margins encourage 
investment in new refining capacity after many years in which low 
returns on investment in the refining industry likely discouraged such 
    The impact of crude oil price increases may also affect the United 
States through its effect on trading partners. The IMF analysis cited 
above suggests that an increase in the price of a barrel of oil from 
$20 to $30 would result in a 0.1 percentage point reduction in Eurozone 
output in the first year after the shock, and a 0.4 percentage point 
reduction in the second year. It suggests Japan would be less 
significantly affected--no impact in the first year and only a 0.1 
percentage point reduction in output in the second year. This may 
affect the United States to the extent that these impacts on our 
trading partners' output reduce their demand for imports from the 
United States.
    Natural Gas. The rise in natural gas prices in the last quarter of 
2000 contributed directly and indirectly (through its effect on the 
cost of electrical power generation) to much of the rise in overall 
energy costs for nonfinancial, nonenergy corporations. However, because 
we import little natural gas, higher prices are largely redistributive 
in nature--resulting in a transfer of income within the United States 
from natural gas users to natural gas producers. The increased 
expenditure on natural gas imports in 2000 due to prices being above 
1997 levels was roughly one-sixth to one-seventh that on oil 
imports.\2\ Moreover, it is important to recall that virtually all of 
the 16 percent of natural gas consumption that is accounted for by 
imports originates in Canada, a large importer of U.S. goods. Thus the 
net ``withdrawal'' of spending from the U.S. economy is made smaller 
since a large proportion of the resulting Canadian spending is on U.S. 
exports. Nonetheless, these higher prices are still likely to weigh on 
the economy in the short run because the increase in capital spending 
by energy producers is unlikely to offset the drag on spending by 
energy consumers.
    \2\ This calculation compares the values for the following 
calculation for oil and natural gas: quantity imported in 2000 times 
the absolute change in price per unit of quantity between 1997 and 
    Natural gas prices are higher relative to trend all over the 
country. However, during the past few months, they were highest in 
California. Even there, however, a recent study published by the 
Federal Reserve Bank of San Francisco notes that ``* * * although 
rising natural gas prices have hurt some producers and consumers in the 
Twelfth [Federal Reserve] District, there is little evidence that 
rising costs have significantly slowed economic growth in the region.'' 
Further, the study observes that expenditures on natural gas in the 
Twelfth District amount to less than 1 percent of Gross State Product 
    \3\ Mary Daly, ``Economic Impact of Rising Natural Gas Prices,'' 
Federal Reserve Bank of San Francisco Economic Letter 2001-04 (February 
9, 2001)
    It is also of interest that some firms stopped production, not 
because they could not afford to purchase natural gas, but because they 
had forward contracts for natural gas, and found it more profitable to 
resell the gas than to use it to produce their goods.
    The differences in prices for natural gas observed across regions, 
and occasional interruptions in gas supply, buttress the 
Administration's argument that more resources need to be devoted to 
enhancing the Nation's natural gas delivery infrastructure. 
Accordingly, the National Energy Policy Development Group has 
highlighted this policy measure in its report.
    California and the Electricity Situation. Nowhere is the concern 
about the impact of the electricity market on the economy greater than 
in California. Most analysts have concluded that the reductions in 
electricity consumption (due to rolling blackouts and voluntary 
outages) have thus far had only a small impact on California GSP, and 
hence national GDP, because of ample opportunity to reallocate 
production and consumption activities around the outages.
    Unfortunately, much of the significant additions to capacity that 
are currently being planned or are under construction will not be in 
place in time for the rising seasonal demand this summer which 
threatens shortfalls and blackouts. Even more unfortunate are press 
reports that planned capacity may be canceled due to uncertainty 
regarding the regulatory environment in California. The likely impact 
of the outages during the upcoming summer months is difficult to 
determine given the vagaries of the weather and the uncertain effect of 
the rate structure that the California Public Utilities Commission has 
implemented. Gauging from the past, the damage from summer blackouts is 
likely to be limited if firms with critical needs for uninterrupted 
power install backup generators; some reduction in demand results from 
higher retail prices; and we experience a moderate summer. California's 
third-quarter GSP growth might be reduced noticeably, however, if an 
unseasonably hot summer were to be combined with limited response to 
the change in retail prices.
    As long as California and Federal policies do not discourage new 
electricity generation, the imbalance should only be a concern in the 
short run. It is nonetheless a concern for the national economic 
outlook. The major impact on California will be felt in the longer 
term, as firms make decisions regarding where to locate. Firms that 
depend on a stable, uninterrupted supply of electricity, or use energy 
as a key component of their production process, may opt for locating 
outside of California.


    In addition to having an impact on consumer demand, business 
investment, and possibly exports, changes in energy markets will also 
affect government outlays and receipts. One important channel through 
which energy price increases will impact outlays is through their 
effect on the CPI-U and thus on Cost of Living Adjustments (COLAs). 
COLAs affect payments for Social Security, Disability Insurance, Civil 
Service Retirement, Military Retirement, and Supplemental Security 
Income; as well as many smaller programs. While the total contribution 
of energy price increases to change in the CPI-U is uncertain, given 
the size of these outlays, even small contributions to changes in the 
overall CPI-U would have nontrivial absolute impacts on outlays. 
Finally, inasmuch as increased energy prices reduce national income, 
government receipts will also be affected.

                             ENERGY POLICY

    The President's National Energy Policy lays out a comprehensive 
blueprint for addressing energy problems facing our country. There are 
many excellent ideas in the National Energy Policy, but I would like to 
emphasize two economic contributions. First, and perhaps the most 
important, markets have, in general, done an excellent job providing 
energy to alleviate scarcity and mitigate price spikes. Where possible, 
market-based solutions will provide the best response to our energy 
needs. However, where market distortions occur, action may be necessary 
to meet the challenge of increasing supply and reducing demand. Relying 
on market signals to allocate resources does not require abandoning 
vulnerable groups. Because there is a significant potential for energy 
problems throughout the remainder of this year, the effects of higher 
market prices can be mitigated for those people who need help through 
programs like the Low Income Home Energy Assistance Program (LIHEAP) 
and weatherization assistance, which also promotes conservation. 
Second, an important policy challenge is to repair and expand our 
energy infrastructure. This point relates to the first in that an 
improved infrastructure enhances the geographic scope of potential 
sources of supply that can respond to market signals in any particular 
    Markets have shown the powerful ability to send signals to 
alleviate scarcity by bringing about supply and demand responses. 
Therefore one of the contributions of the President's Energy Plan is to 
ensure that government policies in the furtherance of valid policy 
aims, such as environmental protection, achieve these aims while 
minimizing the extent to which they delay appropriate responses to 
market signals.
    Our current network of electric generators, transmission lines, 
pipelines, and refineries that convert raw materials into usable fuel 
is in need of repair and expansion. The natural gas distribution 
system, likewise, is hindered by an aging and limited network of 
pipelines. Meeting the anticipated growth in demand will require some 
38,000 miles of new gas pipelines, along with 263,000 miles of 
distribution lines. Similarly, an antiquated and inadequate 
transmission grid hinders our ability to use electricity generation 
surpluses in some regions to alleviate shortages in others. A crucial 
transmission bottleneck in the middle of California limits the amount 
of available power in the south that can be shipped to the north during 
emergencies. While some of the concerns about future energy prices 
arise from the balance between anticipated available supply and demand 
at the national level, a number of local energy markets make up this 
aggregate national energy market. Even if the supply is plentiful at 
the aggregate level, the lack of adequate infrastructure can cause 
unnecessary and harmful local price spikes when local supply falls 
short of local demand, and infrastructure limits constrain the influx 
of additional supplies from other areas. In addition to the issue of 
``boutique'' fuels mentioned earlier, one additional example is the 
case of electricity in New York City. The tight match there between 
available supply and peak demand that some observers expect will set 
the stage for relatively high wholesale electricity prices and 
potentially significant price spikes. Transmission constraints into the 
city limit the extent to which prices there can be mitigated by 
expected surplus capacity in the rest of the state, and additional 
surplus supply from outside the state. With these concerns in mind, the 
President's National Energy Policy makes numerous recommendations with 
an aim toward improving this infrastructure.
    Energy problems facing our economy have been building for years and 
families and businesses are paying the price for higher energy costs. 
Only a concerted, focused and forward-looking effort by both the public 
and private sectors will succeed in strengthening America's response to 
the energy problems now facing us.

                       LONG-TERM ECONOMIC OUTLOOK

    While we have talked in depth about the effects of developments in 
energy markets on the economy, it is important to recognize that most 
of these effects are short-run phenomena. While this is not to say they 
are unimportant, it is important to remember that they do not drive the 
long-run growth potential of our economy. Over the longer term, the 
prospects for the U.S. economy remain bright. I say this because of the 
acceleration of trend productivity growth observed over the last few 
years, and the accompanying rise in the growth rate of potential 
output, making possible rising living standards and low inflation. Over 
the 1973 to 1994 period, the average annual growth rate of labor 
productivity in the nonfarm business sector was 1.4 percent. From 1994 
to 2000, it was 2.5 percent. Over the same period, manufacturing 
productivity grew at 4.7 percent, versus the 2.6 percent observed in 
the earlier period.
    The latest release on productivity growth has given some observers 
pause for thought. Two cautionary points are in order. First, labor 
productivity is pro-cyclical, so that some reduction in productivity 
growth is to be expected. Second, the productivity growth rate for the 
first quarter is likely to be downwardly biased, because of the 
difficulty in measuring self-employed hours. Subsequent observations on 
productivity are likely to reaffirm a higher trend growth rate.
    Rapid productivity growth, upon which our future prosperity rests, 
does not occur in a vacuum. It depends upon the appropriate general 
policy framework and energy policy framework. These frameworks require 
that firms face the correct incentives to invest, and households face 
market signals in allocating their expenditures.


    Changes in energy prices exert important influences on the 
economy's actual and potential output growth and inflation. These 
influences carry over to Federal receipts and outlays. Managing 
economic and budgetary impacts of energy price changes is made easier 
by sound energy policy that enhances the role of market forces.
    Thank you, Mr. Chairman. I would be happy to answer any questions.

    Chairman Nussle. Mr. Hanger.

                    STATEMENT OF JOHN HANGER

    Mr. Hanger. Thank you, Mr. Chairman. I appreciate the 
invitation from you and the members of the committee, and also 
I appreciate the assistance of staff.
    I served on the Pennsylvania Public Utility Commission from 
1993 to 1998, and in 1992 this Congress passed the Energy 
Policy Act of 1992 which deregulated the price of electric 
generation in the wholesale markets in all 50 States. All 50 
States have a form of electric deregulation that is in the 
wholesale market, and in Pennsylvania we determined that the 
world had very seriously changed and potentially there were a 
lot of opportunities as a result of that change.
    By 1996, the legislature and the PEPCO utility commission 
had worked to formulate a plan for Pennsylvania's restructuring 
of its electric industry, and I am here today to highlight some 
of the events and successes, quite frankly, that have been 
experienced in Pennsylvania.
    Pennsylvania I think has gotten very little national 
attention. Perhaps it is because we are the equivalent of a 
passenger liner that has, so far at least, safely gone across 
the Atlantic Ocean. We didn't hear the iceberg, and California 
and some other places have had more serious problem s. And, 
understandably, bad news seems to get a lot of the attention, 
as opposed to some of the good news.
    In Pennsylvania, the market fully opened on January 1st, 
1999. We passed our Electric Competition Act in 1996, the same 
year that California did. So far, over 787,000 customers have 
switched to competitive suppliers. That is more customers being 
served by competitive suppliers, and these are retail 
customers, than all other States combined.
    Thirty-three percent of Duquesne's residential customers 
have switched. Duquesne is the utility that serves the 
Pittsburgh area. Thirty-four percent of PECO energy's 
residential customers have switched. PECO energy is a utility 
that serves the City of Philadelphia and the surrounding 
    Eight thousand megawatts of new generation will be added in 
the Pennsylvania Jersey power pool by 2002, so we have a 
significant amount of new generation that has been added, and 
none of that is through a captive ratepayer base. These are 
merchant plants that are being built with private investment, 
and there is no guarantee of return, but nonetheless there is a 
very significant amount of new supply that is being built.
    I am glad to say one of Penn Future's major purposes is to 
improve Pennsylvania's environment and economy, that this new 
generation is 99 percent cleaner in emissions when looking at 
nitrogen oxide and sulfur dioxide, and 33 percent cleaner on 
carbon dioxide than many of the existing coal-fired plants that 
were, in some cases, operating before the passage of the 
original Clean Air Act.
    Competitive retail prices, compared with what customers 
were paying utilities, are anywhere from about one-half of a 
cent per kilowatt hour to as much as 3.65 cents per kilowatt 
hour below the monopoly rate.
    Now, frankly, customers aren't receiving the full benefits 
of the competitive market as a result of stronger cost policies 
that were put in place, and Pennsylvania is giving both 
customers and its utilities a long transition period to make 
this passage from 60 years of monopoly regulation to, 
hopefully, a fully competitive market successful, and utilities 
have so far managed to make this passage well in Pennsylvania.
    The bond ratings have been unaffected. They have in some 
cases sold some generation, but the utilities are free to 
decide whether they sell generation or not. There is no mandate 
to divest generation. Utilities are being completely free to 
decide what financial instruments they will use to buy or sell 
power. They are free to buy power on the spot market or use 
future contracts or any kind of financial instrument, including 
very long-term contracts.
    As a part of the bargain to sort of offset the government 
intervention in the market on behalf of the shareholder and pay 
over $11 billion of strain of cost to those shareholders, rates 
are capped during the period of the strain of cost recovery. So 
Pennsylvania consumers have rates capped up to 2005. Savings so 
far from rate cuts and shopping savings are over $2.8 billion 
in Pennsylvania, and that is just through the Year 2000.
    Again, every customer in Pennsylvania is either paying less 
or no more than they were paying on January 1st, 1997, 5 years 
later. Frankly, this winter, electricity in Pennsylvania was a 
bargain. Our State average rate, which was 15 percent above the 
national average in the mid-nineties, is now 1 percent below 
the national average.
    We believe we have got a positive impact on our State 
economy from our electric policy. Duquesne's customers will 
receive a 21 percent rate cut. That is for utilities serving 
Pittsburgh next year, when the strain of cost charges come off 
the bill. And that is only part of the good news that will come 
into the Pittsburgh market next year.
    I was very impressed, Mr. Chairman, by your interest in 
diversifying fuel supply and encouraging renewable and energy 
efficiency certainly. That is one of our goals in Pennsylvania. 
Frankly, one of the reasons we have gone to a policy plan is 
the old regulated monopoly system really underinvested in 
energy efficiency and totally underinvested in renewals. And we 
have now a burgeoning wind industry in Pennsylvania. We never 
had any wind power. We now have nearly 100 megawatts of wind 
power that is either under construction or has purchase power 
agreements that will allow for its construction, and that 
should be operating by 2002. We believe in Pennsylvania it is 
actually quite possible to talk about 1,000 megawatts of wind 
being built in the next 10 years.
    I was looking at Secretary Blake's chart net additions, and 
he showed 10,000 megawatts of net additions in the year, I 
believe, 2000. The U.S. wind industry put up 700 megawatts in 
the year 2000. That is roughly 7 percent of the net additions, 
and they are going to be putting up 1,500 megawatts this year 
of the net additions of about 25,000.
    As you can see in one of the charts that I have handed out 
here or made available for the record, that the competitive 
prices are well below the utilities' to start monopoly 
generation rates. And the full benefit of those prices are 
working their way through to customers as the strain of cost 
charges come off.
    I do believe there are challenges in restructuring this 
market, and, frankly, Pennsylvania is taking anywhere from 12 
to 14 years to complete the transition entirely. This is an 
historic transition, and it must be done carefully, must be 
done thoughtfully, and, frankly, nobody knows all the answers 
at any one time. But we are learning in Pennsylvania, and we 
realize that we are at sea, and there are icebergs out there, 
and you have to be watchful.
    The forward prices and PJM have been high, nowhere near as 
high, I am glad to say, as on the west coast or other parts of 
the country. One of the concerns that those forward prices 
reveal to us in Pennsylvania is the inability of customers to 
change their demand in real time. Electricity essentially is a 
product that customers buy before knowing the price. They open 
up the bill 30 days after they use it. This makes electricity 
very unlike gasoline or the price tag on a pair of shoes or 
anything else in the marketplace.
    We need to increase the ability of customers to see prices 
before they make consumption decisions, and that in order to do 
that, we have to pay attention to the demand side 
infrastructure as an appropriate emphasis in the national 
energy plan on building.
    I would put more emphasis on renewables and energy 
efficiency than the Vice President and President have done, but 
I was disappointed to see too little emphasis on the demand 
side of the infrastructure. We need to make the time of use 
meters, appliance control devices, equipment that can give 
customers the ability to, frankly, be wise shoppers, and every 
house has all had a meter. The problem right now is that meter 
is an antiquated 40-year piece of technology. It does not 
record usage in hourly increments. If we can get a small amount 
of demand responding to prices in real time, we will break what 
I call the hockey stick.
    This is what the price curve looks like on very hot hours 
of the year, and there are typically about 100 hours in the 
course of a year when the prices of electricity literally just 
shoot right up, and it is because customers do not see that 
demand or do not see those prices in real time. In order to 
break this hockey stick, we do not have to have every Social 
Security recipient or every small business customer with a real 
time meter watching the price of electricity. We need a 
relatively small number of customers who have the capability to 
do that. Indeed in our marketplace we have calculated that a 1 
percent shift in demand in real time, in other words 1 percent 
of the demand going offline or being reduced, reduces the peak 
spot price by 10 percent. So we can break that hockey stick by 
perhaps getting 4 or 5 percent of the customer demand able to 
remove in real time, and they can profit from doing so.
    This is not a question of driving customers to bankruptcy 
or forcing scarcity or rationing on customers. This is a matter 
of giving customers the ability to profit from changing how and 
when they use electricity. By doing so they can sharply 
discipline the prices in the wholesale market.
    Frankly, we have concluded in Pennsylvania that wholesale 
markets will not work properly unless customers have increased 
real time demand responsibility. And no State, Pennsylvania 
included, has adequately addressed this matter. I think 
increased demand response is so important to the functioning of 
the electric markets at the wholesale and retail level that it 
is something that the Congress and the United States ought to 
address as well.
    In addition to that, the Congress of the United States 
needs to address the failure now after 9 years since the 
passage of the Energy Policy Act to have workable wholesale 
markets. Markets are horribly Balkanized. Frankly, if we 
organized tomato markets or corn markets or car markets in the 
same way we have organized electric markets, we would have a 
disaster in any of those products or services. We have a series 
of hundreds of individual electric markets with individual 
ideosyncratic rules, separate tariffs, separate charges that 
prevent the free movement of electricity.
    This is a responsibility, I believe, of the Congress of the 
United States and the Federal Energy Regulatory Commission. It 
is a responsibility of those entities because of the interstate 
commerce clause. The 50 States are supposed to be a free trade 
zone for movement of products and services. In electricity we 
are so far removed from significant free trade zones that it is 
imperiling the Nation's economy and will continue to imperil 
those States who have deregulated at the retail level.
    The last thing I want to say is in our experience in 
Pennsylvania, you cannot have a competitive electric market 
simply by having a competitive wholesale market. You must have 
a both a competitive wholesale market and a competitive retail 
market. I would agree that it must be genuinely competitive. A 
cartel, a monopoly or an oligopoly is not going to allow for 
competitive pricing at the wholesale levels or the retail 
    But I am concerned that we have a policy that is emerging 
in this country that is neither fish nor fowl. In 1992, we came 
up to the edge of the river, and we decided to cross the river. 
We got on our horse in the middle of the river, frankly. That 
was when we deregulated the price of electricity in the 
wholesale generation market. We have still yet to cross the 
river. We are still in the river. And that is because we 
haven't created liquid effective wholesale markets, and it is 
because we don't have effective competitive retail markets. It 
is the wholesale market that sets the supply curve essentially, 
and it is the retail market that sets the demand curve. Now, 
unless we can get the supply curve and demand curve both 
responding to price in real time, this Nation is going to have 
problems with electric supply.
    In my testimony I have provided over 30 other lessons 
learned which I have not touched upon. I would ask that they be 
incorporated in the record.
    Chairman Nussle. Is that this packet?
    Mr. Hanger. I think that is the short version.
    Chairman Nussle. Oh. We will put both the short and long 
    Mr. Hanger. Thank you.
    [The prepared statement of John Hanger follows:]

  Prepared Statement of John Hanger, President and CEO, Citizens for 
                         Pennsylvania's Future

                           COMPETITIVE MARKET

    5,370.40 megawatts of load have switched to competitive suppliers:
    787,846 customers have switched
    708,071 residential customers have switched
    77,421 commercial customers have switched
    2,354 industrial customers have switched
    33.40 percent of Duquesne's residential customers have switched
    34.10 percent of PECO's residential customers have switched
    8,000 megawatts of new generation will be added in PJM market by 
    For most residential customers, without stranded costs, competitive 
rates are from 0.50 cents to 3.65 cents below historic monopoly rates.

                                                                  Residential  Commercial  Industrial    Total
Allegheny Power.................................................       2,152        1,343           9      3,504
Duquesne Light..................................................     175,160        7,964         271    183,395
GPU Energy......................................................      35,973       10,478         666     47,117
PECO Energy.....................................................     467,424       41,045       1,052    509,521
Penn Power......................................................       8,377        1,192          44      9,613
PPL.............................................................      17,278       15,327         312     32,917
UGI.............................................................       1,707           72           0      1,779
      Total.....................................................     708,071       77,421       2,354    787,846
Pennsylvania Office of Consumer Advocate 04/03/01.

                                                                  Residential  Commercial  Industrial    Total
Allegheny Power.................................................        0.40         1.60        8.70       0.50
Duquesne Light..................................................       33.40        13.90       17.30      31.40
GPU Energy......................................................        3.90         8.30       13.30       4.50
PECO Energy.....................................................       34.10        27.50       32.80      33.50
Penn Power......................................................        6.30         6.70       19.60       6.30
PPL.............................................................        1.60        10.30        5.80       2.60
UGI.............................................................        3.10         1.00  ..........       2.90
Numbers courtesy of the Pennsylvania Office of Consumer Advocate.


     Utilities' bond ratings were not affected by transition.
     Utilities were allowed an opportunity to recover 100 
percent of approved, not claimed, stranded costs.
     GPU and Duquesne have divested about 5000 megawatts of 
     No utility was required to divest generation.
     All utilities are free to use any financial instrument to 
buy or sell power, including forward contracts.
     Nearly all charges for stranded costs and other transition 
costs expire from 2002 to 2010.
     PECO Energy merger completed; GPU merger pending.


     Consumer savings totaled $2.84 billion by 2000 from rate 
cuts and shopping savings.
     Most consumers received from a 2 percent to 8 percent 1-
year rate cut.
     PECO customers receive rate cuts from 1999 to 2005.
     Total rates are capped at January 1, 1997 levels until at 
least 2005 in many cases.
     Generation rates are capped at set levels until 2010 in 
most service territories.
     Duquesne customers will receive approximately a 21 percent 
rate cut in early 2002 when stranded cost charges expire.


     Budgets for low-income assistance programs have nearly 
quadrupled from pre-competition levels.
     Budgets for energy conservation targeted at low-income 
families have quadrupled.
     Renewable energy and cleaner energy products are 
available. 80,000 customers have switched to such products.
     Pennsylvania has had its first and second wind farms 
developed and should have 100mW of wind generation operating by 2002.
     Four Sustainable Development Funds have been formed with 
$75 million of funding to support clean energy initiatives.
     Dominating the new generation market is gas-fired 
generation. It is nearly twice as fuel efficient and 99 percent cleaner 
on NOx and SOx emissions than many old coal-burning plants.

                                      PENNSYLVANIA WIND ENERGY DEVELOPMENT
                                                                                               Power Purchaser/
            Existing                   Operator             Online             Capacity              User
Hazleton, Luzerne County........  Energy Unlimited..  December 1999.....  0.13 mw, 2          Community Energy,
                                                                           turbines.           Inc.
Garrett, Somerset County........  National Wind       May 2000..........  10.40 mw, 8         Green Mountain
                                   Power.                                  turbines.           Energy

                                        NEW WIND PROJECTS IN PENNSYLVANIA
             Project                   Location             Status             Capacity           Online Date
Mill Run Wind Project...........  Fayette County....  Construction        15.0 mw...........  Late 2001
                                                       August 2000.
Somerset Wind Farm..............  Somerset County...  Planned...........  9.0 mw............  December 2001
Waymart Wind Farm...............  Wayne County......  Proposed..........  52.0 mw...........  Late 2001/Early

                                        NEW WIND PROJECTS IN PENNSYLVANIA
       Project Developer                Location               Status            Capacity         Online Date
Global Winds Harvest, Inc......  Bear Creek & Jefferson  Proposed.........  18.2 mw..........  2002
Atlantic Renewable Energy Corp./ Meyersdale............  Proposed.........  30.0 mw..........  TBD
 Zilkha Renewable.
Keystone Wind..................  Somerset County.......  Proposed.........  25.0 mw..........  TBD
Energy Unlimited...............  Mountaintop...........  Proposed.........  16.9 mw..........  TBD

                                                 [In cents/kWh]
                                                                  2000        Lowest    100 Percent    Embedded
                                                                Shopping      Retail    Green Power    Gen. and
                                                                 Credit       Price        Prices       Trans.
Duquesne....................................................         4.80         4.60         6.49         8.75
GPU Met-Ed..................................................         4.53         4.60         7.09         5.70
GPU Penelec.................................................         4.53         4.50         7.09         5.40
PECO........................................................         5.65         4.65         6.37         8.65
PPL.........................................................         4.61         4.30         7.09         6.26
Allegheny...................................................         3.24         4.90         6.49         5.30
Note: 2001 shopping credits will be moderately higher in some cases.

                      FORWARD PRICES, PJM, 4/24/01
                            Month                                $/mWh
May..........................................................     $51.25
June.........................................................      75.00
July.........................................................     117.00
August.......................................................     117.00
September....................................................      46.50
October......................................................      42.85
November.....................................................      42.85
December.....................................................      42.85
January......................................................      48.00
February.....................................................      48.00
March........................................................      40.50
April........................................................      40.50


                  FORWARD PRICES, INTO CINERGY, 3/20/01
                             [On Peak Power]
                        Month--Cinergy                           $/mWh
April........................................................     $41.25
May..........................................................      49.50
June.........................................................      76.50
July.........................................................     121.50
August.......................................................     121.00
September....................................................      45.25
October......................................................      43.00
November.....................................................      43.00
December.....................................................      43.00
January......................................................      47.50
February.....................................................      47.50
March........................................................      39.25

                            THE HOCKEY STICK

                          demand-side response
     Electric restructuring in Pennsylvania, California, or any 
other state will not be complete until consumers are able to modify 
their electricity usage in response to prices.
     These days, the case for fostering demand-side response 
has never been stronger.
     As the next crucial stage in its electric restructuring, 
Pennsylvania must now lead the way to increasing opportunities for 
demand-side response.
     How does it work?
        -- Remote appliance controls
        -- Time-of-use meters
        -- Internet-based energy management platforms
     Until consumers can respond to prices, risks of blackouts, 
prices, and pollution levels will be higher than they should or need 

                       RETAIL COMPETITION LESSONS

    1. The most important decision is to decide what is the goal of the 
    a. Genuine retail competition that features 4 or 5 companies 
competing for all customer classes;
    b. Wholesale competition with a retail dominant company subject to 
price regulation;
    c. Wholesale competition with a retail dominant company not subject 
to price competition.

    2. Electric restructuring will not work anywhere unless consumers 
are able to modify demand in response to real-time prices.
     How it works:
        -- Remote appliance controls
        -- Time-of-use meters
        -- Internet-based energy management platforms
     1 percent reduction in peak demand can produce about 10 
percent reduction in peak price.
     Helps solve 100-hour peak demand problems and break the 
hockey stick.

    3. Wholesale competition is vital to robust retail competition:
    a. FERC and Congress have failed so far to meet their 
constitutional duty of ensuring the interstate commerce of electricity;
    b. Wholesale markets are balkanized and often not transparent;
    c. FERC must mandate membership in appropriately-sized, independent 
regional transmission organizations;
    d. Failure of FERC and Congress to ensure unimpeded interstate 
movement of electricity is creating both increased costs, market power 
abuses, and avoidable risks to reliability.

    4. Retail competition is vital to healthy competitive wholesale 
    a. Retail market establishes demand
    b. Demand response can powerfully limit wholesale prices
    c. Retail market can offer consumers products that increase or 
decrease exposure to wholesale price

    5. Successful transition to electric competition requires:
    a. Genuinely competitive wholesale markets
    b. Genuinely competitive retail markets

    6. Transitions to retail competition can be designed to entrench 
retail market dominance of incumbent utilities. Most, but not all, 
transitioning states have adopted incumbent entrenching plans.
    Transition plans that entrench retail market dominance have several 
common characteristics:
    a. Setting the amount that customers no longer pay the incumbent if 
they switch well below what they pay the incumbent for unbundled 
    b. The amount not paid to the incumbent if customer switches is 
usually set at a wholesale market benchmark.
    c. Weak safeguards against cross subsidization and anti-competitive 
    d. Highly bureaucratic phase-in or customer switching rules.

    7. Transitions to retail competition can be designed to permit the 
development of genuine retail competition. Such plans contain several 
    a. Setting the amount that customers no longer pay the incumbent as 
close as possible to what customers pay the incumbent for unbundled 
generation--the incumbent's unbundled generation rate.
    b. Divestiture of generation assets.
    c. Strong safeguards against cross subsidization and anti-
competitive practices.
    d. Streamlined customer switching rules.

    8. Generally, stranded investment is being recovered, is being 
recovered much more quickly than the life of the asset that is 
stranded, and is being recovered in ways that entrench retail market 
dominance of incumbents.
    a. Stranded investment recovery is a massive government 
interference in the free market that is seriously distorting the price 
signal sent by the total delivered rate of electricity.
    b. This basic point needs repeating because too many in the 
electricity industry wish to ignore it for obvious reasons as they 
parade around under the banner of ``Efficient Competition.''

    9. Sizing the shopping credit or the amount that a customer no 
longer pays the utility if the customer switches is the key regulatory 
decision in designing a transition plan.
    Shopping credit is the portion of utility's unbundled generation 
rate that customers avoid if they switch to a new supplier.
    Shopping credit is not a payment from anyone to anyone, a subsidy 
to anyone, or a penalty of non-shopping customers.

    10. Normal rule of a free market would be that whatever amount the 
customer was paying the utility for unbundled generation would be the 
amount the customer no longer pays if the customer switches.
    No state has followed this normal rule of a free market, as all 
states are allowing some stranded cost recovery.
    Every state has intervened in the free market to penalize the 
shopping customer by adding a stranded cost charge to competitive 
electric offers.
    Not surprisingly, these stranded cost charges have deterred 
shopping, deterred market entry, and entrenched retail market dominance 
of incumbents.

    11. Three basic approaches to sizing shopping credit and treating 
stranded costs have been proposed.
    To simplify, these models can be called: the Free Market Model, the 
Pennsylvania Transition Plan, and the Wholesale Market Plan.
    The following examples assume a residential customer paying an 
unbundled generation rate of 6.0 cents per kilowatt hour.

    The Free Market Model would trigger massive shopping, large numbers 
of new entrants competing for all customer classes, and great 
competitive pressure on incumbents to defend market share by cutting 
their prices. This is basically what is taking place in Germany.
    The Pennsylvania Model allows recovery of 100 percent of authorized 
stranded costs, creates conditions that make new entry possible, can 
provide competitive choices for all customer classes, and breaks retail 
market dominance of incumbents.
    The Wholesale Market Model allows recovery of 100 percent of 
stranded costs on a fast schedule, limits new entry, creates few or no 
choices especially for smaller customers, and entrenches retail market 
dominance of new entrant.
    Under all three approaches the non-shopping customer pays 6.0 cents 
per kilowatt hour unless the incumbent reduces its prices or the 
government orders a rate cut. Then the non-shopping customer receives 
the rate cut and that is all.

    12. Strong universal service policies are needed. Pennsylvania 
nearly quadrupled spending on low-income bill assistance programs and 
on low-income energy conservation programs.

    13. Environmental regulations and laws are not blocking the 
construction of new generation:
    a. The PJM market will add 8,000 megawatts by 2002;
    b. The nation will add 90,000 megawatts by 2002;
    c. Old plants exempted from original Clean Air Act should be 
required to meet same New Source Review emissions standards as new 
    d. Closing the old plant loophole in the Clean Air Act is a matter 
of competitive fairness.

    14. Competition has benefits for the environment by:
    a. Spurring major new investment in cleaner, more efficient 
combined cycle natural gas plants;
    b. Putting pressure on fuel costs that will put a premium on plants 
that use fuel efficiently;
    c. Allowing customers to choose renewable energy products who have 
been denied this option--there is considerable interest in renewable 
energy products;
    d. Spurring technological innovations and commercialization of new 
metering products and distributed generation such as fuel cells.

    15. Transition plans should include public policies that benefit 
the environment:
    a. Establish funds to support renewable energy and energy 
    b. Renewable energy portfolio standards;
    c. Speed deployment of real-time meters and appliance-control 

    16. Competition should produce more savings for customers once 
stranded cost recovery ends.
    High rate utilities have residential generation rates that are as 
much as 4 cents per kilowatt-hour above residential competitive prices.
    Average rate utilities have residential generation rates that are 
about 2 cents per kilowatt-hour above competitive prices.

    17. Aggregation can be a powerful tool for small customers to 
leverage higher savings. Municipalities are well-placed to be 
aggregators for residential customers.

    18. Retail market dominance of incumbents creates risks:
    a. Competitive savings will not reach consumers when stranded cost 
recovery ends.
    b. Rate regulation of incumbents will have to be continued to 
ensure wholesale price is passed through to consumers.
    c. Only spot market price will be passed through.

    Chairman Nussle. Mrs. Bourne.


    Ms. Bourne. Thank you, Mr. Chairman. It is an honor to 
appear before you as a representative of the American 
Legislative Exchange Council. The American Legislative Exchange 
Council is comprised of 2,400 Democrat and Republican State 
legislators who have a keen interest in free market enterprise 
and individual market freedom.
    ALEC's Energy, Environment, Natural Resources and 
Agriculture task force has been carefully monitoring the 
situation in California, and in response we have created an 
energy working group that is tasked with evaluating the current 
status of energy generation and distribution in all 50 States. 
Specifically our goal is to provide a menu of policy options to 
assist the State lawmakers who wish to adopt an effective 
energy legislative package that provides affordable electricity 
in a competitive market to homes, businesses and schools and 
health care facilities of our citizens. Today I would like to 
provide you with an updated snapshot or a photograph today of 
restructuring in the States and list what responses, if any, 
the States have had to the California energy crisis.
    If you look at the chart over there on the easel, I have 
tried to lay out for you the States that have enacted 
restructuring, and the States that have not enacted 
restructuring. The yellow States are the States that have 
delayed restructuring in the past session, this year in 
response to California. Please apologize to the Congressman 
from Texas. I did not intend for Texas to be black. It was 
supposed to be green, but that Texas tea keeps bubbling up 
there. Texas had one of its power regions delayed, and I will 
get into that later, but that is why it is a different color.
    Since the early 1990's, the States have individually been 
studying whether they should deregulate their utility markets, 
and to date 26 States and the District of Columbia have enacted 
some form of electric utility restructuring either through 
legislation or regulation. But it is important to note that not 
all of those States have yet adopted final rules governing 
restructuring. Many are phasing in components of a market-based 
structure either through legislation, regulation or by 
executive order.
    All of the States have initiated a review of the fiscal 
implications of deregulation and are considering a revision of 
portions of their tax codes to accommodate restructuring in a 
variety of ways. However, it should be noted that in light of 
the recent blackouts in California, as I mentioned earlier, a 
few States have delayed this process until the situation is 
thoroughly evaluated.
    States that historically had the highest prices for 
electricity, such as California, Pennsylvania, New York and 
Connecticut and the other New England States, were among the 
first to enact deregulation, and they opened their retail 
markets to allow customers to choose suppliers. Other States 
proceeded more cautiously, limiting the number and type of 
customers getting access to competitive markets.
    The major goal of deregulation was to lower the price of 
electricity through a free market system, and we have to 
remember that at that time of national debate over 
deregulation, the driving issue was the high cost of 
electricity in a regulated environment, and to that end 
industry analysts cite Pennsylvania as a success story and 
California as providing us with lessons to be learned.
    I have provided for you several graphs that you can refer 
to. There is a graph that is the average revenue per kilowatt 
by all sectors, and in there I have noted the prices in 1996, 
when the States began to enact restructuring, and the estimated 
prices of this past January.
    States have used two types of structures to facilitate 
operations in a restructured market, and the independent system 
operator is designed to provide nondiscriminatory open access 
to transmission. A power exchange is an open bulk power market 
for sales of electric power for resale. And primary, as you 
well noted today, regulatory authority over these entities 
resides at the Federal Energy Regulatory Commission and not in 
the States.
    A majority of the restructured States assumed this type of 
system as a basis for their restructured markets. Nine States 
and the District of Columbia directed their utilities to 
transfer the control of their transmission assets to an 
independent transmission organization. A few of these States 
allow other types of regional organizations.
    Texas, again, is unique in that it divides itself into four 
power regions that correspond to NERC regions within Texas. 
Each power region is to establish an ISO or transmission 
company of its own. In terms of divestiture in the 
restructuring language of several States, divestiture of 
generating assets has either been required or encouraged for 
the purpose of increasing competition between power generators, 
reducing the risk of electric company monopolies, and providing 
an opportunity for stranded cost recovery incurred by utilities 
for investments in power plants or long-term contracts under a 
regulatory environment that may not have been recovered in a 
free market competitive environment.
    In my written testimony I have noted that the Department of 
Energy stated at the end of 2000 that only 16 percent of all 
electric utility-generated capacity had been sold. It is my 
understanding that that has increased to 22 percent.
    Functional separation is different than divestiture. A 
utility can form into separate corporations or reorganize into 
separate divisions. The point is to unbundle vertically 
integrated systems to mitigate market power. Although 
functional separation can be a less stringent alternative to 
divestiture, both have been implemented by the States. Seven 
States require separation into different corporations. Nine 
States require reorganization by function, but not by separate 
corporate entities.
    Most States, in a well-intentioned attempt to protect 
customers from price spikes in the transition period, imposed 
four types of price fixes: rate reductions, rate freezes, 
capping rates, freezing rates at preexisting levels. All of 
these structures applied to the rates of incumbent utilities 
for the service to customers who do not change suppliers and to 
the distribution or delivery service for customers who do 
change providers. The basic difference here between a rate cap 
and rate freeze, as I am sure you know, is that the cap rates 
may decline if costs decline, but frozen rates stay the same 
regardless of the changes of cost.
    Now, it is important at this point in time in my testimony 
to point out that we have no idea what the effectiveness of all 
these rate cuts, caps and freezes and the long-term economic 
impacts have in a regulated or deregulated market. The 
information is simply not available at this time. We are going 
to need to study that. Twelve States required rate cuts. Rate 
caps were imposed in nine States. Rate freezes were imposed in 
six States. And like most tax codes, there is a garden variety 
of exceptions and adjustment allowances. Pricing for transfers 
of assets and services between competitive and regulated 
operations has been an issue in some States. Asymmetrical 
pricing and symmetrical pricing have been put into effect, but 
it is important to note that symmetrical pricing, which is 
market value pricing for all transactions, is only in effect in 
Texas at this time.
    In providing choice to customers, a majority of the 
restructuring States imposed disclosure requirements upon the 
incumbent utilities and suppliers. The disclosure rules fall 
into three categories: rates, terms and conditions of service, 
fuel mix and emissions or environmental effects. Disclosure 
about rates and prices are required in 12 States, information 
about fuel mix is required in 13 States, and environmental 
effects must be reported in 13 States.
    And this last disclosure I would describe as somewhat 
political or perhaps disingenuous in that it is virtually 
impossible to trace electrons after they leave their power 
source. They go onto the grid, can travel into a variety of 
transmission paths with electrons from other power sources 
before they reach the end user. And in reality the consumer 
really does not know what electrons are actually delivered to 
his or her electric outlets.
    I want to mention, and there is a graph here that lists the 
State supplements and the moneys that they have been collecting 
for energy efficiency and low-income assistance. I have also 
listed for you the Federal moneys that have been put aside for 
the States.
    As to the States that have delayed restructuring, each has 
delayed for a different reason. Arkansas has delayed 
deregulation until 2003 or 2005. They are monitoring the 
California market. The Governor of Arkansas wanted to 
incorporate the delay, and he signed a bill that requires that 
all retail choice not begin until the Public Service Commission 
can find effective market structures.
    Oklahoma has eliminated the deadline for restructuring. 
Oregon still has a bill in session. They don't close session 
for another 3 weeks. They have introduced a bill that will 
delay regulation or deregulation until 2003.
    And the two most contentious issues in Oregon at the 
moment, in debate at any rate, is the establishment of a 3 
percent public purposes surcharge and a potential date for 
deregulation. That bill is sitting in the senate at this time 
in Oregon.
    Nevada passed legislation to halt electric restructuring, 
but interestingly enough they are allowing more users the 
ability to purchase electricity on a competitive basis, and we 
are waiting for that bill to be signed by the Governor.
    New Mexico had no political pressure for deregulation.
    Texas, as I mentioned previously apparently delayed 
restructuring in their Southwest power pool. They are waiting 
until 2007. The reason for that is they only have one dominant 
supplier in that area, and so what they want to do is build 
another power plant, and they will--once they have more choice 
there, they will fully deregulate that area. In the meantime, 
the rest of Texas is fully deregulated at this point and has a 
40 percent oversupply of power.
    Now, I will get into a little bit of the California crisis 
and provide you with ALEC's perspective on this at this point. 
The electricity crisis in California, while it does indeed have 
serious short-term effects for the residents of California, we 
look at it as an anomaly for the rest of the Nation. There are 
a lot of factors that came into play. The faulty regulatory 
scheme in California is only one aspect of the problem. Current 
prices of natural gas is another aspect. Add a gas pipeline 
breakage incident in August of 2000, the lack of significant 
generation and transmission infrastructure, the drought; you 
have at one point in California, in 1999, 46 percent of 
electricity that was fueled by natural gas. The drought has 
increased California's dependence upon natural gas as a fuel 
for electricity generation. No one in 1996, given the 
significant growth in electronic commerce in the high-tech 
industry, ever anticipated the high demand for electricity 
    No new power plants of a significant size had been built in 
California in 10 years. Now, typically before this time 20 
percent of the power supply in California had been imported. 
That percentage has increased, but it has also been affected by 
the amount of growth and the increased demand for power in the 
rest of the western grid. That is what is causing everyone to 
be a little bit shaky right now in the western grid. What new 
power plants have been built in the West have been fired by 
natural gas, and that price has gone up. The price quadrupled 
in 1998.
    In the California market--now. In 1998, looking at the 
national average, the price had gone up from $2 per million 
BTUs to $8 per million BTUs. But in the California market, 
which had the pipeline break, the price jumped to $60 per 
million BTUs. With 50 percent of its power supplied by natural 
gas, it is no wonder California is paying a high price for 
electricity right now. States with a more diverse fuel source 
of power have been better able to absorb the national price 
spike of natural gas.
    When evaluating California's restructuring scheme, it is 
clear that deregulation did not, in effect, take place. The 
biggest structural defect is the requirement placed on 
utilities to purchase all of their energy needs on the daily 
spot market, which is the California Power Exchange. No other 
State has this requirement. Unfortunately, about 60 percent of 
the current supply is purchased on the spot market. In 
comparison, other power markets such as Pennsylvania, New 
Jersey, Delaware and Maryland areas have a maximum level of 20 
percent purchased on the spot market.
    The second structural defect was the capped retail rates. 
That is why we need to look at that in all of the other States. 
The three utilities in California ran up a $12 billion debt 
purchasing electricity from the exchange and selling it at 
capped retail rates. That is no way to run a business in any 
market, much less a free market. Because the rates are capped, 
consumers have no incentive to change their behavior. In short, 
California has a pricing problem, not a deregulation problem.
    Very few States have fully deregulated at this point in 
their electric utilities. Each State has developed its own 
unique market structure and has implemented its own timetable 
for full restructuring. To that end there is very little 
quantifiable data that effectively measures the economic impact 
of deregulation.
    The National Association of Budget Officers released a 
fiscal survey in December 2000 that did not show any budgetary 
impacts or adjustments related to restructuring. I would 
suspect that in their next report that will be coming out 
shortly, we thought perhaps it would come out yesterday, there 
would probably be some budgetary impacts, but I could not 
testify to that right now.
    In reviewing the State revenues, it is clear that the 
States are collecting funds through a variety of mechanisms 
that can be used for relief if necessary. The critical question 
at this point is to determine if the Federal Government should 
intervene with any legislative actions. In ALEC's opinion, it 
would be premature to introduce legislation at this point. It 
would run the risk of hampering the efforts of deregulation or, 
even worse, possibly exacerbating the power supply shortage. We 
feel we should evaluate California carefully and use it as an 
opportunity for lessons learned.
    Mr. Chairman, now is not the time to constrain market 
forces, but to unleash them. The market forces will correct the 
current shortage of supply as we build more power plants and 
enhance our infrastructure. The States should proceed as they 
see fit. A few of them have chosen to delay. They are making 
good, prudent choices right now. They are collecting a 
significant amount of revenue through their utility and fuel 
taxes. If the price spikes are going up so high that they feel 
concern they can suspend the taxes. Last year when the gasoline 
prices went up, two States suspended those taxes; one State for 
6 months. Michigan reduced its electricity tax. The States 
always have the option of repealing or suspending their utility 
tax or fuel tax if they are concerned about high prices.
    I would like to recommend two options to the committee. I 
think it would be very appropriate at this point in time to 
commission a comprehensive study of the current state of 
electric restructuring in the Nation and its impact upon the 
fiscal status of the States. I think that should be done before 
any Federal legislation is introduced.
    Secondly, whenever we go through a transition, there are 
going to be people who fall out and are hurt during that 
transition, in particular small businesses, as the Congressman 
from California mentioned. Small businesses can be affected in 
an energy crisis, and they most often don't have reserve power 
generators like the large commercial enterprises. They could 
easily shut down in 90 days. A rational way to provide relief 
would be to relax the regulatory guidelines that govern the 
allocation of small business grants or low-income assistance 
funds to help maintain their fiscal stability on a prorated 
basis for those small businesses that are clearly struggling in 
the power shortage. Thank you.
    Chairman Nussle. Thank you.
    [The prepared statement of Ms. Bourne follows:]

  Prepared Statement of Alexandra Liddy Bourne, Energy, Environment, 
Natural Resources, and Agriculture Task Force Director for the American 
                      Legislative Exchange Council

    Mr. Chairman, Members of the House Budget Committee, it is an honor 
to appear before you as a representative of the American Legislative 
Exchange Council (ALEC). The American Legislative Exchange Council is 
comprised of 2400 Democrat and Republican state legislators who have a 
keen interest in free market enterprise and individual freedom.
    ALEC's Energy, Environment, Natural Resources, and Agriculture Task 
Force has been carefully monitoring the situation in California. We 
have created an Energy Working Group tasked with evaluating the current 
status of energy generation and distribution in all 50 states. 
Specifically, our goal is to provide a menu of policy options to assist 
state lawmakers who wish to adopt an effective energy legislative 
package that provides affordable electricity in a competitive market to 
the homes, businesses, schools, and health care facilities of our 
citizens. Today, I would like to provide you with an update on 
restructuring in the states and list what responses, if any, the states 
had to the California energy crisis.


    Since the early 90's, the states have individually been studying 
whether they shoud deregulate their utility markets. To date, 26 states 
and the District of Columbia have enacted some form of electric utility 
restructuring, through legislation or regulation, but not all of those 
states have adopted final rules governing restructuring. Many are 
phasing in components of a market-based structure either through 
legislation, regulation, or by executive order.
    All of the states have initiated a review of the fiscal 
implications of deregulation and are considering a revision of portions 
of their tax codes to accommodate restructuring in a variety of ways. 
However, it should be noted that in light of the recent black outs in 
California, a few states have delayed restructuring until the situation 
is thoroughly evaluated.
    The states that historically had the highest prices for 
electricity, such as California, Pennsylvania, New York, Connecticut, 
and other New England states were among the first to enact deregulation 
and opened their retail markets to allow customers to choose suppliers. 
Other states proceeded cautiously, limiting the number and type of 
customers getting access to competitive markets. The major goal of 
deregulation was to lower the price of electricity through a free 
market system. We have to remember, that at the time of the national 
debate over deregulation, the driving issue was the high cost of 
electricity in a regulated environment. To that end, industry analysts 
cite Pennsylvania as a success story, and California as providing us 
with lessons to be learned.

                            MARKET STRUCTURE

    States have used two types of structures to facilitate operations 
in a restructured market. The Independent System Operator is designed 
to provide nondiscriminatory open access to transmission. A Power 
Exchange is an open bulk power market for sales of electric power for 
resale. Primary regulatory authority over these entities resides at the 
Federal Energy Regulatory Commission and not in the states. A majority 
of the restructured states assumed this type of system as a basis for 
their restructured markets.
    Nine states (AZ, AR, IL, MI, OH, TX, VA, and WV) and the District 
of Columbia directed their utilities to transfer the control of their 
transmission assets to an independent transmission organization. 
(AR,MI,OH,VA, and WV) A few of these states allow other types of 
regional organizations. Michigan and Ohio allow utilities to choose 
between transferring operation and control of their facilities to an 
ISO or divest their transmission assets. Texas is unique in that it 
divides itself into four power regions that correspond to the four NERC 
regions that are within Texas. Each power region must establish an ISO 
or a transmission company.
    The Power Exchange was first formed in California under their 
restructuring legislation. The northeastern state power pools began as 
PX, but changed to ISO's.


    In the restructuring language of several states, divestiture of 
generating assets has either been required or encouraged for the 
purpose of increasing competition between power generators, reducing 
the risk of electric company monopolies, and providing an opportunity 
for stranded cost recovery incurred by utilities for investments in 
power plants or long term contracts under a regulatory environment that 
may not have been recovered in a free market competitive environment. 
According to the Department of Energy only 16% of all electric utility 
generating capacity had been sold to unregulated companies or 
transferred to subsidiaries by the year 2000.
    Some states have only allowed competitive services to be provided 
by separate affiliates, which is a structural approach to regulate 
affiliate transactions, rather than governing the relations between 
competitive business functions through regulation. CA, CT, ME, NV, NM, 
and RI require competitive services only through affiliates. New Jersey 
has authorized the NJBPU to impose competitive services. CA, ME, NV, 
and VA require a public service commission pre-approval of certain 
competitive activities.
    Divestiture has been required in statute by two states, New 
Hampshire and Maine. Most of the states that have restructured have 
encouraged or required incumbent utilities to divest all or some of 
their generation assets through regulatory orders. The thought was to 
reduce the market power of the incumbent utilities or use the sale of 
an asset to determine its value for stranded cost calculations.
    Michigan and Texas use divestiture as an alternative in a menu of 
options. They use capacity auctions with parameters. CA and NY 
encourage divestiture, but have not required it. Utilities in both 
states have divested most of their non-nuclear assets. Several states 
differentiated between nuclear assets and fossil fuel assets. 
Divestiture of nuclear assets were either deferred or delayed for long 
period of time. Five states, AR, DE, NJ, NV, and OR have permitted 
their public utility commissions to order divestiture. AR, DE, and NJ 
have standby authority to intervene if they desire, NV chose to limit 
ownership of generation and transmission facilities. Oregon provides 
incentives for divestiture.
    CT, MA, and RI linked divestiture with stranded cost recovery. MA 
requires all utilities that seek stranded cost recovery must divest all 
non-nuclear generation assets; RI requires at least 15% of non-nuclear 
generation divesture. CT requires divestiture or transfer to an 
affiliate. If the assets were transferred to an affiliate, then the 
utility may not recover stranded costs.

                         PRICING AND MARKETING

    Pricing for transfers of assets and services between competitive 
and regulated operations has been an issue in some states. Asymmetrical 
pricing, which bases prices for transfers from utility to affiliate on 
the higher of fully allocated cost or market value, and from affiliate 
utility at the lower of fully allocated or market value is in effect in 
CA, MA, and NV. Symmetrical pricing, (market value pricing for all 
transactions) is only in effect in Texas.
    There are a wide variety of rules for marketing between competitive 
and noncompetitive operations in a number of states. Joint marketing is 
banned in eight states. (CA, CT, IL, ME, MA, OR, TX, and West 
Virginia.) Five require affiliations with a corporate name to use 
disclaimers. (CA, CT, MA, OR, and Texas.) Maryland and Maine require 
royalty payments by the affiliate for using the corporate name.

                           ENERGY EFFICIENCY

    Most of the state restructuring plans have provisions for energy 
efficiency programs. These programs are funded through a mechanism 
called a System Benefit Charge (SBC). This is a use charge levied on 
end users by the distribution utility. Twelve states have this type of 
fee (AZ, CA, CT, DE, DC, MA, MT, NJ, NY, OH, PA, and RI.). The amount 
varies state to state. Only four of those states have set a time limit 
on the SBC. Twelve states that have initiated a System Benefit Charge. 
In OH, the SBC funds a revolving loan program for energy efficiency.


    As I mentioned previously, a few states have delayed implementation 
of restructuring. Oklahoma, Oregon, Nevada, New Mexico, and a power 
pool in Texas fall into this category. I would like to speak to those 
states specifically.
    Oklahoma enacted Senate Bill 440, which establishes an electric 
restructuring advisory committee to the Governor and the Legislature. 
The previous deadline for restructuring of July 1, 2002 has been 
eliminated. Restructuring will be implemented subsequent to the 
issuance of the final report of this advisory committee and the 
adoption of electric restructuring legislation by the Legislature and 
signed by the Governor. Tax credits were put into place for electric 
generators that have zero emission facilities.
    Oregon drafted a bill, to delay deregulation until 2003. The debate 
is focused on the crisis in California and the continuing drought in 
the northwest. The two most contentious issues are the establishment of 
a 3% ``public purposes'' surcharge and a potential date for 
deregulation. This has passed the House and is now in the Senate.
    Nevada passed legislation, signed by the Governor, to halt electric 
restructuring until they can determine the impact of California's 
crisis upon the western grid. Their primary concern related to the 
stability of power supply due to the increase in natural gas prices and 
the drought. However, A.B. 5 (formerly HB 661) which passed both houses 
allows large users the ability to purchase electricity on a competitive 
basis is pending the Governor's signature.
    New Mexico delayed implementation of deregulation for a variety of 
reasons. The price of electricity is low and there is not a lot of 
political pressure to deregulate. Of utmost concern was revamping their 
tax code, and legislation was introduced to compare their tax structure 
in a regulated and deregulated environment.
    Texas passed legislation that delayed restructuring in only one 
portion of the state that is covered by the Southwest Power Pool until 
2007. This delay is in compliance with their restructuring law that 
allows the state to delay any portion of their grid if it appears that 
there would be a lack of choice. (The bill, is pending signature by the 
Governor.) That portion of the state, the Panhandle, shares a grid with 
New Mexico that has one dominant power supplier. The rest of Texas is 
fully deregulated and has a 40% over supply of power. Their intent is 
to build another power plant and transmission lines in their western 
grid to complete restructuring throughout the state.
    States that have not formally deregulated by legislative action are 
actively studying restructuring to determine how their individual 
states may be impacted. It is important to note that state revenues are 
tied to public utilities and that electric restructuring requires a 
review of the tax code to ensure that the existing tax system does not 
distort a competitive market.

                           CALIFORNIA CRISIS

    The electricity crisis in California, while it has serious short-
term effects for residents in California, can best be described as an 
anomaly for the rest of the nation. There are many factors that came 
into play and no one, in industry or policy, predicted the current 
    The faulty regulatory scheme in California is only one aspect of 
the power supply problem. The current prices of natural gas, coupled 
with a gas pipeline breakage incident in August of 2000, and lack of 
significant generation and transmission infrastructure development have 
adversely affected the availability of power. 46% of the electricity 
consumed in California in 1999, was fueled by natural gas. Furthermore, 
the drought over the past 2-3 years has decreased the availability of 
hydropower further increasing California's dependence upon natural gas 
as a fuel for electricity generation. Given the significant growth in 
electronic commerce in the high tech industry over the past 5 years, no 
one in 1996 anticipated the high demand for electricity today.
    No new power plants of a significant size had been built in 
California in 10 years. Typically, 20% of the power supply had been 
imported. That percentage has increased and has been affected by the 
amount of growth and increased demand for power in neighboring states 
in the Western grid. What new power plants that have been built in the 
west have been fired by natural gas. The price of natural gas 
quadrupled between 1998 and 2000, from $2/million BTU to $8/million 
BTU. In the California market, which had a pipeline break, the price 
jumped to $60/million BTU. (1000 cubic feet). Now with more than 50% of 
its power supplied by natural gas, it is no wonder that California is 
paying a high price for electricity. States with a more diverse source 
of power have been better able to absorb the national price spike of 
natural gas.
    When evaluating California's restructuring scheme, it is clear that 
deregulation, did not, in effect, take place. The biggest structural 
defect is the requirement placed on utilities to purchase all of their 
energy needs on the daily spot market, which is the California Power 
Exchange. No other state has this requirement. Unfortunately, about 60% 
of the current supply is purchased on the spot market. In comparison, 
other power markets, such as the Pennsylvania, New Jersey, Delaware, 
and Maryland area only have a maximum level of 20% purchased on the 
spot market. The second structural defect is the capped retail rates. 
The three utilities in California ran up over $12 billion in debt 
purchasing electricity from the CalPX and selling it at capped retail 
rates. This is no way to run a business in any market, much less a free 
market. Because rates are capped, consumers have no incentive to change 
their behavior. In short, California has a pricing problem, not a 
deregulation problem.


    Very few states have fully deregulated their electric utilities. 
Each state has developed a unique market structure and has implemented 
its own timetable for full restructuring. To that end, there is very 
little quantifiable data that effectively measures the economic impact 
of deregulation. In their fiscal survey released in December 2000, the 
National Association of State Budget Officers did not indicate any 
significant adjustments in state budgets that correlate to deregulation 
or the energy crisis. In reviewing state revenues, it is clear that the 
states are collecting funds through a variety of mechanisms that can be 
utilized for relief if necessary.
    The critical question at this point is to determine if the Federal 
Government should intervene with any legislative actions. In my 
opinion, it would be premature to introduce legislation at this point 
in time. You would run the risk of hampering the efforts at 
deregulation or even worse, exacerbating the power supply shortage. We 
should evaluate California carefully and use it as an opportunity for 
lessons learned. No states have fully implemented restructuring for a 
length of time to collect sufficient data to evaluate the economic 
effects of deregulation. There simply is not enough information to 
determine the positive or negative impacts of electric restructuring in 
the states.
    Mr. Chairman, now is not the time to constrain market forces, but 
to unleash them. The market forces will correct the current shortage of 
supply as we build more power plants and enhance our infrastructure. 
The states should proceed as they see fit. The states collect a 
significant amount of revenue through their utility and fuel taxes. For 
example, when the gasoline prices escalated last year, Illinois and 
Indiana suspended their gasoline tax for a short duration. Michigan 
reduced its electricity tax. The states always have the option of 
repealing or suspending their utility tax or fuel tax if they are 
concerned about high prices.
    I would like to recommend two options to the Committee. I do think 
it would be appropriate for this Committee to commission a 
comprehensive study of the current state of electric restructuring in 
the nation and its impact upon the fiscal status of the states. This 
should be done before any Federal legislation is considered.
    Secondly, small businesses can be adversely affected in an energy 
crisis. They may not have reserve power generators like the large 
commercial enterprises. They could easily shut down in ninety days. A 
rational way to provide relief would be to relax the regulatory 
guidelines that govern the allocation of small business grants or low-
income assistance funds to maintain fiscal stability, on a prorated 
basis, for those small businesses that are clearly struggling in a 
power shortage.
    Thank you.

                                1999 STATE NET ELECTRICITY GENERATION FUEL SHARES
                     State                         Gas       Hydro       Coal     Nuclear    Fuel Oil    Other*
Alabama.......................................          3          6         61         26  .........          4
Alaska........................................         63         14          9  .........         14  .........
Arizona.......................................          6         12         46         36  .........  .........
Arkansas......................................         10          6         52         27  .........          5
California....................................         46         22          1         18          1         12
Colorado......................................         13          4         83  .........  .........  .........
Connecticut...................................          9          2          7         45         29          8
Delaware......................................         36  .........         42  .........         22  .........
District of Columbia..........................  .........  .........  .........  .........        100  .........
Florida.......................................         23  .........         36         17         20          4
Georgia.......................................          2          2         63         26          2          4
Hawaii........................................          3          1         13  .........         74          9
Idaho.........................................          2         92  .........  .........  .........          5
Illinois......................................          3  .........         46         50  .........  .........
Indiana.......................................          5  .........         94  .........          1  .........
Iowa..........................................          1          2         86         10  .........  .........
Kansas........................................          7  .........         70         22          1  .........
Kentucky......................................  .........          3         96  .........          1  .........
Louisiana.....................................         53          1         24         15          2          5
Maine.........................................  .........         22          8  .........         36         34
Maryland......................................          5          3         57         26          8          2
Massachusetts.................................         27          1         28         11         26          5
Michigan......................................         13          1         68         14          1          3
Minnesota.....................................          3          2         61         27          2          4
Mississippi...................................         24  .........         37         24          9          6
Missouri......................................          2          2         83         12  .........  .........
Montana.......................................  .........         40         58  .........          2  .........
Nebraska......................................          5          5         57         32  .........  .........
Nevada........................................         30          9         55  .........          1          5
New Hampshire.................................  .........          9         20         53         10          8
New Jersey....................................         31  .........         14         51          2          2
New Mexico....................................         13          1         86  .........  .........  .........
New York......................................         33         15         16         26          9          2
North Carolina................................          1          3         62         32          1          1
North Dakota..................................  .........          8         91  .........  .........  .........
Ohio..........................................          1  .........         86         12  .........          1
Oklahoma......................................         33          6         61  .........  .........  .........
Oregon........................................         12         81          7  .........  .........          1
Pennsylvania..................................          2          1         57         37          2          1
Rhode Island..................................         92  .........  .........  .........          6          2
South Carolina................................          1          1         40         57  .........          1
South Dakota..................................          2         63         35  .........  .........  .........
Tennessee.....................................          1          8         61         29          1  .........
Texas.........................................         49  .........         39         10  .........          1
Utah..........................................          2          3         94  .........  .........  .........
Vermont.......................................  .........         19  .........         72  .........          8
Virginia......................................          7  .........         47         38          5          4
Washington....................................          3         83          7          5  .........          1
West Virginia.................................  .........          1         99  .........  .........  .........
Wisconsin.....................................          3          3         69         19          2          3
Wyoming.......................................          1          3         96  .........  .........  .........
* Includes generation by geothermal, wood, waste, wind and solar.

Source: EIA.

                                  [Residential, Commercial, Industrial, Other]
                          State/Region                                 1996        2000 (Revised    (Estimate,
                                                                                     estimate)       January)
Alabama.........................................................            5.35               5             5.5
Alaska..........................................................           10.24             9.6             9.9
Arizona.........................................................            7.54             6.5             6.3
Arkansas........................................................            6.15             5.2             5.8
California......................................................            9.48               8            11.8
Colorado........................................................            6.05             5.8             5.8
Connecticut.....................................................           10.51             9.5             9.8
Delaware........................................................            6.88             6.3             6.8
District of Columbia............................................            7.35             6.2             6.5
Florida.........................................................            7.18             6.7             7.4
Georgia.........................................................            6.43             5.8             5.9
Hawaii..........................................................           12.12            13.2            14.3
Idaho...........................................................            3.96               4             4.4
Illinois........................................................            7.69             6.1             5.9
Indiana.........................................................            5.23             5.1               5
Iowa............................................................            5.94             5.6             5.7
Kansas..........................................................            6.52             5.8             5.9
Kentucky........................................................            4.03             3.9               4
Louisiana.......................................................            6.07             5.7             7.5
Maine...........................................................            9.46            10.3            10.7
Maryland........................................................            6.96             6.3             5.9
Massachusetts...................................................           10.13             8.6            10.5
Michigan........................................................             7.1             7.3             7.2
Minnesota.......................................................            5.54             5.5             5.6
Mississippi.....................................................            6.01             5.6               6
Missouri........................................................            6.11               5             5.2
Montana.........................................................            4.72             5.2             5.4
Nebraska........................................................            5.32             4.7             4.8
Nevada..........................................................            5.95             5.8             6.4
New Hampshire...................................................           11.59            11.7            11.8
New Jersey......................................................            10.5             9.1             9.4
New Mexico......................................................            6.76             6.3             7.2
New York........................................................           11.13              10            11.2
North Carolina..................................................            6.53             6.5             6.4
North Dakota....................................................            5.65             5.1             5.1
Ohio............................................................             6.3             6.2             6.3
Oklahoma........................................................            5.56             4.5             5.9
Oregon..........................................................            4.77             4.8             4.9
Pennsylvania....................................................            7.96             6.3             7.5
Rhode Island....................................................           10.48             9.3            10.8
South Carolina..................................................            5.67             5.5             5.5
South Dakota....................................................            6.18               6             6.1
Tennessee.......................................................            5.24             5.4             5.6
Texas...........................................................            6.16             5.8             6.7
Utah............................................................            5.28             4.5             4.8
Vermont.........................................................            9.74            11.7            10.8
Virginia........................................................            6.09             5.7             5.8
Washington......................................................            4.19             4.4             4.8
West Virginia...................................................            5.21               5               5
Wisconsin.......................................................            5.25             5.5             5.9
Wyoming.........................................................            4.31             4.3             4.3
U.S. Average....................................................            6.86            6.29            6.89
New England.....................................................           10.28             9.6            10.5
Middle Atlantic.................................................            9.76             8.3             9.3
East North Central..............................................            6.48             6.1             6.1
West North Central..............................................            5.91             5.4             5.5
South Atlantic..................................................            6.54             6.1             6.3
East Coast Central..............................................            5.04             4.9             5.2
West South Central..............................................            6.08             5.6             6.7
Mountain........................................................               6             5.6             5.7
Pacific Contiguous..............................................            7.54             6.6             8.9
Pacific Noncontiguous...........................................           11.49            11.7            12.5
Source: EIA.

                                      Annual Growth
                                     Rate of Electric
                                      Power Industry    U.S. Population
               State                    Generating     Growth Rate 1990-
                                     Capability 1988-         2000
Alabama...........................               1.4               10.1
Alaska............................               1.6                 14
Arizona...........................               n/a                 40
Arkansas..........................               n/a               13.7
California........................              -0.5               13.8
Colorado..........................               0.3               30.6
Connecticut.......................              -1.6                3.6
Delaware..........................               2.4               17.6
District of Columbia..............                 0               -5.7
Florida...........................               1.5               23.5
Georgia...........................                 2               26.4
Hawaii............................               0.4                9.3
Idaho.............................               1.3               28.5
Illinois..........................              -0.2                8.6
Indiana...........................               0.8                9.7
Iowa..............................               0.7                5.4
Kansas............................               0.5                8.5
Kentucky..........................               n/a                9.7
Louisiana.........................               0.3                5.9
Maine.............................              -2.9                3.8
Maryland..........................               1.6               10.8
Massachusetts.....................              -0.7                5.5
Michigan..........................              -0.3                6.9
Minnesota.........................               0.8               12.4
Mississippi.......................               0.3               10.5
Missouri..........................               0.8                9.3
Montana...........................               0.1               12.9
Nebraska..........................               n/a                8.4
Nevada............................               1.8               66.3
New Hampshire.....................               5.3               11.4
New Jersey........................               0.6                8.9
New Mexico........................               0.5               20.1
New York..........................               0.4                5.5
North Carolina....................               0.7               21.4
North Dakota......................               n/a                0.5
Ohio..............................               0.4                4.7
Oklahoma..........................              -0.2                9.7
Oregon............................              -0.2               20.4
Pennsylvania......................               0.5                3.4
Rhode Island......................                 2                4.5
South Carolina....................               1.7               15.1
South Dakota......................               1.1                8.5
Tennessee.........................               0.4               16.7
Texas.............................               1.1               22.8
Utah..............................               0.8               29.6
Vermont...........................              -0.6                8.2
Virginia..........................               1.8               14.4
Washington........................  .................              21.1
West Virginia.....................               0.6                0.8
Wisconsin.........................               1.2                9.6
Wyoming...........................               n/a                8.9
Source: Annual Growth Rate figures are from EIA. Population figures are
  from the Census Bureau.

                                           State by State
                                           Supplements to
                                               Energy         Federal State     Federal State    Federal LIHEAP
                 States                    Assistance and      Energy and        Energy and       Total FY 2001
                                               Energy        Weatherization    Weatherization    Net Allotments
                                          Efficiency 1999-    Program 2000      Program 2001
Alabama.................................        $4,704,842        $1,949,000        $2,225,000       $15,391,608
Alaska..................................         5,128,850         1,262,000         1,440,000         8,199,055
Arizona.................................         9,131,292         1,271,000         1,452,000         6,695,222
Arkansas................................           282,397         1,633,000         1,856,000        11,828,642
California..............................       194,024,888         5,899,000         6,734,000        83,564,820
Colorado................................         9,185,512         3,763,000         4,270,000        29,508,966
Connecticut.............................        16,325,068         1,983,000         2,241,000        38,737,465
Delaware................................           513,724           566,000           647,000         5,098,480
District of Columbia....................         1,331,300           599,000           683,000         5,935,168
Florida.................................         3,789,906         2,276,000         2,601,000        22,832,348
Georgia.................................        14,060,000         2,460,000         2,804,000        19,493,640
Hawaii..................................  ................           355,000           409,000         1,754,871
Idaho...................................           832,386         1,431,000         1,632,000        10,608,421
Illinois................................        72,830,000         9,627,000        10,894,000       107,758,782
Indiana.................................         5,804,047           469,000         5,318,000        48,209,925
Iowa....................................         3,138,770         3,434,000         3,896,000        34,462,679
Kansas..................................  ................         1,927,000         2,188,000        15,862,659
Kentucky................................         3,279,264         3,223,000         3,663,000        24,159,896
Louisiana...............................  ................         1,669,000         1,926,000        15,793,748
Maine...................................        10,510,713         2,123,000         2,412,000        23,801,167
Maryland................................        56,581,181         2,191,000         2,480,000        29,262,298
Massachusetts...........................        42,179,186         4,645,000         5,256,000        77,326,683
Michigan................................         6,540,712        10,206,000        11,558,000       102,528,794
Minnesota...............................        11,189,589         6,573,000         7,446,000        72,967,826
Mississippi.............................           918,641         1,358,000         1,551,000        13,291,039
Missouri................................         2,000,000         4,222,000         4,789,000        42,251,922
Montana.................................         3,151,752         1,753,000         1,994,000        11,199,768
Nebraska................................  ................         1,803,000         2,049,000        17,066,470
Nevada..................................           455,387           769,000           884,000         3,418,118
New Hampshire...........................         2,156,123         1,176,000         1,336,000        14,543,697
New Jersey..............................        92,810,684         4,001,000         4,523,000        72,478,497
New Mexico..............................           500,000         1,430,000         1,631,000         8,846,522
New York................................        55,296,250        13,921,000        15,730,000       236,485,833
North Carolina..........................         2,104,658         3,213,000         3,654,000        33,015,992
North Dakota............................  ................         1,727,000         1,966,000        11,520,492
Ohio....................................       127,359,566         9,484,000        10,742,000        94,532,311
Oklahoma................................         1,981,037         2,004,000         2,280,000        13,287,038
Oregon..................................        11,695,654         2,105,000         2,396,000        20,940,364
Pennsylvania............................       140,715,909        10,076,000        11,409,000       126,165,069
Rhode Island............................         3,855,081           947,000         1,076,000        12,846,941
South Carolina..........................           537,289         1,514,000         1,729,000        12,099,894
South Dakota............................           923,719         1,364,000         1,553,000         9,706,274
Tennessee...............................  ................         3,109,000         3,535,000        23,785,839
Texas...................................         4,333,601         5,169,000         5,936,000        40,596,786
Utah....................................         2,194,731         1,557,000         1,774,000        13,509,870
Vermont.................................         4,638,207           986,000         1,121,000        10,808,709
Virginia................................         2,202,689         3,120,000         3,541,000        34,491,924
Washington..............................        18,768,914         3,288,000         3,746,000        33,054,374
West Virginia...........................         3,207,371         2,275,000         2,582,000        16,128,816
Wisconsin...............................        28,189,986         5,829,000         6,603,000        65,903,241
Wyoming.................................  ................           915,000         1,046,000         5,459,900
Source: Supplements and LIHEAP figures are from the LIHEAP Clearinghouse. State Energy and Weatherization figures are from the OMB.

    Chairman Nussle. First of all, Dr. Hubbard, you have had an 
opportunity to listen to some of the State circumstances as 
Mrs. Bourne has just outlined it. What would you suggest in a 
nutshell are the lessons learned thus far from the west coast 
experience, in your opinion, as we begin to look at an overall 
national energy strategy?
    Mr. Hubbard. Well, I first agree with what Mrs. Bourne 
said. I think it is very important to stress the role of market 
forces, but we have to remember that market forces have to be 
completely market forces. I think one lesson we have learned is 
that very partial deregulations can lead to very significant 
adverse consequences. So I think that in implementing 
deregulations, one of the lessons from the State experiments is 
that we need to focus on getting complete deregulation.
    Chairman Nussle. The purpose of this hearing, just from an 
overall macro sense, because that is what we have to deal with 
here at the Budget Committee is obviously making macrodecisions 
about Federal priorities as we move forward. And obviously 
economic growth, the economy in general has a very large impact 
on that both from a receipt standpoint as you have outlined as 
well as an expenditure standpoint.
    Clearly from your testimony there is a very direct impact 
on the budget, short term and long term. Is there a way that 
you can boil that down for us so that as I am talking to 
colleagues, as I am talking to people in the media, as I am 
talking to constituents, that I can describe for them what the 
impact will be on the budget in the short and long term? How 
would you describe it for me in a nutshell, without being 
disrespectful, in a noneconomist, as much as that is possible, 
language so that I can describe it to other Members and to 
    Mr. Hubbard. Sure. I think the simple way to think of it is 
the energy price increases reduce national income, and you can 
use rules of thumb. Every percentage point of GDP lost is about 
$100 billion. And the tax share in GDP at the margin is about 
.3. So you can use calculations like that to illustrate.
    The effects are actually, as you said, Mr. Chairman, quite 
substantial. I think they point toward a long-term focus, 
because, frankly, in real time there is very little that the 
committee could do in reacting to energy price fluctuations. 
But I think what you can do is encourage long-term 
infrastructure investments and remind people that if we make 
the right long-term policies, we are much less likely to pay 
those costs that you have identified impacts.
    Chairman Nussle. One of the primary concerns after the 
budget is written here at the committee and we begin to enact 
the budget is to enforce it, because if, in fact, we are not 
able to enforce the constraints, I call them riding the fences. 
We have got fences around Medicare and fences around Social 
Security. We have got so many fences, we are building fences 
all the time. The good news about those fences is that so far 
they are holding, but if they don't hold, and if we see a 
downturn, and that has an impact on the budget that you are 
describing, then there is going to be pressure on those fences, 
on the tax fences and the possibility of providing additional 
tax relief in the future, on the spending fences, because we 
are going into the appropriations season right now, and 
Washington likes to spend money. That is how we send out the 
press releases back home, let people know what we are bringing 
to them in the different appropriation bills that are moving.
    And so what you are describing for us right now is that 
there is in our energy strategy a direct nexus between our 
ability to do a good job and in providing the stability in this 
market and the overall long-term stability and predictability 
in the budget. Do you see any icebergs out there in the 
immediate future that we need, as has been described? I think 
``iceberg'' was used by Mr. Hanger. What icebergs do you see 
out there in the immediate future that we need to keep an eye 
    Mr. Hubbard. Well, in regards to energy markets and 
electricity markets, I think one iceberg is clearly the 
California situation, which I don't anticipate any early 
resolution of. A second iceberg is, just as came up in Mr. 
Hanger's testimony, the fact that we do have Balkanized energy 
and electricity markets in many ways, and until we move toward 
a better and more uniform infrastructure, we can get regional 
price spikes. We can get gasoline prices that are quite high in 
some parts of the country, or it could be electricity, or it 
could be natural gas. So I think it a focus on infrastructure 
is one.
    Chairman Nussle. Mr. Hanger, your testimony on the demand 
information to the consumers, the consumer information, I 
thought was quite illuminating. Your entire testimony was. I 
appreciate you coming and you are right, when the ocean liner 
reaches the shore, and there isn't any malfunction along the 
way, it doesn't really get much attention. We are trying to 
give you that attention here today.
    Back in my district I had the opportunity to talk to a 
local municipality that is doing some of the things that you 
were suggesting, providing better consumer information, prior 
to getting the bill about exactly what the prices will be of 
the energy used during different parts of the day, year, 
season, et cetera. One of the examples they used is going out 
and I am not sure I know all the fancy language for it, but 
they do some blow tests to show where the leaks are in the 
house for weather decisions, as an example. They also take 
photographs, infrared photographs, to show whether or not they 
need insulation, as an example.
    Is there a way to quantify the effect, in your opinion, on 
what this can have? I think there has been a lot of good 
comments today about conservation and renewables, but in this 
area in particular, where there is some personal responsibility 
in this energy crisis, this isn't just a matter of just 
accepting this and assuming that you have no impact on it. The 
personal responsibility here I think is important. Is there a 
way to the quantify how this can effect the energy situation 
that we find ourselves in?
    Mr. Hanger. A couple comments before getting to the 
quantification issue. I would like to distinguish between what 
I call energy conservation or energy efficiency and demand 
response. Energy efficiency or conservation is, I think, vital 
to navigating our energy future. In that category I would put 
things like the increasing insulation in homes, appliance 
efficiency standards, auto efficiency standards, compact 
fluorescent light bulbs, both public policies and market 
choices that people make in order to use energy less 
    Demand response is what I am trying to focus on, is giving 
consumers both the tools, they need some tools, and the 
information in order to make changes in how they use 
electricity and when they use electricity. That is critical to 
the functioning of a market.
    I think it is unfortunate the energy conservation has 
become almost polarized ideologically. There are some people 
that just think it is a waste of time and money, and there are 
some people that think it is the Holy Grail. I am more, 
frankly, in the camp that it is the Holy Grail. But I want to 
distinguish that debate from the need to get demand response 
functioning in the market. You cannot have an effective 
electric market, either the wholesale or retail level, unless 
customers can change how they use electricity and when they use 
electricity. You will get price spikes. You will have market 
power, you will have misallocation of resources, no matter how 
you design the market.
    So I just want to make it clear that there is a distinction 
between demand response and energy efficiency. I have seen data 
on the Nation's energy efficiency, and certainly I believe it 
is the case that more or less our economy is about 40 percent 
more energy-efficient today than it was, say, 30 years ago. So 
we have made significant progress over the last 30 years in 
generating more GDP with less energy per dollar GDP. And 
Secretary Blake indicated that that was likely to continue and 
should continue.
    Many customers can certainly reduce electric usage with 
very minimal interventions in their height of business 
operations or homes by 10 percent. That is an easy goal for 
many businesses or homes to do, and in some cases that is 
happening through price spikes. Price spikes did make people 
aware of the need to conserve energy. And other cases it is 
being advanced by energy policies like the appliance standards 
that are going through the Department of Energy's regulatory 
process now.
    Chairman Nussle. Thank you very much.
    Mr. Spratt.
    Mr. Spratt. Thank you all for your testimony. And I have 
questions for all of you, but for the fact that time is getting 
away from us, I wanted to ask Dr. Hubbard quickly. I read your 
testimony and listened to what you had to say, and I gather 
that you weren't greatly concerned about the impact of energy 
prices on the economy right now so long as there is no further 
shock in price increases. And I may be misreading what you have 
    Mr. Hubbard. Well, I think the fair way to say it is that 
energy price increases have contributed to the growth slowdown 
we are in right now, but going forward the question is one of 
the impact of even higher energy prices, and I think there the 
worry is a little less severe than it has been in the past 
couple of years. That doesn't mean, though, we are not going to 
have very important regional price spikes, and that is where I 
think the attention needs to be.
    Mr. Spratt. Don't you think that if oil stayed ratcheted 
about $30 a barrel and gas prices stayed over $5 per MM BTU, 
that this would create a drag on the economy?
    Mr. Hubbard. It certainly would, Congressman. The oil 
prices are predicted to stay high through 2002. Gas prices are 
predicted to come down a bit.
    Mr. Spratt. One of the rules of thumb that you cited on 
page 8 of your testimony was from an IMF analysis indicating 
that the shock that we have experienced before, going from $11 
to $20 and then on up to $30 a barrel over a 3-year period of 
time would have an effect of about two-tenths of a percent the 
first year and then four-tenths of a percent on production and 
the output in the second year.
    OMB told us not long ago as a rule of thumb if there is a 
1-year, \1/2\-percentage point reduction in GDP, that we could 
expect about $6 billion reduction in the unified surplus the 
first year, about $15 billion the second year, and by year 4 or 
5 it would be about $20 billion, cumulative effect. Do you have 
any rules of thumb like that for applying the likely diminution 
in output to the budget that we are dealing with and to the 
unified surplus in particular?
    Mr. Hubbard. Again, going back to the chairman's question, 
too, the easiest rule of thumb is on the tax side. So a half of 
percentage point loss of GDP is about $50 billion, and that 
would lead to revenue shortfalls as much as $15 billion. The 
spending would depend on your assumptions about pass-through 
into COLAs, but you could well be looking at budget hits at 
least $15 to $20 billion, so the OMB number is perfectly 
    Mr. Spratt. The first year or over time?
    Mr. Hubbard. By the second year probably.
    Mr. Spratt. Are those effects factored into the forecast 
that we are working with now?
    Mr. Hubbard. Well, certainly when the Congressional Budget 
Office does a macroeconomic forecast for you and for the 
Congress, they would be making assumptions about energy prices. 
The administration does that in coming up with our own budget. 
So that would be factored into assumptions that the CBO would 
be doing for you about growth and the economy.
    Mr. Spratt. We have got that May study, but the two 
forecasts that we have been using, the OMB's budget that came 
up in January and CBO's analysis that came on January 30, both 
really came too early in January to be based on fourth quarter 
calendar year 2000. They really went back to the third quarter 
with some extrapolation. And a lot of this has kind of reared 
its ugly head since last fall. We have only begun to see that 
this is something that is a significant change. It is not going 
away in a hurry. We hope it will go away in time, but it is not 
going to disappear in a hurry. My question is have we really 
taken account of these effects of energy yet in the forecasts 
that we are basing the budget upon?
    Mr. Hubbard. Certainly the forecasts, at the time the 
budget documents and the CBO analysis were prepared, would have 
used energy price forecasts at that time. We are in midsession 
review season both here and in the administration, so whatever 
the current forecasts are going forward for energy prices would 
be used in the review. So I think when you get the midsession 
review from the CBO, the new energy information should be 
reflected in that baseline.
    Mr. Spratt. When will you have your review completed at OMB 
and the White House?
    Mr. Hubbard. My guess is that we should have ours completed 
sometime in early August. We are in the middle of the process 
    Mr. Spratt. Thank you very much.
    Chairman Nussle. Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman. I will say coming 
from the oil patch, I have sort of a mixed view on this, 
because at the same time of the high prices, particularly of 
gas prices, it is having a very detrimental effect on the 
petrochemical economy, which I also have a great deal, since 
most of our petrochemical plants now use gas and feed stock as 
compared to their competitors abroad, which still use oil as a 
feed stock, so it creates a problem. But I think it also is 
indicative of how quickly the energy markets clear, because if 
you go back just a couple of years ago, as you noted in your 
testimony, Mr. Hubbard, gas prices were 50 percent of where 
they were. In gas E and P was off dramatically. The same could 
be said in the oil market where oil prices dip below $10 a 
barrel, and the E and P was off as well.
    The ability to raise capital, and I think the ability to 
raise capital in the United States is pretty indicative of a 
free enterprise market, was almost impossible. And the ability 
to raise capital for a refinery operation, because the margins 
are so narrow, as you know, was next to nil.
    In fact, I can remember 15 years ago, before I was in this 
job, in the investment banking business where you couldn't rise 
a dime of capital for a refinery, and, quite frankly, it had 
little to do with environmental regulation. It had to do with 
the fact that you just really couldn't make any money in it.
    I do have some questions that I want to ask you. You talk 
about the boutique fuels and the tightness in that market. I am 
curious why, if the administration is cognizant of that fact, 
why would the phaseout of MTBE as a fuel additive because of 
its effect on groundwater supplies, why the administration 
would go ahead and move toward this imposition of use of 
ethanol, which could seem to me to only further Balkanize the 
refined fuel markets. And so I am curious about that.
    I would also like to get your opinion, which doesn't affect 
administration policy, but from your academic background--well, 
it does take into effect administration policy. The 
administration policy is now to push for expansion of E and P, 
and I have two issues with that. One, what is the risk that we 
overshoot, as we have overshot in the past, by artificially 
trying to create investment. Second, whatever the reason, just 
a few years back when you had transmission companies apparently 
moving out of the transmission business and consolidation 
occurring somewhat in that, along particularly in the pipeline 
business, and transmission companies, including some in my home 
area, moving more into the consumer and trading side, what was 
the impetus for that?
    Mr. Hubbard. Well, you have really asked three questions. 
Let's take them in turn. On the boutique fuels issue, I think 
the MTBE decision is reflective that it was a very good 
environmental policy. My purpose in bringing it up is simply to 
make sure that we all understand the trade-offs and we make 
these policy decisions between environmental policy and energy 
    Mr. Bentsen. If I might interrupt, I appreciate that 
because I do agree there are trade-offs. I guess my question is 
why wouldn't the EPA move with a phaseout rather than a 
complete walking away completely from MTBE, but a phaseout of 
MTBE as opposed to imposing a requirement for ethanol? I don't 
want to get crosswise with the chairman being from the Corn 
Belt, because, quite frankly, the transmission structure of 
that, the refinery structure of that is not in place. It would 
seem to me that would be counterproductive to where this 
administration wants to go to stabilize refined gasoline 
    Mr. Hubbard. Well, again, I apologize. I would really have 
to defer to my EPA colleagues, but I think the general 
principle that was involved was, again, environmental policy 
versus energy markets.
    On your second question about overshooting, you are 
absolutely right to frame the problem in the way that you did. 
And you started with the example in the past of low margins. 
And I think this industry, take refining in your example, is 
one in which you have very uncertain prices, and uncertainty 
can affect investment greatly. So I think the goal in energy 
policy, in the energy strategy, is not for overshooting, but to 
provide the right market incentives to guide that long-term 
investment, which could be everything from more certainty in 
regulatory policy to making sure that we have neutral playing 
fields for those investments.
    So I agree with you. You are focused on exactly the right 
thing, but at least the goal of the energy strategy is to let 
market signals provide that as opposed to shifting regulatory 
    Your question about the activities of the companies 
involved, really it is hard to say these are sound business 
decisions of folks in the private sector. I think it reflects 
the fact that energy is quickly evolving, as you know quite 
well, into a risk management business as well. And I think much 
of the shift you are seeing in some of the companies involved 
reflects that increased focus on risk management and the 
availability of more instruments for risk management in energy.
    Mr. Bentsen. Thank you.
    Chairman Nussle. Mr. Honda.
    Mr. Honda. Thank you, Mr. Chairman.
    I guess the graph that I was interested in was a chart that 
Mrs. Bourne had shared with us and the chart with all the 
States and their state of deregulation. The column, price, 
fixed rate, cuts, caps and freezes, you had something like 14 
States that had either freezes or rate caps, and the rest 
weren't. I guess there were 7 others that didn't have any. 
Could you tell me and share with us the reasoning behind the 
States' decision on imposing State freeze caps on regulatory 
caps and those States who had not imposed those?
    Mrs. Bourne. Each State made the decision separately. Some 
wanted to have more of a market approach to it, and others were 
very concerned about the rates possibly going up, so they just 
selected different things that they thought would work for 
those States.
    Not having been in the process at the time, I have not yet 
found the reasoning for each State. Just from a personal 
perspective it was a very well intentioned approach to put 
these things into place. They were anticipating some jumps in 
prices, it could happen, so they put these price controls in 
place, and they put it in each State that they have them, each 
was a different way as well. It could be for a period of 3 
years or 5 years. Some, I think Pennsylvania, has one for 9 
years. Some of them are for residential customers; some of them 
are just for industrial customers. Some are at the wholesale 
level; some are at the retail level.
    Mr. Honda. Would it be fair to say that these various 
States imposed these tools because there was--there was--I 
guess it is a measure of their confidence whether the market 
was going to really go down for the rates, so they imposed 
certain kinds of price capping, if you will. Some were 
temporary, others were permanent; is that correct?
    Mrs. Bourne. None of them are permanent that I can find. 
They are just for different lengths of time.
    Mr. Honda. Would you say that the motivation was to see 
what happened in terms----
    Mrs. Bourne. Sure. And that is probably a prudent thing to 
do. When you are in a free market, and you are going from a 
regulated environment to a deregulated environment, you don't 
necessarily know how things are going to respond. But what we 
do not know now is what these various caps, freezes, etc., what 
kinds of an impact they had. I think that is more important to 
find out at this point in time. I think someone used the word 
``gaming'' the market earlier today, and I don't know if we are 
talking about regulators gaming the market or the private side 
gaming the market. I don't even like the term ``gaming the 
market,'' because I don't think that is what was taking place, 
but clearly the controls maybe having an impact. But we really 
don't know what that impact is.
    Mr. Honda. In those States that have imposed these freezes 
or caps, although temporary, have they experienced what the 
Western States have experienced?
    Mrs. Bourne. Each State is different. For example, 
California had a cap in place, and it still has prices going 
up. Other States have not had those prices. I think it is more 
of a reflection of the fuel mixes that they have. They are not 
so dependent on one particular type of fuel for energy.
    Mr. Honda. So did any of those States have the bidding 
process that California had? What are some of the distinctions?
    Mr. Hanger. Can I jump in here? The PJM power pool, which 
serves Maryland, Delaware, New Jersey, soon to be all of 
Pennsylvania, and this building, Washington, DC, do have the 
same bidding process that is used in California. This bidding 
also has a wholesale price cap of $1,000 per megawatt hour. The 
reason why Pennsylvania has a rate cap is that this is a 
transition period. We are going from 60 percent of monopoly 
regulation of a commodity that has unique characteristics. We 
cannot basically store electricity. Beyond that, supply and 
demand have to be constantly in balance every minute of every 
time. It is quite different from coal, where you can pile it up 
and store it. Gas you can store.
    Frankly, the market institutions are not in place to do the 
trading. We don't have free movement of electricity in large 
regional markets. So there has been two huge interventions in 
the free market in every State that I am aware of, one on 
behalf of shareholders. It is called stranded cost recovery. A 
market wouldn't recover those costs for shareholders. They have 
lost it. The trucking industry didn't have stranded cost 
recovery. The airline industry when it was deregulated did not 
have stranded cost recovery. If you switched from Eastern to 
United, you didn't keep paying Eastern for the ticket you no 
longer bought from them. I have switched my supplier, I am 
still paying my old supplier $10 a month.
    That is huge growth intervention, raising the price of the 
market price of electricity on behalf of the shareholder. To 
compensate or offset that during the periods of transition, 
Pennsylvania, I think wisely, has done two things, imposed a 
rate cap while that period of stranded cost recovery is going 
on, but give the utilities all the instruments so they can meet 
the costs of rate cap; in other words, supply power at that 
capped rate.
    That is what California failed to do. California imposed 
the rate cap at the retail level then mandated that the 
utilities divest 50 percent of their power plants and buy all 
of their power out of the spot market. Pennsylvania did not 
mandate divesting the historic power plants that the ratepayer 
basically had paid for through the cost of service, regulatory 
process, and gave utilities complete and total discretion on 
contracting, so that the utilities in Pennsylvania, with the 
one exception of GPUs recently had some problems, but we are 
through that now, had no problems meeting the rate caps. In 
fact, they are flourishing. I am delighted to say that 
Pennsylvania utilities are highly profitable, and the rates are 
capped, and we are building over time a competitive market.
    Mr. Honda. So in the process of giving a stamp on these 
plans, different States, all these plans went through FERC?
    Mr. Hanger. Well, Pennsylvania's retail plan never really 
went through FERC. I want to compliment FERC for cooperating, 
at least when I was on the commission. I think it has happened 
since I left the commission, with Pennsylvania's retail plan. 
We had, frankly, the benefit of having a very sophisticated, 
probably, of what the wholesale markets call the PJM power 
plants, frankly, the largest free trade zone for electricity, 
and that basic wholesale market was able to be as liquid and as 
free and as successful as it was because it existed for 60 
    California tried to create the wholesale market or trading 
mechanism out of whole cloth. You didn't have anything up to 
1998. So FERC did not review the Pennsylvania retail plan, but 
FERC certainly played a constructive role in the wholesale 
market in Pennsylvania. But States don't have to give a retail 
restructuring plan to FERC for an approval.
    Mr. Honda. So the key, in your opinion, then, in California 
was that although there was a rate cap imposed on utilities, 
and the piece was that they should not have allowed the 
utilities to buy versus or----
    Mr. Hanger. They required them. That did two things.
    Mr. Honda. That was the piece that would supply----
    Mr. Hanger. They imposed a rate cap, which you can do. 
Pennsylvania's rate caps are going to survive until 2010. But 
you have got to give the utilities the way to meet the cost of 
that rate cap, and they have had historic generations that they 
have been paid for by ratepayers that are basically paid off in 
many cases. Plus if you give them the contracting capability so 
they can enter into long-term contracts--when Pennsylvania made 
the transition in 1998, there was oodles of power on a long-
term basis well below the rate cap. So any utility could have 
gone out and bought electricity at basically 3 cents a kilowatt 
hour, and all these companies have been accused of price 
gouging, but have been lined up to sell in Pennsylvania at 3 
cents for 5 or 10 years. It was at that time in Pennsylvania a 
buyers' market.
    Mr. Honda. I don't disagree with that. This probably was a 
mistake of requiring PG&E to divest themselves of the 
production portion of it. Was the assumption that if they were 
required to divest themselves, that would open up the entire 
market of supply in different States?
    Mr. Hanger. I served with some of the commissioners in 
California at the time, and I know that the concern was there 
was horizontal market power. In other words, the existing 
utilities own the most of the generation. You would not have a 
competitive generation market unless you required divestiture. 
That was the concern, and that is an important, legitimate 
    And another unique characteristic of electricity is that 
demand is highly inelastic. That is why I come here today 
talking about demand response, which I think is a matter of 
national importance. We have to make the demand curve more 
elastic for electricity. But when have you a commodity or a 
product with a demand curve that is highly inelastic, it is 
very easy to exercise market power. You don't, in fact, have to 
have 80 percent of the market cornered in one company in order 
to get very serious market power problems. And I do not believe 
that electric restructuring competitive generation markets will 
maintain public support simply by repeating illogical 
statements. They have to work. They have to produce results for 
the consumers. And if the public loses confidence in this, we 
can come up here with all of the paeans to the free market, and 
it won't mean a hill of beans.
    Congressman Hoekstra's question about where did that 30 
cents go is going to get more poignant and more difficult to 
answer. We have to make these markets be properly designed, 
have to have a transition period, and, very frankly, we have to 
make them genuinely competitive. And there is a role for 
government in making sure that they are genuinely competitive.
    Mr. Honda. That is?
    Mr. Hanger. That role? Well, do we have all day? At a 
minimum it is two or three things that I would highlight. One 
is working right now on the demand response. These markets 
won't be, in my mind at least, free of very troubling market 
power until you get demand response.
    The second is making sure that the way you collect stranded 
cost recovery doesn't, in fact, kill the market. In California, 
another problem is that he collected stranded cost in a fashion 
that made it impossible for any new company to enter that 
market at the retail level. Enron is getting kicked around a 
lot in the media these days. Enron spent about $10 million in 
1998 trying to enter the retail market in California, and they 
lost their shirts. They finally figured out one of the rules 
that been established there, which is basically called the 
default rate, made it impossible for any new entrant to enter 
that market and beat the default rate, which was an 
artificially imposed lower price.
    So there is a whole series of policies both at the Federal 
level and the State level that need to be emphasized.
    And the last thing I would say is that we do not have 
trading mechanisms for electricity across this country. You can 
build all the power line you want, and that will not create 
competitive wholesale markets. We do not have the institutions. 
I am talking about institutions--we don't have the equivalent 
of the New York Stock Exchange and the SEC that creates the 
trading mechanisms. So merely building power lines isn't going 
to create a competitive market. All that may do is entrench the 
local monopoly.
    We have got hundreds and hundreds of separate markets that 
are basically in the wholesale level. Each local utility 
service territory is almost its own individual wholesale 
market. Again, if we organize any market, whether it is cars, 
potatoes, I don't care what it is, in that fashion, we would 
have a disaster. So the details matter. Ideology, whether it is 
from the left or the right, isn't going to get us through this.
    Mr. Honda. Great. Thank you.
    Chairman Nussle. I thank the gentleman. Those are great 
questions and very interesting responses, which is why I let it 
go a little longer than it should have, but that is what we are 
looking for.
    I appreciate the testimony of this panel. I appreciate you 
taking the time to do this. It was all very interesting 
testimony. And clearly, again, we have established that not 
only does this have an impact on the economy, but, therefore, 
on the budget overall. And so I appreciate the testimony that 
you have provided us here today. Thank you.
    The final panel that we have before the Budget Committee 
today consists of three witnesses: Justin Bradley, who is the 
energy project manager at the Silicon Valley Manufacturing 
Association; William Beach, who is the director of the Center 
for Data Analysis of the Heritage Foundation; and David 
Bradley, who is the executive director for the National 
Community Action Foundation.
    Welcome, all three of you, to the witness table. Your 
entire testimony will be made part of the record, and I would 
ask that you take the time allotted to summarize your testimony 
as you see fit. And we will begin with Mr. Bradley.



    Mr. David Bradley. Thank you. I appreciate this opportunity 
to share some thoughts with you. This hearing has thoroughly 
explored the long-run promise of the free market for energy 
consumers. I am a little bit afriad it falls for me to raise 
further deep concerns about the promise, concerns I believe are 
shared among millions of American consumers, not only the very 
low-income families who are clients of community action 
agencies that I work with. Many others live from paycheck to 
paycheck and have little flexibility and few assets to draw 
down when facing dramatic changes in the cost of energy. Low-
income consumers need stable and affordable prices. Both these 
adjectives are important.
    Our low-income clients are indeed very concerned about 
price, immediate, midterm and long-term. The poor live in a 
short time frame because of the continuous threat of economic 
loss and prices without having any reserves or wealth to tide 
them over bad times. Community action agencies, of which the 
weatherization program you saw in Iowa would be the operating 
home, specialize in getting families and elderly through these 
crises of their life and trying to keep people on the brink of 
poverty from losing ground as they struggle to remain self-
sufficient. The roughly half billion dollars of LIHEAP 
assistance they deliver annually, and the weatherization 
assistance services are part of about $6 billion in services 
that the 1,100 CAAs provide nationwide.
    It is important to understand that there are two things 
that we are deeply concerned about. One of them is volatility, 
especially when it means higher cost. It is not tolerable for 
the small consumer without discretion to switch family spending 
priorities or to draw down assets. Many families will cut back 
on vacations this summer, but the poor have cut back on 
medication, food, and have run up debt.
    I have two charts which I would like to submit for the 
record showing the impact of the fiscal year 2001 energy bills 
on the poor. Figure 1 in my testimony shows the cost as a 
percent of income for poor and nonpoor consumers. If the 
median-income household expense of energy were as high a share 
of income as the poor have this year, its bills would have 
exceeded $6,000 by now on average and would be $10,000 come 
    And I realize a lot of this hearing is focused on the 
administration's national energy policy. There are some things 
about the energy policy that we are very much in favor of, and 
there are others, obviously, that we and others have raised 
concerns about.
    It is important to note that the National Energy Policy 
Development Group did recognize the energy burden on low-income 
households, energy bills are higher as a proportion of income 
than for other American households, and also it recognized that 
low-income families have to make the choice between basic 
needs: food, clothing, rent and paying their utility bills. 
Once they are behind on the bills, getting caught up becomes 
impossible for many. The elderly will often forego the 
prescriptions, the medical care and even basic nutrition that 
enables them to maintain their health and independence to pay 
    The NEPD Group recognized two important programs: 
Weatherization and LIHEAP. And on the first, weatherization, 
the administration proposed a $120 million increase, which I 
believe this Budget Committee supported, but unfortunately, 
what we are seeing right now is the clash between energy policy 
and budget policy. The administration's energy policy request 
and the initiative that they unveiled had one primary low-
income energy program initiative in there, and that was 
weatherization, but on the first test, the first test of 
funding this program, the House Interior Committee, despite a 
bipartisan, strong effort, failed. The President's low-income 
weatherization funding request was not honored; it has fallen 
short of the request that the administration thought that they 
would get.
    We were delighted when the President insisted on raising 
weatherization back to its historic levels and enjoyed the 
partnership in working with the new DOE staff, but we are 
concerned that new budget policies make for difficult low-
income energy choices for millions of Americans.
    This extremely effective program cuts the main fuel bill by 
over 20 percent on average. It saved weatherized families an 
average of $300 this year, or nearly half of one typical 
client's Social Security check. Figure 3 in my written 
testimony shows the value of past weatherization to the 
families who are now enjoying lower bills, along with the 
LIHEAP funding now available this year.
    The second major concern, particularly for the low-income 
energy consumer, is LIHEAP. The major tool in dealing with 
volatility in energy is the LIHEAP program. It is a very blunt 
instrument. Even when it is delivered in time to plan, 
advertise and manage the program, as it was in fiscal year 2001 
when the contingency funds in regular appropriations totaling 
$2.25 billion were available early in winter, and our local 
agencies could hire the staff, open the phones, and States 
could set the highest possible benefits in eligibility, their 
forecasters thought prudent. This year has proven that, even 
when the funds are available early and when coupled with 10 to 
20 percent more in charitable, utility, State, and local 
giving, there simply was not enough to meet the demands and 
prevent massive numbers of utility shutoffs in this warmer 
    We have worked with the Congress and several members on 
this committee on a bipartisan basis to win a $600 million 
LIHEAP supplemental, and one-half of that is now in the 
supplemental appropriations bill for 2001. There is some hope 
that the Senate on a bipartisan basis may add double that 
figure to $600 million for the supplemental.
    The President has repeatedly expressed his concern for 
LIHEAP as recently as in his trip to the west coast 2 weeks 
ago, and he is obviously feeling the constraints as well. The 
administration's request on LIHEAP actually is 20 percent below 
the current outlays of the energy program. This comes in spite 
of the Department of Energy predicting no real energy price 
changes, in the upcoming year.
    I would hope that as you look at the energy policy, as you 
look at programs that make a difference in the lives of people, 
that you keep an eye on both weatherization and the LIHEAP 
program. Senators Murkowski and Lott have sought to increase 
LIHEAP to $3.4 billion through fiscal year 2010 and increase 
weatherization from $250 million up to $500 million by fiscal 
year 2005. The Senate has also adopted with bipartisan support 
an amendment to the bankruptcy legislation that would increase 
LIHEAP authorization to $3.4 billion. Many, including Senator 
Domenici, joined on that amendment.
    Low-income families need your assistance, and they need to 
be remembered as this debate develops. According to DOE, more 
than 1.1 million low-income families lost their heat in winter 
for several days or more because of their inability to pay in 
1997. We believe this year will be worse than in any recent 
year in history. Our agencies have cobbled together many 
programs and many program resources to deal with families 
facing these crises, and move them to shelters, evaluate them 
for food and medical and other benefits that could help them 
pay their bills; however, all of the programs that help the 
low-income cope with the effects of this devastating energy 
crisis in some way are supported by Federal (or State) 
discretionary funds, so strategies need to be considered and 
dealt with in light of the budget caps and uncertain funding in 
the future.
    We hope your committee over the coming year will seek to 
recognize low-income energy concerns in both the policy and the 
spending priorities so that low-income energy consumers are not 
left out in the proverbial cold. Thank you very much.
    Chairman Nussle. Thank you very much.
    [The information referred to follows:]

 Prepared Statement of David Bradley, Executive Director, the National 
                      Community Action Foundation

    My name is David Bradley, Executive Director for The National 
Community Action Foundation (NCAF). NCAF is a private, non-profit 
organization which serves as an advocate and lobbyist for low-income 
programs. NCAF works on a broad range of issues, including: including 
the Community Services Block Grant, the Low-Income Home Energy 
Assistance, Weatherization, Workforce Development, Housing and Shelter 
for the Homeless, Health, Nutrition, Tax and Incomes Policy, Welfare 
Reform, Head Start, Child Care Block Grant. Community Action Agencies 
deliver most of the DOE Weatherization Assistance Program services, 
about 40 percent of the LIHEAP benefits and services, and more than 
$100 million of ``leveraged'' energy resources such as energy 
efficiency contracts from investor-owned utilities.
    Our Community Action Agencies also work on redesigning and 
expanding the limited resources available today for keeping energy 
supplies flowing to the homes of the poor. They have been advocates at 
utility commissions and legislatures when the needs of residential 
customers are at stake.
    Many members of this Committee have been vocally concerned about 
the energy situation we have faced this year. Members from both 
Majority and Minority of this committee are counted among the 
longstanding champions of LIHEAP. The Ranking Member, Mr. Spratt is a 
long time champion of a vast range of our local initiatives. 
Congressman Moran is fresh off the field of funding battles on which, 
together, we fought for the President's Request for Weatherization last 
week--and got most of the way to victory.
    A recent report, ``The Winter Behind, the Summer Ahead: Low-Income 
Energy Consumers Face a Harsh Spring by Economic Opportunity Studies of 
Washington'' confirms in cold statistics the growing anguish of low-
income energy consumers. I am attaching a copy for the Committee 
Record; using Department of Energy statistics, it shows:
     Over the fiscal year 2001, the poor will need to spend 
about one-fifth of their entire income to purchase their basic home 
energy supplies for heat, hot water, lights and appliances;
     Worse, during the winter, the majority of poor ran up 
bills equal to nearly 30 percent of their entire winter income;
     These burdens were far worse for some:
     For homes heated with natural gas, bills since October for 
gas and electricity together have averaged $1100 so far; they can 
expect another $700 in costs for all energy before next fall;
     Fuel-oil users have spent about the same as gas customers 
so far this year; they face slightly lower summer bills:
     Propane users have been hit hard; their heating season 
costs, usually lower than average, averaged over $1000;
     Homes heated by electricity did not fully experience the 
price increases in gas this winter; their heating season bills averaged 
over $500 for all fuels; that statistic brings down the national 
average for all the poor. (DOE predicts no change in electricity costs; 
the bills we are seeing from communities across the country suggest the 
opposite, and we expect the burdens of electric heat users to become 
far worse shortly;)
     The households, who are not low-income, the majority of 
home consumers, will see annual energy bills total about 40 percent 
more on average than in past year, but their Energy Burden, or the 
percent of income they have to devote to energy, will be less than 5 
percent--as compared to 20 percent for the poor. The change means they 
have to give up nearly 1 percent more of their budget on average this 
year; for moderate income families, the percentage is higher, of 
course. And this is a significant expenditure to most families. Other 
spending will be delayed.
    To put it another way, if the energy bills of a family with $50,000 
a year ate up the same share of its income that the annual energy bills 
of low-income families devour, their average energy bills for would be 
$10,000. Of that, they would already owe more than $6,000 today!
    When economics or nature brings on such crises, most families 
adjust activities to pay for necessities. The poor do not eat out, take 
trips or plan home remodeling that can be put off, they do not have the 
savings to tap. This year, most of them do not expect a tax refund 
check. The poor, who not have enough disposable income to meet their 
needs and deal with life's unpleasant surprises at any time, face 
dramatic reductions in their budgets for food, shelter, medicine and 
other necessities. LIHEAP resources available this year have not kept 
up--but cuts loom in the future, nevertheless. The President's Budget 
Request would be a quarter lower than the resources available this 
year, if he chooses to release all emergency contingency funds.
    Mr. Chairman, the 29 million households that quality for LIHEAP 
will have spent $44 billion for their household energy in fiscal year 
2001. Available LIHEAP totaled about $2.3 billion in Federal funds and 
perhaps another $200 million in contributions from charities, states 
and utilities. These funds are exhausted in most states; caseloads went 
up by about a million families, including people our local CAA's have 
never seen come seeking help. We are told by the utilities that unpaid 
debts are at record levels and that stoppages of utility service will 
follow. We are hoping for a $600 million supplemental.
    In other words, $2.5 billion cannot meet the need this winter. The 
future, under the new Budget Resolution, portends reductions in real 
discretionary spending.
    The Outlook: Similar bills, growing debt, shrinking assistance 
    Mr. Chairman, the reason consumer energy costs are national 
headlines is the story about the new price of natural gas. 60 percent 
of all Americans use gas, most of them for home heat. Natural gas 
deregulation is complete; this winter was a trial run of market pricing 
of this basic, irreplaceable commodity under severe weather conditions. 
It has proved deregulation of a basic commodity means consumer prices 
will be unstable, at best, as demand is at the mercy of weather and the 
industry's needs. To the poor, this market means they cannot afford to 
be housed, fed and clothed, and to keep warm all in the same month.
    There is no reason to believe these energy costs represent a short 
term or unpredictable phenomenon. In most areas, this winter's weather 
was not extreme; the weather service averaged about 7 percent colder 
than normal. This was far worse than in the previous 2 years that were 
warmer than normal and may have been the aberration. Normal weather 
will recur.
    Further, retail gas and oil prices, while at record highs, are 
predicted by DOE to remain at comparable levels for several years. 
Attached is DOE's table of predicted residential costs: As you can see, 
natural gas prices are expected to be 24 percent higher next summer 
than this year, and roughly the same this winter. In 2002, they are not 
expected to improve. The Department of Energy predicts next years 
natural gas price, and the price this year will be essentially the 
same. $ 9.77 and $ 9.02. Fuel oil and propane prices are expected to be 
the same as well. And that is based on the weather being normal. The 
debts of the poor will keep growing, and the LIHEAP resources will not.
    WEATHERIZATION--a real solution but constrained by the spending 
    We are delighted to be working with the administration, which 
recognizes Weatherization Assistance is an effective way to provide 
immediate and permanent energy cost reductions to the neediest low-
income consumers. No other Federal program can promise comparable cost-
effective, long-term impact on the energy burdens of the poor, while 
reducing demand so that all consumers benefit.
    The Impact of the Proposed 2002 Funding Increases:
     If the current Administration's Budget for FY 2002 
restores the program to historic levels, family energy bill savings 
worth about $37 million per year will be added annually, or about $555 
million over the life of the energy improvements purchased with the 
additional $120 million.
    Relieving the burden of rising bills, for years to come:
     About $48 million was billed to poor families this year 
that could have been avoided if the original program levels had been 
maintained over the past 5 years. In 1994, the Weatherization Program 
had planned to improve 200,000 more low-income homes by now than have 
actually been improved.
     While 15 to 20 million more low-income homes need 
Weatherization, about 5 million homes have already been Weatherized 
with DOE and leveraged funding in tandem since 1979. Taking into 
account the changes in the homes and the improvements program over 
time, the avoided energy cost--the fuel not used and not billed to that 
low-income population of Weatherized homes this year--is about one 
billion dollars. Clearly, this is comparable to nearly half of LIHEAP 
expenditures this year.
    But we did not win the full Presidential request in the Interior 
Appropriations for 2002. Constraints on discretionary funds are 
pressing downwards on even this bipartisan initiative. We hope to 
regain ground, with the help of the White House, before spending levels 
are set in stone..
    And, finally, Mr. Chairman, those two domestic programs are not the 
only tools to solve this crisis; yet the proposed Additional Energy 
Policy offers nothing for the mid-term or long term needs of 
residential consumers.
     The supply of residential gas, fuel oil, and propane needs 
to be stabilized by re-building storage near the consumer, as proposed 
by the House Democratic Caucus;
     Regulations governing consumer protections, conditions in 
which families, children and or the elderly may be left in the dark or 
cold because they cannot pay must be re-examined. There is no longer 
real `universal service!' The Federal Trade Commission should have a 
role in regulating the denial of service as a routine collection 
     Our public and rural power system has virtually no 
protections nor help for needy families--yet we continue to heavily 
subsidize its growth and operations.
     There were extraordinary fuel bills charged to our local 
Community Action Agencies, too. Our Head Start and Senior Day Care 
centers are not in modern updated facilities, not our multi-service 
centers, out Weatherization crew offices nor our food pantries. CAAs 
stayed open nights and weekends through the worst of winter, and our 
overhead has skyrocketed. Our services may suffer; there are no 
Weatherization grants, subsidized loans or tax credits for our 
community-based centers.
     Indeed, the tax cut bill just put in place not only 
constrains programs, it put an end to the hope expressed in the 
programs of both parties that call for targeted tax credits as 
incentives for new technology and efficiency. CAAs could have used such 
credits as they use real estate investment credits, to lower the cost 
of energy efficient community developments.
    In closing, we appreciate this opportunity to emphasize that the 
benefits of market pricing are really only available to those who can 
respond to them. The poor cannot, and our local community action 
agencies cannot. The nation must find a better response and more 
effective protection for the growing numbers of vulnerable families 
hurt by the new and transformed energy economy.

    Chairman Nussle. Mr. Beach.


    Mr. Beach. Thank you very much, Mr. Chairman. My name is 
William W. Beach. I am the director of the Center for Data 
Analysis at the Heritage Foundation, and I will exercise my 
privilege as one of the last witnesses and keep this very, very 
brief. Let me just read a few paragraphs from my submitted 
    The President's energy plan shows great promise on a 
crucial redirection toward greater energy supply. The plan 
achieves greater energy production by prudently altering the 
schedule for attaining certain emission goals that power is 
generating, and refine facilities are encouraging conservation, 
developing alternative energy sources, encouraging gas and 
petroleum exploration, and supporting efforts to achieve more 
energy-efficient homes and office buildings. Indeed, the plan 
may be faulted, if for anything, for doing too much, not too 
little. It dramatically changes the course of energy neglect 
and bad practices by State and Federal Government over the past 
10 years.
    If Congress enacts key components of the President's plan, 
long-term prices for electricity and gasoline as well as its 
natural gas and coal will likely be lower than currently 
forecasted. The economic benefits of generally lower energy 
prices have been reviewed by the chief economist over at the 
Council of Economic Advisers, and it was put it in this 
testimony, and I won't go through them in any great detail 
except to say that it would generally raise the economy, indeed 
just as especially high petroleum prices almost always lead to 
sharp economic slowdowns in the U.S. economy. And that is 
almost without exception since World War II the case: lower-
than-expected energy prices almost always support improved 
economic performance.
    It is commonly known that the surplus, or technically the 
net deficit, of which your committee is keenly concerned, of 
the Federal Government is intimately tied to long-term economic 
performance. Any set of events or policy changes that push the 
U.S. economy on a higher growth path usually results in 
improved financial performance. Tax cuts have this effect, and 
so do sustained reductions in energy prices.
    Your committee asked me to perform a simulation, which I 
now report to you. I used the very standard model of the U.S. 
economy used by Fortune 500 companies. Most of the agencies 
which testified before you during the course of the year and 
many, many think tanks around town and the United States we 
felt we needed macroeconomic model to illustrate the economic 
and financial effects of a modest decline in energy prices, in 
this case a 10 percent reduction in crude oil prices beginning 
in the fourth quarter of this year through the end of 2011.
    Mr. Chairman, we are busy almost around the clock doing an 
analysis of the President's plan, and I would be more than 
happy at some future time to come back and report the results 
of those, but this little simulation indicates the direction of 
our results.
    While many in Congress and certainly the President have in 
mind much more aggressive energy solutions than the one I have 
chosen here, what is true of this small change will hold for 
those envisioned in the more global plan. The economic model 
indicates the following probable effects of crude oil changes, 
of this decline of 10 percent, will occur if that 10 percent 
decline begins in the fourth quarter of 2001.
    First, inflation-adjusted gross domestic price product 
prices by an average of $52 billion per year between 2001 and 
2011. This is after inflation or by about one-half of a 
percentage point. The near-term economic growth rate rises by 
three-tenths of a percentage point, and that is a significant 
and fairly substantial response from just that small of a 
decline in oil.
    Secondly, the decline in oil prices produces an average of 
173,000 more jobs per year. The increased productivity of the 
economy accommodates those new jobs, and the unemployment rate 
drops consistently below the forecast with higher oil prices. I 
have a chart in my extended remarks called chart 2 which shows 
the employment side. The civilian labor force increases by a 
small amount in the first 6 months following the decline, about 
2,000 jobs, before bounding up to 205,000 additional jobs by 
the end of the second year. Productivity gains keep the 
unemployment rate amazingly below the baseline forecast 
throughout this entire 10-year period. Fixed investment, 
adjusted for inflation, increases by a total of $202 billion 
over the 10-year period.
    Now, with respect to Federal revenues, we see a modest 
increase in Federal revenues, but we have a significantly lower 
expenditure picture in the forecast period. As my fifth chart 
shows, lower energy costs reduce Federal outlays.
    Some observers of the Federal budget process need to be 
reminded, certainly not yourself, Mr. Chairman, that the 
surplus frequently changes for nonrevenue reasons. Enormous 
attention paid to the tax policy changes over the past several 
months likely has obscured the fact that the general fund 
surplus is affected by changes in outlays more often than it is 
affected by revenue variation. Our analysis indicates that this 
small change in petroleum prices would produce a total of $100 
billion in lower outlay savings for the Federal budget over the 
next 10 years, so it is a $100 billion drop which you are 
currently looking at as your forecast.
    The reduction in energy prices results in a modest drop in 
inflation. While this decrease in the CPI affects the budget 
positively, it results in small decreases in revenues when 
compared with the baseline.
    And finally, as my sixth chart shows, the net effect of 
revenue and outlay changes adds a total of $76 billion to 
unified budget surpluses over this 10-year period, of which the 
greatest part is attributable to the general fund, and if your 
own estimates of what the President has proposed are correct, 
both on the tax side and on the budget side, it essentially 
means that if we see a 10 percent drop in petroleum prices, the 
surplus will rise sufficiently to cover all of the costs that 
you are looking at now in this 10-year plan.
    Considering that the crude oil policy changes largely 
enhance U.S. exploration and drilling, combined with foreign 
policy moves toward OPEC constitutes a small portion of the 
President's plan, it is doubtful save to assert that the 
results of a comprehensive modeling of this initiative will 
show much greater and larger budget results. That modeling 
effort is now under way at the Center for Data Analysis.
    Thank you, Mr. Chairman.
    Chairman Nussle. Thank you.
    [The information referred to follows:]

   Prepared Statement of William W. Beach, Director, Center for Data 
                   Analysis, the Heritage Foundation

    The current energy problems in the western and New England states, 
particularly California and New York, stem from a combination of 
Federal and state policy failures and higher foreign oil prices. While 
the low supplies of gasoline and the prices of electrical power that 
brought these problems to national attention have begun to improve, the 
underlying policy challenges remain. U.S. consumers of gasoline and 
electricity need more domestically produced supply, and Federal energy 
policy needs now to be redirected to producing wide-ranging increases 
in supply.
    The President's energy plan shows great promise on this crucial 
redirection toward greater supply. The plan achieves greater energy 
production by prudently altering the schedule for attaining certain 
emission goals at power generating and refining facilities, encouraging 
conservation, developing alternative energy sources, encouraging gas 
and petroleum exploration, and supporting efforts to achieve more 
energy efficient homes and office buildings. Indeed, the plan may be 
faulted for doing too much, not too little. It dramatically changes the 
course of energy neglect and bad practices by state and Federal 
Governments over the past 10 years.
    If Congress enacts key components of the President's plan, long-
term prices for electricity and gasoline (as well as natural gas and 
coal) will likely be lower than currently forecasted. The economic 
benefits of generally lower energy prices are widely shared throughout 
the economy in the form of higher productivity, higher real wages, and 
greater levels of economic output than would otherwise result from 
generally higher energy prices. Indeed, just as especially high 
petroleum prices almost always lead to sharp economic slowdowns in the 
United States, lower than expected energy prices almost always support 
improved economic performance.
    It is commonly known that the surplus (or, technically, the net 
deficit) of the Federal Government is intimately tied to long-term 
economic performance. Any set of events or policy changes that puts the 
U.S. economy on a higher growth path usually results in improved 
financial performance. Tax cuts have this effect and so do sustained 
reductions in energy prices.
    I used the WEFA Macroeconomic Model to illustrate the economic and 
financial effects of a modest decline in energy prices, in this case a 
10-percent reduction in crude oil prices beginning in the fourth 
quarter of this year through the end of 2011. While many in Congress 
and certainly the President have in mind much more aggressive energy 
solutions than the one I've chose here, what is true of this small 
change will hold for those envisioned in the more global plans.
    The WEFA Macroeconomic Model is well suited for this simulation. 
Besides being one of the oldest and most widely respected models of the 
U.S. economy, it is in extensive use in Fortune 500 companies and 
throughout the Federal Government. The Heritage Foundation has been 
using the WEFA model for the past 4 years to perform simulations of 
major policy changes.
    In preparing this simulation, no other changes were made to the 
model. In other words, I did not assume that the labor force would grow 
as non-workers decided to take advantage of increased economic activity 
to enter the labor force. Nor did I assume that borrowing costs would 
be lower than predicted by the model itself. It actually is quite 
common for economists to make these assumptions, and both of these 
changes to the model would have significantly improved the results. In 
other words, I allowed the model to calculate the effects of the one 
change I did impose on the equations: a 10-percent drop in petroleum 
    This economic model indicates the following probable effects if 
crude oil prices decline by 10 percent beginning in the fourth quarter 
of 2001:
     Inflation adjusted Gross Domestic Product rises by an 
average of $52 billion dollars per year between 2001 and 2011, or by 
about one-half of a percentage point. The near-term economic growth 
rate rises by .3 percent.
    Chart 1 shows the pattern of forecasted GDP growth following the 
price decline. Output jumps by nearly $30 billion above baseline in the 
first year before doubling by the end of the third year following the 
initial price drop. The sustained patter of above-baseline forecasts 
indicates that the energy price decline had a significant effect on 
economic productive.

     The decline in oil prices produces an average of 173,000 
more jobs per year. The increased productivity of the economy 
accommodates these new jobs, and the unemployment rates drops 
consistently below a forecast with higher oil prices.
    Chart 2 shows the employment side of the output growth. The 
civilian labor force increases by a small amount the first 6 months 
following the price decline (about 2,000 jobs) before bounding up to 
205,000 new jobs above baseline at the end of the second year. 
Productivity gains keep the unemployment rate below the baseline 
forecast throughout the 10-year period.

     As Chart 3 shows, fixed investment adjusted for inflation 
increases by a total of $202 billion over the 10-year period, and the 
annual rate of investment is nearly 1 percent higher than baseline.

    One important reason for the growth in fixed investment (investment 
in plant and equipment) is the forecasted lower cost of capital. Chart 
4 shows the pattern of capital cost changes. At the end of the period, 
the user cost of capital is about 70 basis points below baseline.

     The effect of greater economic activity modestly increases 
Federal revenues and produces significantly lower expenditures.
    As Chart 5 shows, lower energy costs reduces Federal outlays. Some 
observers of the Federal budget process need to be reminded that the 
surplus frequently changes for non-revenue reasons. The enormous 
attention paid to tax policy change over the past several months likely 
has obscured the fact the that the general fund surplus is affected by 
changes in outlays more often than it is affected by revenue variation.

    Our analysis indicates that this small change in petroleum prices 
would produce a total of about $100 billion in outlay savings to the 
Federal Government over this 10-year period.
    The reduction in energy prices results in a modest drop in 
inflation. While this decrease in the CPI affects the budget 
positively, it results in small decreases in revenues when compared 
with baseline.
     As Chart 6 shows, the net effect of revenue and outlay 
changes adds a total of $76 billion to unified budget surpluses over 
this 10-year period, of which the greatest part is attributable to the 
general fund.

    Considering that the crude oil policy changes (largely enhanced 
U.S. exploration and drilling combined with foreign policy moves toward 
OPEC) constitutes a small portion of the President's plan, it is 
doubtless safe to assert that the results of a comprehensive modeling 
of this initiative will show much larger budget results. That modeling 
effort now is underway in the Center for Data Analysis.

    Chairman Nussle. Mr. Bradley.


    Mr. Justin Bradley. Thank you, Mr. Chairman. I am Justin D. 
Bradley, and I am the energy director for the Silicon Valley 
Manufacturing Group, and actually with two Bradleys on and a 
Beach, perhaps we get a 3-D look at this issue and get a tan 
while doing it.
    With that said, what I would like to do is talk a bit about 
the manufacturing group and what we are doing.
    Manufacturing Group is a public policy trade association 
that was founded 22 years ago by David Packard of Hewlett-
Packard ironically to address this very issue, the energy 
crisis of the late 1970's, and today represents over 190 of the 
most respected high-tech employers and supporting industries. 
And collectively we employ more than 270,000 workers in Silicon 
Valley alone, representing 1 in 4 of the private sector work 
force. And all together, the Silicon Valley economy generates a 
gross annual regional product of $106 billion, with a Bay area 
economy at $350 billion, or one-third of California's economy.
    And one additional fact for those of you who invest is that 
one-third of the Nation's venture capital goes to that little 
region. So there is a lot at stake when we talk about energy 
policy for California, for the Western region and for the 
Nation when we talk about these matters.
    Some perspective first. It was about 1 year ago that I 
testified before the House Commerce Committee about energy, and 
I was on a panel with quite a few folks who were testifying 
about the high price of gasoline in the Midwest, and there was 
a lot of motion around that topic. Prices bring that kind of 
attention, I believe, because of the immediate understanding 
and impact on people who consume those products.
    After I had finished, there was not a single question about 
energy, in part because it hadn't really reached the national 
consciousness yet. It was only days before that we had our 
first blackout in the Bay area because of a regional heat wave. 
Since then California has endured numerous blackouts, is over 
$20 billion in debt from utility and State undercollections. 
And the market and customer choice is apparently dead, and we 
are still struggling to find a solution. The issue has become 
theatrical, and in other means, to polarize and create 
additional economic uncertainty.
    I wish to enter into the record a report on California's 
energy crisis and its impact on the Bay area economy, 
coauthored by the Bay Area Economic Forum, and I believe you 
have a copy with you right now. I am not going to go into 
detail on this. I am just going to highlight a few points in 
there, and then I can take some questions.
    First, the energy crisis in California and the west coast 
is a crisis of inadequate infrastructure to meet growing 
demand. The perfect storm of unprecedented economic growth, 
lack of adequate rainfall in the West, unusually high summer 
temperatures, unscheduled outages from aging generation 
facilities exposed our lack of local generation, transmission 
line and natural gas pipeline bottlenecks.
    The Bay area economy grew at an average rate of 9 percent 
per year from 1995 to 1999, compared to 4 percent for the rest 
of the U.S. During the same period. However, growth of the 
energy intensity did not follow that in the business sector, 
although it did in the residential. In fact, there is also a 
crisis building in natural gas. Because of transmission 
constraints and increasing reliance on natural gas to make 
power, California faces the risk of fully depleting storage 
late this winter. When the gas is issued in short supply, power 
plants are the first to have delivery curtailed; thus a winter 
shortage could mean more blackouts.
    Second, it is a crisis of inadequate market models. 
California's deregulation model undercut the development of 
direct access from customer to supplier and forced the market 
to rely artificially on the spot market. When opportunities for 
adjustments came, particularly last summer, in the form of 
long-term contracts, regulatory authorities did not respond 
adequately. The legislative solution that finally arrived in 
early 2001 put the State in the sole role of procuring power, 
killing direct access for customers and a competitive market.
    Third, the lack of reliable energy is the greatest threat 
to the economy. Although many business sectors with low margins 
are highly rate-sensitive, such as bioscientists, heavy 
manufacturing and resource extraction, and high rates are 
devastating to them, the impact of unreliable power, blackouts, 
is many times that of the rising cost of power. And in this 
document you will see many factors of analysis that illustrate 
how it does affect the various business sectors, and you can 
get a sense for where the greatest impact is in terms of rate 
and in terms of unreliability.
    But the impact of unreliable power is many times that of 
the rising cost of power. The value of lost power is, for the 
residential customer, about 30 times the price of the power had 
it been available. For businesses it is much higher, ranging 
from $11 to $53 a kilowatt hour. Another way to express it is 
that each megawatt hour of power that goes undelivered 
represents about $16,000 of lost California economic output. 
The economic impact to Bay area business customers, a 50 
percent rate hike would cost 500- to 600 million. A modest 
number of blackouts this summer would cost the Bay area economy 
from 1- to 5 billion, reducing growth rate by up to 1 percent. 
Worst case weather projections could make that impact grow to 
20 billion.
    Recommendations: First of all, resolving the crisis today 
should not come at the cost or expense of the long-term 
competitiveness of the economy. National energy policy can do 
much to help stabilize the energy situation in the Western 
United States. We are already working strongly on conservation, 
load management and energy efficiency. There has been a steep 
drop in the use of electricity over the past year, some 
estimates over 10 percent, so we are doing our part.
    We also have programs that incentivize energy conservation 
and load management that are beginning to be understood better, 
but it is so complex that oftentimes information needs to get 
in the hands of those who may use these programs so they can 
understand how they can benefit.
    But perhaps the single most important element to restoring 
and ensuring that customers can obtain direct access to energy 
contracts in the transmission system, and, in fact, this is an 
issue of great importance this month because the California 
Public Utilities Commission is going to decide whether or not 
to close the door permanently on direct access on the 28th of 
June. Customer choice is essential to this, and it is the best 
way to bring the most power at the lowest prices to the State 
and the Western region.
    Immediate and expedited investment in power and natural gas 
transmission capability; otherwise we may be seeing a much 
larger crisis in the coming years.
    Support funding for the National Energy Reliability 
Initiative in the fiscal 2002 budget. It is a joint public/
private partnership to fund research and development in on-site 
power generation, transmission distribution, natural gas 
infrastructure, advance power controls to meet the energy needs 
of the digital economy.
    Employ probabilistic modeling tools to break decision 
    Accelerate commitment of capital in the public and private 
sector. This can help companies decide whether to invest and 
distribute generation or employ real-time pricing as a 
strategy. And I bring this up because oftentimes there are so 
many mutually dependent, complicated variables that do nothing 
is the option that is selected rather than taking something 
that has an objective financial benefit.
    And finally, employ a cooperative approach between Federal 
and State authorities. Energy policy must be based primarily on 
sound economic principles. We need strong Federal leadership 
that takes the high road, understanding this is a very complex 
issue, defining simple short-term fixes and requiring healthy 
cooperation and good faith.
    And on behalf of the Silicon Valley Manufacturing Group, 
thank you for the opportunity to comment.
    Chairman Nussle. Thank you very much.
    [The information referred to follows:]

 Prepared Statement of Justin D. Bradley, Director of Energy Programs, 
                   Silicon Valley Manufacturing Group

    Mr. Chairman and members of the Committee, my name is Justin D. 
Bradley. I am the Director of Energy Programs for the Silicon Valley 
Manufacturing Group (``Manufacturing Group''). Thank you for providing 
the Manufacturing Group the opportunity to testify before this 
Committee on the economic and budgetary effects of national energy 
policy. The Manufacturing Group is a public policy trade association 
that was founded 22 years ago by David Packard of Hewlett Packard in 
response to the energy crisis of the late 70's. Today, it represents 
over 190 of the most respected high-tech employers and supporting 
industries. Collectively, we employ more than 275,000 workers in 
Silicon Valley alone representing one in four of the private sector 
workforce. Altogether, the Silicon Valley economy generates a gross 
annual regional product of over $106 billion, with the Bay Area economy 
at $350 billion or one third of California's output. In addition, one 
third of the nation's venture capital ($13.5 Billion) was invested in 
the region in 2000.


    One year ago I testified before the House Commerce Committee 
warning on the impacts of a looming energy crisis on California, and 
it's economic impact on the state and the U.S. After I finished, there 
was not a single question. All the attention was on the matter of the 
cost of gasoline in the Midwest. Not only was there little interest in 
this issue, I was later challenged as being out of touch with the 
issue. Since then California has endured numerous blackouts, is over 
$20 billion in debt, the market and customer choice apparently dead, 
and is struggling to find a solution. The issue has become low theater, 
and another means to polarize and create additional economic 
    I wish to enter into the record a report on California's energy 
crisis and its impact on the Bay Area economy authored by the Bay Area 
Economic Forum (a partnership of the Bay Area Council and Association 
of Bay Area Governments--of which SVMG was a contributing member). The 
report was released at SVMG's Energy Tools conference at Oracle 
Corporation on April 20, 2001 and is entitled ``The Bay Area--A 
Knowledge Economy Needs Power.'' The results show the tremendous 
economic impact of unreliable power on the information economy. I would 
like to take the time to highlight just a few of the key results of the 
research and then follow with recommendations.
    First, the energy crisis in California is a crisis of inadequate 
infrastructure to meet growing demand. The perfect storm of 
unprecedented economic growth, lack of adequate rainfall in the west, 
unusually high summer temperatures, unscheduled outages from aging 
generation facilities exposed our lack of local generation, 
transmission line and natural gas pipeline bottlenecks. The Bay Area 
Economy grew at an average rate of 9 percent per year from 1995-1999 
compared to 4 percent for the U.S. during the same period. However, 
growth of energy intensity was most prominent among residential users.
    In fact, there is also a quiet crisis building in natural gas. 
Because of transmission constraints and an increasing reliance on 
natural gas to make power, California faces the risk of fully depleted 
storage late in this winter. When the gas is in short supply, power 
plants are the first to have delivery curtailed. Thus a winter shortage 
could mean more blackouts.
    Second, it is a crisis of inadequate market models. California's 
``deregulation'' model undercut the development of direct access from 
customer to supplier and forced the market to rely artificially on the 
spot market. When opportunities for adjustment came, particularly last 
summer in the form of long-term contracts, regulatory authorities did 
not respond. The legislative solution that finally arrived in early 
2001 put the state in the sole role of procuring power, killed direct 
access for customers and a competitive market.
    Third, Lack of reliability is the greatest threat to the economy. 
Many business sectors are highly rate sensitive such as biosciences, 
heavy manufacturing and resource extraction, and high rates are 
devastating to them. But the impact of unreliable power (blackouts) is 
many times that of rising cost of power. The value of lost power is for 
the residential consumer is about 30 times the price of the power had 
it been available. For business it is much higher, ranging from $11 to 
$53/kWh. Another way to express it is that each megawatt hour of power 
that goes undelivered represents about $16,000 of lost California 
economic output. The economic impact to Bay Area Business customers of 
a 50 percent rate hike will cost $500-600 million. A modest number of 
blackouts this summer would cost the Bay Area economy from $1-5 billion 
reducing the growth rate by up to 1 percent. Worst-case weather 
projections could make that impact grow to $20 billion.


    What must be done? National energy policy can do much to help 
stabilize the energy situation in the western United States.
     Perhaps the single most important element is restoring and 
ensuring that customers can obtain direct access to energy contracts 
and the transmission system. A functioning and competitive wholesale 
and retail power market is the best way to bring the most power at the 
lowest prices to the state and western region.
     Immediate and expedited investment in power and natural 
gas transmission capability, otherwise we may be seeing a much larger 
crisis in coming years.
     Support funding for the National Energy Reliability 
Initiative in fiscal year 2002 budget. NERI is a joint public/private 
partnership to fund research and development in on-site power 
generation, transmission and distribution, natural gas infrastructure, 
advanced power control to meet the energy needs of the digital economy.
     Employ probablistic modeling tools to break decision 
gridlock and accelerate commitment of capital in the public and private 
sector. This can help companies decide whether to invest in distributed 
generation or employ of real time pricing.
     Employ a cooperative approach between Federal and state 
authorities. Energy policy must be based primarily on sound economic 
principles, not clever sound bites that appeal to voters. We need 
strong Federal leadership that takes the high road, understanding this 
is a very complex and difficult issue defying simple short-term fixes 
and requiring healthy cooperation and good faith.
    On behalf of the Silicon Valley Manufacturing Group, thank you for 
giving me this opportunity to provide these comments.

    Chairman Nussle. First, you had the opportunity to listen 
to much of the testimony today, and there has been a lot of so-
called experts who don't live in California coming, obviously 
other than Representative Filner, that have been trying to tell 
us and give us the advice of what has been going on in 
California. Do you take any exception with their testimony? Do 
you have anything to add as far as lessons learned as we move 
forward? I mean, your analysis, and I haven't had a chance to 
read the whole thing, but I think you touch on a number of 
similar items, but is there anything you want to add to what 
they have suggested, or subtract or take issue with in their 
analysis of what has been happening in California?
    Mr. Justin Bradley. I guess I just want to highlight again 
my main point is that it is very easy to talk about price 
because it is something everyone understands, and it is a very 
important issue and affects many of our member companies deeply 
and can cause them to shift their operations out of State, 
perhaps to another country. It is much more difficult to talk 
about reliability or the availability of power because people 
don't get the concept quite as well, but the multiplied impact 
on the economy of the lack of available power is something that 
must be understood and responded to. It is somewhere between 
four and eight times as big an impact as is price. Price is 
important, but we must do the kinds of short- and long-term 
strategies that help ensure that we have reliable power.
    Chairman Nussle. So as we look at this impact on the 
overall budget, as we look at strategies, long-term strategies, 
to take into consideration all of the different angles, what 
you are highlighting today is the premise that has been made on 
both of the former panels, that volatility in supply and 
volatility in price is as important as any other factor that we 
need to look at? That is basically what you are telling us?
    Mr. Justin Bradley. Well, certainly volatility is a sign 
that the market and its regulating mechanisms are not 
responding the way they should. It is much like what happens 
with Hansen's disease. If you can't feel the stimulus and 
respond to it quickly, then there is damage that happens, and a 
healthy market needs to have those kinds of stimuli restored to 
it so that it works. And volatility tends to tell us that those 
signals are not reaching the proper end point so we can make 
those kind of adjustments.
    Chairman Nussle. Thank you.
    Mr. Beach, I just want to understand why you decided, maybe 
you said this and I just didn't catch it, why did you decide to 
assume a 10-percent drop in petroleum prices at a time when 
most of us are experiencing increases? I mean, why do you use 
that as your modeling example?
    Mr. Beach. There was a couple of reasons for that, Mr. 
Chairman. The scope of work that I had laid out for me today 
was to give you an illustration of what it would mean if energy 
prices were to fall. It is a matter of historical record that 
we have had 10 percent drops and increases in oil prices. As a 
consequence of that, I have a model that has all those price 
volatility items in it, and it is, of course--a very good thing 
if you are going to measure something in this model. It had 
happened in the past.
    Thirdly, the President's plan would easily produce, we 
think, over the course of time a 10 percent drop in west Texas 
intermediate crude, probably even more than that, and if you 
combine that with the new source review extensions and 
redefinitions that is recommended, that is refining power 
distribution companies would not have to comply as quickly and 
as greatly with the nitrogen oxide and sulfur dioxide and other 
kinds of volatile organic compound requirements, if you say, 
well, look, that is going to happen, you have a tremendous jump 
in energy in the short run such that it is altogether possible 
that that will drop the price of natural gas below its 
exploration break-even point.
    We chose the simplest possible path today to illustrate to 
you what it would mean to the budget, and we can supply your 
staff with even greater detail just on this simple simulation.
    In inflation drops, for example, when inflation drops, your 
wage and salary tax base doesn't grow as rapidly, so you don't 
have that revenue bump that you might think that you get with a 
stronger economic growth if you have lower inflation. So most 
of your benefits come off on the spending side. So there were a 
lot of reasons that militated against a complex simulation.
    I guess the last reason, Mr. Chairman, is that we are doing 
it right now, and when it is complete, we would be happy to 
send it to you.
    Chairman Nussle. And just so I am clear, the record is 
clear, in order for this model to be correct, when are you 
assuming enactment of the national energy strategy?
    Mr. Beach. Well, if by some miracle it were enacted by the 
end of this year, that is how this particular model works. Now, 
we could enact it at the end of next year, and results would be 
just moved out 1 year in your budget year, approximately the 
same results, not approximately the same numbers.
    Models are really good. I am a big advocate of dynamic 
scoring. I will be working with many committees on that over 
the next year. They are a very good tool for giving you as the 
decisionmaker insight of what it means if we take a certain 
policy change, because they bring an enormously complex 
constellation of issues and concerns together much more than 
the human mind can even think about at any one particular point 
in time and solves those for you in a systematic way. And I 
think this was a very interesting set of results.
    I should say we ought to seriously moving forward with some 
sort of energy plan in the expectation that the surplus might, 
in fact, pay for some key parts of it.
    Chairman Nussle. And then my last question is only have you 
had the ability to test this model? It is great to have a 
model, it is great to have forecast, but if you didn't predict 
last Sunday's weather correctly, and you spoiled my picnic with 
my family, I am not going to trust you much in the future. So 
have you had a chance to test this model in any way, shape or 
form so we know how much we can rely upon the data that you are 
providing for us?
    Mr. Beach. Right. All models are inherently inaccurate to a 
certain extent because they are forecast, and you can't shoot 
the arrow with the same degree of precision each time. However, 
we used the oldest commercially available model around. It was 
developed now over 40 years ago at the University of 
Pennsylvania by a Nobel Prize winner and his team. It has been 
used, and it is best to say it has been used by Ford and GM and 
many, many large companies to do their business forecasting. I 
think it is the best credential, and we have been very 
comfortable with it. It was accurate in forecasting our budget 
surpluses over the last several years within $20 billion, and 
it has done a nice job for us. There are times when it doesn't 
predict things like the Asian financial crisis, et cetera, but 
we have used it reliably.
    Chairman Nussle. Thank you.
    Mr. Spratt.
    Mr. Spratt. David Bradley, appreciate your coming and 
testifying and your patience and perseverance this morning.
    What is the current level of funding for the LIHEAP 
    Mr. David Bradley. Currently, $2.25 billion, and for this 
fiscal year, the House Appropriations Committee has added $300 
million in a supplemental, the administration requested $150 
million supplemental.
    Mr. Spratt. $300 million in the pending supplemental?
    Mr. David Bradley. Pending supplemental, and there will 
probably be a floor amendment for $600 million.
    Mr. Spratt. So that takes the program to 2.5 billion.
    Mr. David Bradley. At a minimum.
    Mr. Spratt. In the current fiscal year.
    If you divide that by the number of beneficiaries, people 
who actually get a LIHEAP grant, what is the average per 
    Mr. David Bradley. It is 4.1 million people being served by 
LIHEAP right now. I can get it for you maybe for the record.
    Mr. Spratt. I simply knew from my own experience dealing 
with community action agencies in my district, they were 
averaging around $150. Is that in the ballpark?
    Mr. David Bradley. Yes, in the South.
    Mr. Spratt. That is not very much money at today's price 
levels. What does that buy the average consumer? How many days?
    Mr. David Bradley. Well, it will sometimes give them the 
difference in the course of a month--literally between eating, 
heating and food or medicine. It makes a real difference in the 
quality of life that they have. The average beneficiary family 
is earning under $10,000 a year in income.
    Mr. Spratt. What was the Bush administration's request for 
fiscal 2002?
    Mr. David Bradley. $1.4 billion plus $300 million 
contingency, they--there was some hope, some hope--I think 
Secretary Thompson is supportive of LIHEAP. It is very 
important in Wisconsin. I think he is generally supportive. 
There was some hope that they would come in at $2.25 billion.
    Mr. Spratt. But you say in your testimony that at today's 
price levels, natural gas and other fuels, $2.5 billion itself 
is not adequate.
    Mr. David Bradley. The authorizing committees that look at 
LIHEAP, as well as the energy committees, and, I might add, 
even now Minority Leader Lott is looking at $3 to $3.4 billion 
for LIHEAP as pretty much stopgap. That is a guess, meaning 
need probably is much higher, but they recognize that $3.4 
billion beats $2.25 billion or $1.4 billion plus $300 million. 
There is a recognition of an increased need on that program.
    Mr. Spratt. Do you have any data about low-income 
consumers' accounts unpaid, delinquent accounts with utility 
    Mr. David Bradley. Yes. I'd like to provide some for the 
record. Yes, we have, in many, many of the Members' districts. 
We have got stories on those that are doing without.
    Mr. Spratt. Well, I appreciate your adding this dimension 
to the hearing, because a lot of the testimony has been to the 
effect that if we bear with it, the market will self-correct, 
it will work these problems out, maybe even optimize the 
result, and that the shock as a whole that we have experienced 
can probably be absorbed by the economy. But that is in the 
aggregate, and there are certainly people out there, lots of 
people, who can't absorb it, and it makes a major difference in 
their lives.
    Mr. David Bradley. And connected with this is the low-
income weatherization program. I thought the administration 
really was quite on target when candidate Bush and President 
Bush and Secretary Abraham continued to talk about energy 
conservation, and particularly the low-income weatherization 
program, as a central part of their energy policy. It made a 
lot of sense and certainly sent a good signal to low-income 
energy consumers.
    The reality is that the first step out of the box, we have 
run into trouble on House Interior Appropriations even though 
it was a bipartisan coalition supporting it. If you are looking 
at the administration's 10-year forecast for supporting the 
program, the very first step out they are falling short of what 
they promised, and that, clearly, at least in the community I 
work with, clearly sends mixed signals about whether low-income 
energy consumers are going to be remembered during this long 
    Mr. Spratt. Thank you again for your testimony. If you will 
submit that for the record, we would appreciate having it.
    [The information referred to follows:]

  Mr. David Bradley's Reply to Mr. Spratt's Question About Low-Income 
            Consumers Delinquent Accounts With Utility Firms

    The State government directors of LIHEAP report to their national 
association, the National Energy Assistance Directors Association 
(NEADA), such figures as they may be given by energy vendors. The 
recent compilation shows mounting terminations of gas and electric 
service to homes. Even if families find the wherewithal to pay the 
balance owed, they face stiff reconnection charges and penalties--costs 
that only add to the sacrifices they will have to make to get the 
lights back on and keep the heat going next winter.
    NCAF believes that the failure of state utility regulators or the 
FERC to require timely disclosure of the number and location of 
households who lose service is a major failure of emergency management. 
Reports rely on informal, even anecdotal evidence. As the rules grow 
looser to accommodate the market, we can neither track the need by 
learning how many have remained without utility service for an extended 
period of time (a sure symptom of inability to pay and impending family 
crisis) nor identify the current or former LIHEAP participants who may 
be at life-threatening risk in order to reach out with additional 
    The Committee should be aware that not only are LIHEAP payments 
very limited, but that they are not made available to those facing 
utility termination unless the amount is adequate to satisfy the 
collections department of the utility. Along with lack of funds, it's a 
reason many eligible people are being turned away.

    Chairman Nussle. Mr. Honda.
    Mr. Honda. Thank you, Mr. Chairman, and I appreciate the 
witnesses today on the panel.
    To Mr. Bradley, the LIHEAP program, I agree, is a good 
program. I have met with some providers of weatherization, also 
providers of LIHEAP programs. They are telling me that in a 
couple of months they are going to be running out of money. So 
the increase that we are looking at in our budget is probably 
the $150 million that you sort of quoted soft figure, probably 
even less than that, because I think there will be an increase 
of the number of people that will want to participate in this.
    So I think we are going to fall further short of that, and 
if I remember a lot of the stories that I have, people I have 
met who are homeless not because they didn't want to work, but 
because of a paycheck that couldn't keep up with the cost of 
living, my sense that homelessness will increase among working 
people because they can't keep up with the increase in the cost 
of energy and things like that.
    I was wondering very quickly if you had any thoughts about 
the affordable housing portion that HUD is responsible for, 
because I understand that they have a fixed dollar amount that 
they can provide for those who are involved in the housing 
program, and with the increase that will have to come out of 
the persons who will be a beneficiary of the programs.
    Mr. David Bradley. We are actually taking a look at some 
HUD programs now because the Financial Services Committee asked 
us to do some things. I will be happy to provide something for 
the record that is literally in development this week.
    [The information referred to follows:]

Mr. David Bradley's Reply to Mr. Honda's Question About the Affordable 
              Housing Portion That is HUD's Responsibility

    In response to Mr. Honda's interest in the problem of keeping rents 
affordable, I am submitting recent comments on proposed HUD rules 
regarding calculation of shelter costs when determining the amount of 
rent payment a tenant of HUD subsidized housing will pay out of pocket. 
The author, Roger Colton Esq. Is renowned in our low-income advocacy 
community for his expertise on the many ways housing and utility 
regulations affect the low-income consumer.
    To put too simply the matters his testimony explains in depth, when 
the energy costs included in the rent rise dramatically, as has been 
the case for two consecutive winters, the recoverable total costs for 
the owner or for the subsidy program rise beyond planned outlays--and 
the cost of keeping the rent contribution at the 30 percent of income 
standards a problem not factored into HUD budgeting; but, as is more 
common, when fuel costs are paid by the renter on the basis of 
individually metered usage, the previously established rent 
contribution plus the energy costs which are also shelter costs add up 
to a lot more than is either allowed or than has been budgeted by the 
tenant. Contributions are not adjusted in short order, and the means 
for calculating the base on which they are established is faulty. Mr. 
Colton's recommendations deal with fixing the HUD procedures for income 
and shelter cost determination in periods of high and/or rapidly 
changing energy costs. However, we think this Committee should consider 
establishing reserve funds for subsidized housing programs, as well as 
for LIHEA,P to enable struggling families and housing projects alike to 
cushion the impact of these volatile energy markets.
    At the time of the hearing we were hopeful that at least a short-
term solution involving more changes to HUD procedures would have been 
adopted or mandated; I regret to report we do not have such news to 
report to the Committee at this time.

    Mr. Honda. I think budgetwise it will be helpful for us. 
And to Mr. Bradley, the other Bradley, Manufacturing Group has 
been an interesting and a welcome organization in Santa Clara 
County, Silicon Valley, because they have taken on issues that 
I think most people historically would never have guessed that 
would be important to you guys. But you have really taken on 
issues like infrastructure, transportation, housing, education, 
homelessness, quality-of-life issues that are important to all 
people there, and the folks had developed initiatives on those 
areas. Energy was not part of it because it hadn't become 
prominent when you developed the initiatives.
    What is the impact on those initiatives that Manufacturing 
Group have set out for themselves in light of the energy 
    Mr. Justin Bradley. I am not sure if I understand. What is 
the impact financially on Silicon Valley or----
    Mr. Honda. On the initiatives that Manufacturing Group has.
    Mr. Justin Bradley. Let me tell you a little bit about what 
we are doing. One of our goals is to make sure that both 
employers who are members of the manufacturing group, their 
employees and their families have tools to be successful with 
their own personal energy policy. Many organizations don't have 
energy experts they can turn to to look for strategy and 
tactical matters to be successful, particularly in the matters 
of energy efficiency, conservation and load management, smart 
load management. So what we do is we have those kinds of 
resources, and we are able to leverage them not just inside the 
organization, but beyond our borders.
    One of the tools we use, in fact, is the Internet. The 
Internet has a Website that we have put together in partnership 
with the NRDC, the Natural Resource Defense Council, 
partnership to provide information about all of the incentive 
programs that the State and regional agencies provide so that 
organizations and individuals can take advantage of them. We 
also as an organization have joined with dozens of other 
private organizations to commit to 20 percent conservation over 
the next couple of years through a host of different measures 
to do that, and we go around and meet with various municipal 
authorities during the summertime, we have our local government 
days, and in each case we are going to meet with the city 
managers and mayors. We exchange information about what we are 
doing, and what we find is they are responsive to create 
partnerships to make these kinds of things happen.
    So what we try to be is a broker with information and a 
connector of people so that we can be more successful. That is 
just a sense for what we are doing.
    Mr. Honda. I take it further. Not only a broker, but being 
proactive in looking at making some steps that will help your 
employees be able to survive this crisis. And I have to 
compliment the group that conservation did play a large part in 
our ability to meet the crisis, and I think stats are that you 
are able to realize a 10 percent savings because of that.
    The conservation effort, is there any discussions that you 
might have between conservation efforts and the volatility 
issues that you had mentioned? I wasn't here for all of your 
    Mr. Justin Bradley. I think perhaps someone on this panel, 
I can't recall who, mentioned the leverage for every 1 percent 
you conserve, you affect the price tenfold in a positive 
direction, and that, for instance, San Diego, when they had 
price signals stream, were able to conserve 5 or 10 because 
they felt immediately the real cost of power. And if the State, 
for instance, had 5 percent more available power, then we would 
have avoided a good part of the blackouts that we have had in 
the last several months.
    Mr. Honda. So would it be fair to say that Manufacturing 
Group would support a policy, conservation policy, as part of 
our energy, national energy policy nationwide?
    Mr. Justin Bradley. We already do, and we very much support 
that notion, yes.
    Mr. Honda. Thank you.
    Chairman Nussle. Thank you, Mr. Honda.
    Mr. Justin Bradley and Mr. David Bradley, we appreciate 
your testimony, and we thank you for the opportunity to 
question you about a number of items. I think we learned today, 
and I think Mr. Honda, who has obviously a unique perspective 
on this, as well, and many others who testified today, that 
there is not only an energy challenge for the entire country, 
not just for the west coast, but that it has very important 
economic impact for the country, and on our budget and the 
decisions that will be made in this room in days, months, years 
to come. And so we appreciate the chance to explore that. 
Hopefully we will have the opportunity to do that again in the 
    And with that, we thank the witnesses for their testimony, 
and this hearing is adjourned.
    [Whereupon, at 1:47 p.m., the committee was adjourned.]