[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
ECONOMIC AND BUDGETARY EFFECTS OF NATIONAL ENERGY POLICY
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
HEARING HELD IN WASHINGTON, DC, JUNE 20, 2001
Serial No. 107-11
Printed for the use of the Committee on the Budget
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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
ANDER CRENSHAW, Florida
ADAM PUTNAM, Florida
MARK KIRK, Illinois
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
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
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
Prepared statement....................................... 6
Reply to Mr. Capuano's question about BTU exports........ 17
Reply to Mr. Capuano's question about the Alaskan
Reply to Mr. Capuano's question about an Alaskan gas
Reply to Ms. Hooley's question about energy costs' impact
on schools............................................. 22
Reply to Mr. Honda's question about natural gas
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
ECONOMIC AND BUDGETARY EFFECTS OF NATIONAL ENERGY POLICY
WEDNESDAY, JUNE 20, 2001
House of Representatives,
Committee on the Budget,
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-
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
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
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
STATEMENT OF FRANCIS S. BLAKE, DEPUTY SECRETARY, U.S.
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
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.
ECONOMIC EFFECTS OF THE NATIONAL ENERGY POLICY
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
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. Thank you very much for your testimony. It was
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
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
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
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
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
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
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.
TABLE 1.--CALIFORNIA NATURAL GAS CONSUMPTION BY NON-UTILITY AND UTILITY GENERATORS, AND PRICES TO ELECTRIC
[Million cubic feet and dollars per thousand cubic feet]
California Consumption (MMcf) Prices ($/
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
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''
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
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
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
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
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
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
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,
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
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
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
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
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.
STATEMENT OF THE HON. BOB FILNER, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF CALIFORNIA
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
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
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,
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
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
And, finally, what can we do in the short term to deal with
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
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. 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.
STATEMENTS OF R. GLENN HUBBARD, CHAIRMAN, COUNCIL OF ECONOMIC
ADVISERS; JOHN HANGER, PRESIDENT, CITIZENS FOR PENNSYLVANIA'S
FUTURE; AND SANDY LIDDY BOURNE, AMERICAN LEGISLATIVE EXCHANGE
Chairman Nussle. Dr. Hubbard.
STATEMENT OF R. GLENN HUBBARD
Mr. Hubbard. Thank you very much, Mr. Chairman and
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
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.
RECENT ECONOMIC DEVELOPMENTS
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.
THE MACROECONOMIC IMPACT OF ENERGY PRICE INCREASES
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
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
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-
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.
IMPACT OF DEVELOPMENTS IN SPECIFIC ENERGY MARKETS
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
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
\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
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.
EFFECT OF ENERGY PRICES ON GOVERNMENT OUTLAYS AND RECEIPTS
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.
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
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
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.
NUMBER OF CUSTOMERS SERVED BY AN ALTERNATIVE SUPPLIER AS OF APRIL 1, 2001
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.
PERCENTAGE OF CUSTOMERS SERVED BY AN ALTERNATIVE SUPPLIER AS OF APRIL 1, 2001
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.
ENVIRONMENT & UNIVERSAL SERVICE
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
Existing Operator Online Capacity User
Hazleton, Luzerne County........ Energy Unlimited.. December 1999..... 0.13 mw, 2 Community Energy,
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
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
Keystone Wind.................. Somerset County....... Proposed......... 25.0 mw.......... TBD
Energy Unlimited............... Mountaintop........... Proposed......... 16.9 mw.......... TBD
COMPARISON OF RESIDENTIAL UNBUNDLED EMBEDDED GENERATION TO RETAIL POWER PRICES
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
FORWARD PRICES, INTO CINERGY, 3/20/01
[On Peak Power]
THE HOCKEY STICK
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
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
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
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
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-
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
Not surprisingly, these stranded cost charges have deterred
shopping, deterred market entry, and entrenched retail market dominance
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
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
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
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.
STATEMENT OF SANDY LIDDY 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
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
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
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
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
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
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 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
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.
CURRENT STATUS IN RESTRUCTURING
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.
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
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.
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.
STATES DELAYING RESTRUCTURING
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
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.
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
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
ECONOMIC IMPACTS OF DEREGULATION
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
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
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.
AVERAGE REVENUE PER KILOWATTHOUR BY, ALL SECTORS IN CENTS
[Residential, Commercial, Industrial, Other]
State/Region 1996 2000 (Revised (Estimate,
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
ANNUAL AND POPULATION PERCENTAGE GROWTH, 1990'S
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.
FEDERAL AND STATE FUNDS: LOW-INCOME AND ENERGY CONSERVATION PROGRAMS
State by State
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
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
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
Chairman Nussle. Thank you very much.
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
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
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
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
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
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.
STATEMENTS OF DAVID BRADLEY, EXECUTIVE DIRECTOR, NATIONAL
COMMUNITY ACTION FOUNDATION; WILLIAM W. BEACH, DIRECTOR, CENTER
FOR DATA ANALYSIS, THE HERITAGE FOUNDATION; JUSTIN D. BRADLEY,
DIRECTOR OF ENERGY PROGRAMS, SILICON VALLEY MANUFACTURING GROUP
STATEMENT OF DAVID 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
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
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
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
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
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
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
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.
STATEMENT OF WILLIAM W. 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
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
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
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
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
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
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
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
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.
STATEMENT OF JUSTIN D. 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
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. 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
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
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
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
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.]