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



 
      NATIONAL ELECTRICITY POLICY: FEDERAL GOVERNMENT PERSPECTIVES
=======================================================================


                                HEARING

                               before the

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION
                               __________

                           SEPTEMBER 20, 2001
                               __________

                           Serial No. 107-76
                               __________

       Printed for the use of the Committee on Energy and Commerce







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                    COMMITTEE ON ENERGY AND COMMERCE

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

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

                  David V. Marventano, Staff Director
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                 Subcommittee on Energy and Air Quality

                      JOE BARTON, Texas, Chairman

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

                                  (ii)















                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Blake, Hon. Francis, Deputy Secretary, U.S. Department of 
      Energy.....................................................    32
    Breathitt, Hon. Linda K., Commissioner, Federal Energy 
      Regulatory Commission......................................    60
    Brownell, Hon. Nora Mead, Commissioner, Federal Energy 
      Regulatory Commission......................................    65
    Massey, Hon. William L., Commissioner, Federal Energy 
      Regulatory Commission......................................    68
    Wood, Hon. Pat, III, Chairman, Federal Energy Regulatory 
      Commission.................................................    52
Material submitted for the record:
    Breathitt, Hon. Linda K., Commissioner, Federal Energy 
      Regulatory Commission, letter dated February 7, 2001, 
      enclosing response for the record..........................   105
    Brownell, Hon. Nora Mead, Commissioner, Federal Energy 
      Regulatory Commission, letter dated November 1, 2001, 
      enclosing response for the record..........................   100
    Massey, Hon. William L., Commissioner, Federal Energy 
      Regulatory Commission, letter dated November 1, 2001, 
      enclosing response for the record..........................   102
    White Paper on Electricity Legislation dated July 20, 2001...    90
    Wood, Hon. Pat, III, Chairman, Federal Energy Regulatory 
      Commission, letter dated October 29, 2001, enclosing 
      response for the record....................................    95

                                 (iii)

  















      NATIONAL ELECTRICITY POLICY: FEDERAL GOVERNMENT PERSPECTIVES

                              ----------                              


                      THURSDAY, SEPTEMBER 20, 2001

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Ganske, Norwood, 
Shimkus, Shadegg, Bryant, Walden, Tauzin (ex officio), Boucher, 
Hall, Sawyer, Wynn, John, Waxman, Markey, Barrett, Luther, and 
Strickland.
    Staff present: Sean Cunningham, majority counsel; Jason 
Bentley, majority counsel; Andy Black, policy coordinator; 
Peter Kielty, legislative clerk; Sue Sheridan, minority 
counsel; and Erik Kessler, minority professional staff.
    Mr. Barton. The subcommittee will come to order. We are 
going to start the hearing and immediately recess until we get 
the ranking minority member or a minority member, but I do want 
to start on time. So we are in session subject to a quorum, and 
the Chair would note that there is an absence of a quorum at 
this time.
    [Brief recess.]
    Mr. Barton. The subcommittee will now come to order and the 
Chair would note that there is a quorum. The Chair would 
recognize himself for an opening statement.
    This is the subcommittee's first hearing since what I call 
``Day of Decision'' which was Tuesday, September 11. As 
Chairman of this subcommittee, I think for all members of the 
subcommittee, we want to offer our condolences to all of the 
families who had people injured, killed, or who are missing.
    We want to give special prayers to Congressman Vito 
Fossella of this subcommittee who had a large number of 
constituents at the World Trade Center. He has one of his 
staffers, Ms. Julie Walker, who has a cousin who is missing and 
is yet unaccounted for. So we are with all of those in our 
prayers and in our thoughts.
    As a result of last Tuesday, our Nation's focus has 
fundamentally shifted. The issues before this subcommittee and 
this Congress and this country that were so important on 
September 10 are not nearly as important today. We must pay 
much more attention to our national security, and that includes 
our energy infrastructure.
    This subcommittee stands ready to help the President and 
the administration, on a bipartisan basis, to guarantee to the 
largest extent possible the security and safety of our 
infrastructure and the people that use that infrastructure and 
maintain it. Energy is the lifeblood of our Nation's economy. 
We have to do everything we can to protect our power plants, 
transmission assets, pipelines, terminals, production 
facilities, and the list is endless.
    I have already spoken with the full committee chairman, Mr. 
Tauzin, who is with us today; at the staff level with Mr. 
Dingell; the ranking Democrat, Mr. Boucher, who is here; and we 
were as a united subcommittee, ready and willing to help. If 
there is legislation that the President feels is needed, we 
will do our very best to act quickly in a bipartisan fashion 
without partisanship. We are ready to hold public and private 
briefings or hearings necessary to help the President and the 
American people on the immediate issues that are within our 
jurisdiction.
    Today we are going to go ahead with a hearing that is 
important to the future of our electricity industry. This is a 
hearing that has been planned for several months and the 
decision was made to go ahead with it, although we know that, 
as I said, the focus has changed. We have our Deputy Secretary 
of Energy, Mr. Blake, with us and we want to thank him.
    We also have on the second panel, I think, all the current 
commissioners of the Federal Energy Regulatory Commission, 
including its new chairman, Mr. Wood, and we want to thank you 
for being here, as well as Ms. Brownell who is a new 
commissioner in the purple, and our two stalwarts, Ms. 
Breathitt and Mr. Massey, who are still doing yeoman's work at 
the Commission.
    When we discuss electricity restructuring, the goals are 
the same. We want to use restructuring and do restructuring in 
such a way that we increase the supply of electricity, that we 
improve the effective operation of our transmission grid and 
that we also increase the capacity of our transmission grid.
    There are a number of questions that we are going to ask 
today. We want to give the Deputy Secretary and the Commission 
the opportunity to enlighten us on their thoughts concerning 
regional transmission organizations, better known as RTOs; 
whether that needs to be a voluntary system, a mandatory 
system. If we need to give FERC the authority to mandate 
participation; exactly how should we go about getting that 
adequate and full participation? Is there a magic number of 
RTOs for the country? Is 4 the magic number? Is 6 the magic 
number? Is 8 the magic number? Is there a magic number.
    What do we do to encourage private sector investments in 
new generation and transmission. How important and to what 
detail should Congress be prescriptive in legislation 
determining how to set the structure of RTOs, if any.
    Those are some of the questions that we are going to offer 
today for consideration to the administration and to the FERC 
Commission. Again I want to thank our witnesses, the Deputy 
Secretary and the FERC commissioners, and we look forward to 
hearing from you.
    [The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Subcommittee on Energy 
                            and Air Quality
    This is this Subcommittee's first hearing since last Tuesday. Let 
me first offer my own condolences to all those who were injured, or who 
have family or friends missing. I want to specifically offer my 
thoughts to Congressman Vito Fossella of Staten Island, whose district 
was heavily affected, and to his energy staffer, one of my favorites, 
Julie Walker, who is missing a cousin. My prayers are with you all.
    As a result of last Tuesday, our Nation's focus has fundamentally 
shifted. We must pay more attention to security--of the American people 
and of our critical infrastructure. This Subcommittee will help 
Congress and the Nation promote the security of our assets. Energy 
remains the lifeblood of our economy. We must do all we can to protect 
our power plants, transmission assets, and pipelines.
    I will work with Chairman Tauzin, Ranking Member Dingell and 
Ranking Member Boucher, as well as other Subcommittee Members, to 
determine how this Subcommittee can help. If Federal agencies need 
legislation to deal with this emergency, we will review their requests 
quickly and without partisanship. We will hold whatever briefings or 
hearings necessary to help the President and the American people on 
immediate issues within our jurisdiction. We will also work together on 
an appropriate pace to resume our traditional legislative activities.
    This hearing on the future of our electric industry was planned 
before the events of last Tuesday. But it is even more timely now. I 
appreciate this star cast of witnesses coming at such a crucial time. 
Deputy Secretary Blake, thank you for returning, and for offering the 
Subcommittee an energy security update in your testimony, as well as 
your perspective on national electricity policy. As I have said, we 
stand ready to help in any way.
    I want to also welcome the Commissioners of the Federal Energy 
Regulatory Commission. In addition to frequent guests Bill Massey and 
Linda Breathitt, I see we have two new characters--both familiar faces. 
Nora Brownell was well known for her work on the Pennsylvania Public 
Utilities Commission, and you have been helpful to this Subcommittee 
before on electricity issues. Welcome to the Commission and to 
Washington.
    Finally, I want to welcome my good friend, another Texas Aggie, Pat 
Wood. Thank you for accepting this mission, and I'm glad you are here 
at such a crucial time. I look forward to working with you, and I 
commend to you a Subcommittee Membership, both Republican and Democrat, 
who are good people to work with and take their responsibilities 
seriously.
    Our goals with electricity restructuring should be many. Among them 
are:

1. Increasing the supply of electricity
2. Improving the effective operation of our transmission grid
3. Increasing the capacity of our transmission grid.
    Among the many questions you have each been asked to discuss, I am 
particularly interested in your thoughts concerning Regional 
Transmission Organizations (RTOs).

 Is the current voluntary system adequate in getting full 
        participation?
 What is the magic in 3 RTOs in the Eastern interconnect and 1 
        RTO in the Western interconnect?
 Also, how can we encourage private sector investment in new 
        generation and transmission?
 Finally, how prescriptive does Congress need to be concerning 
        enforceable standards for reliability?
    Thank you again for being here during a busy time.

    Mr. Barton. The Chair would now recognize the ranking 
member on the minority side, Mr. Boucher of Virginia, for an 
opening statement.
    Mr. Boucher. Thank you very much, Mr. Chairman. I share 
your commitment to taking such steps as it is appropriate for 
this subcommittee to take as we seek to address the national 
security needs that now confront the Nation, and I want to 
compliment the chairman on his very appropriate statement in 
that regard and his comments on that subject.
    With today's hearing, we examine the areas in which 
strengthening is needed in the Nation's electricity system and 
how Congress can promote that strengthening through appropriate 
legislation. It is proper that we begin this examination 
through the assistance of the witnesses we have present today 
from the U.S. Department of Energy and from the Federal Energy 
Regulatory Commission. And I want to extend a welcome to the 
witnesses.
    I also went to take the opportunity of these remarks this 
morning to note the singular persistence of Chairman Barton in 
his longstanding efforts to address this particular set of 
energy policy challenges. During the last Congress he drafted 
and built a broad base of support for a major electricity 
restructuring measure, and while all members of the 
subcommittee found provisions in his measure both to like and 
dislike, he received universal approval from the members for 
the collaborative and the bipartisan process that he undertook 
as his comprehensive measure was constructed and brought to 
this subcommittee for markup. I am pleased that the chairman 
has indicated that a similarly inclusive process will be 
undertaken for the electricity legislation that it is our goal 
to consider this year.
    Some issues that were central to the debate last year are 
simply no longer on the agenda. For example, in the wake of the 
California experience, there appears to be no appetite today 
for the enactment of a national requirement for access to 
transmission lines to accommodate retail competition. I think 
that, unlike the last Congress, when the lack of agreement on a 
retail wheeling mandate stalled the consideration of this 
subcommittee's bill at the full committee, we are unlikely to 
give serious consideration to retail competition matters as a 
part of our conversation this year.
    Instead, our debate will now focus on transmission issues 
relating to system adequacy, reliability, and appropriate 
access for electricity generated for the wholesale market. We 
will ask how best to assure a proper allocation of existing 
capacity, and whether and by what means the Federal Government 
should encourage the construction of new capacity.
    We will also inquire regarding the proper balance between 
Federal and State authorities for the regulation of the 
transmission grid. And in conducting this phase of the inquiry, 
I think that we should be mindful that some of the most 
fundamental questions regarding the balance between State and 
Federal jurisdiction will be argued before the Supreme Court on 
October 3, with the anticipation that a Supreme Court decision 
may be forthcoming on these very important matters during the 
spring of next year, or perhaps earlier.
    We will also be asking a number of other important 
questions. Does the Federal Energy Regulatory Commission, which 
is under new leadership, believe that it has sufficient 
authority under the Federal Power Act and other statutes to 
fulfill its responsibilities? And, if not, what precise new 
statutory authority does the FERC need and to what purpose 
would those new authorities, if granted, be applied?
    Does the administration believe that a time has now arrived 
for the passage of a comprehensive electricity measure and, if 
so, does the administration have legislative proposals for this 
subcommittee to consider?
    As we determine the best path forward, we also invite the 
consultation of all externally interested parties, and we would 
very much welcome the advice and recommendation of stakeholders 
as we consider legislation.
    I look forward to working with Chairman Barton and with all 
members of this subcommittee as we take the steps this fall to 
strengthen our Nation's electricity system.
    Finally, I want to extend a word of welcome to today's 
witnesses and offer a particular welcome and congratulations on 
their appointments to Chairman Wood and to Commissioner 
Brownell of the Federal Energy Regulatory Commission. We very 
much look forward to hearing from them and from the other 
commissioners as well.
    Thank you, Mr. Chairman and I look forward to today's 
testimony.
    Mr. Barton. We thank you, Mr. Boucher.
    The gentleman from Louisiana, Mr. Tauzin is recognized for 
an opening statement.
    Chairman Tauzin. Thank you Mr. Chairman. Let me thank you 
for continuing during these most unsettling days at our 
Nation's Capitol these most important hearings on the Nation's 
continuing efforts to improve its electricity policy and to 
establish a more reliable and secure general energy program for 
our country.
    You made the point, but let me make it again: This tragedy 
last week touched every one of us. One of my good friend's--
Russell Keen from Lake Charles, Louisiana--son was in an 
elevator in one of the buildings in New York at the time the 
second plane hit and the elevator crashed downward. He survived 
that, along with another gentleman and two ladies who worked 
with him. And you may have seen him on CNN. The ladies escaped 
through a 15-inch crack in the space that they could come out 
of the elevator. Russell Keen, Jr. didn't make it out. In fact, 
the firemen who were arriving at the scene to help get him out 
of that elevator were probably lost along with him as the 
building came down at that moment.
    We think of him and we think of the firemen and all at the 
Pentagon and the unfortunate passengers who were aboard those 
planes today. And we pray for them and we pray for our country.
    But we also recognize that perhaps the most important thing 
we can do for all of them is to continue the work of this 
committee and the Congress in securing our national security. 
And part of that is in energy and is in the electric grids in 
the systems that keep our country strong and powerful and 
powered.
    In that regard, this hearing is just one more step in a 
long series of hearings, Mr. Chairman, that you have already 
embarked upon to examine the reliability of the Nation's 
infrastructure.
    I want to thank your ranking member for his excellent 
statement as well, as usual. The cooperation and understanding 
that we have with you and Members on the other side as we go 
forward in this area are going to be critical if we are to 
address legislation to the floor. And I want to thank you 
again, Rick, for that effort.
    And I also want to thank the ranking member of the full 
committee, Mr. Dingell, who, as you know--I want to make this 
announcement to all the members--last week joined me in a 
letter not only to the FERC and also to DOE, but to every 
agency under our jurisdiction, inviting them to communicate 
with us in an internal review as to all the agency operations, 
to examine those agency operations, the security of those 
operations, and the potential vulnerabilities of any of those 
assets so that we might work collaboratively to better protect 
and insure for our Nation's security those assets.
    As that information comes back to us, it is beginning to 
filter back. I have also assigned our vice chairman, Richard 
Burr, to the job of working with each one of our subcommittee 
chairs, including Mr. Barton, and the committees response to 
those evaluations delivered to us by all the agencies, some of 
whom are testifying today. Obviously, some of the specific 
legislative proposals and some of the findings in that review 
are not ready for public discussion, and we will not have that 
today. But internally, our committee is working with these 
agencies and all the agencies under our jurisdiction in that 
process. And I have asked Mr. Burr to coordinate that effort, 
and all the subcommittee chairs have been instructed to work 
with Mr. Burr in that effort.
    As you know, our vice chairman serves on the Intelligence 
Committee and is a member of the Special Committee on Terrorism 
and has a very special knowledge of the potential threats that 
might continue to exist within our country. So our committee 
will continue with this work without necessarily holding public 
hearings on it. And more importantly, we will move forward in 
this public arena with the work of our committee, particularly 
this important work in securing the Nation's electric grids.
    Again, I want to thank this subcommittee for the work it 
has already put into beginning to establish for America a more 
competitive and reliable system of electricity. We have 
witnesses today from the FERC, who are returning members of 
course, Commissioners Massey and Breathitt, and I want to thank 
both of them and the chairman for the excellent cooperation the 
FERC extended to us as they assisted in a way we found suitable 
with the crisis that was building in California. I think our 
committee and the FERC's effort in that regard as we worked 
together, with a few good breaks from the weather and from the 
Almighty, helped to stave off some very serious consequences in 
California, and I want to thank the commissioners for there 
efforts during that time.
    I also want to welcome, of course, the new chairman, Pat 
Wood and the new commissioner, Ms. Brownell, to the service of 
the Commission. Mr. Wood comes from my neighboring State. I 
have come to know him in some of the telecommunication 
battlefields that have been waged around some of the big issues 
that I chaired as the Telecommunications Subcommittee Chair, 
and he brings a wealth of talent and capabilities to the office 
of chairman of the Federal Energy Regulatory Commission. We are 
delighted, Pat, to welcome you to the committee. Ms. Brownell, 
likewise, for your extraordinary experience in communications 
and finances. I know that you will bring indeed a great new 
talent to the Commission. We welcome you both.
    To Deputy Secretary Blake, I know this is your second 
visit. You appeared on the Price-Anderson Act, but I want to 
thank you again for the excellent relationship already building 
between the Secretary and your office and our committee.
    As the Secretary announces the administration's position on 
emergency electric grid concerns, I want you to know that the 
chairman of this subcommittee and the full committee is 
prepared to work with you to expedite that before we leave 
session this year.
    Again, Mr. Chairman, you have done incredible work and this 
committee has done incredible work. I think we honor again the 
lives of our fellow citizens who were lost last week by 
demonstrating that we are going to carry on this Nation's 
business and we will secure this Nation's power grids and its 
power systems, and that the work you do will help immeasurably 
to that end. And I yield back the balance of my time.
    [The prepared statement of Hon. W.J. ``Billy'' Tauzin 
follows:]
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    I would like to thank Chairman Barton for continuing--during these 
unsettling days--with these important hearings into our Nation's 
Electricity Policy.
    I should note at the outset that the tragic events of last week 
make it critically important that we continue to examine the 
reliability of our Nation's energy infrastructure (and I use that term 
``reliability'' in a broader sense than just electricity). Several 
months ago, the Committee embarked upon this review, and most recently 
Ranking Member Dingell and I sent letters to the FERC and DOE, along 
with the other agencies within our jurisdiction, requesting specific 
legislative proposals that will enable them to respond fully to the 
recent attacks. I'm sure our audience will understand if our witnesses 
are not able to discuss publicly, at this time, what some of those 
recommendations may contain.
    As we move forward, however, we must also maintain focus on vital 
long-term policies. The electric power industry is an essential 
component of our Nation's energy infrastructure. And, as legislators, 
it is up to us to put in place a legal structure that outlines our 
vision for a 21st Century version of this industry.
    For the past century, the power industry has consisted of heavily 
regulated, vertically-integrated monopolies. Yet the industry is 
changing, opening to competition. We now see on a daily basis that 
competitive wholesale power markets are the superior model. Over the 
past decade, for example, the number of wholesale power transactions 
has increased 400% while wholesale prices have steadily declined. 
Technologies have reduced the cost of generating electricity as well as 
the size of generating facilities.
    To carry this success further, we in Congress need to ensure that 
American consumers have access to the most efficient, cleanest and most 
affordable electric power the market is able to produce--irrespective 
of who produces it. Whether you're in a state that allows retail choice 
or you rely on your utility to go out into the wholesale market to buy 
your power, there are better sources of electricity available today 
because of competition.
    To extend competition's great benefits, we must still overcome 
certain, anticompetitive barriers. We still do not have the seamless 
interstate networks of transmission needed to support truly efficient 
wholesale markets. Because of this, consumers aren't fully enjoying the 
benefits and savings of competition. We're also not building new 
transmission infrastructure, in part because of regulatory uncertainty, 
but also because we can't get it sited.
    We have made tremendous leaps in recent years in technology and our 
ability to process information. It's time we make sure that technology 
is applied to generating, transmitting, distributing and using 
electricity.
    I am anxious to hear today what our governmental witnesses have to 
say about the direction of our Nation's electricity policy. This is 
Deputy Secretary Blake's first visit to our Committee--and I 
congratulate you on your appointment and look forward to hearing the 
Administration's views. For Chairman Wood and Commissioner Brownell, 
this is their first time appearing before the Energy & Air Quality 
Subcommittee, also, and I welcome you both. For Commissioners Massey 
and Breathitt, I welcome you back.
    Thank you once again, Mr. Chairman.

    Mr. Barton. We thank the gentleman from Louisiana. We are 
not going to limit members on their opening statements. I don't 
think this is a day to adhere to regular protocol. But we would 
encourage members to attempt to be somewhat precise in their 
comments.
    The gentleman from Ohio, Mr. Sawyer is recognized for an 
opening statement.
    Mr. Sawyer. Mr. Chairman, I appreciate what you just said 
and will attempt to do precisely that. In that regard, let me 
associate myself with your remarks, those of Mr. Boucher and 
the chairman of the full committee, particularly with regard to 
the observations of the latter two regarding your leadership of 
this effort in the last Congress.
    Just by way of observation, I remember 7 and even 5 years 
ago when we were still talking largely about deregulation, and 
today we are almost always refer to restructuring, and the 
growth in the recognition of the importance of the transmission 
grid and how we go about the business of growing and nurturing 
and maintaining a modern structure for a working set of 
regional markets in this country continues to be central to our 
discussions.
    In that regard, I thank you for your openness to ideas from 
both your left and your right, and look forward to our 
continuing to work together this year.
    [The prepared statement of Hon. Tom Sawyer follows:]
  Prepared Statement of Hon. Tom Sawyer, a Representative in Congress 
                         from the State of Ohio
    Thank you, Mr. Chairman. I am grateful that we have the chance to 
take up these hearings again after last week's horrendous events. Those 
events are, of course, at the front of our minds, but we must also try 
to continue with the important work that we must do in this committee. 
I believe that no effort to solve this country's energy problems will 
be effective if we do not also tackle electricity issues. That is why I 
am glad that we will have the chance to hear from Deputy Secretary 
Blake and all the FERC commissioners. I hope that we can learn more 
about what we should be doing at the federal level to finish the job of 
restructuring this country's electricity system.
    With the Energy Policy Act of 1992, Congress altered the direction 
of the electricity industry. We now have widespread merchant 
generators, long-distance wheeling of electricity across transmission 
lines, and the development of a new business organization: the regional 
transmission organization. We started down this road, away from the 
vertically integrated local utilities of old, but today we still do not 
a have a clear vision of where, ultimately, we are headed. The 
transition that started over a decade ago is far from complete, nor is 
it clear what the final form of the transition will be.
    It would be understandable to look at the example of California, or 
to see the slow progress in some other states and think that perhaps we 
should try to go back to the old way of doing things. I myself 
supported such a temporary retreat to allow California to redraft its 
rules to allow for a functional retail market. But a broader return to 
vertical utilities would be neither feasible nor wise.
    Rather, we in the federal government should marshal the will to put 
together the kind of federal framework that will allow the retail 
electricity markets that are developing in some of the states to work 
properly. A significant part of that effort will be to provide the 
regional transmission systems that will allow for the easy flow of 
electricity between markets. Without such a measure the promise of 
competitive wholesale and retail electricity markets will not be 
realized.
    I look forward to the testimony of these witnesses and the work 
that we have ahead of us in this committee.

    Mr. Barton. We thank the gentleman for those kind words. 
The gentleman from Illinois, Mr. Shimkus is recognized for an 
opening statement.
    Mr. Shimkus. Thank you, Mr. Chair. I would ask unanimous 
consent that the full opening statements be submitted into the 
record. And would just----
    Mr. Barton. Without objection.
    Mr. Shimkus. [continuing] like to add that what we do here 
is important, and we have all followed the energy debate. It is 
even more so important now as some--we have new national 
security concerns. The transmission grid needs to be part of 
the entire discussion as we talk about energy security.
    I will be concerned with looking at the siting issues and 
we have to address the States rights issue, the private 
property rights issue, regional coordination and, as I got in 
trouble for a while ago, talking about Federal land siting. I 
think that is doable, and there is a lot more Federal land than 
pristine national parks that are available out there to help us 
grow the grid.
    RTOs has been a big issue on my plate and I know there is a 
proposal for maybe four nationally in Illinois. We had a time 
when there are three right now--or parts of three. It is very, 
very confusing. And I am open to a debate on discussion on how 
we need to move in that direction. Again, the most important 
thing is that power generation and transmission is really 
critical to the livelihood of us as an economic power, and even 
more important in these tough times that we are experiencing 
right now. Hopefully we can move with due diligence and work 
together to move something that will be beneficial for the 
country.
    And with that, Mr. Chairman, I yield back my time.
    Mr. Barton. We thank the gentleman. The Chair now 
recognizes the ranking member of the full Science Committee, 
one of the most distinguished members of this committee, a 
veteran of World War II where he flew fighter planes, I believe 
in the Pacific, but I wouldn't swear to that; one of the very 
best examples of what a Congressman is really all about, and 
working for his constituents in his State, the very honorable 
Ralph Hall of Texas.
    Mr. Hall. Thank you, Senator. Mr. Chairman, thank you for 
your tenacity and your pursuit of a decent bill. You have 
really worked hard on it. And I associate myself with Chairman 
Tauzin, and when he tells me that he has gotten together with 
former Chairman Dingell, I always have a real sense of 
satisfaction as well as some kind of a pang of fear until I 
have read the small print. But you get those two together, that 
is great leadership, combined with our Chairman.
    I will be brief, too. I certainly thank Francis Blake for 
her time of planning to get here, being here, and then 
testifying and then answering questions that we will submit 
later.
    I just basically want to say that while terrorist attacks 
are foremost on our minds, I think it is important that we also 
think offensively rather than defensively about the future of 
the bulk power transmission system, that is something that I 
have great concern over, and the overall architecture of 
electrical restructuring. It is reasonably clear what the 
structure of the distribution companies will be and it is also 
reasonably clear as to what the structure of the generation 
sector is going to be. What is not clear is what the structure 
of the transmission sector will be. And I think it is fair to 
say that some of the best minds in the industry have changed 
their minds about what it should look like, probably more than 
once.
    I think our overreaching goal should be that whatever 
legislation we eventually write will not prohibit the evolution 
of the transmission sector. The wisdom of also the Deputy 
Secretary and the chairman and members of the FERC is certainly 
going to be very welcome.
    I would be remiss if I didn't take an opportunity to 
welcome a fellow Texan, as others have welcomed him. While this 
is Pat Wood's first appearance before this subcommittee as 
chairman of the FERC, he has been before us before. We all know 
him. He is very capable. He was a logical selection and also a 
guy capable of personal friendship. I think it is good to have 
someone like that that we can reach. I yield back my time.
    Mr. Barton. We thank the gentleman from Texas. The 
distinguished gentleman from Georgia, Mr. Norwood, is 
recognized for an opening statement.
    Mr. Norwood. Thank you very much Mr. Chairman. I would like 
to commend you for holding this hearing today to obtain 
important input from Federal Governmental entities on the 
subject of electricity as part of a continuing coordination to 
craft a real, coherent national energy policy. I appreciate 
your selection of witnesses and an opportunity to hear their 
perspective on a variety of issues today. Especially, Mr. 
Chairman, I appreciate your remarks and your opening statement; 
and, Chairman Tauzin, they are very easy to align yourself with 
those remarks and I think all of us on this committee do.
    It is a time when I think you are doing the right thing. I 
think we need to stand up, though we are in pain, and we need 
to move forward with the people's business. And I think the 
thing that you could do, or we could do, that would most please 
the terrorists is us not to deal with the people's business. 
And this is a time when it sort of like reminds me of my old 
football coach who used to say, sometimes you just have to play 
hurt.
    And though we are all hurting for the American people and 
so many people that have been associated with this disaster, we 
need to move on with the American people's business while at 
the same time we very quietly and steadily, with a steel 
resolve, prepare to deal with Osama bin Laden and other 
terrorists around the world.
    Clearly our electricity system is changing, Mr. Chairman. 
One thing, however, that is not is the need to protect 
reliability. Over the last 10 years, through measures enacted 
by both the Congress and the FERC, this country's electricity 
network has undergone significant changes. Evolving from what 
used to be historically small wholesale power sales that 
insured reliability, today's current wholesale megamarket 
allows many different buyers and sellers to transfer power back 
and forth from one end of the grid to the other. In fact, the 
wholesale market alone is approximately 400 percent larger 
today than it was just 10 years ago. With a growing and ever 
changing market, Congress certainly faces new challenges to 
maintain reliable operability of the system.
    Reliability is even more on my mind in the wake of last 
week's malicious attack on both the World Trade Center towers 
and the Pentagon, just a few miles from here. In fact, I have 
probably, like many of you, wondered about many potential 
targets that might exist in the minds of evil folks responsible 
for such heinous and incomprehensible acts. The several 
substations, many transformers, and a number of transmission 
lines located near the twin towers were either destroyed or 
heavily damaged, leaving thousands of residents without power. 
I am certain that other members of this committee have 
considered the widespread damage that could potentially be left 
by a similar well-designed attack against specific and critical 
points of the energy infrastructure within the United States.
    As we all know, secure and reliable operation of our oil 
refineries, pipelines, transmission networks, and generating 
facilities are of paramount interest to the security of this 
Nation. With many of my constituents working at the Savannah 
River site just across the Savannah River that borders my 
district, and that work at our nuclear power plant at Vogtle, 
this is a major concern of mine. On a national scale, effects 
could be catastrophic.
    I am pleased to see that the witnesses are prepared to 
discuss safety and security measures that have been put in 
place to guard against and prevent against such a scenario.
    Thank you very much, Chairman Barton, for your leadership 
of this committee. I, for one, appreciate the fact that you are 
moving forward today.
    Mr. Barton. Thank you. Thank you. The gentleman from Texas 
wishes to be recognized out of order to make a correction to 
his opening statement.
    Mr. Hall. Yeah. Mr. Chairman, I just had a note from 
Chairman Tauzin that, ``Ralph, you have been out of Texas so 
long, you can't tell the difference between one Francis and 
another.'' And I think I have always been told that it is 
better to remain silent and be thought a fool as to open your 
mouth and remove all doubt. But I want to tell you that the 
next time I see Francis will be my second time, and when they 
kept alluding to Mr. Blake, I kept looking at these three 
ladies and trying to figure out which one you were.
    I yield back my time. And I will always remember Francis 
Blake.
    Mr. Barton. The gentleman from Louisiana, who has one of 
the strategic petroleum reserve facilities in his district, is 
recognized for an opening statement.
    Mr. John. Thank you, Mr. Chairman. First of all, let me 
commend you on your tenacity and your leadership with this 
committee, not only with this hearing here today, but since we 
commenced this Congress and began focusing on energy-related 
issues. I think these issues are very important. And also the 
chairman and my fellow Louisianan, Mr. Tauzin, for his 
leadership. And of course on our side, Mr. Boucher and Mr. 
Dingell.
    I believe that the events that took place just over a week 
ago have really shed a whole new light on energy and on its 
role in our national security. You know, I believe in the area 
of electricity you have to have three components that must work 
well together. You must be able to recover the natural resource 
through exploration and production, you must be able to 
generate, and you must be able also to transmit the power. And 
I think that those three components must work very well 
together.
    But in light of all of the issues that we have addressed up 
to this point relative to energy, I think with the actions that 
happened just last week, it gives us a whole new focus; and we 
will debate and redebate the role that energy, especially, 
electricity will play in our national security.
    So I look forward to the testimony from the Department of 
Energy and also from the Federal Energy and Regulatory 
Commission because this is a new era; not an old issue, but a 
new era with a new focus as we move on from here.
    So, thank you Mr. Chairman. I appreciate it.
    Mr. Barton. We thank the gentleman from Louisiana. We would 
recognize the distinguished gentleman from Tennessee, Mr. 
Bryant, for an opening statement.
    Mr. Bryant. Thank you, Mr. Chairman, for your series of 
hearings and your continuation of bringing very qualified 
people before this committee, subcommittee, to listen to 
testimony or to give testimony to us.
    Three quick points I would like to make. We are all 
commenting about the events of September 11, and I simply want 
to say, obviously I would echo everything that has been said, 
but I want to say, beyond that, I hope we are very careful as a 
Department and as a Congress and the entire administration; and 
I hope, too, that the media will be responsible in the 
discussion, the dissemination of any kind of information 
regarding our electricity system in particular, but our entire 
power system, our natural gas pipelines and so forth, but today 
electricity and discussing those in detail and particularly 
just laying out for the public and everybody to see what is out 
there and where there may be vulnerabilities or weaknesses.
    Too often we are seeing today so-called experts, retired 
military people, on television disclosing in their opinion what 
we will do as a military strategy, and there aren't that many 
out there, and laying it out in detail or disclosing that we 
are separating the President and Vice President for security 
reasons, and we are sending one to Camp David. And if you need 
directions we will be happy to, you know, go to our Web site 
and we will tell you.
    So again, in this particular area of security, I hope we 
can keep that in mind and limit--and I hope we don't ask the 
type of questions that will bring out responses that, you know, 
where are we weak and where are we vulnerable and so forth. At 
least make them do some work if they are going to do it.
    Second point, Mr. Secretary. I want to thank you on behalf 
of my constituents for you and the Department, those there that 
very quickly acted, what we used to call sui sponte in the 
court, on your own to, when we first heard of these people 
raising the price of gasoline, price gouging that occurred, 
going out on your own initiative and making that determination 
that there was no supply problem, and warning--putting out that 
word to people who could then warn these people that we would 
not accept that type of conduct under these circumstances. And 
again, I think that was something that really worked.
    I know in my State of Tennessee that occurred around and 
that lasted about 1 day until we got the Secretary letter out 
to our Governor and other people in our State with enforcement 
power. So I thank you for that.
    And my third point and final point is that as one from the 
Tennessee Valley Authority region, I have been very conscious 
of how we look at any legislation that involves deregulation. 
And I want to commend your--particularly the folks that I have 
dealt with in your Department in this issue, who have been very 
open and responsive to the work that we are trying to do as a 
part of that process of potentially deregulating the wholesale 
of electricity around this country. We have worked hard with 
the stakeholders in the Tennessee Valley over the last 2 years 
to develop consensus language, something that we can all live 
with. Nobody is completely happy with it.
    But again, the various parties have compromised and that 
consensus language was a part of the bill--well, basically that 
consensus language was a part of the bill that passed out of 
the subcommittee last year, and should anything move in the 
nature of a deregulation bill this year, we are going to be 
seeking that same language. And again we have worked with 
people in your Department on this. While we don't see exactly 
the same on every point, there are just a few minor differences 
out there, and we will continue to work.
    And again, I would encourage you to work with us on that 
and I just thank you for the work that you have done with us in 
the past and would yield back the balance of my time.
    Mr. Barton. I thank the gentleman from Tennessee and 
recognize the distinguished gentleman from Maryland, Mr. Wynn, 
for an opening statement.
    Mr. Wynn. Thank you very much, Mr. Chairman. I too would 
like to comment and commend you on your ``tenacity,'' I think 
was the word used by one of my colleagues, in pursuing these 
issues and bringing together very effective, I believe, 
hearings on this subject.
    I am particularly interested in the witnesses from FERC and 
particularly with respect to the July 12 order which directed 
the combination of--I believe it was four RTOs in the 
northeastern region, including the PJM which serves my own 
State of Maryland.
    I basically have two issues that I am anxiously looking 
forward to hearing about. The first is, what is the problem 
that they were attempting to address in this order? There is a 
reference to seams in the transmission system that needed to be 
smoothed out. I think that is very delicate and diplomatic 
language. But I would specifically like to know what was the 
problem they are trying to correct.
    And then I think second and, more importantly, I would like 
to know the basis for their authority; because I believe it is 
Ms. Woods that suggests that--Mr. Wood. Excuse me. That was 
bad. All right, Mr. Wood. What I want to know is, you make 
reference to perhaps the need for clarification of that 
authority which suggests that you are not sure, the Commission 
is not sure whether in fact you have the authority to order 
these mandatory RTOs. And my own public utility commission in 
Maryland which has worked with PJM and had great success, we 
have had very good levels of reserves, we are wondering why--
whether you have the authority to do this.
    So if you would elaborate on that, I would certainly 
appreciate it. And again, Mr. Chairman, I thank you for 
convening the hearing and relinquish the balance of my time.
    Mr. Barton. I thank the gentleman. We now recognize the 
distinguished gentleman from Iowa, Congressman Ganske, for an 
opening statement.
    Mr. Ganske. Mr. Chairman, the tragic events of last week 
have changed our focus today. I believe the Deputy Secretary 
will address security issues related to last week's attack and 
response by the Department of Energy. I would encourage him to 
advise us on steps which could be taken to further the 
Department's ability to help secure our Nation's power supplies 
either in today's forum or in future communications.
    We all have an obligation to assure that our power supply 
is safe and secure. Special attention must be paid to 
facilities such as our national dams and nuclear power plants. 
And I know the Department is aware of and sensitive to these 
concerns.
    I would like the Deputy Secretary's assessment that all 
necessary and proper steps are being taken to provide for 
appropriate security precautions. The transmission system in 
our country is just as important as the production facilities 
in guaranteeing a consistent and uninterrupted flow of power to 
our cities, towns and rural communities. Recent events have 
magnified the concerns we have with our power supply. But even 
before those events, there were steps which needed to be taken 
to improve our power grid and our transmission capabilities.
    Our electricity power grid is an essential part of the 
national economy. With the slowdown in the economy, it is 
appropriate for us to move forward on this issue. I yield back 
my time.
    Mr. Barton. We thank the next Senator from Iowa for those 
comments. Mr. Waxman of California.
    Mr. Waxman. Have you done everybody?
    Mr. Barton. I think so, Henry. I think you are next.
    Mr. Waxman. Thank you very much, Mr. Chair. Today the 
subcommittee is going to hear testimony from the Department of 
Energy and the commissioners of the Federal Energy Regulatory 
Commission regarding the national electricity policy.
    I am uncomfortable about turning to this issue so quickly 
after the tragic events of last week. Today's testimony raises 
a number of very controversial issues and I would prefer to 
focus on actions that bring us together rather than immediately 
jumping into divisive policy debates. Having said that, I can 
see that the chairman is intent on moving forward, and we 
cannot down play or gloss over the very significant policy 
disagreements that underlie electricity legislation.
    First, we must insure that we do no harm. California 
electricity restructuring legislation was hurried through the 
State legislature and the flaws became evident only much later. 
Many other States have since acted with equal speed, and I am 
not sure that anyone fully understands how those laws will turn 
out. So we must be careful. And we also must learn from recent 
experience.
    As California and other western States struggled through 
their electricity crisis over the past year, the Department of 
Energy sat on its hands. The Secretary even embarked on a 
public relations campaign to convince the American people that 
the Federal Government could not meaningfully assist western 
families. FERC refused to help until it was confronted with the 
very real possibility of congressional action. Throughout the 
West, we became painfully aware of how Federal inaction could 
harm consumers and the States.
    Ultimately President Bush ended up endorsing FERC action to 
restrain runaway electricity prices. But for those of us from 
the West, that action came too late to prevent major economic 
hemorrhaging.
    I remain concerned that FERC's actions did not go far 
enough. And we now begin to discuss legislation on electricity 
policy. As we do that, it is clear that we need to insure that 
FERC is more responsive to consumers. It must become more 
effective at addressing market power and preventing market 
manipulation. We cannot allow the intransigence of one 
commissioner to prevent meaningful Federal action when it is 
desperately needed. Western States are certainly opposed to 
greater authority at FERC, at the expense of the States.
    And I would like to submit for the record two letters from 
the Western Governors Association, dated September 6 and 
September 12 on this issue.
    Mr. Barton. Without objection.
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    Mr. Waxman. Additionally, there are a number of other 
critical issues that must be addressed in the context of 
electricity restructuring. For example, we must take energy 
conservation seriously. DOE has estimated that investments in 
energy efficiency have generated a 30 to 1 rate of return. 
Efficiency and load management measures also directly improve 
system reliability by reducing demand and strain on our 
delivery systems. But with the deregulation of the industry, 
utility investments in energy efficiency and load management 
programs have dropped by roughly 50 percent since 1993. We must 
reverse this trend.
    We must also seek to spur investment in distributive 
generation and renewable generation. This approach will best 
protect the environment while also creating a more secure 
electricity infrastructure. I look forward to hearing today's 
witnesses and hope we can act in a thoughtful bipartisan 
manner.
    Thank you Mr. Chairman.
    Mr. Barton. Thank the gentleman. I will just comment on 
your opening statement. I think it is well taken. We really 
thought whether we ought to do this hearing or not. It was not 
an easy decision. But since this does impact energy security, 
the Chair's decision was to go ahead and do the hearing, and 
then work with the minority to determine what specific hearings 
on more specific energy security issues could be scheduled, 
whether they be open hearings or private briefings. So I think 
your opening statement was well taken.
    I want you to know it is not a trivial decision to do what 
we are doing today. The gentleman from Oregon is recognized for 
an opening statement.
    Mr. Walden.
    Mr. Walden. Thank you very much, Mr. Chairman. I appreciate 
your holding this hearing today. I will keep my remarks brief. 
I think you can really sum it up in about three words: 
reliability, security, and self sufficiency. And if there was 
ever a time for us to explore all three of those, this is it.
    Clearly, in the wake of the events of last week and the 
roller coaster of our economy today, it is more clear than ever 
that we need to have self-sufficiency when it comes to our 
energy policy; that we need to make sure that the grid is 
secure and reliable.
    I think the other issue we need to continue to focus on is 
domestic production, especially of natural gas and oil. With 
the industrial downturn that is underway, we are seeing prices 
come down both in terms of electricity in the western market as 
well as prices of natural gas. That is a false security from 
the price side, because when our economy does turn around, we 
are going to have the same shortages we had before we went into 
this downturn and yet we probably won't have any additional 
supply.
    So I think we now need to focus on how do we add to supply, 
how do we add to distribution, how do we make sure our sites 
are secure. Otherwise, about the time we try and crawl up on 
out of this economic downturn, we are going to run smack dab 
into high energy costs, rolling blackouts, and the lack of 
energy and higher costs certainly for consumers.
    So I thank you for the hearing. I appreciate your 
willingness to work with us on the Northwest title. And I also 
want to thank the full committee chairman for his efforts on 
the price gouging issue as well. It is an unconscionable act in 
my mind if we do have businesses out there who engage in price 
gouging. They, in my mind are aiding and abetting the goals of 
the terrorist organization, and I say that without regret.
    Thank you, Mr. Chairman.
    Mr. Barton. Thank the gentleman. The gentleman from 
Arizona, Mr. Shadegg, is recognized for an opening statement.
    Mr. Shadegg. I thank you, Mr. Chairman, and I do commend 
you for holding this hearing today. I also appreciate your 
remarks indicating the thoughtful consideration that went into 
whether or not we should go forward.
    Since the events of last Tuesday, I have urged my 
constituents that, as much as possible, America needs to get 
back to life as normal. I have urged them that our airplanes 
must fly and we must use them. Our sports teams must play and 
we must attend. Our commerce must continue and we must 
participate. I think that is extremely important. And in that 
regard, this Congress has work to do. And I think we should be 
doing our work in every area.
    I would say, however, that there is a new element brought 
to this debate. It seems to me that security now becomes vastly 
more important and something we should focus on, something that 
perhaps we should have been focusing on to a greater extent 
before last Tuesday's events.
    I commend the full committee chairman for the effort he is 
undertaking to survey all of the agencies that we oversee and 
to have them come back to us with information with regard to 
security efforts or measures that they could take and anything 
this committee could do legislatively to assist in those 
efforts.
    With regard specifically to the energy issue, I would 
associate myself with the comments of others who have pointed 
out that this is a long-term crisis. We recognize that, for 
example, the California energy crisis that we struggled with 
over the last several months did not occur in a day. It 
occurred because people did not look farsightedly into the 
future. They, for example, stopped building power plants when 
they were needed. They underestimated the demand increase that 
was a part of the overall economy.
    And so I think it is very appropriate that this committee 
do its job. There is work that needs to be done in assessing 
our production capacity and whether we have enough new power 
plants coming on line. There is work to be done in assessing 
our transmission facilities. Those are clearly deficient. So I 
think we should be doing what we can do.
    At the same time our economy is in fact struggling, and I 
think with regard to any dramatic restructuring I think we have 
to proceed with some additional element of caution at this 
point in time, as I am sure every member of this committee is 
aware. And I commend the chairman for his comments indicating 
that he is much aware of that, and I yield back the balance of 
my time.
    Chairman Tauzin. Will the gentleman yield briefly?
    Mr. Walden. Certainly.
    Chairman Tauzin. I thank the gentleman. I asked the 
gentleman to yield simply to inform the members who perhaps 
were not here when we started that next week we are scheduling 
intense private briefings from some of the more important 
agency heads under our jurisdiction, including the Department 
of Energy, who will have a chance to privately discuss some of 
the things we are finding. So all of the members should be 
prepared. Next week, I think next Tuesday is the day we are 
trying to do it, to schedule these hearings. So stay in touch 
and we will inform on you the date and time.
    Mr. Shadegg. Reclaiming my time, that was precisely what I 
was complimenting you for, Mr. Chairman, and so I appreciate 
that and yield back the balance of my time.
    Mr. Barton. Seeing no other members present who have not 
yet had an opportunity to make an opening statement, the Chair 
would ask unanimous consent that all members not present have 
the opportunity to put their opening statements in the record. 
Hearing no objection, so ordered.
    [Additional statements submitted for the record follow:]
  Prepared Statement of Hon. Mike Doyle, a Representative in Congress 
                     from the State of Pennsylvania
    Mr. Chairman, thank you for convening this hearing to further 
examine our current national electricity policy and to identify what 
steps should be taken to improve the efficiency, reliability and 
competitiveness of our facilities and markets. While the events of 
September 11th remain omnipresent and are at the forefront of 
Congressional priorities, we can ill-afford to ignore the critical role 
that electric power plays in our national security.
    As we are all aware, Congress passed the Energy Policy Act of 1992 
during the Persian Gulf War and it would appear that Congress is once 
again charged with the responsibility of responding in like fashion. 
The House has already accomplished a great deal with the passage of 
H.R. 4 and we should proceed with the task at hand regarding 
comprehensive electricity policy.
    Obviously, we need to focus on structural and jurisdictional 
matters. I am personally interested in amending the Federal Power Act 
to enhance the advancement of combined heat and power. But like many of 
my colleagues I am most eager to discuss the security of our systems. 
We will hear in greater detail from Secretary Blake that the attack on 
the Pentagon had no direct impact on the Washington metropolitan energy 
infrastructure and that outside of lower Manhattan our energy 
infrastructure was not affected. Without question this is good news and 
should help to calm concerns. But we also know that security issues 
have become a top priority at our nation's nuclear power plants and 
water treatment facilities. And we also know that numerous reviews that 
have examined potential terrorist acts that could debilitate our 
nation's infrastructure identify damage to electric power among the top 
physical threats.
    Our schedule of regular order may feel a bit awkward, but is 
important that we move ahead with completing the work on all facets of 
our national energy policy. I appreciate Chairman Barton's efforts in 
this regard and look forward to working with all members of the 
Committee in reaching this imperative goal.
    Thank you Mr. Chairman.
                                 ______
                                 
 Prepared Statement of Hon. Bill Luther, a Representative in Congress 
                      from the State of Minnesota
    Thank you Mr. Chairman for holding this wide-ranging hearing 
designed to hear the views of the Administration and the FERC with 
regard to the electric power industry. Coming from a state that has not 
adopted deregulation at the state level, I urge a deliberative approach 
to any mandated federal legislation. I also urge that any proposal 
considered by this committee have the best interests of electricity 
consumers in mind including the promotion of conservation and renewable 
and innovative energy sources. Considering the tragic events of last 
week, I am also interested in any comments or views from the 
Administration with regard to energy security issues and would urge 
this subcommittee to begin looking at this subject in greater detail. 
Thank you Mr. Chairman.

    Mr. Barton. We would like to welcome our first witness, the 
Honorable Deputy Secretary of Energy, Mr. Francis Blake. If you 
would come forward. Welcome back. We are glad to have on you on 
this very busy day. We know how pressing your duties are as the 
chief operating officer of the Department of Energy. We are 
going to give you 10 minutes to summarize your written 
testimony. If you need a little bit longer, or take a little 
bit less, that is fine. Welcome to the committee, and your full 
statement is in the record in its entirety.

    STATEMENT OF HON. FRANCIS BLAKE, DEPUTY SECRETARY, U.S. 
                      DEPARTMENT OF ENERGY

    Mr. Blake. Thank you Mr. Chairman, members of the 
committee. I would just briefly summarize my statement, and in 
light of all of your opening comments, I thought I would just 
start with a few observations on the security of our energy 
infrastructure.
    Last week's terrorist attack did not disrupt our energy 
infrastructure. With the exception of the devastation in lower 
Manhattan, the electricity grid was unaffected. Trading in oil 
and gas proceeded largely without disruption. And under the 
circumstances, the energy markets have remained remarkably 
stable, with the exception of a few isolated instances of price 
gouging and price spikes.
    At DOE we have an emergency operation headed by General 
McBroom, a retired Air Force major general, who led combat 
units during the Gulf War and has planned and executed 
responses to numerous emergencies and natural disasters. Our 
operation team works with other Federal agencies, State and 
local government, and industry to respond in the event of 
emergencies.
    Let me give you just a sense of the process. Last week on 
the electricity grid, the National Electric Reliability 
Counsel, NERC, issued the highest threat advisory to their 
electrical industry security coordinators who, in turn, 
notified all the electrical control centers, who, in turn, 
notified all 3,000 individual utilities around the country and 
Canada and in Mexico. Representative security measures taken 
include increased guards, restricted access, moving system 
operators to alternate control centers, and taking appropriate 
cyber security measures.
    At DOE, we were in regular contact with FERC and the 
National Infrastructure Protection Center of the FBI. 
Cooperation and communication with the industry with other 
forms of government have been excellent. But we are going to 
look for ways to improve and we are in the process of 
evaluating lessons learned. I look forward to keeping the 
committee informed. And obviously, we will have an opportunity 
next week and to keep you advised as we go forward with our 
assessments.
    Now, let me turn to today's specific topic, the 
comprehensive electric legislation. We are very pleased that 
the committee is considering comprehensive electric 
legislation. The Federal Power Act was written in 1935 at a 
time when there was virtually no interstate commerce in 
electricity. Electricity markets were local, and power 
generation was considered a natural monopoly. Today the 
transmission grid is both interstate and national, and the 
notion of a natural monopoly in generation is a thing of the 
past. The administration believes we need to modernize our 
electricity laws. Comprehensive legislation can make wholesale 
markets more competitive, lower prices, improve reliability and 
benefit consumers. The administration very much respects the 
role of the State in electricity controlling legislation, but 
we also believe that there are a few core Federal issues. And 
in that respect, we believe the goals of comprehensive 
legislation should be first to make the markets more 
competitive, finish the job of opening the transmission system 
and remove transmission bottlenecks, lower barriers to entry 
for new electricity supply, for example, through uniform 
interconnection standards, promotion of reliability to 
enforceable standards developed by self regulating 
organizations, increased protection for the consumers through 
uniform information disclosure requirements, promotion of 
additional investment, for example, in repealing the Public 
Utility Holding Company Act.
    We also believe legislation can help promote energy 
efficiency, for example, by developing realtime pricing 
programs and giving FERC authority over demand options.
    There are additional elements in this legislation. I won't 
go through them all item by item, but we very much applaud the 
committee's attention to this legislation, and we look forward 
to working with you. Thank you very much.
    [The prepared statemment of Hon. Francis Blake follows:]
  Prepared Statement of Hon. Francis Blake, Deputy Secretary of Energy
    Mr. Chairman and Members of the Subcommittee, I welcome the 
opportunity to testify before you today on national electricity 
legislation.
                      last week's terrorist attack
    Before I address the subject of this hearing, I would like to 
briefly address the energy issues arising out of the vicious and 
cowardly attack on our country last week.
    The terrorist attack on our country had a significant impact on the 
energy infrastructure in lower Manhattan. The fire and building 
collapses destroyed two substations located under the World Trade 
Center as well as power transformers, circuit breakers, underground 
cable and other distribution equipment. Multiple transmission lines 
were damaged, resulting in the outage of a third substation. Con Edison 
is restoring limited temporary service by deploying mobile generators 
and reconfiguring portions of the effected distribution system. New 
power lines are being installed above ground to replace damaged 
underground cable. Normal electricity service in areas where there is 
limited physical damage is being restored, but restoration to areas 
where there is significant damage will take much longer. There also has 
been a disruption to natural gas service in lower Manhattan. The attack 
on the Pentagon had no impact on the energy infrastructure in the 
Washington, D.C. area.
    Last week's attack raises issues relating to the security of our 
energy infrastructure. Outside of lower Manhattan, our energy 
infrastructure was not affected, and there were no specific threats to 
oil refineries, oil and gas pipelines, electric transmission lines, and 
generation facilities, including nuclear power plants.
    Notwithstanding, the security of our energy infrastructure was 
upgraded in the wake of the attack. Commercial nuclear power plants 
were placed on their highest alert status, the North American Electric 
Reliability Council, an industry organization responsible for 
maintaining bulk power system reliability, recommended that 
transmission operators implement heightened security measures, pipeline 
owners were put on high alert after the attacks, and security at oil 
refineries was upgraded.
    As you know, there were isolated reports of gasoline price gouging 
in the wake of the attack last week. In response, the Secretary of 
Energy determined there was no supply disruption to justify reported 
prices and issued a public statement that these high prices were 
unjustified. The Federal Trade Commission also threatened to take 
enforcement action. Gasoline price spikes receded in wake of these 
actions.
    The Department is conducting an assessment of the security of our 
energy infrastructure. When this assessment is complete, the Department 
will recommend appropriate action.
                need for federal electricity legislation
    I commend you for holding this hearing. Earlier in the year, many 
believed there was little likelihood Congress would consider 
electricity legislation. The view was that the California electricity 
crisis would discourage both the Administration and Congress from 
dealing with electricity legislation. Your hearing disproves this 
common wisdom.
    The Administration believes the opposite is true--the electricity 
crisis in California and the West demonstrates the need for Congress to 
act. This experience shows there is a need to make wholesale 
electricity markets more competitive, to strengthen the transmission 
grid, to increase electricity supply, to protect consumers, and to 
improve reliability. The California electricity crisis is a dramatic 
demonstration of problems that exist under the status quo--problems 
that Congress should address.
    The Administration recognizes the need for Congress to pass 
comprehensive electricity legislation. The National Energy Policy 
included a recommendation that the ``Secretary of Energy propose 
comprehensive electricity legislation that promotes competition, 
protects consumers, enhances reliability, promotes renewable energy, 
improves efficiency, repeals the Public Utility Holding Company Act of 
1935, and reforms the Public Utility Regulatory Policies Act of 1978.''
    Since 1995, Congress has been grappling with electricity 
legislation. Initial efforts sought to require States to open their 
retail electricity market by a date certain. Subsequent legislation 
focused on promoting competition in electricity markets and 
complementin--not commanding--State retail competition programs.
    We clearly need to revise Federal electricity laws to recognize 
changes in electricity markets. The principal Federal electricity law--
the Federal Power Act--was written in 1935. At the time, there was 
virtually no interstate commerce in electricity, there was no 
interstate transmission grid, electricity markets were local, power 
plants were built right next to consumers, and electricity generation 
was perceived to be a natural monopoly.
    The Federal Power Act was enacted to fill a regulatory gap, out of 
recognition that States cannot regulate interstate commerce. Initially, 
the Federal role was modest, since there was very little interstate 
commerce in electricity. As interstate commerce in electricity 
expanded, it was only natural that the Federal role would also expand.
    Today, the transmission grid is both interstate and international, 
electricity markets encompass entire regions, almost all wholesale 
electricity sales are in interstate commerce, and the natural monopoly 
in generation has long since been disproved.
    The Administration believes the time has come to make changes to 
Federal electricity law to reflect changes that have occurred over the 
past 66 years, and the sweeping changes that are underway in the 
industry. The Administration believes there is a need to modernize our 
electricity laws.
    The Administration believes it is essential that Congress pass 
comprehensive electricity legislation. Electricity legislation can make 
wholesale electricity markets more competitive, lower prices, 
strengthen the transmission grid, increase electricity supplies, 
protect consumers, and improve reliability.
    I want to make it very clear that the Administration respects the 
State role in electricity regulation. For example, the Administration 
does not support proposals to require that States open their retail 
electricity markets by a date certain. It believes that it is a State 
responsibility to determine whether and when to open retail electricity 
markets to competition. At the same time, the Administration recognizes 
that since 1935 the Federal government has been charged with 
responsibility over wholesale electricity markets and the transmission 
of electricity in interstate commerce.
    The Administration believes that electricity legislation should 
focus on core Federal issues that are beyond State authority.
Regulation of Interstate Commerce
    Electricity markets are increasingly regional in nature. Under the 
Constitution, States have no authority to regulate interstate commerce 
and regulation of interstate commerce is a Federal responsibility. The 
California experience shows that actions taken by one State can have 
regional consequences.
Transmission
    Assuring that our transmission system can deliver reliable 
electricity supplies is a core Federal issue. As the National Energy 
Policy noted, investment in new transmission capacity has failed to 
keep pace with growth in demand and with changes in the industry's 
structure. Since 1989, electricity sales have increased by 2.1 percent 
per year, yet transmission capacity has increased by only 0.8 percent 
per year. There is widespread recognition that there is a need to 
expand the transmission system, remove bottlenecks, and provide for 
open access. Since the transmission system is both interstate and 
international, regulation of the grid is a Federal responsibility.
    There are various reasons why transmission constraints exist. In 
some cases, the problem is a lack of economic incentive. The national 
energy policy proposes a solution to that problem: encouraging the 
Federal Energy Regulatory Commission (FERC) to develop incentive rates 
to promote transmission expansion. FERC has great flexibility under 
current law to set transmission rates at a level to attract investment. 
Recently, FERC has shown flexibility in considering nontraditional 
transmission rates. For those reasons, it does not appear legislation 
is needed to address transmission pricing.
    In other cases, the problem is the siting process itself. Under 
current law, transmission siting is an exclusively State function. That 
law was written 66 years ago, at a time when power plants were located 
right next to customers, and decades before transmission lines 
interconnected States and regions. Congress did not provide for 
transmission siting by the Federal government because it did not 
foresee the transmission system would develop into not only an 
interstate but also an international grid.
    Much has changed since 1935. The transmission grid is the 
interstate highway system for electricity. It should not be a system of 
local toll roads.
    Electricity legislation can remove transmission bottlenecks by 
providing for siting by the Federal government of transmission 
facilities used for interstate transmission. The Administration 
believes legislation should preserve State transmission siting 
authority, but should provide for Federal siting of transmission 
facilities that are in the national interest, based on effects on 
reliability, interstate commerce in electricity, and on competition in 
wholesale electricity markets. We believe Federal siting decisions 
should rely in large part on recommendations made by regional siting 
boards.
    We also believe that Federal electricity legislation should grant 
FERC authority to require State and municipal utilities and rural 
electric cooperatives to provide open access to their transmission 
systems, in the same manner as jurisdictional transmitting utilities. 
This is a step towards establishing one set of rules to govern the 
transmission grid.
Reliability
    Ensuring the reliability of the interstate transmission system is 
also a Federal responsibility. Since the 1960s, the reliability of our 
transmission system has been based on voluntary compliance with 
unenforceable reliability standards. That is no longer tenable, and 
Federal legislation is needed to provide for enforceable standards 
developed by a self-regulating organization subject to FERC oversight.
Market Power
    The Administration believes that FERC needs to be able to mitigate 
market power. However, the debate about market power often starts with 
a misunderstanding about FERC authority under current law. Under the 
Federal Power Act, FERC is responsible for ensuring that rates charged 
by public utilities are just and reasonable. As a general matter, the 
ability to set rates is the ability to prevent the exercise of market 
power. An exercise of market power generally entails charging rates 
that are higher than those produced in a truly competitive market. For 
that reason, FERC can prevent the exercise of market power through its 
authority over wholesale rates and by ordering refunds of unjust and 
unreasonable rates.
    In our view, a discussion of market power issues must start with an 
understanding of FERC authority under existing law and a determination 
of whether existing FERC authority to address market power is 
inadequate.
    Legislation can strengthen FERC authority to address market power. 
For example, the Administration believes legislation should amend the 
refund provisions of the Federal Power Act and provide that refunds are 
effective on the date of complaint, not 60 days later. The 
Administration believes there is a need to increase the penalties for 
criminal violations of the Federal Power Act and expand the scope of 
the civil penalty provisions to include any violation of the Federal 
Power Act, not just the provisions added by the Energy Policy Act of 
1992.
    The Administration believes that FERC should retain its authority 
to approve mergers and asset dispositions, given its expertise on the 
electricity industry. We also believe it is appropriate to clarify FERC 
authority to approve holding company mergers and mergers and asset 
dispositions involving generation facilities.
Electricity Supply
    The lack of uniform interconnection standards appears to have 
contributed to the difficulty in developing independent power plants in 
some regions of the country. Federal legislation can help assure 
adequate electricity supplies, by providing for uniform interconnection 
standards and reforming FERC authority to issue interconnection orders.
Consumer Protection
    Electricity markets are regional in nature, and are no longer 
confined neatly within individual States. For that reason, there is a 
need for electricity legislation that protects consumers against 
``slamming'' and ``cramming,'' strengthens the bargaining power of 
consumers through aggregation, protects consumer privacy, and ensures 
that consumers have the information to make informed decisions to meet 
their needs.
Federal Electric Utilities
    Another core Federal issue is defining the role of Federal electric 
utilities like the Tennessee Valley Authority (TVA) and Bonneville 
Power Administration in competitive electricity markets. Obviously, 
States have no authority over Federal electric utilities. Legislation 
is needed to provide open access to transmission systems operated by 
the Federal electric utilities and ensure that one set of rules governs 
the entire interstate transmission system. There is a need for other 
specific TVA and Bonneville reforms. I assure the Subcommittee that the 
Administration intends to work closely with the Congressional 
delegations from these regions on these reforms.
Reform of Federal Electricity Laws
    There is a need to reform Federal electricity laws, such as the 
Public Utility Holding Company Act of 1935 (PUHCA) and the Public 
Utility Regulatory Policies Act of 1978 (PURPA). With respect to PUHCA, 
each of the past four presidents has supported PUHCA repeal. PUHCA 
repeal is an idea whose time came a long time ago. There is also a need 
to repeal the PURPA mandatory purchase obligation prospectively.
Jurisdiction
    Federal legislation should also clarify Federal and State 
jurisdiction. One jurisdictional issue is State authority to charge 
public purpose fees. The Administration believes that States are in the 
best position to develop public purpose programs to suit their needs. 
Some States may prefer to develop strong low-income assistance, while 
others focus on rural assistance, while still others concentrate on 
conservation. States have different needs, and need the flexibility to 
craft programs to suit those needs. These programs can be funded 
through the distribution charges--an area where States have exclusive 
jurisdiction--or charges on retail sales of electricity.
    Electricity legislation can clarify the authority of States to 
impose fees to fund public purpose programs that meet their needs and 
avoid bypass of State fees. We believe this is a better approach than 
imposing a Federal tax to fund a Public Benefits Fund. One concern 
relating to a Public Benefits Fund that has not received much attention 
is equities in allocating funds. There is no assurance that fees raised 
in one State to finance a Public Benefits Fund will not be spent in 
other States.
Energy Efficiency and Renewable Energy
    A stable power supply should consist of a clean and diverse 
portfolio of domestic energy supplies--including renewable and 
alternative supplies--that are available right here in the United 
States. The National Energy Policy includes several recommendations on 
ways that new and emerging technologies can help us provide for 
increased generation of electricity while protecting the environment, 
as well as on ways to increase use of renewable and alternative energy 
supplies. These recommendations should be considered as electricity 
legislation is developed.
    By no means is this intended to be an exclusive list and there are 
other issues that may be appropriate to address in Federal electricity 
legislation.
                               conclusion
    We have a rare opportunity to learn a lesson from the California 
experience and act to prevent a future electricity crisis. Congress 
normally passes energy legislation in the wake of a crisis, and it is 
rare for Congress to act to prevent an energy crisis.
    Mr. Chairman, Congress has been slowly reforming Federal 
electricity laws for over twenty years. This process began with the 
Public Utility Regulatory Policies Act of 1978, which the encouraged 
the development of independent power producers. This process continued 
with enactment of the Energy Policy Act of 1992, which provided greater 
access to the transmission system and further encouraged the 
development of independent power producers. The time has come for 
Congress to take another step, a bigger step, one that can make 
electricity markets more competitive and result in lower electricity 
prices, and ample and reliable electricity suppliers.
    The Administration looks forward to working closely with the 
Committee to develop comprehensive electricity legislation.
    I appreciate the opportunity to testify before you today.

    Mr. Barton. We thank you. The Chair would recognize himself 
for the first 5-minute question round. Has the Department 
decided, Mr. Secretary, whether to put forward an electricity 
legislative package of its own?
    Mr. Blake. We are developing legislative principles and we 
should be able to share those within the week.
    Mr. Barton. But legislative principles may not be the same 
as legislative language; is that correct?
    Mr. Blake. I think we look forward to working with this 
committee and your staff on the language itself.
    Mr. Barton. It is my understanding that the administration 
has made a decision to encourage the Senate to move companion 
to H.R. 4, the Comprehensive Energy Enhancement Act that passed 
the House in early August. Is that true or not true?
    Mr. Blake. That is my understanding.
    Mr. Barton. If that happens and our colleagues in the 
Senate that act, obviously, we would attempt to have a 
conference between the House and the Senate in the very near 
future. Does the administration have a position on whether we 
should attempt to put in an electricity restructuring component 
in a conference between the House and the Senate on the pending 
bill that has passed the House?
    Mr. Blake. We would like to see--I am not entirely sure I 
understand the question.
    Mr. Barton. It is a good thing if you don't entirely 
understand the question.
    Mr. Blake. We would like to see that as part of the 
overall----
    Mr. Barton. Regular order for us, to move the electricity 
restructuring bill as a stand-alone through subcommittee, full 
committee, to the floor and the Senate have a separate 
conference. But if the House and the Senate are going to 
adjourn in the middle of October, which is a possibility, we 
might want to speed up the electricity component into a bill 
that has already cleared the two legislative Chambers.
    Mr. Blake. I understand. We would support prompt action on 
it.
    Mr. Barton. Does the administration have a position on the 
thorny issue of mandatory RTOs versus voluntary RTOs? And if 
you do, can you enunciate that position today?
    Mr. Blake. I think the administration's view is FERC has 
the authority that it now needs.
    Mr. Barton. So the administration would be silent on----
    Mr. Blake. Yes.
    Mr. Barton. But is willing to take instruction from the 
subcommittee if we have a different view?
    Mr. Blake. Always.
    Mr. Barton. Remember the answer to that now--always. We 
don't have you under oath, but that is a very good answer from 
the chairman's viewpoint. In your opinion, given what happened 
last week, would it be helpful to have a restructuring package 
in any bill that the President signs on energy? Would that, in 
your opinion, tend to enhance our ability to react and prevent 
future terrorists' attacks or to minimize the damage? Do you 
have a position on that?
    Mr. Blake. I think there are linkages between reliability 
and security that we need to think through, particularly in 
light of the attacks last week. And that is something we are, 
in the process in the department are doing now. And I think 
this legislation would be helpful.
    Mr. Barton. I am going to yield the balance of my time and 
let Mr. Boucher ask questions. Thank you.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. And 
Mr. Blake, welcome. We are glad to have you with you us this 
afternoon. Let me ask a question of you concerning the violence 
between State and Federal regulatory with regard to 
transmission. I presume you are familiar with the contents of 
the Federal Energy Regulatory Commission's order 888?
    Mr. Blake. In a general sense.
    Mr. Boucher. That order asserted FERC authority over the 
transmission component of unbundled transactions for 
transmission and the sale of electricity in States that are 
open to retail competition. And no sooner had the FERC issued 
that order that it was sued from both directions. It was sued 
by one set of parties claiming that the FERC did not have the 
statutory authority to go as far as it went. And then it was 
sued by a group of energy marketers claiming that it had not 
only the statutory authority, but a legal mandate to go even 
further and to assert jurisdiction over transmission even in 
States that are closed to retail competition and even with 
regard to bundled transactions.
    And I have a series of questions for you concerning that 
circumstance. First, a procedural question. The U.S. Supreme 
Court is scheduled to have arguments on October 3 on both of 
these lawsuits. And we can probably anticipate a decision from 
the Supreme Court either later this year or perhaps at the 
latest in the spring of next year on this rather complicated 
set of jurisdictional questions that really go to the heart of 
the balance between Federal and State authorities.
    And so as the first question, I would be interested in 
knowing whether you would advise us, given the uncertainties of 
the legislative process and the potential perhaps that even an 
effort to legislate in one direction or the other should it not 
be successful, might have some bearing on the Court's 
interpretation of these statutory authorities. I wonder, if 
given those circumstances, you have any advice for us on 
whether we would be well advised to wait until the Supreme 
Court has rendered a judgment on these questions or whether we 
should go forward and attempt to pronounce what we believe the 
proper measure of FERC authority in these situations should be?
    Mr. Blake. Since the Supreme Court will be looking to try 
to discern Congress's intent, if prior to that decision 
Congress can clarify that intent and can make clear in the 
administration's view that FERC did have the authority to issue 
that order, that would be preferable from the administration's 
perspective.
    Mr. Boucher. So your advice would be go forward and 
legislate in our own time and make our own decisions, 
notwithstanding the impending decision of the Supreme Court on 
these matters?
    Mr. Blake. Yes, sir.
    Mr. Boucher. Could you pull that microphone a bit closer. I 
am having a little bit of trouble. I heard your answer to 
Chairman Barton's question with regard to the authority of the 
FERC with respect to regional transmission organizations. And I 
would just like to ask for some clarification with regard to 
one aspect of that. Your basic advice is don't legislate on 
this subject. I think I heard that clearly. Was I correct in 
that interpretation?
    Mr. Blake. We think FERC has the authority now as 
appropriate.
    Mr. Boucher. There are really two aspects to that FERC 
authority, and this is the question I want to pose to you. The 
FERC has issued several orders with regard to regional 
transmission organizations. One of those orders encouraged 
investor-owned utilities to seek memberships in RTOs.
    Another of the orders, the most recent order, addresses the 
structure of RTOs and imposes some Federal requirements with 
regard to structure. Do you believe that the FERC has 
sufficient authority to order a particular structuring of RTOs? 
Does the FERC have sufficient authority, for example, to 
buttress the order that it issued recently addressing 
structure? And do you believe that the FERC has authority to 
order participation in RTOs by the investor-owned utilities? 
And as a further question, do you believe that the FERC should 
order participation in RTOs by investor-owned utilities?
    Mr. Blake. The first response is I would also be interested 
in Chairman Woods' answer to those questions.
    Mr. Boucher. We are going to ask him the same question.
    Mr. Blake. I am sure. I would not hold myself out as an 
expert on where the boundary lines are of FERC's authority. 
From the administration's perspective, as we look at the RTO 
structuring, and what we see in the larger sense, is adequate 
authority in the current statute and a view that that is best 
resolved at the technical level through the comment process and 
the input from the stakeholders, the exact process that FERC is 
going through now.
    Mr. Norwood [presiding]. The time has expired.
    Mr. Boucher. Let me thank you very much, Mr. Blake. We 
appreciate your participation here. Mr. Chairman, I would like 
to ask that the record of this hearing remain open for an 
appropriate time within which we might submit some additional 
questions in writing to Mr. Blake concerning the 
administration's position on this complex and very important 
set of issues. I do have some additional questions and I will 
send them to you, Mr. Blake.
    Mr. Norwood. So ordered. I would like to recognize the 
chairman of the Commerce Committee, Mr. Tauzin.
    Chairman Tauzin. Mr. Blake, we have noted that since the 
NES was adopted, the National Energy Strategy that opened the 
wholesale markets in electricity, the wholesale market, has 
increased by 400 percent and prices have steadily declined in 
the wholesale market during that period of time. Is it this 
administration's position that the NES and wholesale marketing 
changes the laws we made in that period of time that worked 
successfully and were a model for what we should go forward 
with?
    Mr. Blake. I think the opening of the wholesale market has 
worked, on the whole, very successfully.
    Chairman Tauzin. The second question--I know we just went 
through a pretty technical series of questions, but I want to 
get something perhaps even more basic than that. The whole of 
the electric laws in America, electric policy laws, pricing and 
transmission, have been built around the notion that 
electricity gets transmitted from a point of origin to the 
point of use. That isn't the way the system really works, is 
it?
    Mr. Blake. No.
    Chairman Tauzin. Explain to this committee and the 
listening audience how it really works.
    Mr. Blake. The actual electrical flow is often quite 
different than what is called the contract path flow. And part 
of this restructuring legislation, I think, is an effort to 
match----
    Mr. Norwood. Mr. Blake, would you try to speak directly 
into that microphone.
    Chairman Tauzin. We are doing some nice work in this room 
and it will be a lot better when you come back.
    Mr. Blake. Your question goes to the point of to better 
match what is actually happening as we move to regional and 
national grid structure.
    Chairman Tauzin. And it is in the Nation's interest that we 
move to regional and national grids, is it not, in the same way 
that we move to national pipeline systems so that buyers could 
deal directly with producers and actually negotiate better 
prices and delivery terms; is that correct?
    Mr. Blake. That is absolutely correct.
    Chairman Tauzin. And if it is correct, it requires us to 
rethink policy in the light of reality. There was a great 
article written about the notion that if you think of 
electricity grids as lakes of electricity--and it doesn't 
matter where the water comes in, you are only going to take it 
out from where you are. You are not going to pipe it across the 
lake to get to that water that was introduced to the other side 
of the lake. You are going to take water from the lake wherever 
you are. But the policy, the pricing structures, the regulatory 
structures, are all built around the notion that we have 
pipelines running across the lake going from point of 
production to the point of use and delivery, when that isn't 
the way the systems works or electrons work. And basically the 
argument that our committee has made, and I hope the 
administration will join us in, is that it is time for us to 
think about making our policy and our pricing and our delivery 
and our markets look like the physics, the reality of the way 
electricity is introduced and the way it is used within a grid; 
is that correct?
    Mr. Blake. Yes, sir.
    Chairman Tauzin. So I hope you are going to be very 
supportive of this committee's efforts to find a way to move us 
from this almost dark-age view of the way electricity functions 
in a society to the way it really does function and the way it 
should operate in a free market. And in doing that, we have to 
worry about a transition and we have to worry about the fact 
that this old system of pricing and of delivery and regulation 
have created situations where some people are paying much too 
much for electricity, and other people are paying quite a good 
price. Isn't that our political dilemma how we move from that 
old system to a new one where there is more uniformity in the 
market price?
    Mr. Blake. Greater liquidity will help and that is what the 
legislation is designed to promote.
    Chairman Tauzin. And if I could echo the chairman's 
concern, this is pretty tough business. I mean, we don't really 
have consensus yet whether the RTOs ought to be mandatory or 
voluntary. This is the kind of transition stuff we are talking 
about. And we are going to need the guidance of the new 
administration in that area, and I know you said you would take 
guidance from us and you know we need those principles so we 
can come to some recommendations that make sense. I understand 
the chairman is going to very soon release a working draft so 
we can begin the intricate discussions of how to make that 
transition to this working marketplace.
    In that regard, I would hope that the administration, as 
well as all our friends in the industry, take that as a cue 
that time is running on this issue. And we may not dispose of 
it in the next couple of weeks, but it will be disposed of 
relatively soon at this committee level. I would encourage you 
to work very hard toward a consensus that Chairman Barton and 
indeed Mr. Boucher pointed out, yet need to be resolved. Thank 
you.
    Mr. Norwood. Thank you, Mr. Chairman. I recognize Mr. 
Shimkus for 5 minutes.
    Mr. Shimkus. Thank you, thank you, Mr. Chairman, and Mr. 
Blake it is good to have you. What elements of a comprehensive 
electricity package, if any, are so critical to the security of 
our Nation that they should be enacted into law immediately, 
i.e., in the next several weeks or at the end of this year?
    Mr. Blake. On the physical security of the infrastructure?
    Mr. Shimkus. Just the whole restructuring debate.
    Mr. Blake. On the physical security side, we are, as I 
indicated, now looking and taking another look at those sets of 
issues and hope to give you some recommendations or the result 
of our review very soon, but I am not in a position today to 
respond to that. On the reliability issues, I think there is a 
wide consensus that one of the things you want to move toward 
are standards that are enforceable through private 
organization, much like, you know, the stock exchange or 
something like that.
    Mr. Shimkus. As a basis of the comments on the FERC, which 
we will get a chance to talk to next, is it your position that 
they currently have the authority to do what needs to be done 
under their jurisdiction? What is the administration's position 
on FERC's authority to order divestiture?
    Mr. Blake. I am just being advised they can condition 
mergers which would be consistent with the similar authority of 
Justice or FTC. But they can't order divestiture on their own.
    Mr. Shimkus. Do you see that as an important element in 
restructuring?
    Mr. Blake. I don't think we would support an independent 
authority different than what regular antitrust reviewing 
authorities have.
    Mr. Shimkus. So you feel that that is not needed?
    Mr. Blake. Right. Exactly.
    Mr. Shimkus. And don't worry. Joe used to do that to us all 
the time. So you are in good hands. Your testimony also goes on 
to list some legislation reforms that could strengthen FERC's 
ability to address the market power issue, you know, in the 
chairman's comments on how we price and it is not a pipe delay 
that is the analogy I have been taught. But then people would 
turn back to the old regional monopoly standard of saying, 
well, those--when there was a lake, there was, you know, one 
producer and one--and the consumer and it was all one happy 
family. When we deregulated into the wholesale aspects of 
selling of power, now we have to change how we account for--how 
do we allow the grid to operate hopefully more effectively and 
efficiently.
    And we just have come out of a--dealt a blow with some 
movement by the administration, some movement by the State, 
some interest by us on what occurred on the western grid and 
the western prices in California. So talk to me about the 
market procedure authority.
    Mr. Blake. The administration's view is largely--the 
principal issue around market power does go to the rates 
charged. You would retain--there is no change in FERC authority 
on just and reasonable rates. The only changes we see on market 
power are really more along the edges.
    You mentioned the merger authority. We see some value in 
clarifying some of that authority that they have over mergers 
and divestitures. But the larger issue that you are going to, I 
think we see is already encompassed within the statute.
    Mr. Shimkus. Do you feel that an expansion of the 
transmission grid would ease up some of those market power 
concerns and open up the ability to contract and receive power? 
I mean, that is probably the best way to address the market 
power concerns if I am having an expanded grid.
    Mr. Blake. It would definitely help in terms of getting low 
cost power to more places, the better access that you have.
    Mr. Norwood. I thank the gentleman.
    Mr. Shimkus. Let me just finish. That is one of the 
important things of addressing the States' rights issue, the 
property rights' issue and the coordination across State lines 
which will be a tremendous hurdle to overcome on regional RTOs 
and transmission grid.
    Mr. Norwood. I thank the gentlemen and I yield myself 5 
minutes for questioning.
    Mr. Blake, I want to talk a minute about RTOs just for a 
second. Could you describe for us some of the criteria that you 
have used in determining what type of RTO structure might work 
best?
    Mr. Blake. Congressman, that is really a matter that we 
feel lies within the expertise of the Commission. And the 
Department has not yet taken a position on here, you know, what 
is the size of the RTO.
    Mr. Norwood. Haven't you stated publicly that you thought 
we needed more and larger RTOs?
    Mr. Blake. We publicly supported BPAs----
    Mr. Norwood. I want to ask you another question and I want 
to keep in mind what Congressman Bryant said. I don't want to 
know how to make the clock, but I want you to make me feel 
better because I felt like your response wasn't enthusiastic 
when the question came up about what DOE is doing or talking 
about to protect our infrastructure.
    Now I want to emphasize to you, I don't want to hear every 
little detail, but I want to go away from here feeling better 
that you are at work on this problem. So I want to give you 
another opportunity to make me feel better that you guys are 
giving serious consideration to what a lot of us are very 
concerned about.
    Mr. Blake. Yes. You should feel comfortable. We actually, 
as I mentioned in my opening comments, we have around the 
clock, emergency operation center, that is designed to respond 
directly to emergencies. On the broader issue of the security 
of our energy infrastructure, we are taking the lessons learned 
over the last week and we are in the process of identifying 
vulnerability assessments, what are the right responses and we 
should be to give you a more detailed answer on that than I am 
in a position to give today.
    Mr. Norwood. How long do you think it might be before you 
could give us a more detailed answer?
    Mr. Blake. I think the answer is going to have a lot of 
different elements to it, but we will be in a position next 
week.
    Mr. Norwood. Is this something you are going to tell me or 
you are going to be going public with?
    Mr. Blake. I think there are elements that we would not go 
public with.
    Mr. Norwood. But parts of it will be?
    Mr. Blake. Yes.
    Mr. Norwood. Part of the concern here is that we have--we 
don't want to tell everybody how we are going to make the 
clock, but we also have to comfort the public, that is close to 
a lot of DOE facilities that there are changes being made in 
view of what happened on the 11th.
    Mr. Blake. So with respect to the DOE facilities 
themselves--and I was responding more toward our look across 
the entire energy infrastructure, which is quite a large 
undertaking. With respect to the DOE facilities themselves, we 
have had them in highest alert throughout the last week. We are 
again, as we think is prudent to do, after any event, making a 
reassessment, always looking at how we can do things better and 
how we can assess the risks and threats correctly but I can 
absolutely assure we have highest confidence around the 
security of those facilities.
    Mr. Norwood. Do you agree with me that security at some of 
these facilities over the last 10 years has perhaps not been 
taken as seriously as it has been 10 years prior to that?
    Mr. Blake. I am not in a position to respond historically. 
I can tell you how seriously we take it now, and we take it 
completely seriously.
    Mr. Norwood. And we are in the process of considering how 
to upgrade that security.
    Mr. Blake. We are----
    Mr. Norwood. If you didn't have anything to work with, then 
just making that alert doesn't get the job done.
    Mr. Blake. No, sir. We have excellent security systems 
around these facilities.
    Mr. Norwood. We could talk later, couldn't we? We need to 
do lunch. That will work. My time has expired. Mr. Chairman----
    Mr. Barton. You are doing good.
    Mr. Norwood. I also got to leave.
    Mr. Barton. I recognize----
    Mr. Norwood. Mr. Ganske, you are recognized for 5 minutes 
for questioning.
    Mr. Ganske. Thank you, Mr. Chairman.
    Mr. Blake, I want you to share with us a little bit what 
happened at the Department of Energy on Tuesday, September 11. 
When did you find out that we had a multiple terrorist attack 
on the United States?
    Mr. Blake. I don't know the specific time, but it was 
clearly in the--9 to 10 o'clock in the morning--9:15, sometime 
around there. We went down to--as I said, we have an emergency 
response center. We went down to our emergency response center. 
We assessed the advisability of increasing the security status 
at all of our DOE facilities. We did that. We obviously----
    Mr. Ganske. What time was that?
    Mr. Blake. Congressman, I can provide that to you for the 
record. But it would have been in the morning of the 11th.
    [The following was received for the record:]
    [GRAPHIC] [TIFF OMITTED] T5757.028
    
    [GRAPHIC] [TIFF OMITTED] T5757.029
    
    [GRAPHIC] [TIFF OMITTED] T5757.030
    
    Mr. Ganske. Well, was it within 15 minutes of the second 
airplane hitting the World Trade Center?
    Mr. Blake. Congressman, let me provide that on the record 
for you.
    Mr. Ganske. When you say we go to the highest alert, what 
does that mean?
    Mr. Blake. Actually, it is what we call condition 2. There 
is a condition 1 that would apply in the circumstances of a 
direct attack.
    Mr. Ganske. What does that mean? What does condition 2 
mean?
    Mr. Blake. Condition 2 means full readiness. And in the 
case of our facilities, it is extra guards. As you know, in the 
case of our facilities, we have nuclear material. It is 
securing the nuclear material. It is restricting access. There 
are a set of steps that are well known, thought out in advance 
that go into place automatically on that----
    Mr. Ganske. Does that communication go out from the 
emergency center----
    Mr. Blake. Yes, sir.
    Mr. Ganske. [continuing] to all of the DOE facilities?
    Mr. Blake. Yes, sir.
    Mr. Ganske. And then they have in place plans for that 
level of alert. Who makes that decision?
    Mr. Blake. In that instance,--in that particular instance, 
it was the Secretary. I mean we had a briefing and decided to 
go to the higher alert status.
    Mr. Ganske. Explain to me, then, the chain of information 
that the Secretary would get for that--for making that decision 
or for getting the information from other agencies?
    Mr. Blake. If I understand the question, we do have our 
intelligence operations. They are in communication with the 
intelligence operations of other parts of the government, 
including the FBI.
    Mr. Ganske. So does the FBI have a call list? Who makes 
that decision to call you?
    Mr. Blake. Sir, I am not sure who makes the decision. The 
FBI doesn't--the FBI informs us of key data and information.
    Mr. Ganske. Would you be waiting for that information 
before you would make a decision to call an alert?
    Mr. Blake. And it would depend on the circumstances. In 
this particular case, I don't believe we waited for a 
particular piece of data from the FBI or from anyone else.
    Mr. Ganske. I think much has been made of the fact that 
there are many different agencies that deal with security 
issues. Yours is one as related to the nuclear power plants and 
things like that, weapons production facilities, things like 
that. Is there an overall communications coordinating governing 
body for this type of--for an emergency like this?
    Mr. Blake. There is the national infrastructure protection 
center, run by the FBI. And just as a clarification, the 
security status for nuclear plants--commercial nuclear plants 
is decided by the NRC, although we are--as is the case on that 
Tuesday, we were in communication with them.
    Mr. Ganske. Is part of your ongoing evaluation in terms of 
a response looking at the issue of interagency communication? 
Is that----
    Mr. Blake. That would be one of the things we would look 
at. There was no issue.
    Mr. Ganske. I am not saying there was a problem.
    Mr. Blake. But that is one of the things we look at. Yes, 
sir.
    Mr. Ganske. How do you--at DOE, do you have responsibility 
for security at, say, large dams, like the Hoover Dam? Who has 
responsibility for security like that?
    Mr. Blake. I would think that would be with the Corps of 
Engineers. I believe they maintain--and the Bureau of 
Reclamation.
    Mr. Barton. I couldn't hear your answer.
    Mr. Blake. Corps of Engineers and the Bureau of 
Reclamation.
    Mr. Barton. Gentleman's time has expired. If you have one 
more question----
    Mr. Ganske. There are a lot of questions that I think we 
are going to be dealing with.
    Mr. Barton. We are going to do private briefings and we may 
do some public hearings, so there will be plenty opportunity 
for questioning. The gentleman from Ohio is recognized for 5 
minutes for questions.
    Mr. Strickland. Thank you, Mr. Chairman. Mr. Deputy 
Secretary, on September 18, in the Federal Register, the 
Department of Energy issued a notice of intent to prepare an 
environmental impact statement for the depleted uranium 
hexafluoride conversion facilities. I note in that publication, 
that there is an indication that the preferred alternative 
would be a 2 conversion facility plan. But there is also a list 
of alternatives laid out, for example, 1 plant, instead of 2 
plants and all the way down to doing nothing and simply 
maintaining the cannisters as they exist now.
    Now I compare that with the law, which says, the Secretary 
of Energy shall prepare and the President shall include on--for 
fiscal year 2000, a plan and proposed legislation to ensure 
that all amounts accrued on the books of the United States 
Enrichment Corporation for the disposal of depleted uranium 
hexafluoride will be used to commence construction of not later 
than January 31, 2004, and to operate an onsite facility at 
each of the gassiest diffusion plants at Paducah, Kentucky and 
Portsmouth, Ohio to treat and recycle depleted uranium 
hexafluoride.
    I am puzzled that it seems that the law was very clear in 
calling for two facilities to be built; one at Paducah and one 
at Portsmouth. And this notice in the Federal Registry implies 
that there may be other acceptable alternatives. And I was 
wondering if you could speak to that seeming contradiction.
    Mr. Blake. Congressman, I am not familiar with that, so let 
me provide a response to you on the record.
    Mr. Strickland. If you would, I would certainly appreciate 
it, sir.
    [The following was received for the record:]

    The Department recognizes that P.L. 105-204 requires the Department 
to develop a plan for construction and operation of a facility at each 
of the gaseous diffusion plants for the disposition of depleted uranium 
hexafluoride. It also required that the Department's actions regarding 
the conversion of depleted uranium be consistent with the National 
Environmental Policy Act (NEPA). Under NEPA, an agency must examine 
reasonable alternatives for accomplishing the underlying goal of the 
proposed action, the conversion of DOE's uranium hexafluoride, as well 
as a ``no action'' alternative. Since Public Law 105-204 did not 
specify that DOE was to implement a specific approach but only to 
develop a plan for one, and even though DOE has identified the 
construction of conversion facilities at both Portsmouth and Paducah as 
its current preferred alternative, DOE is obligated by law to consider 
and analyze other alternatives that would allow DOE to accomplish the 
goal of converting the depleted uranium hexafluoride before it can 
proceed with construction of any facility.

    Mr. Strickland. Second question, sir, in the National 
Energy Policy Report, there is an inclusion of a recommendation 
that DOE and EPA review the so-called New Source Review 
Program, including administrative interpretations and 
implementations of that program. I was wondering if you could 
tell me when that review is likely to be completed, or if it 
has been completed and will the administration move forward 
with administrative reform of that program, which many believe, 
and certainly I believe to be broken?
    Mr. Blake. Sir, I know that the review is ongoing. It was 
obviously the events of the last week that have thrown it off 
schedule a little bit. But I know they are working on that. And 
that the administration's intent is to propose improvements to 
that program.
    Mr. Strickland. Thank you. I would just urge you to make 
sure that the NSR not be interpreted or used in a way as to 
discourage routine maintenance. I know maintenance--I have been 
told by both industry folks as well as members of the labor 
unions that maintenance is essential in terms of energy 
efficiency and pollution decreasing and workplace safety. I 
think this is an important issue that is facing the industry. 
Certainly, I have written letters to the department about it in 
the past and it is something that I would hope the department 
would move expeditiously to deal with. With that, Mr. Chairman, 
I yield back the remainder of my time.
    Mr. Barton. Thank the gentleman. And the gentleman from 
Oregon is recognized for 5 minutes.
    Mr. Walden. Is that closing bell on the Stock Exchange, 
which only dropped 310 points today? Mr. Chairman, I just have 
a couple of questions as they relate regionally for the 
Secretary to--specifically the northwest, since we are somewhat 
unique out there with the Bonneville Power Administration. Can 
you describe for me the administration's view about congestion 
in our distribution system in the northwest?
    Mr. Blake. For the transmission system, as pointed out in 
the energy policy and the President's energy policy, we see the 
need to have additional transmission in the northwest. There is 
a great deal of power generation that is planned to go on line, 
and that will need access to the transmission grid.
    Mr. Walden. And presently, I am told there are some 40 
choke points in the northwest in the power grid, the way it is 
configured. Is that pretty much----
    Mr. Blake. I know there are a number of them. I don't know 
if 40 is exactly the right answer.
    Mr. Walden. And what do you think it is going to take and 
what is the administration's view on trying to build out that 
system?
    Mr. Blake. We are, at the Department, are working with 
Bonneville to try to understand exactly what would be required 
for construction activity on the new lines. It will be a 
substantial--be a substantial investment.
    Mr. Walden. And it is my understanding that the ratepayers 
of that region will pay back whatever the borrowing authority 
is with some level of interest?
    Mr. Blake. That's correct.
    Mr. Walden. Is it the administration's position that it is 
not a subsidy then?
    Mr. Blake. I hope we will be able to work out the increased 
borrowing authority issue.
    Mr. Walden. I am curious about as we go down this road on 
changing energy policy in the country, what, if any, 
requirements there would be to make sure that--using the lake 
analogy that there are streams flowing in, or do people sort of 
migrate away from certain sectors of the industry to go to the 
more profitable sectors?
    Do you see or envision any kind of wholesale energy reform 
legislation--any kind of requirement for supply, surplus 
capacity?
    Mr. Blake. I think the only way that would come in is 
through reliability standards. And as I mentioned, one of the 
elements of the legislation would be enforceable reliability 
standards.
    Mr. Walden. And you would see some sort of requirement then 
for capacity production?
    Mr. Blake. It will differ region to region. But to the 
extent that is part of the reliability concerns in that region, 
yes.
    Mr. Walden. Because that is an issue that I have. It seems 
like if we evaluate the situation in California, it didn't seem 
like they were adding a lot of supply, at the same time, doing 
great conservation efforts, but also increasing demand. And so 
I get concerned about creating a system where you have these 
choke points that could result, in effect, congestion pricing 
that would create wonderful profit centers at areas of 
congestion. I have yet to figure out how the consumer benefits 
from that.
    Mr. Blake. Exactly one of the things that the legislation 
should attempt to address is eliminating those kinds of 
bottlenecks that allow that pricing.
    Mr. Walden. And is there a sequence between getting those 
eliminated before we go into opening the market up that ought 
to occur? Are you looking at that?
    Mr. Blake. One of the things we are doing in response to 
the energy policy is conducting a national grid assessment, 
trying to identify where are the key choke points in the system 
and then identify the national interest in removing those choke 
points.
    Mr. Walden. The other issue in terms of my region, we are 
fortunate in having a very effective hydropower system which is 
the most renewable, first of all, and cheapest, second of all, 
electric power system. And I know with hydro relicensing coming 
up, there is wide range of estimates about how much power 
generation capacity will be lost through that process because 
of the various laws involved and could be, some say, a couple 
of percent, to 6 or 8 percent loss. Where do you see us going 
on that on hydro relicensing?
    Mr. Blake. Again, the energy policy identified exactly that 
as an issue. DOE, in conjunction with other agencies because 
there are a number of other Federal agencies that have more 
direct authority over this, such as FERC and others, are trying 
to look at how we improve the hydro relicensing process.
    Mr. Walden. I know my time is up, Mr. Chairman. Thank you 
very much.
    Mr. Barton. Gentleman from Arizona is recognized for 5 
minutes.
    Mr. Shadegg. I appreciate your testimony here today and I 
really want to focus on just two points and see if I can't coax 
you into elaborating a little bit further. You have mentioned 
reliability legislation. And in response to my colleague's, Mr. 
Walden's questions, you referenced enforceable reliability 
standards. Can you give the committee a broad outline of what 
the administration is seeking in terms of reliability 
legislation and go perhaps deeper into the issue of enforceable 
reliability standards?
    Mr. Blake. I think the notion that the administration has 
is that you have entities like NERC that have set reliability 
standards and these standards should be made enforceable. FERC 
would be able to delegate some measure of enforcement authority 
so that you would have a structure similar, as I mentioned, to 
what you have with the stock exchange.
    Mr. Shadegg. And do you see the administration coming 
forward with that in the immediate future?
    Mr. Blake. Excuse me?
    Mr. Shadegg. How soon can we expect to see specifically 
what the administration----
    Mr. Blake. I think next week.
    Mr. Shadegg. With regard to enforceable reliability 
standards, how--do you have any idea specifically what 
enforcement measures would be in place? Would you be able to 
order plants to take specific steps? Can you go into any 
further detail on that?
    Mr. Blake. I haven't thought through and I don't know that 
we are going to have specific proposals on where--what level of 
enforcement authority. I think that is something we want to 
work through on the details with the committee.
    Mr. Shadegg. Second, in reference to I believe your opening 
remarks, a set of principles you anticipate revealing, as you 
know, Senator Bingaman recently revealed a set of principles. 
Are you in a position today to give us a highlight of how the 
principles you anticipate releasing will differ from those he 
released?
    Mr. Blake. I think there will actually be a good deal of 
common ground between our principles and what is in Senator 
Bingaman's bill, making wholesale power markets open through 
open transmission access, strengthening FERC authority in the 
areas on market abuse, lowering buyers on electricity supply 
through interconnection standards. Some of the areas of 
disagreement, there are provisions in his bill for, as I 
understand it, sort of a national surcharge that would get 
placed through the transmission grid that we have a problem 
with and some other issues. But we are largely along the same 
lines as Senator Bingaman.
    Mr. Shadegg. Do you think it will be substantially similar 
with that one exception? Are there others that you can identify 
for us now?
    Mr. Blake. We will in the process next week. We will give 
you a good breakout of where we differ from Senator Bingaman's 
legislation.
    Mr. Shadegg. Thank you for your testimony and yield back 
the balance of my time.
    Mr. Barton. Mr. Boucher, any further questions?
    Mr. Boucher. No questions.
    Mr. Barton. The only question I have, in our California 
specific legislation, we put in an authorization for Federal 
funding to buy out and build out Path 15. It is my 
understanding that the Department of Energy has put that out 
for proposal and there have been a number of bids put forward 
by private companies to build the Path 15 connection in 
northern and southern California. Could you elaborate on that 
briefly.
    Mr. Blake. Mr. Chairman, I am actually recused from that 
because one of the companies that has responded to it was 
General Electric. But I know prior to recusing myself that 
there were, in fact, private entities that expressed interest 
in responding to that.
    Mr. Barton. Is there somebody in DOE that has not recused 
that could give us an answer on the record so that could be 
part of the hearing record?
    Mr. Blake. We will do that.
    Mr. Barton. We thank you for your time and when you go back 
to the Department of Energy, there is a high degree of 
probability that you and others are going to be asked at a 
minimum to brief this subcommittee and full committee on some 
of these issues that Mr. Ganske and Mr. Norwood raised next 
week. So we need to get a list of the availability of your 
ability to come brief this subcommittee.
    Mr. Blake. Look forward to doing that. Thank you very much.
    Mr. Barton. I would like now to bring forward our second 
panel. We have the distinguished FERC commissioner starting 
with their distinguished chairman, Honorable Pat Wood, Texas 
Aggie, from my home State; Commissioner Linda Breathitt; 
Commissioner Bill Massey; and our new commissioner from 
Pennsylvania, Commissioner Brownell. Ladies and gentlemen 
welcome to the subcommittee.
    We will put everyone's testimony in the record in its 
entirety and start with the Chairman, Mr. Wood. And we will 
give you 7 minutes and then we will go right down the row and 
give Commissioner Breathitt and Commissioner Brownell and 
Commissioner Massey the opportunity to also speak for 7 
minutes, if they so wish. Welcome to the subcommittee, Chairman 
Wood.

    STATEMENTS OF HON. PAT WOOD III, CHAIRMAN; HON. LINDA K. 
BREATHITT, COMMISSIONER; HON. NORA MEAD BROWNELL, COMMISSIONER; 
   AND HON. WILLIAM L. MASSEY, COMMISSIONER, FEDERAL ENERGY 
                     REGULATORY COMMISSION

    Mr. Wood. Thank you, Chairman Barton. I guess in light of 
the events of last week, we all think first and foremost about 
security and reliability issues. And as a former State 
regulator, we have all had to deal with things like hurricanes, 
wildfires, encroachments on utilities, the Y2K issues, 
shortfalls in hydroelectricity. That is a continuing issue; 
certainly earthquakes. But this one is different. This one is a 
longer term issue that doesn't have a date-certain ending, and 
I think requires a very different mindset than one we had 10 
days ago.
    I should say, as Deputy Secretary Blake did, that the 
utilities have performed very well as a supporting cast in this 
tragedy. The measures that have been implemented across the 
industry certainly in hydroelectric dams, in oil, natural gas 
and refined product pipelines in the production area for both 
power and natural gas, including, certainly, the all important 
nuclear power stations, transmission substations, transmission 
transformers, transmission lines in general.
    In fact the Commission weighed in last week--all four of us 
pretty soon after the event wanted to make clear to the 
industry that our policy statement that expenditures spent to 
enhance and increase the security of the facilities that we 
have regulatory authority over would be able to be treated 
expeditiously for rate recovery.
    Bottom line is don't let cost and don't let the worry about 
how you are going to get your money back be a reason why you 
cut back on any needed and prudent security measures. So we 
weighed in on that as well.
    But the bottom line, we have got a very open and a very 
dispersed system for energy in this country. That is both a 
blessing and a curse; a curse in that it is so open and so 
visible. Every map for aviators or for geology or whatever 
shows you where our transmission lines are and where fuel 
pipelines cross and where railways go by and carry coal to your 
power plant, where power plants are. They are extremely 
visible. Again, that is also a plus because it is so dispersed, 
it is so everywhere, that there is a lot of give in our very 
reliable power delivery system.
    I think total prevention against attack is a promise I 
cannot make. But insulation of the public and industry from its 
negative effects is something that we can actually do better. 
Redundancy of pipelines, of transmission lines, of power 
production facilities and others is our best bet. Redundancy 
used to be a big picture, a big fixture on the scene here in 
the country. Then what we knew would be a multi-year transition 
in the electric power industry began in 1992 with the Energy 
Policy Act. To me, as I believe Mr. Wynn asked, the authority 
that the Commission has to move forward on the initiatives that 
it has had since 1992 was clear in that Act. Retail issues are 
left to the States. Wholesale issues are the job of the Fed. 
and it is our job collectively to make markets work.
    I think, Mr. Boucher, you put it pretty well in your 
opening statement that I made note of that. We are, next week, 
hearing Supreme Court review of a decision that I believe, 
Bill, you were the only one on the Commission at the time that 
it was made 5 years ago about the balance between States and 
Fed.
    So my discussions, and certainly probably every answer in 
response I will give particularly on the RTO issues is yes, 
there is clear authority in the statute to remedy unjust and 
unreasonable and discriminatory actions for the use of the 
grid. And we will move forward on that as I think you all or 
your predecessors in 1992 wanted us to do.
    But bottom line, it would help the Commission. It would 
help the people of this country significantly if there is any 
doubt raised by anybody that comes before the committee about 
this that the committee clarify it, that the Congress and 
President clarify that this happens so we don't spend 5 years 
making lawyers rich, but keeping money out of the pockets of 
people who could benefit from competition.
    I say that with all due respect as a lawyer. But I do view 
that we have been treading water for 9 years. The swimmer is 
tired. We need to get on the other shore. People on the dock 
are waiting for us to come on across. FERC is committed today 
to providing the necessary leadership to set forth the clear 
path to end this overly long transition. It is important for us 
to work with our brother and sister regulators at the State 
level. They are the front line. And we know that people that 
might oppose competition might try to drive a wedge between us 
and our brother and sister regulators, but they won't succeed.
    It is our job, as you expect us to do, to provide clear 
rules for business investment in this industry. It is important 
to make those rules clear as to how money gets repaid to the 
investor. Cost recovery is very important. So for us it is 
important to get investment dollars back in this bedrock 
industry. That is how we get the redundancy. That is how we get 
the security.
    That is potentially going to be an issue for a very long 
time, as this threat continues to be dealt with. I should add, 
in light of the home State of the Chair, under then-Governor 
Bush's strong leadership, we did provide this certainty in 
Texas in the past 6 years. And there was investment. There has 
been tremendous investment both in the power delivery system 
and the power production system. And I think that is certainly 
the ground upon which you can build a successful deregulated 
system. Without it, I think you are building a house on sinking 
sand. And in doing so, I want to make sure that you all know we 
will ensure the reliable, safe and competitive marketplace that 
Congress said it wanted in 1992.
    And I conclude by saying the Nation's customers deserve no 
less.
    [The prepared statement of Hon. Pat Wood III follows:]
     Prepared Statement of Pat Wood, III, Chairman, Federal Energy 
                         Regulatory Commission
                      i. introduction and summary
    Mr. Chairman and Members of the Subcommittee: Good afternoon. Thank 
you for the opportunity to speak today on the role of competitive 
wholesale power markets in providing affordable, reliable electricity 
for customers, and the role of the Federal government in ensuring the 
continuing development of the industry. As an initial matter, I would 
like to talk about the issue that has been on my mind since the tragic 
events of September 11, 2001. Then, I will discuss the important near-
term steps necessary for achieving a seamless nationwide power market 
that will provide customers the reasonably-priced and reliable service 
they deserve.
    Our Nation has been unalterably shaken by the terrorist attacks of 
September 11, 2001. Fortunately, our electric system remained secure 
during and after the attacks. The attacks did not disrupt service in a 
broad regional area. Utilities quickly implemented their heightened 
security procedures. Many of these procedures are still in effect. And 
our existing independent transmission system operators (ISOs) in the 
Northeast were vitally involved in monitoring and maintaining 
transmission grid reliability in the stricken region.
    A key question I have pondered is, can the electric power system 
sustain a terrorist attack? To be frank, in the face of an organized, 
well-financed, wide-spread effort to do harm, such a dispersed, highly 
visible and open system could suffer damage. The industry and its 
regulators are on alert and are taking many precautions, and the 
industry is working hard to anticipate and forestall such damage. Last 
week, the Commission issued a policy statement to its regulated 
industries stressing the importance of security measures and our 
willingness to consider exceptional cost recovery for unprecedented 
security-related expenses and investments.
    While we must continue to take all appropriate security measures 
for existing infrastructure, our best insurance policy is redundancy. 
The electric power industry has had a long history of building 
sufficient additional infrastructure to handle unplanned contingencies. 
Over-design of the grid for double or triple failure contingencies and 
construction of excess generation capacity (reserve margin) have been 
historically effective ways to assure reliable performance through 
redundancy.
    The extended and uncertain path of industry restructuring since the 
passage of the 1992 Energy Policy Act, though, has taken its toll on 
investment in infrastructure. Investors have not been eager to invest 
capital where rules are unclear and cost recovery is uncertain. This 
under-investment in critical energy infrastructure undermines the 
potential for competitive markets to yield significant customer 
benefits (as we have seen in California) and diminishes our reliability 
safety margin as well.
    This will not change until we who work on behalf of the public 
declare an end to inaction, clarify the rules for the future and get 
through this transition.
    Some have argued for federalization of all of these issues; others 
have advocated leaving it at the state level. I believe, however, that 
the solution lies in recognizing that electric power markets are 
regional in their nature. For that reason, the Commission has been 
promoting the formation and development of a small number of regional 
transmission organizations (RTOs). These institutions, once formed, 
will assure reliable minute-by-minute grid operations, optimize fair 
use of the ``electric highway'' by all users, plan for the future 
transmission needs of the region and ensure that long-term supply stays 
ahead of long-term demand.
    What was a good idea for promoting competitive markets ten days ago 
is imperative for a reliable national power grid today. Handling the 
basic RTO duties is challenging and expensive, but it's even more 
costly to society if these duties are on a utility-by-utility basis (if 
at all), as they are today. The costs of planning and executing the 
level of security and infrastructure protection that will be needed in 
the days and years ahead will be significant and will require expertise 
and sophistication that most individual utilities or even small, sub-
regional groups of utilities cannot possess. This level of security and 
its cost demand a size and scope that only a large, region-wide 
organization with intentional redundancy and access to resources can 
provide.
    Although the Commission decided in past years to move forward with 
RTO formation on a voluntary basis, the Commission can go further and 
require them. This may be a moot point if the industry moves 
assertively forward to form RTOs that cover the nation's regional power 
markets. To the extent, however, that any party challenges this forward 
progress in courts, then Congress should make clear its intent that 
these organizations are its preference. This will save the industry 
four years in the courts, will ensure customers get the billions of 
dollars of savings that a competitive power market can deliver during 
that time, and most importantly, will rebuild to secure and reliable 
levels a bedrock industry that has suffered inadequate investment in 
the past decade.
                             ii. background
A. The Industry's Past
    In the early decades of the industry, the transmission grid was 
much less developed than it is now, interconnections between utilities 
were fewer, and power supply was a local business. Government, 
customers and even utilities recognized that, based on the technology 
at the time, regulated monopolies were less costly than the turmoil of 
door-to-door competition. So, for many years after its inception, the 
electric utility industry was regulated comprehensively on a cost-of-
service basis.
    By the 1970s, however, the industry began to change. The energy 
crises of that decade led Congress to enact the Public Utility 
Regulatory Policies Act (PURPA). PURPA encouraged the development of 
non-utility generators using cogeneration, renewable fuels or small 
power technologies. Regulated utilities were required to buy power from 
these non-utility generators so long as the latter met PURPA's 
ownership and efficiency criteria. The rates for sales by the non-
utility generators were based, not on their costs, but on the costs 
avoided by their utility buyers. Many regulated utilities began, for 
the first time, to face strong competition for the opportunity to 
generate the power needed by their retail customers. This also 
stimulated dramatic efficiency improvements in generation technology.
    In the 1980s, the Commission further encouraged the development of 
competition. If a generator demonstrated that it and its affiliates 
lacked market power, the Commission allowed it to sell at market-based 
rates instead of cost-based rates. If the generator or its affiliates 
owned or controlled transmission facilities (a source of market power), 
the Commission authorized market-based rates only if other sellers were 
allowed to use the transmission facilities to compete for sales to 
wholesale customers.
    In 1992, Congress enacted the Energy Policy Act, strongly endorsing 
competition in wholesale markets. Congress authorized an exemption from 
the requirements of the Public Utility Holding Company Act (the 1935 
companion to the Federal Power Act) for companies selling power 
exclusively at wholesale. Congress also authorized the Commission to 
order utilities, on a case-by-case basis, to provide transmission 
service.
    In 1996, the Commission adopted its Order No. 888, requiring all 
public utilities to offer nondiscriminatory, open access service over 
transmission facilities they own, control or operate. As a result of 
this service, most wholesale buyers and sellers now have more trading 
options than they had in the past.
    These efforts by Congress and the Commission laid the groundwork 
for more competition in wholesale power markets. However, events in 
California and the West over the last eighteen months, and the notable 
lack of progress in other areas of the country outside the Northeast 
are strong proof that more needs to be done. Every day I hear from 
someone in the industry about the uncertain investment climate created 
by vague rules or incomplete policies, and that uncertainty does not 
help us achieve our societal goals.
B. The Industry's Future
    Our goal is a seamless national power marketplace, and the 
Commission has chosen to realize this goal through the creation of 
regional transmission organizations. An RTO is an entity that is 
independent from market participants and operates (and also may own) 
the transmission grid for a large region of the country. A well-
functioning RTO will serve a multi-faceted role, including transmission 
planning, assuring reliability of service and adequacy of supply, 
facilitating transparent power markets and monitoring behavior of 
market participants.
    In late 1999, the Commission adopted its Order No. 2000, 
encouraging the formation of RTOs. If properly constituted and truly 
independent, RTOs can promote wholesale competition and, where states 
choose to pursue it, retail competition. RTOs can broaden the size of 
markets by eliminating ``pancaking'' of transmission rates. RTOs can 
offer ``one-stop shopping'' for transmission service across a large 
region, better manage transmission congestion and reliability, and 
facilitate transmission planning across a multi-state region. By doing 
so, RTOs will allow buyers and sellers to have more trading choices 
than they now have and deliver lower energy costs and greater short- 
and long-term reliability on the electric grid.
    The Commission has endorsed the ultimate formation of four RTOs in 
its jurisdictional markets, three in the eastern United States (one in 
the Northeast, Southeast and Midwest) and one in the western United 
States. (The fifth RTO, the Electric Reliability Council of Texas 
Interconnection, is not in interstate commerce and is not under direct 
Commission jurisdiction.) However, we recognize that many obstacles 
must be overcome to reach this goal. In this regard, market 
participants in the Northeast and Southeast recently completed 
mediation on RTO formation, and the progress made during those 
discussions is encouraging. In the Midwest, two proposed RTOs have 
agreed on a framework for coordinating their services.
    The issue now is whether, and how, more can be accomplished in the 
short-term. Perhaps the most difficult issues are in the western United 
States, because of the past eighteen months of problems in that 
region's markets. However, utilities and elected officials in the 
western United States have a strong tradition of region-wide 
cooperation and, in my view, this tradition will eventually support the 
formation of a region-wide RTO.
    For Congress at this time, the guiding principle should be to 
reaffirm the development of a reliable and competitive wholesale 
market, thereby assuring customers of a supply sufficient to meet their 
energy needs at the lowest reasonable cost. This principle requires 
different approaches in the transmission and generation segments of the 
industry.
    Transmission will have to remain regulated for the foreseeable 
future. Lawmakers and regulators should help ensure that transmission 
owners and operators have economic incentives to design, build, 
operate, and expand the transmission grid to meet the needs of all 
customers and other market participants.
    In contrast, in the wholesale power sector, we need to rely on 
competition instead of traditional regulation wherever possible. 
Existing laws that hinder competition need to be modified or repealed. 
While the Commission stands ready to intervene in power markets when 
market rules or other factors lead to unjust and unreasonable prices, 
legislation reducing the existing barriers to entry and providing 
regulatory clarity will minimize the need for such efforts in the 
future.
    Before addressing these issues in detail, however, I will discuss 
the events of last week as they relate to the Commission's 
responsibilities and, in particular, how they relate to RTOs.
         iii. effects of the terrorist actions on energy supply
    Our Nation's electric system remained secure during and after the 
September 11 terrorist attacks. Two substations in New York were 
crushed in the destruction of the World Trade Center towers. An 
additional substation was damaged. The local utility and its suppliers 
are working to replace the substations quickly.
    Following the terrorist attacks, all electric utilities and 
generators have been in a heightened security condition. 
Understandably, utilities do not publicize their specific activities 
and precautions. However, many rely upon procedures developed over the 
past several decades, including the Y2K preparedness plans. Generating 
stations implement higher security levels, normally unmanned 
substations and facilities are manned, and security centers go into 
``lock down'' with regard to access. In some areas, there may be 
greater reliance on local generation over imports. Some utilities also 
check ``black start'' units (combustion turbines and hydro facilities 
used to restore power quickly) to make sure they are readily available, 
and test backup communications systems. Additionally, NERC put the 
nation's twenty-one grid security coordinators on full alert for 
several days.
    The three ISOs operating the regional grids in the Northeast serve 
as security coordinators in their regions and were vitally involved in 
monitoring and maintaining grid reliability. Since late last week, 
security coordinators have participated in a daily secure telephone 
conference call with representatives of the U.S. Department of Energy 
and the North American Electric Reliability Council (NERC) regarding 
security threats to the electrical system. These calls will continue 
for some time.
    Last week the Commission assured the companies we regulate 
(transmission-owning public utilities as well as gas and oil pipelines) 
that we will welcome applications to recover prudently incurred costs 
necessary to further safeguard the reliability and security of our 
energy supply infrastructure. The Commission's aim was to prevent 
uncertainty about companies' ability to recover these costs, especially 
for those operating under frozen or indexed rates. The Commission 
stated that companies may propose a separate rate recovery mechanism, 
such as a surcharge to current rates or some other cost recovery 
method.
    In the aftermath of last week's events, the media reported sharp 
price increases for gasoline in some regions. We have not seen 
comparable increases for natural gas or wholesale power, and prices for 
these commodities remain in the same range they have been in recent 
weeks. The increasingly-important power and natural gas trading 
operations across the country maintained their activities, even though 
the important NYMEX commodity operation in New York City was directly 
affected by the attacks there.
    Last week's attacks prompted some to question whether we should 
continue to require transparency of transmission information to all 
potential transmission users. We require transmission providers to make 
available to traders an electronic bulletin board type service showing 
how much power can be moved from one grid location to another so they 
can reserve transmission capacity for trades. However, this requirement 
does not reveal the grid design, the locations of secure facilities, or 
important operational procedures. Thus, I do not believe our current 
transparency rules increase the vulnerability of the transmission grid 
to potential terrorist attacks.
    Some also have asked whether having RTOs would help or hurt in the 
case of a terrorist attack. As I noted earlier, the three existing ISOs 
in the Northeast, which are precursor organizations to the RTOs we are 
trying to encourage, were critical to maintaining transmission grid 
reliability during and after the September 11 attacks. I therefore 
believe that last week's events demonstrate the effectiveness of RTOs 
and strengthen the need for RTOs. An RTO can develop a comprehensive 
security plan for a large area, drawing on a broader array of 
electrical and human resources. Joint security plans for fuel supply 
controls, grid operation, and telecommunications can be coordinated 
with multi-state emergency authorities. Further, only one or two major 
control centers must be hardened for protection. Such modifications are 
less costly than similar modifications for many smaller control 
centers. Centralized authority and communications involve fewer 
parties, facilitating quick decisionmaking and dissemination of vital 
instructions. In a large RTO, one standard communications protocol can 
be used instead of having numerous protocols for many utilities.
                      iv. other reliability risks
    In addition to the national security issues outlined above, there 
are other reliability risks that need attention. The recent changes in 
the electric power industry have increased the incentives for, and 
frequency of, violations of reliability rules. As a result, the issue 
confronting the industry is whether federal action on reliability is 
necessary.
    A number of credible parties have argued that the Commission cannot 
enforce reliability standards for users of the grid. Congress should 
remove any doubt in this crucial area and provide explicit authority. 
Cooperation among utilities ensured a reliable electric supply in the 
past, but with many new players now using the grid, mandatory 
reliability rules administered by the RTO and enforceable under 
government authority are called for. I have seen drafts from several 
parties in this regard and believe the simplest solution may be the 
best. In 1999, Texas Governor Bush signed into law the following 
provision: ``The commission may delegate authority to the [ERCOT ISO] 
to enforce operating standards within [ERCOT].'' PURA sect. 39.151(i)
    Absent clear federal authority to address reliability issues 
directly, the shortcomings of the traditional voluntary approach to 
reliability issues has driven some in the industry to seek other 
approaches. One option is to enforce reliability standards through 
contracts. Public utilities may voluntarily include reliability-related 
provisions in contracts or tariffs filed with the Commission because 
they affect or relate to the rates, terms and conditions of 
jurisdictional service. If reliability provisions in Commission-
jurisdictional contracts are accepted and on file with the Commission, 
the Commission can enforce the reliability-related provisions against 
public utility parties to the contracts.
    A system of such contractual arrangements has been established by 
utilities in the Western Systems Coordinating Council (WSCC), the 
regional reliability council for the Western United States. The 
effectiveness of the WSCC arrangement and the Commission's ability to 
enforce it have not been fully tested. But a voluntary contractual 
regime is not the simplest, fastest or most effective way to establish 
and adequately enforce reliability standards. It depends solely on the 
willingness of public utilities to make voluntary filings and, even 
then, it may not capture the electric facilities of non-public 
utilities. Reliability is at risk to the extent that not all market 
participants are covered by the same requirements.
    Federal legislation is a better option. On May 17, 2001, the 
Administration released its National Energy Policy Report. The Report 
recommends that the President direct the Secretary of Energy to work 
with the Commission to improve the reliability of the interstate 
transmission system and to develop legislation providing for 
enforcement by a self-regulating organization subject to the 
Commission's oversight.
    I believe a legislative approach is preferable to the contractual 
approach discussed above. I support streamlined legislation that gives 
the Commission authority to adopt and enforce reliability rules, and to 
give deference as appropriate to organizations that develop such rules. 
I believe that RTOs should play the central role not only in 
transmission access and planning but also in reliability, and that the 
Commission can and should defer to these organizations once they are up 
and running. But the Commission should retain oversight and enforcement 
responsibilities to assure that the nation's reliability needs and 
rules are effective and honored by industry participants.
    Congress should understand that mandatory reliability rules alone 
are not enough to ensure the reliability of the grid. In its Order No. 
2000 on RTOs, the Commission set out at length the need for an RTO to 
ensure reliability in each region. In particular, RTOs must have the 
authority to ensure the short-term reliability of the regional grid and 
must be responsible for planning, and for directing or arranging, 
necessary transmission expansion and upgrades that will enable it to 
provide efficient and reliable transmission service.
                      v. transmission jurisdiction
    There are several other transmission-related steps Congress can 
take to promote competition in wholesale markets. First, Congress 
should strengthen the Commission's ability to create truly open, 
competitive wholesale electricity markets by recognizing that 
``separate but equal'' transmission is inherently unequal. Transmission 
of electric power is interstate commerce and should be fairly 
recognized as such. And all users of transmission service should be 
treated equally, provided they pay for it. Further, there will remain 
barriers of cost, time and uncertainty that slow investment in 
generation and increase the cost of electricity. One need look no 
further than Chairman Barton's home state to observe the positive 
impact that having clear rules from a single regulator has had on 
needed investment and expansion of the grid.
    Second, as stated in the introduction, it would significantly speed 
the advent of competitive markets if Congress clarified the 
Commission's authority to promote large RTOs. The Commission is moving 
aggressively to promote the formation of RTOs but a clearer statement 
of Congressional intent could help avoid years of lengthy litigation.
    Third, it is important that federal tax laws not be used as excuses 
by certain market players to resist or hinder development of 
competitive power markets. In that regard, Congress should address the 
private use restrictions affecting public power and cooperatives and 
the tax disincentives for investor-owned utilities to transfer 
transmission assets to RTOs. The provisions passed by the House earlier 
this year in this regard are very important to ensure that expected 
customer benefits from competition are not offset by tax payments.
    Fourth, explicit Congressional support for standardization of rules 
and procedures for interconnecting all new generation, including but 
not limited to small-scale distributed generation, would avoid years of 
costly litigation. This is a high priority goal of the Commission 
currently. Standardization will help minimize the costs and barriers 
for new generation, and clarification of the Commission's authority in 
this area will forestall the uncertainty of litigation about 
jurisdiction. The timely expansion of generation capacity achievable in 
this way will facilitate new entry into the markets and reduce prices 
for customers.
                            vi. other issues
A. Market Monitoring and Enforcement
    Competitive markets do not just happen; they require ongoing 
oversight. In the context of wholesale power markets, the foremost 
component of effective oversight is regular monitoring of prices. When 
price changes are inconsistent with the operation of competitive 
markets, market monitors must inquire further and ensure that market 
participants are not engaging in anticompetitive behavior.
    The Commission has required or authorized the existing ISOs to 
perform certain market oversight functions, such as data collection and 
initial analysis. In the future, this role should be performed by RTOs.
    The Commission itself must make a stronger commitment to market 
monitoring. As Chairman, one of my goals is to work with my colleagues 
to strengthen the Commission's market monitoring efforts. We must be 
vigilant and timely if we are to be effective. We intend to make that 
happen by changing our priorities and reallocating our resources. I 
will provide more detail to the Committee in the near future on our 
efforts in this regard.
    Congress also can help. While the Commission can require refunds 
and impose civil penalties in certain circumstances under the FPA, both 
authorities are limited.
    Currently, on refunds, section 206 of the Federal Power Act allows 
the Commission to require refunds for a 15 month period beginning 60 
days after the filing of a complaint or publication of the Commission's 
initiation of an investigation. Section 5 of the Natural Gas Act does 
not contain a similar refund provision but permits rate changes on;y 
prospectively. Section 206 of the FPA also allows the Commission to 
change rates prospectively upon completion of the complaint or 
investigation proceeding.
    Electric utility customers would benefit if the Commission had 
additional authority to order refunds. Congress should authorize 
refunds from the date of filing of the complaint or publication of the 
Commission's initiation of an investigation. Either of these events 
provides notice to market participants that their transactions may be 
modified after-the-fact, and allows market participants to modify their 
trading activity or knowingly accept the risk of rate uncertainty.
    Congress also should expand the Commission's authority to impose 
civil penalties. Existing section 316A of the FPA allows the Commission 
to assess civil penalties of up to $10,000 per day for the violation of 
limited provisions of the FPA (sections 211, 212, 213 or 214) or of any 
rule or order issued under those provisions. This section could be 
extended to cover any violation of Part II of the FPA or any rules or 
orders issued thereunder.
B. Price-Responsive Demand
    Effective markets balance supply with customer response, allowing 
for lower usage as prices rise. But in regulated retail electric 
markets, with their uniform rates, utilities have no choice but to buy 
or produce power, whatever the cost, and customers do not receive price 
signals about the true value of the energy they are using. The 
Commission will be working with the Department of Energy, RTOs and 
others to establish price-responsive demand mechanisms that reach a 
variety of customer groups and allow them to reduce their energy demand 
when prices are too high. This will reduce overall peak load levels, 
peak energy prices and supplier market power. I believe the 
Commission's present authority in this area is sufficient; but, to the 
extent this is questioned, statutory clarification would speed the 
implementation of this important demand-side mechanism.
C. PUHCA
    The Public Utility Holding Company Act (PUHCA) requires registered 
holding companies to submit to extensive regulation by the Securities 
and Exchange Commission. PUHCA also generally requires holding 
companies to operate an ``integrated'' and contiguous system. As a 
result, PUHCA encourages concentrations of generation ownership and 
control in local markets that are inconsistent with competition, and 
discourages asset combinations that could be pro-competitive. PUHCA may 
also provide a significant disincentive for investment in independent 
transmission companies that would qualify as RTOs. Under PUHCA, any 
entity that owns or controls facilities used for the transmission of 
electric energy--such as an RTO--falls within the definition of a 
public utility company, and any owner of ten percent or more of such a 
company would be a holding company and potentially could be required to 
become a registered holding company. This discourages investments in 
independent transmission companies that qualify as RTOs.
    PUHCA was enacted primarily to undo harms caused by byzantine 
holding company structures that no longer exist. In the decades since 
PUHCA was enacted, utility regulation has increased substantially under 
the Federal Power Act, federal securities laws and state laws. PUHCA 
has outlived its usefulness, and now does more harm than good. PUHCA 
should be repealed.
D. PURPA
    As noted earlier, PURPA was enacted in the late-1970s in the 
aftermath of that decade's energy crises. The legislation's goal was to 
remove impediments to the use of cogeneration and renewable-based 
generation, and promote their use by requiring utilities to buy this 
power at the utilities' avoided costs.
    Today in many parts of the country, the impediments addressed in 
PURPA are gone (although other impediments may exist, such as the need 
for grid expansion). Also, PURPA's ``forced sale'' requirements are no 
longer necessary to promote the development of competition, in light of 
the availability of open access transmission, and more often serve to 
distort competitive outcomes. Congress should repeal PURPA but 
``grandfather'' existing PURPA contracts. To provide a smoother 
transition for parties which made investments under the expectations 
created by PURPA, it may be appropriate to limit its repeal to those 
states where all generation entities have the ability to sell their 
output to the widest possible range of customers.
E. Transmission Siting
    Since the Commission adopted its open access requirements in 1996, 
the use of the interstate transmission grid has grown dramatically. 
Also, wholesale markets have become much more regional than local, 
encompassing large multi-state areas. Unfortunately, the grid has not 
been expanded commensurately. Thus, the grid increasingly is pushed to 
its operational limits. The risk of possible terrorist attacks against 
our energy infrastructure makes even more urgent the need for 
additional transmission capacity to protect against contingencies. 
Moreover, transmission constraints frequently prevent the most 
efficient use of generation facilities. The institutional structures 
for authorizing construction or expansion of transmission lines do not 
meet our needs.
    Congress should provide a mechanism for ensuring timely action on 
transmission siting applications. It would add certainty to the siting 
process if a time limit were placed upon state-specific approvals, and 
a multi-state Section 209 Joint Board (drawn from states within the 
relevant RTO region) were set up as a backstop if the regulatory time 
limit (e.g., one year) is not met. To recognize the fact that the 
overwhelming number of transmission siting issues are dealt with 
expeditiously by states, it would be appropriate to limit this 
provision only to those projects deemed critical by the Secretary or by 
the RTO (unless the states find regional transmission siting so 
efficient and effective that they choose to send more projects up to 
the regional board for handling) .
                            vii. conclusion
    Well-functioning power markets depend on three key elements: 
adequate infrastructure, clear and balanced rules that allow efficient 
trading among market participants, and effective market oversight. Our 
goal is to use the authority and resources of the Commission to pursue 
this three-pronged strategy to facilitate robust wholesale electric 
competition that benefits customers across the country.
    The Commission will continue to regulate transmission for the 
foreseeable future, while encouraging transmission to become more 
responsive to the needs of the market. The Commission also intends to 
monitor wholesale markets more proactively to anticipate many problems, 
and take aggressive actions where unforeseen problems occur, instead of 
waiting in the expectation that markets will always self-correct.
    It has been a slow nine years since the President's father signed 
the 1992 Energy Policy Act into law. Its promises of a competitive 
electric power marketplace are still largely unfulfilled, and the slow 
transition is beginning to take its toll in unacceptable ways. I pledge 
to you my complete dedication to the task of making up for lost time 
and welcome your support.

    Mr. Barton. Thank you, Chairman.
    I would now like to hear from Commissioner Breathitt for 7 
minutes.

              STATEMENT OF HON. LINDA K. BREATHITT

    Ms. Breathitt. Good afternoon, Chairman Barton and members 
of the subcommittee, Mr. Boucher. Thank you for the opportunity 
to appear today to discuss the role of the Federal Government, 
and in particular, the Federal Energy Regulatory Commission in 
the continuing development of our Nation's electric and natural 
gas industries. In my written testimony, I have outlined major 
issues confronting the Commission today, and I also have made 
some recommendations for legislation that I believe will assist 
the Commission in its paramount objective to promote fully 
competitive wholesale electricity markets. In this regard, 
FERC's emphasis in the near future will be to complete the 
development of regional transmission organizations with clear 
responsibilities, independence and sufficient scope.
    Since the Commission began promoting RTOs as a means to 
remove barriers and impediments present in wholesale markets, I 
have been fully committed to the goal of RTO implementation. 
Order 2000 remains the guiding document for achieving these 
goals. Although some are impatient with the pace, the voluntary 
approach is working. State commissions and other stakeholders 
throughout the country have devoted considerable time and 
resources to see that RTOs get up and running.
    Another area where the Commission will be concentrating its 
attention is the consideration of a generic rulemaking 
proceeding on transmission interconnections. I believe 
interconnection rules should be clarified and standardized to 
ensure that new sources of generation are able to interconnect 
to the transmission system, and I also believe that we must 
carefully consider the associated cost responsibilities.
    Also most important in the development of competitive 
markets is reliability. As the Deputy Secretary also said, I 
believe the current voluntary system, which has been in place 
for over 3 decades, should be replaced with one in which a 
self-regulated organization with oversight by the Commission 
enforces mandatory reliability standards, and I would welcome 
legislation in that regard.
    On another legislative matter, I support the repeal of 
PUHCA conditioned upon the grant of enhanced authority by the 
Commission to address market power problems and assurance that 
both FERC and the States would have greater access to books and 
records of holding companies. I also support the repeal of the 
mandatory purchase requirements in Section 210 of PURPA, 
subject to new provisions that would remove disincentives for 
renewable generation sources.
    Transmission siting is another area I think where Congress 
could assist us. You have heard my thoughts on transmission 
siting. I will briefly tell you that I recommend still that 
FERC be granted Federal eminent domain authority over 
interstate lines in order to centralize planning expansion and 
siting, but not power plants and not distribution. In addition, 
I think FERC could improve its oversight capabilities with 
clear authority to collect and publish transactional data while 
protecting proprietary information. And I also recommend 
expansion of our authority to remedy violations of law.
    Finally, in light of the tragic events of September 11, I 
would like to recognize that the heightened security concerns 
of the Nation's energy industry may bring before the Commission 
new issues, some of which we may not be able to anticipate. 
Should matters within our jurisdiction arise out of last week's 
events, I assure the subcommittee that I stand ready as I know 
my colleagues do, to do whatever is necessary to resolve them 
consistent with the public interest. Thank you.
    [The prepared statement of Hon. Linda K. Breathitt 
follows:]
   Prepared Statement of Hon. Linda Breathitt, Commissioner, Federal 
                      Energy Regulatory Commission
    Mr. Chairman and Members of the Subcommittee: I appreciate this 
opportunity to appear before you today to discuss the Federal Energy 
Regulatory Commission's (FERC) role in developing competitive wholesale 
power markets and its role in ensuring the continuing development of 
our Nation's electric power industry. As requested by the Subcommittee, 
my testimony addresses the following issues: (1) significant changes in 
the electric power industry; (2) the Public Utility Holding Company Act 
of 1935 (PUHCA) and the Public Utility Regulatory Policies Act of 1978 
(PURPA); (3) the status of Regional Transmission Organization (RTO) 
formation; (4) FERC's role in the siting of electric transmission 
facilities; (5) FERC's role in overseeing wholesale electricity 
markets; (6) FERC's refund authority; and (7) measures undertaken to 
protect the integrity of the Nation's electric power infrastructure. 
Where appropriate, my testimony includes comments on legislation that I 
believe is needed to assist FERC in continuing the development of 
competitive wholesale markets.
    In 1996, with the issuance of Order Nos. 888 and 889, FERC 
established the foundation for competitive wholesale power markets in 
the United States. With these rules, FERC ordered all transmission-
owning public utilities to file nondiscriminatory open-access tariffs, 
thereby opening up interstate transmission. FERC's goal was to ensure 
that customers have the benefits of competitively priced generation.
    With the issuance of Order No. 2000 in December 1999, FERC 
continued its effort to create open and fair competitive markets. Order 
No. 2000 focused on the formation of Regional Transmission 
Organizations (RTOs). The Commission found that RTOs may eliminate 
undue discrimination in transmission services that can occur when the 
operation of the transmission system remains in the control of 
vertically-integrated utilities. The Commission also found that RTOs 
can improve grid reliability, improve market performance, and 
facilitate lighter-handed regulation. Much of FERC's emphasis in the 
near future will be to complete the development of RTOs with clear 
responsibilities, independence, and sufficient scope.
    Since the Commission began promoting RTOs as a means to remove 
barriers and impediments present in wholesale electricity markets, I 
have been fully committed to the goal of RTO implementation. When the 
Commission deliberated over how to attain the objective of RTO 
formation, we decided to adopt an open collaborative process that 
relied on voluntary regional participation. In a series of orders 
issued on July 12, 2001, the Commission dramatically departed from the 
voluntary approach we pursued in Order No. 2000 by directing the 
formation of four specific RTOs for the United States, excluding Texas.
    I dissented on this aspect of the July 12 orders. My concern was 
that this decision on RTO formation departed from the basic 
philosophies embodied in Order No. 2000, and that any such action 
should be preceded by a formal notice-and-comment rulemaking. This path 
would allow the Commission to make a reasoned decision informed by the 
views of all interested parties--most importantly, state commissions.
    Apart from the departure from the voluntary nature of Order No. 
2000, I have further concerns with July 12 orders' determinations 
regarding RTO scope and timing. I certainly favor the development of 
large RTOs reflecting natural markets. I am not, however, convinced 
that four RTOs would meet the noble goals of Order No. 2000 any better 
than six or seven--or even eight--RTOs of sufficient size. In addition, 
I believe that the Commission's July 12 decisions demonstrate little 
regard for the status and timing of RTO formation efforts in various 
regions of the country. The process of merging markets as RTOs are 
formed is revealing itself to be a highly technical and complex 
endeavor. It is my view that the Commission should recognize this in 
developing realistic expectations.
    I also felt it necessary at the time to comment on the majority's 
assertion that forming larger RTOs will result in lower wholesale 
prices, and do so now. This is a laudable goal, and as such, I embrace 
it. However, the promise of lower wholesale electricity prices is one 
that I, as a federal official, am not willing to make to consumers at 
this time. Competitive markets should produce lower prices; but we have 
not yet reached that level of market development. Consequently, I have 
urged my colleagues to be more circumspect in promising lower prices. 
Consumers and ratepayers of electricity are going through a trying time 
at present. We need to be honest and up front as to the benefits and, 
yes, sometimes the struggles, of moving toward competition.
    Of utmost importance in the development of competitive energy 
markets is reliability. I believe that the voluntary reliability 
system, which has been in place for over three decades, should be 
replaced with one in which a self-regulated independent reliability 
organization, with oversight by the Commission, establishes and 
enforces mandatory reliability standards. I would support legislation 
which authorizes a system for assuring the reliability of the electric 
grid that: (1) is mandatory, (2) requires sanctions and penalties for 
failure to comply with reliability rules, and (3) is subject to federal 
oversight. In my view, such a change in the manner in which the 
reliability of the interconnected grid is overseen and managed is 
required in order to ensure a competitive bulk power market. I would 
wholeheartedly support the establishment of a self-regulated 
independent reliability organization, with oversight by the Commission.
    I believe that interconnection rules should be clarified in order 
to ensure that new sources of generation are able to interconnect to 
the transmission system. FERC has stated its intent to evaluate in the 
near future the importance of standardizing interconnection policies 
and procedures in a generic proceeding. I fully support such 
standardization. A related issue is who should bear the costs of new 
interconnections and upgrades. These pricing decisions need to be made 
carefully and with consideration of the multiple factors at issue. Any 
changes in cost responsibility for interconnections should be 
accomplished through a formal rulemaking, where all affected parties 
have an opportunity to express their views.
    There has been significant discussion among industry participants 
concerning the conditional repeal of both PUHCA and the mandatory 
purchase requirements of PURPA. If PUHCA is repealed, I urge that such 
repeal be conditioned upon the grant of enhanced authority to the 
Commission to address market power problems, and assurance that both 
the Commission and the states would have greater access to the books 
and records of holding companies. I also support repeal of the 
mandatory purchase requirement in Section 210 of PURPA, subject to new 
provisions that would remove disincentives for renewable generation 
sources.
    Another issue that arises in the context of FERC's goal to 
encourage competition in wholesale electric markets is the Commission's 
role in the siting of transmission facilities. I fear that the goal of 
a national grid may be unattainable absent a new approach to 
transmission planning, expansion, and siting. Currently, under the 
Federal Power Act, the Commission has no role in the permitting and 
siting of new transmission facilities. I believe that shortages of 
transmission are no longer just single state issues; instead, these 
shortages have become interstate commerce issues that must be addressed 
by the federal government.
    There have been proposals to use federal eminent domain as a 
backstop to a cooperative, regionally-based approach to transmission 
and siting issues. In essence, FERC would be granted eminent domain 
authority, which we, in turn, would be allowed to cede to regional 
regulatory compacts. My primary concern with this approach is that it 
could result in costly and inefficient duplication of processes, 
records, and efforts by the various decisional authorities involved in 
transmission siting. As we have seen with the Commission's hydropower 
licensing program, for example, it is very difficult to build speed 
into a process over which several entities exercise jurisdiction. While 
the Commission has made great progress in streamlining cumbersome 
processes in this regard, I would caution the Subcommittee about 
initiating a new regime for transmission siting that could easily be 
mired in bureaucratic wrangling.
    My recommendation would be for FERC to be granted federal eminent 
domain authority similar to the authority the Commission exercises with 
respect to the siting of interstate natural gas pipelines under the 
Natural Gas Act. The Commission could build into its implementation of 
such legislation procedures to ensure cooperation by the states and 
regional input. I believe this more centralized approach is necessary 
from an efficiency standpoint, and will result in less bureaucracy and 
more timely decisions for transmission providers and consumers. 
Furthermore, I am not advocating that the Commission should have siting 
authority for electric distribution lines or power plants. I believe 
state governments are best positioned to make those determinations.
    I also have a concern that there is not sufficient investment in 
transmission facilities. In my opinion, the transmission system is not 
keeping pace with the growing demand in the bulk power market. The 
difficulty associated with siting is one reason for this. Others are 
that the industry is increasingly unwilling to make transmission-
related investments given the uncertainties that exist in an industry 
still in the midst of restructuring, as well as the risk of earning 
inadequate returns on new transmission investments. The Commission must 
do its part to ensure that its transmission pricing policies 
incorporate an allowance for reasonable returns on investments. 
Independent transmission companies as well as merchant transmission 
companies need certainty to develop their plans.
    In order to provide effective oversight of wholesale electricity 
markets, FERC is preparing itself to operate in today's fast-paced 
commercial environment. A critical element of market oversight is the 
availability of market information is a usable format. There is clearly 
a relationship between strong market transparency rules and effective 
regulation. I strongly believe that transparency acts as an effective 
deterrent to market power by allowing regulators and the public to 
monitor the marketplace for abuses. The lack of accurate, timely, and 
easily accessed pricing information can impede competition and 
liquidity; and for that reason, I have supported many FERC initiatives 
aimed at expanding the range of publicly available transactional 
information. With a view toward legislative action, I recommend that 
FERC and the Energy Information Administration be granted clear 
authority to collect and publish appropriate transactional data, while 
protecting proprietary information. These goals are not inconsistent 
with one another.
    The Subcommittee has asked for comment on the authority of the 
Commission to remedy violations of law. I believe that it would be 
helpful for the Commission to have some additional authority to prevent 
the exercise of market power. In my comments to H.R. 1941, ``The 
Electric Refund Fairness Act of 2001,'' I indicated my support for 
legislation that would expand the refund authority set forth in section 
206(b) of the Federal Power Act. I did, however, emphasize that, in 
addition to the objective of protecting consumers, I believe it is 
important for regulators to seek to minimize uncertainty of energy 
transactions. For example, I would not advocate granting the Commission 
authority to reopen and order refunds on past transactions. That said, 
I would welcome legislation amending the FPA to allow the Commission to 
order refunds as of the date formal notice of a complaint is issued. 
All interested persons would be on notice that transactions are the 
subject of complaint or investigation, and that rates may change and 
refunds may be ordered as a result. Customers would have the added 
protection of an earlier refund effective date. I would also advocate 
lengthening the refund effective period beyond the current fifteen 
months; I have suggested twenty months after the refund effective date 
would be appropriate. Both goals of protection and certainty would be 
met under this framework.
    In addition, I believe an amendment to the FPA to give the 
Commission authority to assess penalties, in addition to refunds and 
interest, could act as a powerful deterrent against the abuse of market 
power. However, I believe that, in the interest of certainty, a 
statutory upper limit to any such penalties should be included. 
Further, I would suggest that any limits on new penalty authority 
should be high enough to be effective and withstand the passage of 
time.
    Finally, in light of the tragic events of September 11, 2001, the 
Subcommittee has asked for comment on the security of the Nation's 
energy infrastructures. FERC's role in the security of the energy 
transportation and supply infrastructure is very limited. However, the 
Commission's dam safety program extends to every jurisdictional 
hydroelectric facility, and each has in place an emergency action plan. 
In the event of emergency, these plans trigger procedures designed to 
minimize the impact of a breach on downstream property and homeowners. 
While jurisdictional pipelines and transmission owners are subject to 
certain reporting requirements, FERC does not have the authority to 
prescribe or monitor pipeline and electric transmission security. 
However, our staff is in contact with pipeline and transmission 
companies, many of which are operating under heightened security 
procedures.
    The Commission's regulatory purview is largely economic; and in 
this regard, we recognize that the entities under FERC's jurisdiction 
may incur extraordinary expenses as a result of the terrorist attacks 
that have taken place. In particular, electric, gas, and oil companies 
have begun to adopt new procedures and install new facilities to 
further safeguard the electric power transmission grid and gas and oil 
pipeline systems. The costs of such additional security measures remain 
unclear. In order to reduce the uncertainty about company's ability to 
recover expenses, the Commission issued a Statement of Policy on 
September 14, 2001, to assure the industry that our policy favors 
recovery of such costs.
    In closing, I emphasize that comprehensive federal electric 
legislation is needed to address important and unresolved issues in the 
restructuring of the electric industry. The Commission must have 
sufficient authority to advance its goals of achieving fair, open and 
competitive bulk power markets. Current impediments to the development 
of such markets must be removed as quickly as possible so that the 
intended benefits of restructuring for the American consumer ultimately 
may be realized.

    Mr. Barton. Thank you, Commissioner. We now want to welcome 
our new commissioner, Commissioner Brownell from the great 
State of Pennsylvania, former PUC Commissioner there. Welcome 
to the subcommittee and ask you to summarize your remarks in 7 
minutes.

              STATEMENT OF HON. NORA MEAD BROWNELL

    Ms. Brownell. Thank you very much, Mr. Chairman, and 
members of the subcommittee. I am pleased to be here today. The 
events of the past week have, of course, caused all of us to 
rethink our priorities, both professionally and personally. But 
I am encouraged by your continued focus on energy markets and 
infrastructure. While it would be easy to be diverted, I 
believe this is a major economic issue that is costing 
consumers hundreds of millions of dollars. It is limiting the 
growth potential of our business community in our country. The 
economic development of this country rests on the efficient and 
innovative energy markets and a fully developed infrastructure.
    Each day of delay raises the cost in ways I do not think we 
are effectively measuring. Today I would like to focus on the 
economic issues. I will talk about the importance of RTOs for 
future investment as well as for security. A couple of facts: 
Generation reserve capacity has declined from 22 percent in 
1990 to less than 15 percent in the year 2000. New generation 
is clearly needed. New investment in transmission capacity is 
less than one half of 1 percent per year over the next 10 
years; not keeping up with the pace of growth. Transmission 
constraints are growing. In the year 2000, there were an 
estimated $73 million in additional costs in central 
California; $580 million for the first 9 months in PJM New York 
and New England; $19 million in central east interface in New 
York in August alone.
    It is clear that the costs are growing, but it is also 
clear that unless and until we create regulatory and 
legislative certainty, the investment will not flow. I would 
like to quote just a few members of the investment community, 
``An Electric Fall Outlet'' by Christine Upenski and Deborah 
Coy from Schwab Markets. I quote, ``When the FERC on July 11 
launched an effort to jumpstart the RTO process, RTOs are 
expected to be the basis of regional markets for power and an 
improvement over single State or small regional systems. FERC's 
leadership on this issue could help build regulatory certainty 
needed to free up investment and transmission assets and market 
institutions that many companies see as necessary to reach full 
growth potential.''
    In a letter from J.P. Morgan, speaking of the importance 
and interests of the private equity sector of that company, 
they speak of this as an attractive business opportunity and 
the importance of private equity in constructing new assets to 
relieve transmission constraints and enhanced power flows and 
aggregating assets to create the critical mass necessary to 
provide the level of public service envisioned by FERC in its 
RTO policies.
    But they go on to say that unless we can create some 
certainty and fairness in the structure and the organization of 
the markets that private equity will not flow. That is an 
example of everything we see from the analyst community, from 
the lending community and for the private and public capital 
market.
    So it seems clear to me that at a time in this country when 
our economy needs the infusion of capital in ways that we never 
thought about before it is important that we fulfill our 
responsibilities and address the concerns of the investment 
community and save the consumers the hundreds of millions 
dollars that are being wasted.
    Just a moment on security issues. Every crisis management 
expert that I have ever consulted identify a number of 
essential ingredients for successful response in a crisis: 
accurate, timely communication, standardized and predictable 
protocols and response mechanisms, contingency planning, backup 
and redundancy features and the ability to identify and isolate 
vulnerabilities that serve as core features of crisis 
management.
    I was in probably the largest commercial fire at our 
banking institution in Philadelphia, and we were up and running 
in 24 days because the crisis management plan that I had had 
all those elements.
    I worked for Governor Dick Thornburg in the aftermath of 
TMI, and one of the clear messages to us was that when those 
things were lacking it was difficult to respond to the crisis. 
I think RTOs respond to those in ways that the existing market 
structure may or may not. It is easier to communicate and 
organize among 4, 6, 8 or 10 large, well-planned organizations 
than it is with scattered organizations who do not have central 
planning functions and who do not have contingency plans and 
redundancies.
    There are many things that we need to do. We need to 
address market monitoring interconnection standards. We need 
the ability to impose civil penalties. We need changes in the 
tax laws. We need to address the issue of transmission siting. 
There is much for you to do, and there is much for us to do. 
But we feel, with my colleagues, a sense of urgency and a 
renewed dedication to resolve the issues, to work with the 
States and the other stakeholders to bring an energy market and 
the efficiency that competition can bring to this country.
    Thank you.
    [The prepared statement of Hon. Nora Mead Brownell 
follows:]
 Prepared Statement of Hon. Nora Mead Brownell, Commissioner, Federal 
                      Energy Regulatory Commission
    Mr. Chairman and Members of the Subcommittee: Thank you for the 
opportunity to share my thoughts on the direction that our nation's 
electric restructuring policy should take. Over the past 10 days, I, 
like most Americans, have reassessed what is important in life, as an 
individual, an American, and a public servant. One thing that is 
obviously important is that we carefully consider the security of the 
nation's electric grid. I am eager to work with you and my colleagues 
to take every appropriate step to ensure that our energy infrastructure 
remains free from hideous acts of sabotage like those we witnessed last 
week.
    Our energy production and delivery systems are among the best in 
the world and their safety and security are vital to our continued 
economic growth and development. We are proud of our energy industry's 
planning, communication and response in this crisis. Three days after 
the attacks on the World Trade Towers and the Pentagon, the Commission 
issued a Statement of Policy that provides the energy industry with 
regulatory assurance on energy infrastructure reliability and security 
matters. Specifically, the Commission has assured cost recovery for 
prudently incurred expenditures that electric, gas and oil companies 
incur to adopt new procedures, update existing procedures and install 
facilities to upgrade the safety of their electric power transmission 
grid and gas and oil systems. I believe that our action is a good, 
responsive measure. It reassures the industry to undertake what is 
necessary and prudent. The Commission will continue to encourage 
jurisdictional entities to be proactive when it comes to securing the 
nation's electric grid.
    I also believe that the time is ripe for participants in the energy 
industry (including government) to review their response plans. The 
energy industry has evolved and is much more complex. As part of a 
continuous process of review and evaluation of crisis management and 
response, I think some consideration should be given to the need for 
periodic operational audits of our energy providers and the 
organizational structures which manage them to assess, among other 
things, reliability, safety, security and communication protocols.
    While we must take steps to protect the security of our nation's 
energy infrastructure, we must also get on with the other business of 
planning for the future, so that the forces of terror are not allowed a 
greater toll than they have already taken from this country. This 
nation's energy policy is at a critical juncture. Fear of change must 
not deter us from finishing the job of transforming an outdated, 
inefficient electricity industry into the economically competitive, 
technologically vibrant marketplace that American consumers deserve.
    One necessary step in transforming electricity markets is the 
development of Regional Transmission Organizations (RTOs). Large, 
independent RTOs can improve grid reliability by facilitating 
transmission planning across a multi-state region, create better 
pricing mechanisms such as eliminating ``pancaking'', improve 
efficiency through better congestion management, and attract investment 
in infrastructure by facilitating regional consensus on the need for 
construction. Moreover, the development of large RTOs can enhance the 
security of the electrical grid.
    Every crisis management expert that I have ever consulted 
identifies a number of essential ingredients for a successful response 
to a crisis:

 Accurate, timely communication
 standardized and predictable protocols and response mechanisms
 contingency planning
 back-up and redundancy features and
 the ability to identify and isolate vulnerabilities all serve 
        as core features of crisis management.
    Critical to the execution of any management plan is that all 
affected players know the plan, forward and back. It should be second 
nature; often there is no time to consult the play book. I believe that 
a large, fully functioning RTO is positioned to be a critical link in 
crisis management and ensuring reliability.
    With large RTOs there will be a centralized chain of command and 
standardized processes. We also expect that RTOs would tend to have 
modern, forward looking control systems that generally exceed the 
capabilities of smaller systems. As a result, inefficiencies of non-
standardized protocols and operation of the grid are reduced. There are 
no surprises. Emergency situations are better addressed from this 
efficiency of response. An RTO has the ability to ascertain and 
communicate system status and response plans more quickly than 20 or so 
control area operators. This is, I believe, what every crisis manager 
looks for. To this end, I believe that large RTOs are in a position to 
be flexible to accommodate security needs (a single control area 
operator may not be required).
    In addition, the RTO may serve as a central point for information. 
Accurate, timely information is critical to the assessment of the 
situation. Concerns that the Commission's goals of transparent market 
information and our OASIS system reveal too much information are 
misplaced. Information posted on OASIS does not include operating data, 
status of generation, or operational characteristics of transmission 
lines. Much of the information we seek to make publicly available is 
information necessary for the growth of markets; and is not sensitive 
information regarding energy management systems.
    In sum, RTOs play an important role in assuring reliability. 
Congress should affirm FERC's authority to require the formation of 
RTOs and it should do so now.
    In addition to the formation of RTOs, we must take other steps if 
we are to transform the electricity industry. The Public Utility 
Holding Company Act (PUHCA) was necessary to address abuses that 
existed a half-century ago. However, that statute has not only outlived 
its usefulness, it is actually thwarting needed development of our 
electricity resources by subjecting registered utility holding 
companies to heavy-handed regulation of ordinary business activities 
and to outdated requirements that they operate ``integrated''' and 
contiguous systems. One of PUHCA's perverse effects is that it causes 
foreign companies to buy here and U.S. companies to invest overseas. 
For a myriad of reasons, PUHCA should be repealed.
    The Public Utility Regulatory Policies Act (PURPA) also needs 
repeal. PURPA was enacted out of concern over dependence on oil for 
electric generation. Now, 22 years later, a gas-fired generator can be 
on-line in less than two years, and many advances are being made in 
distributed generation. Therefore, PURPA's subsidies for certain types 
of generation are no longer appropriate and more importantly stifle the 
nation's economy.
    I also believe that changes in tax laws must be considered to allow 
companies to effectively restructure and transform themselves and to 
attract new investment.
    We also need to develop uniform business rules. Where rules are 
standardized, there is less room for manipulation. I believe that all 
interstate transmission facilities should be under one set of open 
access rules, including the facilities owned and/or operated by 
municipals, cooperatives, the Tennessee Valley Authority, and the 
federal power market administrations and regardless of whether they are 
used for unbundled wholesale, unbundled retail, or bundled retail 
transactions. I also believe that we should develop standardized 
generation interconnection policies. Having all transmission under one 
set of rules will ensure a properly functioning and transparent 
transmission grid. It will reduce transaction costs, improve 
efficiency, and allow for competition. GISB successfully accomplished 
this goal in the gas industry and is poised to do so in the electric 
industry.
    Furthermore, we must revise the way in which transmission 
facilities are sited. State-by-state siting of such transmission 
superhighways is an anachronism that impedes transmission investment 
and slows transmission construction. An RTO, or regional structure, 
with significant input of the states, should be the first stop for 
siting approval. However, at some point, it may be necessary for the 
Commission to make the final determination. Therefore, I suggest that 
the Commission act as a backstop and be given siting authority over 
interstate transmission comparable to the interstate natural gas 
pipeline siting authority in Section 7 of the Natural Gas Act.
    Finally, the Commission must have an expanded role in monitoring 
for, and mitigating, market power abuse. The Commission must hire, 
train, and re-train personnel skilled in market monitoring and market 
power mitigation or buy expertise on a short-term basis, as needed. We 
must seek out experts to assist us in our new role. We must also act 
swiftly and with certainty to respond to market abuses. Markets are 
fragile and prolonged problems will destroy the market and the 
confidence of consumers. Therefore, I believe strengthening the 
Commission's market monitoring and enforcement capabilities must be a 
top priority. As markets change, market monitoring and enforcement 
capabilities become an even more critical piece of the regulatory 
puzzle. Effective market monitoring also includes modeling for the 
future, so we can more effectively anticipate where investment in 
infrastructure is needed.
    Let me offer a few suggestions that may help the Commission develop 
an effective market monitoring and enforcement program. There are many 
different players in the energy markets, many that have not 
traditionally been subject to our jurisdiction. A significant amount of 
relevant information about the operation of markets is in the 
possession of these entities. At times, there has been a reluctance to 
cooperate and provide the necessary information. It may be appropriate 
to clarify that the Commission has the authority to seek the 
information necessary to perform its statutory responsibilities from 
either jurisdictional or non-jurisdictional sources. With regard to the 
Commission's enforcement capability, the enabling statutes of the 
Securities and Exchange Commission and the Federal Communications 
Commission provide for a range of enforcement measures, such as civil 
penalties. I believe that providing the Commission with similar 
authority would send a powerful message to electricity market 
participants that we take violations of the Federal Power Act just as 
seriously.
    The list of tasks for you in Congress and for us at the Commission 
is long but it is critical that we move forward. The cost to our 
country grows each day. Lack of investment in infrastructure (new 
transmission investment represents an average growth rate of less than 
one-half of one percent per year over the next decade), delays in the 
development and introduction of new technologies, uncertainty in and 
lack of confidence from capital markets impacts companies' values and 
thwarts transition. We need clarity and resolution. At the Commission 
we are working on a business plan--a blue print for the future. Our 
plan sets forth an aggressive set of actions to resolve the 
uncertainties of the marketplace. We are committed to delivering to 
America's consumers the promise of an efficient, reliable, innovative 
energy future.
    I hope that this information is useful to you. If I can be of 
further assistance, please do not hesitate to contact me.

    Mr. Barton. Thank you, Commissioner.
    We now want to hear from Commissioner Massey. Your 
statement is in the record in its entirety. We would ask that 
you elaborate in 7 minutes.

               STATEMENT OF HON. WILLIAM L. MASSEY

    Mr. Massey. Thank you Mr. Chairman.
    Mr. Chair, Mr. Boucher, members of the subcommittee, my 
colleagues have laid out a number of the issues quite well, so 
I will be brief.
    Developing competitive, efficient wholesale markets based 
on a reliable transmission platform is a highly desirable goal. 
There are, however, a number of barriers to creating robust 
markets, including grid operation influenced by merchant 
interests, fractured grid operation, and a jurisdictional 
patchwork of rules governing the grid.
    Necessary grid expansion is simply not keeping pace with 
the requirements of robust wholesale markets. The lack of 
uniformity in generation interconnection standards among 
regions and utilities poses unnecessary barriers to entry by 
new, efficient, reliable generators. There has been inadequate 
monitoring and policing of evolving markets. Demand 
responsiveness that could act as a break on price run-ups is 
generally absent from electricity markets. Vibrant markets 
require a reliable trading platform, yet there are no legally 
enforceable reliability rules.
    The Commission does not have all of the tools it needs both 
to promote large regional markets and to protect the public 
interest. A number of legislative changes are critical to 
achieving the goal of well-functioning wholesale markets that 
yield substantial consumer benefits, and that is what I think 
we all want.
    All interstate transmission should be placed under one set 
of jurisdictional rules. The FERC should have authority to 
order the formation of RTOs and to site electric transmission 
facilities necessary for interstate commerce to flourish. 
Insuring that necessary transmission facilities are sited and 
built would be a huge step toward meeting our reliability 
goals.
    Congress should promote the formation, the adoption of 
uniform nationwide generation interconnection standards. This 
would be another critical step toward reliability. The barrier 
to entry posed by confusing interconnection standards should be 
eliminated. Refunds should be authorized if rates are 
determined to be unjust and unreasonable, at least back to the 
date of the initiation of a complaint.
    The Commission should have authority to assess civil 
penalties against prohibitive market behavior. Its authority 
over utility mergers should be strengthened in a number of 
ways, and direct authority to remedy market power should be 
provided.
    The Commission and State commissions should be strongly 
encouraged to insure that electricity markets include demand 
responsiveness. And, finally, the promulgation of mandatory 
reliability standards for bulk power markets must be authorized 
by Congress.
    I believe that confidence in market structure, confidence 
that the market is based upon a solid RTO platform that has 
clear authority for reliability planning, for an entire region, 
that is following mandatory reliability rules, will spur 
investment in the generation and transmission infrastructure 
necessary for a reliable system. And Congress can take steps to 
increase industry confidence that the necessary infrastructure 
can get sited in a timely fashion.
    Mr. Chairman, I think it is obvious that I believe that 
there is a strong Federal role that is required to solve these 
problems. I have been engaged in this activity at the 
Commission now for 8 years, moving toward a market structure 
that benefits consumers; and I must say I have a sense of 
impatience about it. I would like for us to move forward 
aggressively with Congress's help to solve these problems.
    Thank you.
    [The prepared statement of Hon. William L. Massey follows:]
  Prepared Statement of Hon. William L. Massey, Commissioner, Federal 
                      Energy Regulatory Commission
    Mr. Chairman and Members of the Subcommittee on Energy and Air 
Quality: Thank you for the opportunity to testify on the role of 
competitive wholesale power markets in providing affordable reliable 
electricity to American consumers and the role of the Federal 
government in ensuring the development of the power industry.
                  historical and statutory background
    The electric power industry has undergone significant economic and 
technological changes that have rendered inadequate the current 
statutory scheme for regulatory oversight. In order to shorten my 
testimony, I am attaching a White Paper recently made available to the 
Senate Committee on Energy and Natural Resources by Chairman Bingaman. 
The White Paper provides excellent description of the historical 
development of the electric power industry and the role various 
statutes have played in that development.
    The development of competitive efficient wholesale markets is a 
highly desirable goal. This is primarily a federal responsibility, and 
achieving this goal will benefit our nation's consumers and economy. 
There are, however, a number of barriers to the creation of robust 
markets, including grid operation influenced by merchant interests, 
fractured grid operation, and a jurisdictional patchwork of rules 
governing the grid. Almost a third of the grid is not subject directly 
to the FERC's open access and nondiscrimination requirements. Necessary 
grid expansion in not keeping pace with the requirements of robust 
wholesale markets. This means that cheaper power cannot always reach 
the customers who want it. The lack of uniformity in generation 
interconnection standards among regions and utilities poses unnecessary 
barriers to entry by generators that could provide cheaper power for 
consumers. There has been inadequate monitoring and policing of 
evolving markets. Demand responsiveness could act as a brake on price 
run ups, yet is generally absent from electricity markets. Vibrant 
markets require a reliable trading platform, yet there are no legally 
enforceable reliability standards.
    With notable exceptions such as PURPA and EPACT, the legal 
framework that governs the electricity industry is now more than sixty 
five years old and assumed an old fashioned cost of service regime. 
Simply stated, the Commission does not have all of the tools it needs 
both to promote large regional markets and to protect the public 
interest. I would like to underscore a number of legislative changes 
that are critical to achieving the goal of well functioning competitive 
markets that yield substantial consumer benefits.
Transmission Jurisdiction
A. One Set of Rules
    Congress should place all interstate transmission under one set of 
open access rules. That means subjecting the transmission facilities of 
municipal electric agencies, rural cooperatives, the Tennessee Valley 
Authority, and the Power Marketing Administrations to the Commission's 
open access rules. These entities control 30% of the nation's 
electricity transmission grid. Their current non-jurisdictional status 
has resulted in a patchwork of rules that hinder seamless electricity 
markets. Markets require an open non-discriminatory transmission 
network in order to flourish.
    In addition, all transmission, whether it underlies an unbundled 
wholesale, unbundled retail, or bundled retail transaction, should be 
subject to one set of fair and non-discriminatory interstate rules 
administered by the Commission. This will give market participants 
confidence in the integrity and fairness of the delivery system, and 
will facilitate robust trade by eliminating the current balkanized 
state-by-state rules on essential interstate facilities.
B. Regional Transmission Organizations
    While the Commission has made substantial progress in forming the 
Regional Transmission Organizations that are critical to the 
competitive market place, our hand would be strengthened by a clear 
declaration by the Congress that these institutions are in the public 
interest and should be formed. One appropriate action would be to give 
the Commission clear authority to order the formation of such 
institutions in compliance with Commission standards. I firmly believe 
that large RTOs consistent with FERC's vision in Order No. 2000 are 
absolutely essential for the smooth functioning of electricity markets. 
RTOs will eliminate the conflicting incentives vertically integrated 
firms still have in providing access. RTOs will streamline 
interconnection standards and help get new generation into the market. 
RTOs will improve transmission pricing, regional planning, congestion 
management, and produce consistent market rules. We know for a fact 
that resources will trade into the market that is most favorable to 
them. Trade should be based on true economics, not the idiosyncracies 
of differing market rules across the region. A clear message from 
Congress would certainly speed the formation of these critical 
institutions.
C. Transmission Siting
    I would recommend that Congress transfer to the Commission the 
authority to site new interstate electric transmission facilities. The 
transmission grid is the critical superhighway for electricity 
commerce, but it is becoming congested due to the increased demands of 
a strong economy and to new uses for which it was not designed. 
Transmission expansion has not kept pace with these changes in the 
interstate electricity marketplace.
    Although the Commission is responsible for well functioning 
electricity markets, it has no authority to site the electric 
transmission facilities that are necessary for such markets to thrive 
and product consumer benefits. Existing law leaves siting to state 
authorities. This contrasts sharply with section 7 of the Natural Gas 
Act, which authorizes the Commission to site and grant eminent domain 
for the construction of interstate gas pipeline facilities. Exercising 
that authority, the Commission balances local concerns with the need 
for new pipeline capacity to support evolving markets. We have 
certificated well over 12,000 miles of new pipeline capacity during the 
last six years. No comparable expansion of the electric grid has 
occurred.
    I recommend legislation that would transfer siting authority to the 
Commission. Such authority would make it more likely that transmission 
facilities necessary to reliably support emerging regional interstate 
markets would be sited and constructed. A strong argument can be made 
that the certification of facilities necessary for interstate commerce 
to thrive should be carried out by a federal agency.
    Adequate grid facilities are essential to robust wholesale power 
markets. I am confident that transmission will be built in sufficient 
quantities if siting authority is rationalized, rate jurisdiction is 
clarified, and adequate cost recovery mechanisms and risk-based rates 
of return are allowed.
D. Generation Interconnection
    I would recommend that Congress direct the Commission to adopt 
uniform nationwide standards that streamline the process of 
interconnecting generators to the grid. The Commission has taken some 
steps in this direction by encouraging utilities to file their 
interconnection rules, but more must be done. Generation siting 
decisions should not depend on how easy it is to hook up in a 
particular region or with a certain transmission provider. Standardized 
and uniform rules promulgated by the Commission are necessary.
Rates and Market Power
    Ensuring just and reasonable prices must be addressed far 
differently as we move to competitive markets than under the monopoly 
structure. It is more complex now. The basis nature of our regulatory 
tasks is moving from reviewing cost-based prices charged by individual 
sellers to ensuring good performance by markets. I believe that the 
Commission's current regulatory tools are inadequate to the new task.
A. Refunds
    I believe the Commission needs additional authority to properly 
address the issue of refunds for unjust and unreasonable wholesale 
electricity prices. The Commission has concluded that section 206 of 
the Federal Power Act does not allow the Commission to require refunds 
of unjust and unreasonable rates charged prior to a date 60 days after 
a complaint is filed or the Commission initiates an investigation. I 
recommend that section 206 be amended to allow the Commission to order 
refunds for past periods if the rates charged are determined to be 
unjust and unreasonable. Limitations on how far back in time the 
Commission can order refunds may be appropriate.
B. Civil Penalties
    I recommend that the Commission be given authority to assess civil 
penalties against participants that engage in prohibited behavior in 
electricity markets, such as anticompetitive acts and violations of 
tariff terms and conditions. If the Commission is to be the ``cop on 
the beat'' of competitive markets, we must have the tools needed to 
ensure good behavior. Refunds alone are not a sufficient deterrent 
against bad behavior. Simply giving the money back if you are caught is 
not enough. The consequences of engaging in prohibited behavior must be 
severe enough to act as a deterrent.
C. Mergers and Consolidations
    To ensure that mergers do not undercut our competitive goals, the 
Commission's authority over mergers involving participants in 
electricity markets must be strengthened in a number of ways. 
Consolidations of market participants can have adverse consequences to 
the functioning of electricity markets. The Commission's detailed 
experience with electricity markets and its unique technical expertise 
can provide critical insights into a merger's competitive effects. The 
Commission's authority to review mergers should be strengthened to 
ensure that all significant mergers involving electricity market 
participants are reviewed.
    I recommend that the Commission be given direct authority to review 
mergers that involve generation facilities. The Commission has 
interpreted the FPA as excluding generation facilities per se from our 
direct authority, although that interpretation is currently before the 
courts. It is important that all significant consolidations in 
electricity markets be subject to Commission review. For the same 
reason, the Commission should be given direct authority to review 
consolidations involving holding companies.
    I am also concerned that significant vertical mergers can be 
outside of our merger review authority. Under the current section 203 
of the FPA, our merger jurisdiction is triggered if there is a change 
in control of jurisdictional assets, such as transmission facilities. 
Consequently, consolidations can lie outside of the Commission's 
jurisdiction depending on the way they are structured. For example, a 
merger of a large fuel supplier and a public utility would not be 
subject to Commission review if the utility acquires the fuel supplier 
because there would be no change in control of the jurisdictional 
assets of the utility. If the merger transaction were structured the 
other way, i.e., the fuel supplier acquiring the utility, it would be 
subject to Commission review. Such vertical consolidations can have 
significant anticompetitive effects on electricity markets. Those 
potential adverse effects do not depend on how merger transactions are 
structured, and thus our jurisdiction over those transactions should 
not depend on how they are structured. Therefore, I recommend that the 
Commission be given authority to review all consolidations involving 
electricity market participants.
D. Market Power Mitigation
    Market power still exists in the electricity industry. The FERC, 
with its broad interstate view, must have adequate authority to ensure 
that market power does not squelch the very competition we are 
attempting to facilitate. However, the Commission now has only indirect 
conditioning authority to remedy market power. This is clearly 
inadequate. Therefore, I recommend legislation that would give the 
Commission the direct authority to remedy market power in wholesale 
markets, and also in retail markets if asked by a state commission that 
lacks adequate authority. For example, such authority would allow the 
Commission to order structural remedies directly, such as divestiture, 
needed to mitigate market power.
E. Demand Responsiveness
    Markets need demand responsiveness to price. This is a standard 
means of moderating prices in well-functioning markets, but it is 
generally absent from electricity markets. When prices for other 
commodities get high, consumers can usually respond by buying less, 
thereby acting as a brake on price run-ups. If the price, say, for a 
head of cabbage spikes to $50, consumers simply do not purchase it. 
Without the ability of end use consumers to respond to price, there is 
virtually no limit on the price suppliers can fetch in shortage 
conditions. Consumers see the exorbitant bill only after the fact. This 
does not make for a well functioning market.
    Instilling demand responsiveness into electricity markets requires 
two conditions: first, significant numbers of customers must be able to 
see prices before they consume, and second, they must have reasonable 
means to adjust consumption in response to those prices. Accomplishing 
both of these on a widespread scale will require technical innovation. 
A modest demand response, however, can make a significant difference in 
moderating price where the supply curve is steep.
    Once there is a significant degree of demand responsiveness in a 
market, demand should be allowed to bid demand reductions, or so called 
``negawatts,'' into organized markets along with the megawatts of the 
traditional suppliers. This direct bidding would be the most efficient 
way to include the demand side in the market. But however it is 
accomplished, the important point is that market design simply cannot 
ignore the demand half of the market without suffering painful 
consequences, especially during shortage periods. There was virtually 
no demand responsiveness in the California market. Customers had no 
effective means to reduce demand when prices soared.
    It would be helpful for Congress to send a message that instilling 
a significant measure of demand responsiveness into electricity markets 
is in the public interest. I would recommend that legislation strongly 
encourage FERC and state commissions to cooperate in designing markets 
that include demand responsiveness. This would help to ensure just and 
reasonable wholesale prices and would be an effective market power 
mitigation measure.
Reliability
    The industry needs mandatory reliability standards. Vibrant markets 
must be based upon a reliable trading platform. Yet, under existing law 
there are no legally enforceable reliability standards. The North 
American Electric Reliability Council (NERC) does an excellent job 
preserving reliability, but compliance with its rules is voluntary. A 
voluntary system is likely to break down in a competitive electricity 
industry.
    I strongly recommend federal legislation that would lead to the 
promulgation of mandatory reliability standards. A private standards 
organization (perhaps a restructured NERC) with an independent board of 
directors could promulgate mandatory reliability standards applicable 
to all market participants. These rules would be reviewed by the 
Commission to ensure that they are fair and not unduly discriminatory. 
The mandatory rules would then be applied by RTOs, the entities that 
will be responsible for maintaining short-term reliability in the 
marketplace. Mandatory reliability rules are critical to evolving 
competitive markets, and I urge Congress to enact legislation to 
accomplish this objective.
PURPA and PUHCA Repeal
    PURPA and PUHCA are statutes that may have outlived their 
usefulness and I would support their repeal in the context of broad 
restructuring legislation that ensures robust competitive power 
markets. I would support repeal of PURPA if there is a mechanism 
enacted to promote the development of renewable resources, such as a 
reasonable portfolio standard. I would support PUHCA repeal if state 
and federal regulators are given explicit authority to review the 
books, records and accounts of utilities when necessary to ensure just 
and reasonable rates.
Security of the electric power infrastructure
    The recent acts of terrorism against our Nation underscore the 
absolute importance of ensuring that our infrastructure is a secure as 
possible. The Commission's primary jurisdiction is over the rates 
charged by jurisdictional companies. To that end, I would note that 
last week the Commission issued a statement of policy assuring the 
industries we regulate that they may recover all prudently incurred 
costs to safeguard the infrastructure.
Conclusion
    I stand ready to answer questions and to assist the Subcommittee in 
any way. Thank you for this opportunity to testify.

    Mr. Barton. Thank you, Commissioners.
    The Chair would recognize himself for 5 minutes for 
questions only.
    Chairman Wood, on July 12, the debate about RTOs at the 
FERC, I have received quite a bit of negative feedback, quite 
frankly, from the incumbent investor-owned utilities about some 
of the things that the Commission was attempting to do. And one 
of the questions that I was asked was why the FERC felt 
compelled to try to force everybody into 1 of 4 RTOs. What is 
so magical about four RTOs nationwide instead of a larger 
number if it seemed to work better geographically?
    Mr. Wood. Chairman Barton, I think one of the--I think the 
best way to kind of come at that is compare what it would be 
like with 10 or 12 to the Tower of Babel, or to Europe prior to 
its confederation. You don't really get to a national power 
grid with five. I mean, I am counting ERCOT, of course, as a 
fifth. So I really think of five when people say four.
    Mr. Barton. I kind of count that way, too.
    Mr. Wood. Okay. So we have got a problem we share, too. And 
five may be too many. It was interesting in talking to the 
President after our vote because it was right after Vice 
President Cheney talked about the seamless Nation grid that it 
looked like five was a little too balkanized. Of course, then 
after that you get the call that maybe we should have stuck 
with 12 or 15.
    At the end of the day, setting up the infrastructure to do 
reliability, competitive, open access transmission, planning, 
and supply/demand balance, which is what these organizations 
do, is not cheap. Right now, it is over in some regard 2,000 
separate entities, the utilities in the country that do these 
things individually, the 160 some odd controllers that 
aggregate this a little bit more, the 10 NERC regions which 
aggregate just the reliability part of that. But, you know, 
that is better than nothing. But they are expensive. And I 
think as one who has been in front of, with ERCOT, this problem 
in the past, you don't want to see these replicated or 
duplicated where one will do well.
    I think certainly in light of the reliability issues in the 
last week, to have hardened bunkers to maintain the reliability 
of the grid, to have duplicate or triplicate facilities to make 
sure that they are all secure so that you can really run and 
manage a grid through an event like last week or anything that 
may come our way, 4 or 5 of these is a balance, a good economic 
balance for what the customers have to pay. Ten or 15 or 20 
start to look like wasting the customers money. And so----
    Mr. Barton. But, I mean, there is some number--well, I mean 
larger than four but smaller than 20 that--sure, you know, the 
draft that we are going to release sooner or later on 
electricity, you know, it is going to have a requirement, a 
time period for people to join an RTO and give the industry an 
opportunity to put its RTO where its mouth has been, so to 
speak, that they will join if we give them enough time. And if 
that turns out to be 7 or 8, if they actually make sense 
geographically and have the correct interconnects and at the 
seam, I mean, that would--would that not satisfy some of your 
concerns if it is done properly and they appear to work and all 
that, as opposed to cutting it up into four quadrants?
    Mr. Wood. Fair enough. And I would say, just so it is 
clear, the core issue here is to get to a seamless national 
market----
    Mr. Barton. Exactly.
    Mr. Wood. [continuing] and we could go about that a couple 
of ways. One is to make large groups that solve their own 
problems within themselves. Another is to do a generic market 
standard design, which we may do. We are going to talk about 
this at our meeting next week. We are going to talk about the 
different ways to get to yes on RTO.
    But the large regional RTOs I think are, for the reasons I 
stated before, a pragmatic way to go forward. But, quite 
frankly, you could be like McDonalds; and a hamburger in Boston 
is the same as a hamburger in Arlington, if the standards for 
producing that hamburger are the same across the country.
    Mr. Barton. There ain't no Whataburgers in Boston.
    Mr. Wood. They do have a few Mickey D's. They usually don't 
understand me when I try to go order up there, but that is 
their problem not mine.
    But, in any event, if you have 50 different outlets for 
electricity on the wholesale level, or 12 or 8 or 4 or 1, they 
are all working off the same rules. I guess as a practical 
matter it doesn't really matter if we have got four or----
    Mr. Barton. I have got one more question for Mr. Massey, 
and then I am going to go to Mr. Boucher, and we will do a 
second round if there is enough interest to do it.
    You mentioned in your testimony, Commissioner, the need for 
civil penalties to enforce FERC decisions. The draft that we 
are going to release has a provision for that. As we have 
talked about it, there are a lot of people that would be 
potentially subject to such civil penalties. To say that is 
redundant because the FERC has to approve everything and you 
have the power to enforce your decisions without civil 
penalties. So how do you answer that comment about giving you 
civil penalties to enforce your actions?
    Mr. Massey. Well, I agree with comments that Chairman Wood 
has made on a number of occasions supporting civil penalties. 
Just paying the money back--if you engage in bad market 
behavior, simply paying the money back is not a sufficient 
deterrent. I think we need a big stick to deter bad market 
behavior, and that is my view on it. We would use it 
judiciously, but we ought to be able to use it when we need it.
    Mr. Barton. Do any other commissioners have a comment on 
that one?
    Ms. Breathitt. I supported civil penalties. I said that we 
ought to have an upper limit so there is some certainty as to 
how far we go monetarily, that it is just not open-ended.
    Mr. Barton. Okay.
    Ms. Breathitt. But that it should be sufficient enough to 
be a deterrent.
    Mr. Barton. Okay. Mr. Boucher is recognized for 5 minutes 
for questions.
    Mr. Boucher. Thank you, Mr. Chairman.
    Mr. Wood and other members of the Commission, you probably 
heard Mr. Blake earlier testify that, in the opinion of the 
administration, you already have sufficient authorities to do 
what you should properly be doing with regard to regional 
transmission organizations. And when asked the direct question, 
should we legislate additional authorities for you, his answer 
was no. Now, I think you may have a different view, and I would 
like to give you this opportunity, if you choose to do so, to 
differ with Mr. Blake and explain what additional authorities 
you would like to have conferred upon you by statute to 
legislate or to act with regard to RTOs, either from the 
standpoint of addressing the structure of RTOs or from the 
standpoint of requiring that investor-owned utilities become 
members of RTOs. So here is your opportunity to make your case 
for why you should have additional authorities.
    Mr. Wood, would you like to begin?
    Mr. Wood. Thank you, Mr. Boucher.
    My core answer is I think it is clear, but some other folks 
may have some smudges on their eyeglasses, so why don't you get 
some Kleenex and let's wipe it off of theirs as well. Because 
that is going to take us 5 years to have a court do that. And, 
for me, that--Mr. Blake didn't come at it from that and the--
but as one who has got the Supreme Court looking at an order 
passed 5 years ago by our Commission just now, this week, that 
tens of billions of dollars that are going to be out of 
customers' pockets if we let the legal process work its way 
through what some claim is dubious authority or questionable 
authority--and so I would, on that basis, do it.
    I think we should and will move forward regardless, because 
I think you all or your predecessors gave us that authority in 
1992. It actually has been in the act since 1935 with section 
206. But, in any event, I think you would be doing a good job 
for the folks of the United States to expedite this transition.
    Mr. Boucher. Would you like to have the clear statutory 
authority to be able to order that IOUs join RTOs?
    Mr. Wood. Yes, sir. And perhaps even more than that.
    Mr. Boucher. What more than that?
    Mr. Wood. Well, if you want to go beyond the public utility 
in the act and say we are not going to regulate everything else 
about public power but we are going to want you guys to put, if 
you have transmission--and not too many of them do, but the 
ones that do, including the Federal agencies that are regulated 
directly by Congress--that their transmission be part and 
parcel of these broad organizations so that it is a seamless 
national highway for electricity.
    Mr. Boucher. Okay. I have some other questions. Let me just 
ask if there are members who disagree with anything that 
Commissioner Wood said. Everyone is in agreement.
    Let me turn to the question of order 888 and the set of 
issues relating to your authority over transmission that are 
addressed in order 888. These are the matters that are now 
pending before the Supreme Court with arguments, I think, next 
week and a decision in the not-too-distant future to be 
anticipated.
    When we asked Mr. Blake if he thought that we should 
legislate--what authorities we believe you should have over 
transmission, his answer was that we should go forward and not 
wait for the Supreme Court. My first question to you is, do you 
agree with that opinion? And if we have a particular point of 
view with regard to what your authority should be, should we 
announce that in statutory form?
    The second question that I have for you is, what should we 
do in this area, assuming that we legislate? Order 888 
basically says that FERC has authority over the transmission 
component of unbundled transactions in States where the State 
is open to retail competition. You got sued upon that order 
from some parties saying that you went too far, from other 
parties saying that you should have done more and that you 
should have extended your order and in fact were required in 
their opinion to extend it not just to that set of 
circumstances but also to those instances where in closed 
States you have bundled transactions.
    My question to you is this: No. 1, as I indicated, should 
we legislate on this now, or should we wait and see what the 
court resolves? And assuming that you think we should legislate 
now, what should we do?
    The draft that was reported from this subcommittee last 
year essentially confirmed your authority as announced in order 
888, and it drew the line at that. It didn't go any further. Do 
you think we should go further? Should we give you the 
authority to assert jurisdiction in closed States with respect 
to unbundled transactions?
    Mr. Wood. Yes, sir. Order 2000, really, which is the RTO 
order, really, even though it is voluntary for people to 
participate, it really is broader and subsumed; and 888 is 
subsumed in that as a practical matter. The RTO has elevated 
transmission to a regional multistate--i.e., interstate--
commerce commodity now. All transmission, it is not separate 
but equal, but it is one type of transmission, so it is kind of 
an either/or. I mean, clearly ratifying 888 or going further 
and saying 888 should apply more broadly and not create two 
classes of transmission customer but treat everybody the same 
as a transmission customer, then order 2000, the prior question 
you asked, were the committee to move on the direction of 2000 
as we discussed just in the last question, I think it would 
subsume the questions you raise in 888.
    Mr. Boucher. Let me ask you a direct question. Would you 
like to have the statutory authority to assert jurisdiction 
over transmission in States that are at the present time not 
open to retail competition and, with respect to those 
transactions, where transmission is bundled with the sale of 
the electricity itself?
    Mr. Wood. The transmission is an interstate product. It 
should be handled at one forum. Otherwise, investment won't 
happen. I think we have all heard that. Even Mr. Blake talked a 
little bit about that. So, yes, to answer your question.
    Mr. Boucher. Mr. Massey, would you like to comment?
    Mr. Massey. Mr. Boucher, I was on the Commission when we 
voted for order 888; and, frankly, that was a political 
compromise. There were very strong arguments that we had not 
only the authority but the obligation to go further and assert 
jurisdiction over all transmission, whether bundled or 
unbundled. That doesn't mean we are determining whether a 
particular State moves to retail choice. That is a separate 
issue that would stay with the State. But the question is 
whether the transmission that underlies all transactions ought 
to be subject to the same terms and conditions, and I think it 
should.
    The interstate highway system analogy is not perfect. But 
let's assume you are traveling on the Beltway from Virginia 
into Maryland, and all of a sudden there is a sign over the 
Beltway that says, ``all cars not licensed in the State of 
Maryland exit immediately. Congestion ahead. Beltway reserved 
for Marylanders.'' We would not stand for that. And yet that is 
possible now on the transmission grid.
    Some States believe that they can reserve the transmission 
grid for bundled transactions and give them a higher priority. 
And I believe that all transmission ought to be subject to the 
same set of rules. So I would encourage Congress to act. If I 
knew which way the Supreme Court would come out, I might state 
a different answer, but I would encourage Congress to act and 
to provide that we must exercise jurisdiction over all 
transmission.
    Mr. Boucher. Yes. Ms. Breathitt, please. Thank you, Mr. 
Massey. Ms. Breathitt.
    Ms. Breathitt. I think the Supreme Court is going to rule, 
as you said, fairly quickly. And you also mention that you may 
only be in session a few more weeks, if you adjourn in the 
October timeframe.
    Mr. Boucher. I wouldn't count on that.
    Ms. Breathitt. Well, I would see no harm in--you know, I 
think it is going to be difficult getting energy legislation 
through in a short timeframe. I don't see any harm in waiting 
for the Court.
    On the issue of bundled sales over interstate transmission, 
I think I have testified as long as a year ago that I am in 
favor of full authority over interstate transmission. I think 
there is a way to make sure that native load is handled through 
firm transmission contracts and, quite frankly, utilities 
making sure that they have access to the right amount of 
generation, whether they own it still in vertically integrated 
utilities, or whether they contract for it. So I think there is 
a way to take care of native load.
    Mr. Boucher. Okay. Ms. Brownell.
    Ms. Brownell. I would certainly like to add I certainly 
agree with my colleagues. And I think that if you address this 
issue--and I would not wait for the Supreme Court--respectfully 
to the Supreme Court. I think we have to move forward. But I 
think that clarity on this issue might resolve some of the 
jurisdictional warfare that seems to be, I think, confusing the 
debate and might move us forward on some other issues.
    I don't think you can have multiple masters. I think that 
authority has to be clear. There are other issues that require 
new regional compacts and regional structures that we do need 
to work out with the States, but I think it would help out 
everyone if you moved swiftly and clearly.
    Mr. Boucher. Thank you very much.
    I want to thank each of you for those cogent answers, and 
we will certainly consider your advice.
    Thank you, Mr. Chairman.
    Mr. Barton. Before we yield to Mr. Shimkus, I just--
editorially, you know, the Constitution gives the Congress, I 
think, supremacy over the Supreme Court when we choose to do 
that. And I am often un persuaded by the sagacity of the 
Supreme Court's arguments, so I am willing to tread on that 
ground if we have time to tread.
    The gentleman from Illinois is recognized for 5 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman.
    I do appreciate the commissioners' presence, and I think we 
have had a good discussion. It has helped focus back on some of 
the work that we have to do.
    Mr. Massey, Commissioner Massey, you mentioned in your 
testimony--and I am going to use this to lead into some other 
questions. I am from Illinois, so I have a lot of commodity 
products. I have corn, soybeans and the like. And in your 
testimony you mentioned that, you know, electricity is one of 
the few commodity products that you use the product and then 
you find out how much you are charged. Can we ever change that? 
Is there a way to know what we are purchasing and have four 
contracts like we do in corn and soybeans? I know the big 
consumers may get an opportunity to do that. But will we as 
individual consumers have an opportunity to do that?
    Mr. Massey. Someday, yes. I think the technology is 
emerging to do that. Clearly, the large consumers can do that 
now. I think the key is for a significant number of consumers, 
perhaps the larger ones, to be able to see the price in real 
time and respond accordingly.
    Frankly, I think that if we get markets designed 
appropriately, there will be wholesale aggregators of demand 
reduction that will aggregate demand reduction offers and bid 
megawatts into the market. I believe a megawatt of energy not 
produced is just as valuable as a megawatt.
    Mr. Shimkus. Yes, we had some of those megawatt debates a 
few short months ago.
    I want to go back again, Commissioner Massey, on your 
analogy of the interstate highway system. But isn't the debate 
that the chairman had mentioned earlier, isn't it more like the 
PJM pool where it is just like across State lines--highly 
charged transmission grid out there and it is already across 
the State lines? And we are drawing out of that. We are--the 
consumers are drawing out of that pool of electrons that are 
floating around in the transmission grid. How do we deal with 
the debate if my friends in the co-ops and munis that they are 
not part of that interstate grid of highly charged particles 
that are across State lines?
    We can go to everyone. We will give you a chance to answer 
that.
    Mr. Massey. Well, I think they are part of it--at least, in 
terms of physical flows. They aren't legally, because they are 
not subject directly to the same set of open-access rules as 
the investor-owned utilities are. Roughly a third of the grid 
is not subject to those rules. So there is a patchwork that 
makes it much more difficult to get the market rules right.
    I would encourage Congress to resolve that problem, because 
certainly they are a part of the physical flows right now. We 
just don't have direct authority to require their transmission 
assets to comply with the same set of rules that the assets of 
the investor-owned comply with.
    Mr. Shimkus. Anyone else want to add? I know it hasn't been 
addressed. We have all kind of dodged that issue. But it is not 
an issue that we as individual members will be dodging once we 
talk to our friends from these--our communities.
    Ms. Brownell. Well, I don't think any of us want to dodge 
it. I have spent a lot of time in Pennsylvania and since I have 
been here talking to the co-ops, and they have very specific 
concerns. But I think if some of those concerns could be 
addressed vis-a-vis protections for them that I think they 
would be willing to work with us because I think they do 
understand that we can't have this patchwork and they are part 
of the whole.
    In Pennsylvania in our experience we did not regulate the 
co-ops; and we certainly did not order them, for example, to 
retail competition. But we worked so closely with them that in 
the end they wanted to follow the rules that we set up for the 
market and did and joined us, and we worked with them to make 
sure that it worked and to make sure that their consumers were 
afforded the same protections that others were.
    So I think this is something that we can, by listening and 
being very specific about what their needs are, I think we can 
address them in other ways. Because it is important that 
everyone be part of the whole in order for this national grid 
to work.
    Mr. Shimkus. Let me jump in and we can continue with this 
same answer, but I want to--two things just popped into my 
mind. Also with the exclusion of co-ops and munis is the 
inability to incentivize or to penalize. And incentivize the 
aspect of, if we are going to have an expansion of the grid, 
how do we develop a system by which there is a return on 
investment to the IOUs or the RTO to expand the grid? Where is 
the capital to do that to begin with?
    So I mean I think that is part of the other debate on this 
national network, penalize and incentivize, and if we can 
continue down or whoever wants to jump in--my time has expired 
so after this, Mr. Chairman, I will just yield back my time 
after the answers.
    Mr. Barton. We let both the chairman and the ranking member 
take a little extra time, so if you want a little extra time 
you can, and we will give Mr. Wynn extra time, too.
    Mr. Shimkus. Then I will just finish up by seeing if 
anybody wants to respond to those questions.
    Mr. Wood. I think that the current state of play for RTOs 
is pretty attractive to parties that are smaller, even smaller 
IOUs that are required to do it. Co-ops and munis are 
advantaged by a large and vibrant wholesale market. A lot of 
them don't generate 100 percent of the power that their 
customers need, so they have to go out on the market and buy 
it. So if there is a robust electric highway out there to drive 
on to go get power and bring it back home, that is good for the 
customers of the co-op and the muni.
    So my experience not only in Texas but to date here in the 
Commission has been that the transmission-dependent utilities, 
again, a large number of which are public power entities, like 
RTOs and support them and see the advantages of wholesale 
markets working right for their own customers. So I think the 
incentives are there. When you have got good juicy carrots, you 
don't need so many sticks; and I think the carrots are really 
juicy for this particular segment of the industry.
    The ones that it is not so juicy for are large, that are 
self-reliant on their own generation, so they don't need power 
from the outside. They don't need to use the grid of everybody 
else to get power. So they are a harder group to work with. But 
there are other virtues that they see to RTOs that bring them 
to the party.
    So it might be better to ask them directly, but I 
personally have not seen that that segment and that hole in-
the-grid regulation authority of the FERC is that big a deal. 
So while it might make good legal sense as a practical matter, 
getting these things set up to deliver the benefits that we 
know in fact are in the business of trying to quantify so 
people really do understand that RTOs are good. But that is a 
job we have to do.
    We have to make it evident to you and all and to the public 
that these are better than the world we are leaving behind, not 
just for the competition issues but for the reliability and 
security issues we were talking about today. They deliver good 
benefits to customers. I think that case is what we will be 
making over the months to come at the FERC to you and to the 
public, because the public needs to be confident about this. 
You all need to be confident about this. But the co-ops are one 
part of the public that I hope and believe will see the 
advantages if they haven't already.
    Ms. Breathitt. Congressman, one quick comment. As 
municipals and cooperatives compete for transmission rights 
with everybody else, if their former provider is no longer able 
to do that, they are telling me that they need to be able to 
get firm transmission rights in order to serve their load and 
in that--they see that as a problem.
    Mr. Shimkus. Thank you, Mr. Chairman. I yield back my time.
    Mr. Barton. We will put the new chairman down as a big 
juicy carrot guy, as opposed to a big stick guy.
    Mr. Wood. Oh, I know a few sticks as well.
    Mr. Barton. Oh, okay.
    The gentleman from Maryland, Mr. Wynn, is recognized for 5 
minutes.
    Mr. Wynn. Thank you, Mr. Chairman.
    Mr. Wood, let me--excuse me, Commissioner Wood, I would 
like to apologize if I missed your testimony earlier on this 
subject. But could you explain to me exactly what is the basis 
for your contention that FERC has authority to mandate RTOs? It 
is stated in your testimony somewhat as a conclusion, but I 
would like a reference as to exactly what the authority is.
    Mr. Wood. Yes, sir. It would be section 206 of the Federal 
Power Act.
    Mr. Wynn. 1935?
    Mr. Wood. Yes, sir.
    Mr. Wynn. And would you kind of----
    Mr. Wood. Summarize? The Commission, on its own motion, if 
it observes that any rule, regulation or practice of a public 
utility is unjust, unreasonable, unduly discriminatory, it is 
really the discriminatory or preferential, we shall establish 
that after the hearing and order and do so----
    Mr. Wynn. Okay. So you had----
    Mr. Wood. [continuing] which we have not proposed to do at 
this time.
    Mr. Wynn. Okay. Well, that was my next question. If the 
contention is it is somehow discriminatory conduct in the 
northeastern region, was there ever a hearing on this?
    Mr. Wood. We have not--as I mentioned, we have not had a 
hearing, and we have not mandated that all the utilities up 
there form an RTO. They have come before, they have joined with 
strong encouragement from the Commission in an RTO voluntarily, 
and were asked to mediate, joining their own organizations 
together so that we can have a more regional approach to that. 
But, so far, we have not done a section 206 hearing.
    Mr. Wynn. But, actually, you ordered mediation, literally 
forcing them into this, or the litigation which I believe is 
pursued.
    Mr. Wood. Well, I would just say procedurally ordering 
someone into mediation does not come into the conclusion that 
we are going to 206 hearing. We have got a report back from the 
mediator just about 2 days ago which I have not reviewed at 
this point. So we will see at that point if we need to go 
forward in a different manner. But----
    Mr. Wynn. In the absence of a full-blown hearing, 
evidentiary hearing, what is the basis for concluding that or 
justifying this mediation order?
    Mr. Wood. As you pointed out in your question I believe 
earlier, sir, or opening statement and as I responded to Mr. 
Barton a moment ago, the seams issues, which was the word for 
the Tower of Babel. We have got PJM, for example, of which I 
believe Maryland is a part----
    Mr. Wynn. Yes, that is correct.
    Mr. Wood. [continuing] is right next door to the New York 
independent system operator, which is one the three power grids 
that we were saying talk to each other and see what you can do 
to get to one.
    On a given day in the summer, because the rules are 
different between the two power grids, some are more--the New 
York grid is a little more positive for generators on one side 
and negative for generators, depending on the state of play, 
people would take their power out of the PJM grid to sell into 
New York, rather than just treat it as a seamless grid because 
the rules are different there, being arbitraged. And that is 
clearly not in the public interest. So what do we do about it?
    Mr. Wynn. Now you said--I understand you are kind of 
speaking broadly. But where are those examples or anecdotes 
cited?
    Mr. Wood. We have had orders before the Commission just in 
my short term here, sir. We have had several instances where--
just dealing with the border between New York and PJM. In fact, 
there is one I was reading as recently as last night. There are 
tons of what I call border issues there, and those are what we 
call seams.
    Mr. Wynn. Could you forward those?
    Mr. Wood. Yes, sir, I would be glad to.
    Mr. Wynn. The other issue is, you suggest that--you imply 
that probably you don't have the authority, because you ask 
Congress to clarify the authority. That is on page 4 of your 
testimony, acknowledging that there is literally 4 years worth 
of litigation pending and in order to avert this Congress ought 
to make clear, which implies that it is not clear that you have 
this authority.
    Mr. Wood. It is clear to me. It is not clear to some 
parties. And all it takes is one person to sue us to tie this 
up in court. And, yes, sir, in that regard I probably should 
have been clearer in my testimony. But at the bottom of page 3 
I do say that although we have decided to go forward 
voluntarily on a volunteer basis we can go further and require 
them. And then at this point I point out that some parties may 
not agree with that.
    Mr. Wynn. Okay. So you think there may be room for 
clarification.
    Just one quick question. It is my understanding that PJM 
has significant reserves, about 19 percent, and in New York it 
is substantially lower. Is that correct?
    Mr. Wood. I believe that is--I am not sure about the 
numbers, but I know that PJM is in better shape than is New 
York. New England I think is in better shape than New York. So 
the two bookends are in better shape than the book.
    Mr. Wynn. So the bookends would be disadvantaged, 
theoretically at least, through the merger merging with a less 
successful or a less well-managed center section. Isn't that 
true?
    Mr. Wood. Well, disadvantaged, I guess.
    Mr. Wynn. Our reserves would be less if we merge with an 
independent that is operated----
    Mr. Wood. One that is lower, that is true. But I think----
    Mr. Wynn. That would jeopardize the citizens of Maryland 
who really have done no wrong in this case.
    Mr. Wood. Well, I don't agree. I mean, I think that 
economic sale there that is now available to somebody that is a 
tax-paying citizen of Maryland can now sell power more easily 
to New York and bring revenue back to the State. So I think the 
reserve margin may go down but then that may also result in 
more investment in power plants in the region generally.
    Mr. Wynn. Well, a lower reserve margin doesn't seem to me 
to be a good thing. It certainly has not been a good thing in 
California and has led to forcing people to spot markets and 
other things, generally resulting in higher price to the 
consumer, which is why I am kind of pursuing this because I 
don't see this as advantageous to Maryland. It may be 
advantageous to New York. Obviously, there is a difference of 
opinion here.
    I think my time is up, and I won't belabor the point. Thank 
you, sir. I relinquish what little time I have.
    Mr. Barton. Everybody else has taken another time. If you 
want to ask another question or two, you have got that 
opportunity.
    Mr. Wynn. Well, thank you, Mr. Chairman. I appreciate that. 
I think I have really covered this ground. Thank you, 
Commissioner.
    Mr. Barton. The Chair would recognize himself for the 
second 5-minute round.
    I want to in a similar vein kind of piggyback on 
Congressman Wynn. In our bill that passed the subcommittee in 
the last Congress, we took the NERC reliability proposal and 
put it in the statutory language in the bill. The bill never 
became law. We are going to release a draft in the very near 
future, and at the request of the administration, or at least 
some people working with the administration, we are not being 
quite as prescriptive. We are basically giving the FERC the 
authority to come up with some reliability standards subject to 
certain terms and conditions, but we are not taking verbatim 
the NERC proposal that we had in the bill last time.
    Without having that opportunity to see the draft, does the 
Commission think that we should continue to be prescriptive 
like in 2944? Or do you think it might be more appropriate in 
light of what has happened in the last 2 years to give the FERC 
a little more flexibility on reliability issues? And that is a 
pretty hypothetical question.
    Mr. Wood. Well, it is pretty easy to answer.
    On the top of page 12 of my testimony I mention that a 
corresponding issue was dealt with by then Governor Bush and 
the Texas legislation with one sentence. So I think it is 
substantially shorter than the draft that I have seen or the 
bill that was passed before. You can make it pretty clear that 
Congress wants the Commission or its designee to enforce 
reliability standards and have the authority, as I believe the 
bill talked about, have the authority over a lot of other 
things other than the ones we have now, have authority to 
either penalize or yank certificates of people who aren't 
playing by the rules.
    And this is a governmental function. I think that there is 
no way around that, that the enforcement or police side of what 
we do probably should not be delegated to a private or quasi 
public organization.
    Mr. Barton. Any of the other commissioners wish to comment 
on that?
    Ms. Brownell. I absolutely agree with Pat. I would also 
point out, and I think you were getting there, is that we are 
in a different place now than we were 2 years ago. I think the 
vision of perhaps responsibilities of the RTOs has changed. We 
have learned a great deal about market structure and what kinds 
of responsibilities are required to make it work. And I think 
that, while it might have been appropriate 2 years ago, it is 
no longer appropriate. In fact, I am advised that a number of 
the members of the coalition that endorsed that have, in light 
of changes, actually changed their mind.
    I also think it is very important to remember the 
distinction between what a governmental authority and what we 
do delegate to what I sometimes call the fourth branch of 
government, which is in my mind is not a great public policy.
    Mr. Massey. Mr. Chairman, my view is the answer is probably 
somewhere in between one sentence and 56 pages or whatever it 
is. I know that there is some concern that Congress needs to 
grant through legislation a measure of antitrust protection if 
a bunch of utility representatives are going to get together 
and come up with reliability standards that are mandatory 
because they will have a commercial impact. So I know that 
concern exists; and a one-sentence provision might not solve 
that problem. There may be other nits and gnats that need to be 
worked out. So my answer is somewhat different than my 
colleagues.
    Mr. Barton. Okay. We spent most of the spring trying to put 
together a bill to help California help itself, which was an 
almost impossible task as it turned out. But we did move a bill 
through subcommittee. We didn't move it through full committee. 
As it turned out, God helped California because the weather was 
pretty mild. But apparently the FERC commission also helped 
California, so I am going to give you all an opportunity to pat 
yourselves on the back, if you wish to.
    What did y'all do at the Commission--and, of course, part 
of the time Commissioner Hebert was chairman and we didn't have 
Mr. Wood and Mrs. Brownell. That calmed things down out there. 
Because apparently they are not out of the woods yet, but they 
are at least moving in the right direction. So give y'all a 
chance to comment on what has happened in California that you 
feel like the FERC can take credit for doing a good job.
    Ms. Breathitt. I think a major factor was eliminating the 
tariff that forced 100 percent of the entire load of California 
to be bought and sold in the spot market. I think that has not 
gotten as much notice as it deserves, but eliminating, just 
eliminating the tariff that allowed that, which forced sales to 
be bought and sold with a more fixed price was a huge factor. 
And of course, later, price mitigation plans I think were a 
huge factor. The ability to monitor outages, the mandatory sell 
arrangement for any megawatts that weren't already committed 
into long-term contracts was very important. So there were a 
number of things that the Commission did that have not gotten 
the recognition and notice that they deserved.
    Mr. Barton. Well, you do a good job. You are seldom 
recognized.
    Ms. Breathitt. Over 60 orders.
    Mr. Barton. When you do a bad job you are always 
recognized. That is just one of the rules in Washington. The 
fact that we haven't seen you folks in the headlines means you 
are doing a pretty good job.
    Ms. Breathitt. And I agree it was a factor of weather and 
conservation. But certainly those 60 orders which fed on each 
other over a number of--7 months certainly had an impact.
    Mr. Barton. Okay. Mr. Massey, you were a big player in 
that. Do you want to comment?
    Mr. Massey. I think Commissioner Breathitt has summarized 
it very well, Mr. Chairman.
    Mr. Barton. Okay. The gentleman from Virginia is recognized 
for 5 minutes.
    Mr. Boucher. Thank you, Mr. Chairman.
    One of the more far-reaching recommendations that the 
administration made in its energy strategy submitted to us 
earlier this year is that your Commission be given the same 
kind of authority to site electricity transmission lines that 
you currently have with regard to the siting of natural gas 
transmission lines. That at the end of the process, if there 
are delays in the States of exercising their authority to site 
the transmission lines, that you would be able to implement an 
eminent domain authority and make the final decision and be 
sure that the line be sited.
    I will confess to a certain amount of reservation about 
this recommendation. I would like for those of you who support 
this recommendation to tell me why you do and why it is 
necessary. And if there are those among you who oppose the 
recommendation or have some equivocal view with regard to it I 
would like to hear from you, also.
    To the extent that you support this recommendation, I would 
very much like to have some real examples of problems that have 
arisen and the siting of transmission lines under existing 
State authorities that would merit this rather dramatic shift 
of authority in this sensitive matter to your Commission. These 
recommendations are proposed at the State level. The 
environmental community is very concerned about this. There is 
a quantitative difference between siting electricity 
transmission lines and natural gas transmission lines when it 
comes to the effect that these lines have on the environment. 
So it is truly a major proposal, one I think we have to 
consider carefully; and I would like to have your views and 
particularly examples of why this may be necessary.
    Mr. Wood.
    Mr. Wood. Mr. Boucher, I would acknowledge that this 
proposal certainly makes the transmission, 888, States rights 
and Federal rights issues kind of minor by comparison. The 
human side of me said that is why I left the last job, was to 
get away from that. It was the worst part of being a State 
regulator, and I am amazed that States continue to fight for 
it.
    But as far as, you know, the bigger picture, it is a turf 
issue. That is understandable. The citizens generally want to 
be heard by somebody that is closest to them, so that involves 
local and State people.
    So I think certainly from the discussions that I have 
either been part of or heard about within the administration 
and then the Commission that this is something to approach 
pretty delicately and actually probably pretty restrictedly for 
a small universe of lines that really are a national 
significant impediment to competition type of lines. There are 
a number of different ways to go from a ``we site everything 
from the transmission like a hundred feet through your 
backyard'' to ``we do absolutely nothing whatsoever.'' In 
between there a lot of places to rest, and I could spend all 
day giving you different places to do that.
    I would be more than happy, if the committee is interested, 
to gin up some examples of proper ways to land on that issue to 
try to balance the national needs and the local needs.
    As to examples, I have asked the same question myself 
because I have walked in the shoes of the people that are being 
complained about, not being able to make decisions, and the 
list is relatively short. The list that I have seen, actually 
all ended up getting resolved, one of them after 13 years, I 
should say, and I believe involves your own home State.
    Mr. Boucher. That one is not quite resolved yet. It is on 
its way to being resolved. And it hasn't been quite 13 years. 
Maybe 11.
    Mr. Wood. All right. I knew it was a double digit.
    Mr. Boucher. It has been a while.
    Mr. Wood. It has. That is 1 of 7, Mr. Boucher, that I have 
seen on the list from the industry when I have asked for it.
    Mr. Boucher. Is that the worst example, by the way?
    Mr. Wood. It depends what your definition of worst is. 
Length of time, that is probably it.
    Again, the question sometimes is what never got filed in 
the first place because they knew there would be no way. To 
which my response is, well, if you knew there would be no way, 
then there is probably a reason why it shouldn't be built.
    But the world has changed just in the last 10 years. The 
need for a national highway, if you had told somebody in the 
mid-1940's about the interstate highway system, they would have 
said, well, we don't need that so why on the earth does the 
Federal Government get involved? But we have moved now to an 
interstate highway system, whether we know it or not; and I 
think that and that alone is really what is invoking the need 
to talk about this issue.
    Mr. Boucher. If you have a list----
    Mr. Wood. I will get that for you.
    Mr. Boucher. [continuing] that cites these examples, I 
really would like to see that.
    Mr. Wood. It was instructive. But in the litany of things 
that are, you know, must have today, I would not put that on 
the list. I would--you are asking me as Uncle Santa Claus what 
do I want or what do we need for the good of the public----
    Mr. Boucher. Well, I have had two reassuring answers here 
coming in both ears, and I thank you.
    Mr. Wood. With the same twang.
    Mr. Boucher. Let me offer other commissioners an 
opportunity to comment on this.
    Ms. Brownell. I agree with Pat. It is a tough issue. I have 
done stranded costs, and I don't necessarily want to do siting. 
But I do think it is an issue that we need to understand.
    It was interesting to be with the Western Governors 
Association this summer and watch them grapple with this issue, 
and it was pretty clear to me that they recognized that it is 
not just a State issue, that it is a regional issue. Ideally, I 
think we need to look at some new regional structures, perhaps 
to make these decisions and make recommendations, and perhaps 
it is regional Governors who have an overriding look at 
economic development issues.
    But I think you have to consider very strongly that the 
reason you don't have lots of examples is because many State 
commissions have sent very clear messages just not to come 
calling. In Pennsylvania, the last time we had a transmission 
siting application, and I wasn't there, but I am told that we 
had 900,000 comments in a State of 12 million people. That is a 
lot of attention and very difficult to deal with the political 
pressures and really look at the larger picture.
    So somehow we have to get into the next generation of this 
answer, and we have to be able to answer the question of the 
environmental impact.
    But, once again, with real markets, there are also the 
introduction of new technologies that might address some of 
these issues, but we will never see them unless we get moving 
on the larger picture.
    Mr. Boucher. What kind of new technologies? I am curious.
    Ms. Brownell. I think that there are some potential out 
there to enhance existing transmission that may address some of 
the constraint issues.
    And, by the way, I forgot to mention that DOE is doing a 
study. We are taking a look at transmission constraints where 
they are and getting a better handle of what the cost is, and 
we might be doing a cost-benefit analysis longer term to say 
the price of building this transmission is X and the mitigation 
is Y, but the cost of not doing anything is thus. The Governor 
of Nevada feels quite strongly about that kind of look, and he 
is feeling that impact.
    So I think we are making progress. I wouldn't necessarily 
act tomorrow, but we should not take this off the table and 
wait for a long period of time to address the issue.
    Mr. Boucher. Okay. Mr. Massey.
    Mr. Massey. Mr. Boucher, if I could just put the issue in 
context. If there is congestion on the system that needs to be 
resolved in some way, there are three ways to do it.
    Way No. 1 is a demand reduction, which we all need to be 
working on. You can free up transmission facilities by reducing 
demand, which is the environmentalists' favored approach, of 
course, and it is a good approach.
    No. 2 is to site a generator which can change the flows and 
eliminate the congestion. So transmission investment is not 
always the answer, but sometimes it is. And when it is, it is 
not always laying a wire. There is a new technology, the 
F.A.C.T.S. technology, called a thyrister which is, as I 
understand, a computer chip that allows the lines to be loaded 
with much more confidence. So a line now that is loaded in a 
way that doesn't use all of its capacity could be loaded much 
more up to capacity because of confidence that this computer 
chip can control the flows.
    But when a wire is necessary, the problem is FERC can 
determine that certain facilities are necessary for interstate 
markets to work well, but we cannot ensure that those 
facilities are built. Now there is something about that that 
doesn't make sense. You can have facilities that had to be 
built in a certain State, and yet the argument that the 
facilities would benefit that State may be a weak argument. But 
everyone knows the facility would benefit the broad regional 
market as a whole and benefit other States. So it is very, very 
hard for that particular State to site those facilities. This 
is a problem that has to be solved if markets are going to 
work. Perhaps Federal backstop authority would work. We don't 
have to do all the environmental work. Perhaps working with the 
States to solve this problem. But I am convinced that it is a 
very serious problem that has to be solved.
    Mr. Boucher. Well, those are helpful answers.
    Ms. Breathitt. Very quickly. When we came before you 2 or 3 
times in the last 6 months, we all learned that California had 
not built power plants for 10 years. I think the evidence that 
you are asking for is pretty clear to me. Transmission 
infrastructure is not being built. I don't want to see the same 
wake-up call that we all faced with respect to California with 
getting more and more of what we call transmission loading 
relief calls throughout the country. So it is not being built. 
That is pretty good evidence.
    Mr. Boucher. But in all fairness now, aren't there a number 
of reasons that we are not having an adequate investment in 
transmission infrastructure, which are rate of return issues to 
the utility itself? Has nothing to do with siting concerns?
    Ms. Breathitt. It is applications that just aren't being 
put forth to siting boards, but the return issue and the 
uncertainty of whether or not there is going to be adequate 
return on this investment.
    Mr. Boucher. Well, thank you. Those are helpful answers and 
let me just take the opportunity to express our appreciation 
for your spending as much time as you have with us today.
    Mr. Barton. This will be a final question and I will let 
you all go, I promise. We are probably going to be asked by the 
administration in the next week to really work to get the 
energy package that is already out of the House, if something 
similar gets out of the Senate, to go to conference and move 
that before we adjourn, if we adjourn, in mid October.
    I thought we would be in session until mid November or 
maybe even early December, so I could go through the normal 
process on the electricity and then put out a draft and then 
change it then maybe put out a second draft and then change it 
and then go to markup, subcommittee, full committee and have it 
ready to go to the floor. That may not be possible if--so, you 
all deal with these electricity issues everyday. If the 
President wanted to push the Congress on an energy package on 
his desk by mid October and if the President decides that 
electricity should be a component of that, do you feel like 
that the issues that are still not a consensus are close enough 
to consensus that if we work together, administration and 
legislatively and bipartisanly, that we can forge a consensus 
in the next 3 weeks? Is that possible? That is a real question. 
That is not rhetorical. I want to hear what you all think about 
it.
    Mr. Wood. Well, we haven't met as a body since I have taken 
over as Chair, but I hope we would provide some incentives in 
the near future so that the settlement would happen down here. 
So the ground is fertile for people to come together with at 
least knowledge of what the alternative would be. So we will do 
our best on the fronts that are in our pocket to provide some 
clarity as soon as we can. Now 3 weeks is pretty tight. I think 
to be straight up, the bill you all passed before the last 
break, the tax provisions in that for both public power and 
IOUs participating in RTOs, if enacted, will make anything we 
need to do on RTOs a moot point. I think we will have instant 
migration to RTOs and a very fast forwarding of that agenda.
    Mr. Barton. You are saying that we are closer to consensus 
than some of the parties are telling us now?
    Mr. Wood. Carrots, even if they are sticks painted orange, 
they tend to work a whole lot better than just thou shalts.
    Mr. Barton. I like them to be maroon, but that is a 
personal preference.
    Mr. Wood. Maroon is good. The steps you took that 
facilitated that decision certainly came out of the House on a 
pretty strong vote. I would say that is an important provision. 
And I know that the fiscal tag on that was not in the scope we 
are talking about around this town the last couple of weeks. So 
I--that is just one observation of what may be one of the most 
prickly issues from our earlier discussions, Chairman Barton, 
is the RTO issue. The siting issue has a life of its own, and 
certainly maybe if the tax provisions handle the RTO issue, 
then we do talk about siting.
    Mr. Barton. The other commissioners?
    Mr. Wood. PURPA and PUHCA, and that requires a statutory 
change.
    Mr. Barton. We can do statutory changes. That is what we 
are all about.
    Ms. Breathitt. Public power being scrambling for generation 
resources and transmission resources is huge. There needs to 
be, I think, more discussion of how to get over those hurdles 
and also State commissions need to be, I think, very much 
involved in how we move forward with RTOs and the eminent 
domain question on transmission siting.
    Mr. Barton. Ms. Brownell.
    Ms. Brownell. I think if we can get done in the next couple 
of weeks, what we intend to do at the FERC, and you and the 
administration send a strong message that you are determined to 
get this done, and that it is critically important to get this 
done, I think we will achieve some kind of consensus. But 
understanding that you are dealing with as you know better than 
I, very big competing agendas. So perfect consensus? It is not 
a perfect world. I don't think we will ever get it. But I think 
we can get enough there and provide the carrots--I am more of a 
stick person myself--to make it happen. So would it be tough? 
Yes. Can we do it? Absolutely.
    Mr. Massey. Mr. Chairman, I wouldn't minimize the task that 
you have before you, but I would note that Mr. Blake seemed to 
endorse the bulk of the Bingaman legislation. So if you use 
that as a starting place, I think a lot of the disagreement 
goes away. And if there is a common agreement that the goal is 
large vibrant, robust, wholesale power markets based upon the 
RTO platform, I think a lot of the disagreement melts away.
    Mr. Barton. Well, I want to thank the Commission for taking 
out of a very trying time to come over and testify before the 
subcommittee. It is my intention to work out some final details 
of the proposed draft and let the minority look at that as 
quickly as possible tomorrow. And if that is done in a 
satisfactory way, it is a possibility we could release the 
draft for public review late tomorrow, and if not, sometime 
early next week. So we are adjourned and we do, again, thank 
the Commission for their attendance.
    [Whereupon, at 5:15 p.m., the subcommittee was adjourned.]
    [Additional materal submitted for the record follows:]

                                                      July 20, 2001
To: Members, Committee on Energy and Natural Resources
From: Jeff Bingaman, Chairman
Subject: White Paper on Electricity Legislation
                                summary
    There are many lessons that can be drawn from the recent and 
continuing electricity crisis in California and the West. The clearest 
one is that the market institutions that have developed are not 
adequate to the task. If we are to relieve the current problems in that 
region and prevent their appearance in other regions it is essential 
that the structural defects in the market be cured.
    The Federal Energy Regulatory Commission (FERC) and state 
regulators currently have some tools to relieve these problems. Many of 
the structural defects in the market, however, are either beyond the 
jurisdiction of either FERC or state regulators, or are intractable for 
other reasons, both political and economic.
    Congress has a clear duty to address this situation as part of 
comprehensive energy legislation. Our task must be to look at the 
economic foundations upon which this industry is based, to review the 
market institutions that are developing, and to assess the adequacy of 
the legal and regulatory institutions that are in place to ensure that 
these markets function properly. Such an assessment must lead to a 
legislative solution that will match the regulatory structure to the 
market institutions that they are intended to govern and give adequate 
authority to resolve market defects, without interfering unduly in 
those markets. This Committee has laid the foundation for much of this 
work in previous Congresses. We must now move forward with a 
legislative solution. To leave electricity legislation for another day 
would be to ensure that the problems faced now in the West will be 
replicated across the country.
    The business of supplying electricity has changed. So must the 
regulatory and legal framework within which it operates now change. 
Those changes must reflect the realities of the market. In order to 
understand how laws regulating electricity should be changed, it is 
necessary to understand why the system worked the way that it did, and 
what has changed to make it necessary to change the laws governing that 
system.
    This paper contains a short summary of the history of the industry 
and its legal structure, a discussion of the developments that 
necessitate the change of that legal structure, and an outline of the 
elements that I believe are essential to a legislative solution for 
electricity that is in the broad national interest.
    I plan to use this outline as a framework for my questions in our 
electricity hearings next week. I encourage you to provide me with your 
thoughts and suggestions on this outline and any other elements of 
electricity legislation that you believe should be treated in the 
comprehensive energy legislation we are about to mark up.
                            a brief history
    Electricity has been supplied in the U.S. by regulated monopolies 
for nearly a century. Vertically integrated utilities, with state-
granted monopoly franchises, have sold electricity that they generated, 
over wires that they own, to customers to whom they have the exclusive 
right to sell. The legal structure for regulation of this industry has 
been based on this framework, both at the federal and the state levels.
    The reason that the normal pattern of business--customer choice in 
a competitive market--has not been followed in the electric industry is 
because with the technologies that have been available, a monopoly 
could sell power more cheaply and efficiently than a multiplicity of 
competitors.
    Samuel Insull, Thomas Edison's personal secretary and founder of 
Commonwealth Edison in Chicago, developed some basic understandings at 
the beginning of the last century that set the mold for the sale of 
electricity. The multiplicity of suppliers in Chicago meant duplication 
of facilities that raised costs. Many suppliers, with separate sets of 
distribution wires, and separate small generators could not take 
advantage of the economies of scale that would result from allowing a 
single seller to serve the city. Insull convinced the city's leaders to 
grant him a monopoly to sell power. In return he would serve all 
customers and allow the city to set his rates, as long as they assured 
him of a reasonable return on his investment.
    Thus was born the regulatory compact that became the pattern for 
electric companies throughout the United States. States and cities 
granted monopoly franchises. Utilities developed their own generation 
resources, built distribution systems and sold electricity to their 
customers under these exclusive franchise rights. States developed 
public utility commissions to regulate rates.
    In the 1920s, this system began to get out of control. Large 
holding companies that owned many utilities developed. The regulatory 
systems developed to control the electric monopolies were soon unable 
to function adequately. Since corporate structures were so complicated, 
and holding companies operayed in many states, local or state public 
utility commissions were unable to keep track of revenues, which could 
be shifted from one company to another, or to a parent holding company 
in another state.
    To further complicate matters, it became clear that states did not 
have jurisdiction to control wholesale electricity transactions across 
state lines. The Supreme Court, in a case involving the sales from a 
Rhode Island utility to Attleboro Steam and Electric Company in 
Massachusetts, ruled that states could not regulate interstate sales of 
electricity.
    Abuses in the electric industry were rampant. Assets were shifted 
from state to state. Sales were unregulated. Stocks were peddled from 
door to door. A complex and mostly unseen structure of financing was 
funding the whole tottering structure. Retail customers, since they 
were captive customers of the franchise monopolies, had no protection 
from these abuses.
    When the Roosevelt administration came to power in 1933, among its 
first initiatives were responses to the abuses that had created the 
electricity debacle. In 1935, legislation was signed into law that was 
aimed at these problems. The Public Utilities Act of 1935 had two 
titles, the Public Utility Holding Company Act (PUHCA) and the Federal 
Power Act. The former was intended to deal with corporate structure 
abuses and the latter to regulate transactions in interstate commerce.
    PUHCA broke up the industry into manageable chunks and focused it 
on its core business--the provision of monopoly electricity service--by 
requiring utilities either to operate primarily in a single state or to 
be regulated stringently at the federal level by the Securities and 
Exchange Commission (SEC). Utilities were also forbidden to engage in 
businesses that were not directly related to their monopoly electric 
service without explicit approval by the SEC. The sprawling empires of 
interconnected corporations owning electric utilities were broken up. 
Companies were required to choose between their other businesses and 
the electric industry.
    The Federal Power Act gave the Federal Power Commission authority 
to regulate transmission of electricity in interstate commerce, 
wholesale rates for electricity, dispositions of utility assets--
primarily mergers--and certification of hydro-electric facilities. 
Government owned facilities were not subject to regulation. The 
Commission was explicitly denied jurisdiction over generation 
facilities and over distribution in intrastate commerce.
    With the passage of the Public Utilities Act, the framework for the 
sale of electricity was set. Regulated monopolies sold electricity to 
captive customers and were protected from monopoly abuse by an 
overlapping framework of regulation at the state and federal levels. 
Rates for electricity, both at the state level for retail sales and at 
the federal level for wholesale sales, were set by regulators and based 
on the costs to the utilities to build, maintain and operate 
generation, distribution and transmission facilities plus a reasonable 
return on investment. As technological developments furthered the 
economies of scale and scope on which this industry's efficiency 
depended, electric rates fell. In fact, electric rates, in real dollar 
terms, declined from the turn of the century until the late 1960s.
    In the late 1960s and early 1970s, however, things began to change. 
Utilities, which had seen steady rapid growth of demand throughout the 
first half of the century, built for a continuation of that level of 
demand growth. Plants grew larger and larger. It is certain that the 
oil crisis of the early seventies forced fuel prices up, causing 
reductions in demand. Reduced demand left utilities with excess 
capacity. Customers had to pay for that excess. For the first time in 
history, electricity prices began to rise. Many public utility 
commissions would not allow utilities to recover the cost of building 
excess capacity from their consumers.
    At about this time, technological developments began to change the 
underlying economics of the utility monopoly structure. The economies 
of scale and scope that had lead to the creation of utility monopolies 
began to change. Before this time large central station coal plants 
were the most efficient way to produce electricity. Natural gas 
generators had been expensive and inefficient. Development of new 
combustion turbines that burned natural gas far more efficiently and at 
the same time were far less expensive to build meant that small gas 
plants could compete with large coal plants. Technologies of 
transmission meant that electricity could be shipped for far greater 
distances than in the past. New switching technologies and 
computerization of the control systems meant that regional transmission 
grids were possible.
    The first legislative response to these technological and economic 
changes was the Public Utility Regulatory Policies Act of 1978 (PURPA). 
That law created the first non-utility generators. In order to 
encourage alternative generation resources, such as wind, solar, 
biomass and cogeneration, PURPA freed these types of generators from 
the restrictions of PUHCA and required utilities to buy electricity 
from them at rates equal to the cost avoided for the construction of 
new facilities, as determined by state regulators.
    The result was a fairly gradual change in the way new resources 
were acquired. From the middle of the 1980s through the middle of the 
1990s, over half of the new generation that came on line in the U.S. 
was from these non-utility generators. The wholesale electricity 
business was no longer the exclusive province of utility monopolies.
    In 1992, Congress, seeing the success of the non-monopoly 
generation sector, changed the law to further allow development of a 
competitive wholesale electricity industry. The Energy Policy Act of 
1992 (EPACT) exempted generators who sold exclusively at wholesale from 
PUHCA. It also gave FERC (the successor organization to the Federal 
Power Commission) the authority to require utilities to allow their 
competitors to use their transmission lines to sell electricity. For 
the first time ever, wholesale buyers of electricity could shop freely.
                          recent developments
    Changes since the passage of EPACT have been rapid and dramatic. 
Today utilities no longer build generation for their sales to their 
retail customers, but buy those supplies from the wholesale market. 
Some states have removed the restrictions that require retail 
monopolies, and allow their customers to pick their own generation 
suppliers. Other states have begun the process that will lead to 
dependence on competitive retail markets. Supplies of electricity 
depend to a greater degree than ever before on regional market 
institutions. Virtually all wholesale electric rates are based on the 
market, and not on cost of service.
    The FERC has implemented the changes in the law primarily through 
two major rules, Order No. 888 and Order No. 2000. Both orders deal 
with the transmission system and its uses for competitive sales of 
electricity. Order No. 888, issued in 1996, requires all jurisdictional 
owners of transmission to file tariffs stating the rates, terms and 
conditions for use of their transmission systems by others buyers and 
sellers. Those rates, terms and conditions must be comparable to those 
that the utility gives to itself and its affiliates. This order also 
encourages the development of independent system operators of the 
transmission system. Order No. 2000 extended this encouragement. This 
order required all jurisdictional utilities to file proposals to turn 
control of their transmission facilities over to independent regional 
transmission organizations (RTOs) or to explain why they were not doing 
so by January of 2001.
    All utilities have complied, but not all proposals have been found 
to be acceptable to the Commission. FERC has issued orders in many of 
the filings, either giving conditional approval, or rejecting the 
filings as not meeting the characteristic and functions of the Order.
    The thrust of these orders comes from the Commission's 
understanding that a competitive market that will produce just and 
reasonable rates for electricity cannot exist until the essential 
facilities for trade in electricity, i.e., the transmission system, is 
operated and controlled on a regional basis, and by entities who have 
no vested interest in outcomes in the generation market and so have no 
incentive to manipulate the use of the transmission system for the 
benefit of their generation affiliates.
    The transition to a competitive industry is well under way. 
However, not all has been smooth. The last few years have seen severe 
price spikes in the Midwest and South. There is a clear and pressing 
crisis in prices and supply in the West and particularly in California. 
The North American Electric Reliability Council reports that there may 
be problems with prices and supply in New York, New England and the 
Central South. They also report that there are serious transmission 
constraints that may threaten reliability and supply in the West and 
the Central South. The institutions on which the country now relies for 
delivery of affordable, dependable electricity service are showing the 
strain of adapting to the new market circumstances.
    a legislative proposal for the committee on energy and natural 
                               resources
    To meet the challenges of the new realities of electricity markets, 
Congress must make some important legislative changes. A balanced and 
comprehensive, rather than a piecemeal, solution is imperative. These 
changes that I believe are needed can be grouped under five primary 
headings: 1. Transmission Jurisdiction; 2. Reliability; 3. Rates and 
Market Power; 4. Regional Planning and Siting; 5. Market Transparency 
Rules. These provisions should be complemented by appropriate changes 
to the tax code to allow a transition to a modern transmission grid.
1. Transmission Jurisdiction
    Congress should clarify that FERC has jurisdiction over all 
transmission, whether bundled or unbundled. Once jurisdiction has been 
clarified, the Commission can use its existing legal authority 
determine which facilities are transmission in interstate commerce and 
which are distribution facilities and thus state jurisdictional.
    FERC jurisdiction should be extended to public, cooperative and 
federal utilities. Such jurisdiction should not extend to setting 
transmission rates for these entities, but should require that rates 
set by these transmitting utilities should be comparable to those that 
the public power utilities charge to themselves.
    Legislation should affirm FERC's authority to order utilities to 
join regional transmission organizations.
    Interconnection rules should be clarified in order to ensure that 
new sources of generation are able to interconnect to the transmission 
system.
2. Reliability
    Legislation should authorize a system for assuring the reliability 
of the grid that is mandatory, that requires sanctions and penalties 
for failure to comply with the rules that institutions for that purpose 
develop, and that is subject to federal oversight.
3. Rates and Market Power
    Legislation should require the FERC to promote competitive markets.
    Legislation could require FERC to, where markets are depended on to 
set rates, ensure that those markets are workably competitive. A 
slightly more prescriptive formulation could authorize the Commission 
to allow market-based rates for transactions that are entered into 
freely by participants in a workably competitive market, or rates that 
result from market institutions such as power exchanges or other bid 
mechanisms. Where such workably competitive markets do not exist, the 
Commission should take such actions as are otherwise consistent with 
its authority that it deems necessary to foster competition.
    All sellers into such markets should be clearly subject to market 
rules and market mitigation measures ordered by the Commission. It 
should be made clear that normal transactions, not into market-based-
rate setting institutions, by public power entities should continue to 
be non-jurisdictional.
    Legislation should also clarify that the Commission may take into 
account in assuring just and reasonable market-based rates the effect 
of demand response mechanisms on those rates.
4. Regional Planning and Siting
    A national transmission grid is a necessity, but cannot occur 
without a new approach to transmission planning, expansion, and siting. 
Federal eminent domain, by itself, is not likely to lead to an 
effective approach to meeting this need. What is needed is to use 
federal eminent domain as a backstop to a more cooperative, regionally 
based approach to transmission and siting issues.
    Legislation should authorize regional regulatory compacts that are 
charged with exercising jurisdiction over transmission planning, 
expansion and siting. In this context, it would be necessary to grant 
FERC siting authority, but allow it to cede such authority to 
appropriately constituted regional entities.
    A more extensive authority for regional entities would be to allow 
such bodies to exercise all or some jurisdiction previously exercised 
by states, but that, by reason of the regionality of markets, would be 
in danger of being preempted by the FERC. Such other authorities might 
include jurisdiction over regional reserve requirements, maintenance 
requirements and market monitoring functions.
    PUHCA protections should be replaced by giving FERC jurisdiction 
over mergers of holding companies that own utilities and over 
acquisitions of generation assets.
5. Market Transparency Rules
    Legislation must ensure transparent information on market 
transactions and should grant clear authority to the Energy Information 
Administration and the FERC to collect and publish appropriate data, 
while protecting proprietary information.
                            other provisions
    A balanced and comprehensive legislative solution should also:

 Repeal PUHCA, but only if FERC is given enhanced authority to 
        address market power problems, and both FERC and the states are 
        given greater access to the books and records of holding 
        companies to prevent affiliate abuses.
 Repeal PURPA's mandatory purchase requirements, but only if it 
        is replaced with provisions that remove disincentives for 
        renewables or make their place in the market less sure. Such 
        provisions should include clarification of energy imbalance 
        rules for intermittent generation; interconnection rules for 
        distributed generation; interconnection rules for combined heat 
        and power facilities; and standards to accommodate net metering 
        of renewable resources. Legislation must also develop a market 
        incentive structure to encourage the development of renewable 
        resources.
 Require that sellers of electricity provide adequate 
        information to customers to allow them to make reasonable 
        choices, including information about prices, alternatives, and 
        environmental characteristics of the generation being sold, to 
        the extent practicable. The Federal Trade Commission should 
        also be directed to develop rules to prevent such unfair trade 
        practices as slamming and cramming, and inappropriate 
        disclosure of consumer information.
 Provide for the continuation of programs that traditionally 
        have been borne by utilities through a Public Benefits Fund. 
        The fund should provide support for such programs as low income 
        assistance, research and development, efficiency and 
        conservation investment, renewable resource investment, 
        universal service, and other public good programs that are 
        being left behind by the transition to a competitive industry.
                             tax provisions
    Certain provisions of the tax code create a disincentive for 
participants in the market to engage in certain of the structural 
changes that are necessary. These provisions should be repealed. The 
tax code should be amended to allow utilities to spin transmission 
assets off into separate corporations and to remove tax restrictions on 
participation by public power utilities and cooperative utilities. 
While such provisions are not jurisdictional to this Committee, they 
represent an essential component of a functional electricity policy and 
should be pursued through the committees of jurisdiction.
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