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

                     AND WHERE DO WE GO FROM HERE?

                             JOINT HEARINGS

                               before the


                                and the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION


                       APRIL 10, 11 AND 12, 2001


                           Serial No. 107-28

       Printed for the use of the Committee on Government Reform

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

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                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia                    ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida                  DANNY K. DAVIS, Illinois
DOUG OSE, California                 JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky                  JIM TURNER, Texas
JO ANN DAVIS, Virginia               THOMAS H. ALLEN, Maine
DAVE WELDON, Florida                 WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   ------ ------
ADAM H. PUTNAM, Florida              ------ ------
C.L. ``BUTCH'' OTTER, Idaho                      ------
EDWARD L. SCHROCK, Virginia          BERNARD SANDERS, Vermont 
------ ------                            (Independent)

                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs

                     DOUG OSE, California, Chairman
C.L. ``BUTCH'' OTTER, Idaho          JOHN F. TIERNEY, Massachusetts
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEVEN C. LaTOURETTE, Ohio           PATSY T. MINK, Hawaii
CHRIS CANNON, Utah                   DENNIS J. KUCINICH, Ohio
------ ------                        ROD R. BLAGOJEVICH, Illinois
------ ------

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                       Dan Skopec, Staff Director
              Johnathan Tolman, Professional Staff Member
                        Regina McAllister, Clerk
        Elizabeth Mundinger, Minority Professional Staff Member

                            C O N T E N T S

Hearing held on:
    April 10, 1001...............................................     1
    April 11, 2001...............................................   239
    April 12, 2001...............................................   381
Statement of:
    Burton, Hon. Dan, a Representative in Congress from the State 
      of Indiana.................................................     3
    Davis, Hon. Susan A., a Representative in Congress from the 
      State of California........................................   378
    Filner, Hon. Bob, a Representative in Congress from the State 
      of California..............................................   375
    Hapner, Dede, vice president, regulatory relations, Pacific 
      Gas & Electric; Stephen Pickett, vice president and general 
      counsel, Southern California Edison; Dean Vanech, 
      president, Delta Power Co.; and Paul Desrochers, director 
      of fuel procurement, Thermo Ecotek.........................   299
    Hardage, Sam, president, Woodfin Suite Hotels, LLC; Bill 
      Horn, chairman, San Diego County Board of Supervisors; 
      Douglas Barnhart, president, Douglas E. Barnhart, Inc.; 
      Richard Thomas, vice president, Alpine Stained Glass; Mark 
      Seetin, vice president of governmental affairs, New York 
      Mercantile Exchange; and P. Gregory Conlon, former PUC 
      chairman...................................................   381
    Hebert, Curt, chairman, Federal Energy Regulatory Commission.   248
    Honda, Hon. Michael, a Representative in Congress from the 
      State of California........................................   245
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California........................................     5
    Hunter, Hon. Duncan, a Representative in Congress from the 
      State of California........................................   379
    Lee, Hon. Barbara, a Representative in Congress from the 
      State of California........................................   243
    Lofgren, Hon. Zoe, a Representative in Congress from the 
      State of California........................................   241
    Madden, Kevin P., general counsel, Federal Energy Regulatory 
      Commission; Fred John, senior vice president for external 
      affairs, Sempra Energy; Steve Malcolm, president, Williams 
      Energy Services; and John Stout, senior vice president for 
      asset commercialization, Reliant Energy....................   440
    Madden, Kevin P., general counsel, Federal Energy Regulatory 
      Commission; Loretta Lynch, president, California Public 
      Utilities Commission; Terry W. Winter, president and CEO, 
      California Independent System Operator; and Larry Makovich, 
      senior director, Cambridge Energy Research Associates......    39
    McDonald, J. William, Acting Commissioner, Bureau of 
      Reclamation; Brian Jobson, principal power contract 
      specialist, Sacramento Municipal Utility District; Becky 
      Dell Sheehan, associate counsel, California Farm Bureau 
      Federation; and Thomas Stokely, senior planner, Trinity 
      County Planning Department.................................   144
    Yates, Ed, senior vice president, California League of Food 
      Processors; Peter Verboom, Glenn County Dairyman; and Lewis 
      K. Uhler, president, the National Tax Limitation Committee.     6
Letters, statements, etc., submitted for the record by:
    Barnhart, Douglas, president, Douglas E. Barnhart, Inc., 
      prepared statement of......................................   394
    Burton, Hon. Dan, a Representative in Congress from the State 
      of Indiana, prepared statement of..........................   234
    Desrochers, Paul, director of fuel procurement, Thermo 
      Ecotek, prepared statement of..............................   332
    Hapner, Dede, vice president, regulatory relations, Pacific 
      Gas & Electric, prepared statement of......................   301
    Hardage, Sam, president, Woodfin Suite Hotels, LLC, prepared 
      statement of...............................................   384
    Hebert, Curt, chairman, Federal Energy Regulatory Commission, 
      prepared statement of......................................   250
    Honda, Hon. Michael, a Representative in Congress from the 
      State of California, prepared statement of.................   246
    Jobson, Brian, principal power contract specialist, 
      Sacramento Municipal Utility District, prepared statement 
      of.........................................................   162
    John, Fred, senior vice president for external affairs, 
      Sempra Energy, prepared statement of.......................   443
    Lee, Hon. Barbara, a Representative in Congress from the 
      State of California, prepared statement of.................   244
    Lofgren, Hon. Zoe, a Representative in Congress from the 
      State of California, prepared statement of.................   242
    Lynch, Loretta, president, California Public Utilities 
      Commission, prepared statement of..........................    73
    Madden, Kevin P., general counsel, Federal Energy Regulatory 
      Commission, prepared statement of..........................    42
    Makovich, Larry, senior director, Cambridge Energy Research 
      Associates, prepared statement of..........................    99
    Malcolm, Steve, president, Williams Energy Services, prepared 
      statement of...............................................   485
    McDonald, J. William, Acting Commissioner, Bureau of 
      Reclamation, prepared statement of.........................   148
    Pickett, Stephen, vice president and general counsel, 
      Southern California Edison, prepared statement of..........   311
    Seetin, Mark, vice president of governmental affairs, New 
      York Mercantile Exchange, prepared statement of............   409
    Sheehan, Becky Dell, associate counsel, California Farm 
      Bureau Federation, prepared statement of...................   169
    Stokely, Thomas, senior planner, Trinity County Planning 
      Department, prepared statement of..........................   175
    Thomas, Richard, vice president, Alpine Stained Glass, 
      prepared statement of......................................   401
    Uhler, Lewis K.,president, the National Tax Limitation 
      Committee, prepared statement of...........................    25
    Vanech, Dean, president, Delta Power Co.:
        Information concerning summary of net income.............   351
        Prepared statement of....................................   323
    Winter, Terry W., president and CEO, California Independent 
      System Operator, prepared statement of.....................    84
    Yates, Ed, senior vice president, California League of Food 
      Processors, prepared statement of..........................     8

                     AND WHERE DO WE GO FROM HERE?


                        TUESDAY, APRIL 10, 2001

                House of Representatives, ,
  Subcommittee on Energy Policy, Natural Resources 
                          and Regulatory Affairs, ,
                          Committee on Government Reform, ,
                                                    Sacramento, CA.
    The subcommittee met, pursuant to notice, at 11 a.m., in 
the Sacramento Convention Center, room 204, 1400 J Street, 
Sacramento, CA, Hon. Doug Ose (chairman of the subcommittee) 
    Present: Representatives Ose, Horn and Burton.
    Staff present: Dan Skopec, staff director; Jonathan Tolman, 
professional staff member; Regina McAllister, clerk; and 
Elizabeth Mundinger, minority professional staff member.
    Mr. Ose. Good morning. A quorum being present, the 
subcommittee will come to order. I ask unanimous consent that 
all Members' and witnesses' written opening statements be 
included in the record. Without objection, so ordered.
    I ask unanimous consent that all articles, exhibits, and 
other material referred to be included in the record. Without 
objection, so ordered.
    I ask unanimous consent that Members of Congress who are 
not members of the committee be allowed to participate in 
today's hearing. Without objection, that is agreed to.
    I ask unanimous consent that all questions submitted in 
writing to the witnesses, and their answers, be included in the 
hearing record. And, I ask unanimous consent that questioning 
in this matter proceed under clause 2(J)2 of House rule 11 and 
committee rule 14 in which the chairman and ranking minority 
member allocate time to members of the committee as they deem 
appropriate for extended questioning, not to exceed 60 minutes 
equally divided between the majority and the minority. Within 
objection, so ordered.
    I want to welcome everyone to the first of three hearings 
we will be holding on the California energy crisis. Judging by 
the turnout here today, I think we can safely say that this is 
a crisis that is on the mind of everyone in California and 
around the country. I am hopeful that these hearings will bring 
about an honest discussion of our problems, and produce some 
agreeable resolutions to this crisis. I especially want to 
thank Chairman Burton for allowing the committee the 
opportunity to conduct these hearings in California. Although 
Chairman Burton is from Indiana, I think we will find that 
resolving California's energy crisis is vital to the economic 
well being of the entire country.
    I also want to thank all of the other Members of Congress 
who made the journey to Sacramento, and, in particular, 
Chairman Horn from Long Beach. I look forward to your ideas and 
    The availability, reliability, and price of power are an 
integral part of our economic and social success. The converse 
of that statement is also true: An unavailable, unreliable, and 
expensive source of power will cause an economic and social 
crisis. And, to be sure, this is a crisis.
    Few public policy issues affect consumers as much as 
energy. Higher energy prices and the threat of blackouts affect 
all Californians. California consumers will be faced with 
higher energy prices that will cause real hardship to low 
income families and those living on fixed incomes. I am 
especially concerned about those who share a home with numerous 
extended family members. These families will be held to the 
same energy baseline use standards as a typical nuclear family, 
even though they could have two or three times as many people 
living under the same roof. Consumers will also pay more for 
products they purchase as businesses are forced to pass on 
higher energy costs to their consumers.
    I am deeply concerned that seniors living on fixed incomes 
will have to choose between air conditioning or costly 
medicines in the summertime, or heating in the winter. Either 
choice could be deadly.
    In addition, as a result of the crisis, consumers will pay 
more in the form of squandered surpluses, resulting in higher 
taxes and cuts in government programs, such as education, law 
enforcement, health care, and tax relief. And I just want to 
point out, the San Francisco Chronicle this morning had an 
article that listed the daily expenditures for anti-smoking, 
for an algebra education, and for the war on amphetamine on a 
comparative basis to what we are spending, unanticipatedly for 
    Businesses will also face increased costs as a result of 
this crisis. The cost of doing business in California is 
already very high relative to the surrounding States. I am 
fearful that high energy costs will drive more businesses out 
of California, because many of the small businesses here right 
now will be unable to pass on higher costs or relocate. The 
losses of good jobs and tax revenues because of the energy 
crisis are grave concerns for me. Intel Corp., for instance, 
has stated very clearly that it will no longer invest in 
California, citing an unfriendly business climate and 
uncertainty as to the supply of a reliable source of power.
    Let us also not forget that the California agricultural 
industry is being devastated by high natural gas prices, and 
must brace for massive increases in its electricity bill. As 
you know, most farmers operate on very tight margins. They 
simply will not be able to absorb the price hikes in both 
natural gas and electricity.
    Clearly, high energy prices will have a large, negative 
effect on the California economy, and could possibly drag the 
rest of the Nation into a recession. But, there is something 
even worse than high energy prices, and that is blackouts. Just 
last week, as reported by the L.A. Times, experts were 
predicting over 30 days of blackouts this summer, and where 
blackouts occur, disaster follows. Long-term blackouts this 
summer will endanger lives, especially for our seniors. We have 
already seen this happen in Chicago during the summer of 1998. 
People of fragile health, who live in the deserts and valleys 
of California, will be at extreme risk when the blackouts hit.
    Blackouts wreak havoc on businesses as well. Tomato farmers 
in the Third Congressional District tell me that if a 
processing plant is shut down due to a blackout, that is, power 
is cutoff without any explanation or anticipation, they lose 
the entire product that is being processed, and then have to 
shut down for days to clean and sanitize the plant.
    The same is true in Silicon Valley, where chipmakers could 
lose millions of dollars if they here hit with a single 
blackout. Another example, and we will hear more from Mr. 
Verboom later, is the dairy industry. If a dairy farmer is hit 
with a blackout, you cannot milk your cows. I do not know about 
you, but it is my understanding that if you do not milk a cow, 
you have a problem, especially if that cow is ready to be 
milked. These are but a few examples of a problem that will 
occur among many industries statewide when blackouts hit.
    The purpose of this hearing is to seek input as to what 
role the Federal, State, and local governments have in creating 
a solution for this energy crisis. Some of the questions I hope 
to answer are: What measures have been taken by the State of 
California to solve this crisis? In the wake of PG&E's 
bankruptcy filing, does the Governor have a new plan? Has the 
Bush administration been responsive to requests from the State 
of California? What Federal regulatory measures can be taken to 
help ease the current crisis? And, finally, what is the 
prospect for a solution in the near term and in the long term?
    I want to thank all the witnesses for coming today. I know 
it is tough to make time to testify. I am looking forward to 
hearing from every one, because they each have a unique 
perspective that is important to our discussion. I am hopeful 
that together we can shed some light on what Californians can 
expect this summer, and take some necessary steps to ensure 
that California's energy concerns are finally put behind us.
    Now, I would like to recognize my colleague, Chairman 
Burton, for the purpose of his opening statement.

                        STATE OF INDIANA

    Mr. Burton. It is nice to be in California. It sure is a 
beautiful day. And I am sorry you are having this problem. 
Chairman Ose is chairman of our new Subcommittee on Energy 
Policy, Natural Resources and Regulatory Affairs, and he will 
be watching and working on this problem over the coming months, 
and hopefully coming months, not more than a year.
    For the last year we have held a series of hearings on 
energy policy. We held a hearing last summer on gasoline price 
spikes in the Midwest. We held another hearing in the fall on 
the problems with home heating oil and natural gas. We have 
real problems in those areas. And we do not have all the 
answers, but as a result of the hearings we have already held, 
we have been able to draw at least some conclusions. First, we 
need to develop our natural gas resources. We have tremendous 
deposits of natural gas in this country, but many of them are 
closed to development.
    Almost all of the new electricity plants being built now 
are run by natural gas because it is clean. Demand is going up, 
as it is here in California, but new sources of supply are not 
being developed. The price of natural gas has more than 
tripled, and that is passed on in the form of higher utility 
rates. This has created severe hardships on lower income 
families. There are many areas that can be opened up to 
development without endangering the sensitive environments, and 
we need to do it, and we need to do it now, because it will 
help here in California as well.
    We have to develop more refinery capacity. In 1982 there 
were 231 oil refineries in the United States. Today there are 
only 155. The demands we are placing on them is straining them 
to the breaking point. Because of all the environmental laws we 
have, refineries have to produce more than 50 different blends 
of gasoline for different seasons and regions of the country, 
and that is an amazing burden. We are stretched so thin that 
all it takes is one disruption in a pipeline or refinery to 
cause chaos. That is what happened in the Midwest last summer, 
and that is why they ended up paying more than $2 a gallon for 
    The restrictions we have that make it so difficult to build 
new refineries are so counterproductive. Refineries built 20 or 
30 years ago are dirty and inefficient. With today's 
technology, cleaner, more environmentally safe refineries could 
be built to replace them, but it is just not economical, and 
that has to change.
    We need to have good, strong environmental laws, but we 
have to weigh the costs and the benefits. The new diesel fuel 
rule being developed by the EPA is a good example. Everyone 
agrees that diesel fuel needs to be cleaned up. The oil 
industry has offered a plan to remove 90 percent of the sulfur 
that is now in diesel fuel; 90 percent. Now, that is pretty 
good. But the EPA will not accept that. They are insisting on 
95 percent. And yet, experts are predicting that the extreme 
measures they will have to take to get to that extra 5 percent 
are going to cause serious disruptions in our energy markets, 
and that will affect California as well. I think that decision 
needs to be revisited. I think we have enough problems to deal 
with, without creating new ones.
    So we have learned a lot through this process, but we have 
yet to do a thorough review of the problems we have with 
electricity, and that is why we are here this week. If you want 
to learn about the pitfalls of electricity policy, California 
is the place to be. This is the laboratory, and the experiment 
is not going very well. We are not here to assign blame. We are 
not here to point fingers. We are here to listen and to learn 
and to try to find out ways that we might be of assistance.
    There is going to be an important debate in Congress this 
year on energy policy. We have not had a serious energy policy 
in this country for too long. The Bush administration is going 
to offer a plan. Bills are now being introduced. We have some 
important decisions to make whether we are going to take the 
steps that are necessary to have energy independence and 
reliable supplies, or whether we will not, and that is why 
these hearings are so timely.
    This is such an important issue that we created a new 
subcommittee this year, and I just mentioned that, the 
Subcommittee on Energy Policy, Natural Resources and Regulatory 
Affairs, and I asked Mr. Ose to be the chairman of that 
committee, and I asked him to chair today's hearing. He has 
made this a top priority, and I think that is justified, and I 
think he will do a great job.
    There are a lot of different issues for us to look at this 
week, and I will just mention a few. Why has demand grown so 
rapidly in California and supply grown so slowly? Were there 
early warning signs of this crisis that were missed, and if so, 
what were they? Should the Federal Government place a cap on 
electricity prices, or will this inhibit investment in new 
plants and exploration? Why were long-term contracts not locked 
in when prices were lower? Have power generators made excessive 
profits, and should they be ordered to repay some of that 
money? How are the utilities going to pay off their massive 
debts? We have just seen one company declare bankruptcy. Will 
there be more?
    Over the next 3 days we are going to hear from all sides of 
this debate. Hopefully by the end of the week we will have 
answers to at least some of these questions. Today we are going 
to focus on the State government's role in handling the crisis. 
We are also going to look at how the U.S. Interior Department 
might be contributing to some of the problems. Tomorrow we are 
going to hear from the major utilities and the alternative 
energy producers. We will also question the chairman of the 
Federal Energy Regulatory Commission about their role. On 
Thursday we are going to have the major electricity producers, 
and we will have a lot of questions for them.
    I want to thank all of our witnesses who are here today. We 
have some representatives from the local agricultural sector. I 
know they are having serious problems. Mrs. Lynch from the 
Public Utilities Commission had to rearrange her schedule to be 
here today, and we appreciate that. And to all our other 
witnesses whom I have not mentioned, I want to thank you for 
being here as well, and I look forward to hearing your 
    Thank you, Mr. Chairman.
    Mr. Ose. Thank you. My good friend from Long Beach, I would 
like to recognize Mr. Horn for the purpose of an opening 

                    THE STATE OF CALIFORNIA

    Mr. Horn. I thank the gentleman. I want the people of 
northern California to know that in Mr. Ose they have a first-
class legislator. He has been at everything we have done and we 
held 100 different hearings last year. And he asks first-rate 
questions. I am going to waive an opening statement, because I 
happen to believe in asking the questions, not talking myself. 
The chairman of the full committee has spoken for all of us. 
So, thank you very much.
    Mr. Ose. Thank you, Mr. Horn.
    All right, this committee swears its witnesses in, so we 
are going to have the three of you rise.
    [Witnesses sworn.]
    Mr. Ose. Let the record show the witnesses answered in the 
affirmative. I would ask that you summarize your written 
statement, try and keep it under 5 minutes. Mr. Yates, you are 

                      LIMITATION COMMITTEE

    Mr. Yates. Thank you, Mr. Chairman, Mr. Horn, Mr. Burton. 
Good morning. I am Ed Yates, senior vice president of the 
California League of Food Processors.
    The food processing industry in California is sizable. It 
accounts for 40 percent of the Nation's domestic supply of 
processed fruits and vegetables. It is totally reliant upon an 
ample and adequate supply of energy to process the 16 million 
tons--16 million tons of perishable fruits and vegetables, 
converting that perishable product into safe and storable 
products available to consumers across the country at any time 
they wish to use them.
    The current crisis in California is having a profound 
impact and presents a significant challenge to the food 
processing industry in California. We are facing rolling 
blackouts this summer. Our estimate is at least 30. These are 
extremely disruptive for a process, as Mr. Ose pointed out, 
where it may take, due to a 1 or 2 hour outage, 24 to 36 hours 
to bring the plant back on line. That represents as high as 
24,000 tons of food that either gets thrown away or does not 
get processed. We have no protection currently from rolling 
blackouts, unless you wish to shed some load and participate in 
those kinds of programs.
    Again, I want to emphasize the importance of supply. We are 
facing a prospect of having natural gas supplies curtailed or 
seized by utilities in California. The prospect of that is more 
than scary. We would not be looking at a 1 or 2-hour period of 
down time, like a blackout. We are talking days, and maybe 
weeks of unavailable supply of natural gas.
    We are also extremely concerned about the price of natural 
gas. Currently the price is above $12 a dekatherm. That 
translates to almost $1 billion more in natural gas cost to the 
food processing industry if those prices were to prevail and be 
applied to everyone. We have a unique problem in California 
with the price of delivery of gas to the border. It exceeds the 
price of the commodity.
    We are also very concerned with the effect in California 
that we have in competing with the electric generation 
industry. We compete with them on two levels: one for the price 
of the commodity, and second, for delivery. As the Federal 
Energy Regulatory Commission has opened up interstate pipelines 
to some reasonable form of competition, it is whomever can pay 
the most appears to get the highest priority for delivery. The 
food processing industry, being a relatively low margin 
industry, simply cannot compete with the prices that electric 
generators can pay for the commodity or delivery.
    Food processors, I describe it this way, we are in a 
stainless steel straitjacket. We want the tools necessary to 
help ourselves get through this crisis. Yet in California, the 
very stringent regulations for air pollution and other 
considerations extremely limit our ability to help ourselves. 
We are making initiatives for alternative fuels. We are not 
getting a very open ear for that. We are simply locked into 
natural gas as a supply.
    We did, in our prepared testimony, make four 
recommendations for consideration at the Federal level. We 
believe that the provisions of the Natural Gas Policy Act back 
in the old days which provided for a high priority for 
essential agricultural and food processing use of natural gas 
ought to be revisited, restored, and extended to the burner 
tips of food processors in California. We think that incentives 
ought to be created that would promote the use of alternative 
fuels for boilers and backup generation. We believe that 
someone ought to discover whether or not the high wholesale 
electric prices are reasonable and acceptable in terms of fair 
pricing and competition. We do support competition as long as 
it is fair and equitable and everyone has an opportunity to 
participate. We are in a symbiotic relationship with the grower 
community. We expect a number of processors may shut down this 
season, and we are hoping for some remedies to be forthcoming. 
And with that, I close, and again, I appreciate very much the 
opportunity to make these remarks today. Thank you.
    Mr. Ose. Thank you, Mr. Yates. I was remiss in not 
introducing Mr. Yates. He is the senior vice president of the 
California League of Food Processors.
    Our second witness is Mr. Peter Verboom, who is a dairyman 
from the great county of Glenn County in my district. Mr. 
Verboom, you are recognized for 5 minutes.
    [The prepared statement of Mr. Yates follows:]
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    Mr. Verboom. My name is Peter Verboom. I am actually 
relocating my dairy from San Diego County to Glenn County. I 
have to apologize, I did not bring my written statement, if 
that is OK.
    Mr. Ose. Arrest this man--yes it's OK. [Laughter.]
    Mr. Verboom. Being from San Diego County, when San Diego 
Gas and Electric went to deregulation my cost on my dairy 
facility in San Diego County tripled. They went from $3,500 a 
month to over $10,000 a month. And there is no way that we can 
pass on those costs with our milk prices being controlled. The 
wholesale milk prices are regulated by the State, where the 
retail prices are not, and so we have no way of passing on 
those costs through our product. And so we have to absorb them. 
It does not work, especially given the cost of milk prices as 
they have been in the last year.
    And moving my facility from to northern--I am in the 
process, actually. We were moving cows last night at midnight, 
and we are in the process of moving our herd up. And so I will 
be able to get a clear picture of the difference between SDG&E 
and PG&E, and I am kind of wondering what to expect.
    And so it has been--as far as having the power at the 
dairy, we do have generation facilities at the dairies. But, on 
the other hand, in this past year in the rolling blackouts that 
we have had, I produce milk for Land-O-Lakes. And, Land-O-Lakes 
has a large facility in Tulare. In Tulare, with the brownouts, 
their milk backed up on them, and when the milk backed up, they 
were not able to pick it up at the dairies. A certain amount of 
dairies had to dump their milk, and then also faced the 
possibility of regulations from the Water Quality Control Board 
for contaminating the groundwater. So, it has been a problem. 
It kind of just feeds on itself all the way down the line.
    But my initial statement is that we--as a producer, I have 
no way to pass it on. And so, I wanted to relate that message 
to you. With the milk storage problems, we cannot--that is 
basically my opening statement. I will be open for questions. I 
am sorry I did not have a prepared statement with me.
    Mr. Ose. That is fine. Thank you, Mr. Verboom.
    Our third witness is Lew Uhler, who is the president of the 
National Tax Limitation Committee. He lives in this area. 
    Mr. Uhler. Thank you, Congressman, and Congressmen Burton 
and Horn, for inviting us to do our best to represent the 
viewpoint of taxpayers here in California. We are a national 
committee. We keep our headquarters here in the Sacramento 
area, with tens of thousands of members in this State and 
elsewhere. We have been in operation for the last 25 years, and 
I am proud to say we do not accept any government grants or 
contracts, Federal, State, or local, but are supported only by 
voluntary contributions of taxpayers.
    The gravity of this situation is lost on no one. We know 
that the electric and other energy situation we face now is the 
result of a flawed deregulation program: frozen rates; 
requirements that electrons be purchased on the spot market 
rather than long-term contracts; and a peculiar method of 
financing the daily or hourly requirements by paying everybody 
the highest rate paid to any provider, instead of a blended 
rate with some of the lower cost power being blended in to 
bring the average rate down.
    So, we confront a huge substantive, the politicians and the 
Governor, political situation. Rather than accepting the 
reality of the problem and choosing a market-based solution, 
the Governor and the majority leaders of the legislature have 
chosen a command economy approach as the solution. And in doing 
so, they have opted to place the burden, not on the ratepayers, 
but on the taxpayers of the State.
    Now, there is some overlap, of course. But since 25 percent 
of the generation in the State is by municipal utilities which 
are not caught up in the stupidity of the deregulation plan and 
its execution, they confront a different rate structure than 
others do. And yet they are being asked, as taxpayers, to bear 
some of this burden, I think mainly because they have been 
around and they are credit-worthy. What the political process 
in Sacramento has been doing is looking for credit-worthy 
people to turn to. Hence the public treasury is now obligated 
to pay tens of billions of dollars for current and future 
electricity costs.
    From this moment forward, we have a chance to improve the 
situation. We ought to be guided by the medical Hippocratic 
oath, ``first do no harm.'' And yet yesterday the Governor did 
further harm by proposing--and of course the legislature will 
dispose--that the people of the State, wearing their taxpayers' 
hats, should purchase an antiquated grid system from part of 
the electricity distribution system. So, it appears that the 
Governor is not learning. He is creating a further nightmare 
for the taxpayers. We should have learned, from the decline of 
the Soviet Union, that command economies do not work. Free 
markets do. We have to adopt free market solutions.
    So, I think the real answers here are twofold. First, I 
urge that we turn to the truly credit-worthy buyers, the 
individual residential consumers, the businesses, cities, and 
all the rest, and use their credit. Let their credit be used to 
buy electricity directly from the suppliers, negotiating 
contracts to benefit themselves.
    When we started this crazy deregulation, we had limited 
direct access. Less than 2 percent of the residential users 
opted for alternative suppliers. Why? Because there was no 
price differentiation. We froze the rates as requested by the 
utilities. They have caused this problem now visited on them, 
to a large degree. In terms of the industrial and commercial 
users, 25 to 27 percent of the larger users actually entered 
into direct access contracts. When the State passed AB1X, the 
so-called ``relief act,'' they foreclosed the opportunity for 
direct access. So one of the things we must do is to reverse 
that action and give all of us the opportunity to go directly 
to Enron or Reliant, or whomever and make the best deal we can. 
That may not stop blackouts, but we can also negotiate 
contracts, with the possibility of limiting the blackouts, at 
least during this time.
    Second, as with retailing, there are three things that are 
important: location, location, and location. There are three 
things that are important in solving this problem: supply, 
supply, and supply. What we have to do is get more power out of 
existing generators. As our friend who runs the California 
League of Food Processors, Ed Yates has said, we simply are 
being inundated with rules and regulations by local air quality 
control management districts they have to be disciplined into 
some system.
    And we call on the Governor to ask you for relaxation of 
the clean air rules. In turn, under his emergency authority, he 
should relax the Clean Air Act requirements here in California, 
discipline the local air quality management crowd into a 
system, and get them to produce and continue to produce. Then, 
of course, we need to build a new facilities, nuclear, hydro, 
etc. And I would urge that the Auburn Dam be one of those 
considered for the long-term benefit of this State. Thank you.
    [The prepared statement of Mr. Uhler follows:]
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    Mr. Ose. Thank you, Mr. Uhler. We will now entertain 
questions from the Members. We are going to do this in 10-
minute sections. I want to recognize the gentleman from Indiana 
first for 10 minutes.
    Mr. Burton. Let me start with Mr. Verboom. You said that 
Land-O-Lakes, which is a purchaser of milk products from you--
one of your larger milk purchasers--because of the blackouts 
they had milk spoil.
    Mr. Verboom. Yes.
    Mr. Burton. And they had to dump it. And when they dumped 
it, then they ran into an environmental problem because of the 
pollution of the water supply.
    Mr. Verboom. Let me back up there. The plant itself did not 
dump the milk. They lost the capacity to bring in anymore milk 
from the dairies.
    Mr. Burton. So the dairies had to dump it?
    Mr. Verboom. The dairies had to dump the milk.
    Mr. Burton. And so all the dairy producers were then in 
violation of the environmental rules?
    Mr. Verboom. Yes.
    Mr. Burton. And you said your rate in San Diego went up 300 
percent? Three times?
    Mr. Verboom. It multiplied three times; yes.
    Mr. Burton. OK. So is that the main reason you are 
relocating north?
    Mr. Verboom. No. I was in the process of relocating, but it 
has become a very good reason to--San Diego County, where we 
were located, is not very conducive to dairies.
    Mr. Burton. And you stated that there is a ceiling on the 
wholesale price set by the State, so you have to eat the loss--
    Mr. Verboom. Yes.
    Mr. Burton. [continuing]. When you have to destroy milk or 
get rid of milk that is spoiled?
    Mr. Verboom. Yes. Well, it gets--Land-O-Lakes being a 
cooperative, it gets distributed amongst all the producers, so 
all the producers bear the loss.
    Mr. Burton. OK. But also the electrical cost, also you have 
to eat that?
    Mr. Verboom. I have to eat that, yes. Oh, definitely.
    Mr. Burton. Because of the price ceilings.
    Mr. Verboom. Yes.
    Mr. Burton. It sounds like there are other problems besides 
just generation of electricity you have to deal with there.
    Mr. Verboom. Yes.
    Mr. Burton. Mr. Yates, you said that alternative fuels 
should be allowed to be used, but there was a problem with 
environmental laws in the State. Could you elaborate just a 
little bit on that?
    Mr. Yates. Thank you. In California there are standards for 
the use of alternative fuels. However, the problem is if you 
were to put in the equipment to utilize those fuels and they 
happen to result in an increase of emissions, you have to, 
before you install the equipment, make arrangements to offset 
that increase of emissions. We think that we are not asking 
that those requirements be eliminated. We simply ask that more 
time be allowed to acquire those emission offsets, rather than 
having to do them up front.
    Alternate fuels have historically been an effective and 
very viable means of fighting high costs for natural gas. The 
air regulations in the State--in California have been tightened 
up, so many food processors have lost their ability to utilize 
alternative fuels, and natural gas has been plentiful, 
reasonably priced, and so there was no need. Obviously there is 
a need now to look----
    Mr. Burton. And the utilities are using a lot of natural 
    Mr. Yates. That is correct. As I mentioned, there is an 
increasing demand not only by the utilities to satisfy what 
they call the core, which are residences and small businesses, 
but also electric generation. All those loads are increasing, 
and we set with the high probability that the utilities could 
seize our gas to satisfy the needs of the core group. In 
addition, the Public Utilities Commission in California has 
proposed a rulemaking which would give electric generators 
higher priority than we have for natural gas supply. It does us 
no good to have a supply of electricity if we have no gas to 
process the food.
    Mr. Burton. So, you think you should be treated equally, 
along with the utilities?
    Mr. Yates. At minimum. That is correct.
    Mr. Burton. Let me ask one more question of you, and that 
is, we have tremendous natural gas supplies in the country, but 
because of stringent environmental rules and regulations, a lot 
of those areas have not been able to be tapped. Do you believe 
that we ought to take another look at going after those 
reserves that we have of natural gas in this country?
    Mr. Yates. Yes, I do. I think all efforts should proceed 
with all speed, including the potential of gas supplies in 
California. I do not believe that the potential for gas 
production in California has been either fully identified, nor 
exploited. We hear the numbers, that there is a 50 to 60-year 
supply of natural gas in this country to meet demand. We think 
we would come to the conclusion that there is plenty of gas; it 
is a matter of getting to it, to satisfy our needs.
    Mr. Burton. And through your research, have you found that 
could be garnered in an environmentally safe way?
    Mr. Yates. I believe that is very possible.
    Mr. Burton. Thank you. Mr. Uhler, you said that the 
purchasers who are having a difficult time need to be able to 
have direct access to the supply of electricity. They cannot do 
that now because of State regulation?
    Mr. Uhler. Well, what happened, Congressman, was when the 
regulation plan was first implemented some commercial users 
were given the opportunity for direct access. But meaningful 
direct access to residential users was denied because of the 
cost or rate structure imposed by the Public Utility 
Commission. So, while Enron Commonwealth, many others came in 
and sought to market their energy directly to the homeowner, 
much in the same way AT&T, Sprint, and everybody else entered 
in longline competition, because of the imposed rate control. A 
very small percentage of the people actually signed up. When 
AB1X passed in January here in the State, direct access was 
foreclosed for all users.
    Mr. Burton. Why was that? Why did they do that?
    Mr. Uhler. It beats me. What happened here in California in 
kind of a global sense is, when the crisis arose and we had an 
opportunity to use market principles and buy long term the 
apparent mental state and outlook of the political leadership 
of this State, being essentially central planners, opted for a 
command economy approach.
    Mr. Burton. I understand.
    Mr. Uhler. And decided to take over and run the thing their 
    Mr. Burton. I understand. You said that earlier.
    Mr. Uhler. Yes.
    Mr. Burton. Do you think that should be changed so that 
homeowners have----
    Mr. Uhler. It absolutely must be changed. And I can only 
say that one of the things that is so distressing, in 
yesterday's announcement about the deal with Southern 
California Edison, was that, one of the things taken off the 
table was future development of hydroelectric properties owned 
by Southern California Edison. This is further evidence that 
this State administration will not confront the hardliners in 
the environmental community here in California and ``go for 
it'' in terms of relaxing the rules that will help our food 
processors and our dairy people and help everybody. Unshackle 
us. Our hands are tied.
    Mr. Burton. I can see----
    Mr. Uhler. Let us out! Let us have direct access and we 
will make our own deals.
    Mr. Burton. I can see your enthusiasm, and you were getting 
into my next question. And that is----
    Mr. Burton. Is that a relative of yours back there?
    Mr. Uhler. No, we brought no relatives here this morning, 
    Mr. Burton. Well, you have some supporters. Let me just ask 
you this. And you were touching on this as I interrupted you 
there, and I apologize. You said an increase in production of 
the supply of energy by relaxing some of the clean air rules, 
at least for a period of time I guess is what you were saying. 
Over the long haul, you are for strong environmental standards, 
    Mr. Uhler. Yes. Whether these are good or bad is for the 
    Mr. Burton. But you are talking about in the short run?
    Mr. Uhler. I am talking about in the short run.
    Mr. Burton. OK. Let me follow----
    Mr. Uhler. Both the Federal clean air----
    Mr. Burton. [continuing]. Let me followup. And we can look 
at that at the Federal level. But in the long run--and I will 
address this question to all three of you. I see my time is 
running out. Do you believe that an adequate supply of energy 
can be produced here in California and this region in an 
environmentally safe way, so that even though the rules might 
be relaxed in the short run, if there are proper free market 
principles installed, that we would be able to have an adequate 
amount of energy created to take care of the needs in 
California in an environmentally safe way?
    Mr. Uhler. There is not even the slightest question. We 
could turn to nuclear. We know France now produces 75 percent 
of its domestic electricity through nuclear plants, and does it 
safely. This terror on the part of some environmentalists about 
nuclear is misplaced. We should reopen some nuclear plants that 
have been moth-balled, if we can do it quickly and properly. 
And hydro is of course the cleanest and safest, and also 
conserves our water, which is the next infrastructure problem 
the State faces.
    Mr. Burton. Thank you, Mr. Chairman.
    Mr. Ose. If I might just offer one observation. It would 
help us to have yes or no or I do not know answers to 
questions. And then a very clear statement, and then do the 
expanding on the responses. So, Mr. Horn, for 10 minutes.
    Mr. Horn. Just one to Mr. Uhler, the natural gas situation. 
We have got the natural gas. The question is, can we get it in 
the pipelines in the right places of the State. What do you 
know about the pipelines in northern California?
    Mr. Uhler. I have no specific technical knowledge. I know 
they are trying to fill those pipelines with increased pressure 
at night to increase the storage that otherwise is unavailable. 
But beyond that, I do not have the technical knowledge.
    Mr. Horn. Mr. Chairman, I would like to get the appropriate 
group that represents natural gas, to get those answers to this 
part of the State, and to the degree to which they clean the 
pipes, as you say, and they put other things through there. But 
let us get it at this point in the record, if I might.
    Mr. Ose. Without objection.
    Mr. Horn. No. 2. Mr. Yates, it is truly amazing the 100 
percentages you have with pears and apricots and strawberries 
and peaches. We have got another problem, and that is what is 
gone at the roots of some of those. And I just wondered if you 
know off the top of your head the degree to which those trees 
are dying, and do you happen to have any information on that?
    Mr. Yates. Pardon me? What specific crop are you referring 
    Mr. Horn. Well, in terms of the roots with the peaches, the 
grapes, so forth.
    Mr. Yates. Oh, the disease in the grape community?
    Mr. Horn. Exactly.
    Mr. Yates. That is a huge problem. It is creating some 
shifts in producing areas, severe economic losses, and those 
sorts of things.
    Mr. Horn. Mr. Chairman, I would like that put in the record 
at this point.
    Mr. Ose. Without objection.
    Mr. Horn. Thank you. I yield back to questions.
    Mr. Ose. The gentleman yields back. If I might followup on 
a couple of things. Mr. Verboom, you are moving your dairy from 
San Diego County to Glenn County?
    Mr. Verboom. Yes.
    Mr. Ose. I know you do not ask a cattleman how many head he 
has, but you have a production of how many truckloads per day?
    Mr. Verboom. We produce one truckload of milk per day.
    Mr. Ose. OK. And, how many people work at your dairy?
    Mr. Verboom. At home we have 11. On the new facility we 
will have about 18.
    Mr. Ose. OK. If you cannot get power and you have to dump 
your milk, or you cannot plan with any degree of certainty, 
what happens to those jobs?
    Mr. Verboom. Well, the cows have to be milked and fed. 
There is no getting around it. So, like I said, we have backup 
facilities. But being able to ship the milk to the plant has 
been the problem.
    Mr. Ose. How long can you warehouse the milk on your dairy?
    Mr. Verboom. One day.
    Mr. Ose. So you have a 1-day window----
    Mr. Verboom. Yes.
    Mr. Ose [continuing]. To hold the milk before you have to 
move it?
    Mr. Verboom. Yes.
    Mr. Ose. And, if I understand correctly, it is the Gonzalez 
Milk Pool pricing system that governs what you get for your 
    Mr. Verboom. Yes.
    Mr. Ose. So you and hundreds, if not thousands, of other 
dairy milkers have this same exact problem. You have a 24-hour 
window in which you have to move product from the farm to the 
processing plant. And, if they cannot handle it at the 
processing plant, you lose----
    Mr. Verboom. It stays at the dairy if they cannot take it. 
It stays.
    Mr. Ose. You lose the revenue that would come from the 
    Mr. Verboom. Yes, definitely.
    Mr. Ose. Or the cheese or the butter or what-have-you?
    Mr. Verboom. Right. We get paid for the raw product and we 
would lose that money from that raw product.
    Mr. Ose. How quickly does the unemployment or the economic 
chain reach the people who work for you?
    Mr. Verboom. Well, it has not gotten to that point, but if 
it did, everybody would be out of work. Because if it came to 
the point where we could not get paid for our product, we would 
have to close it down.
    Mr. Ose. OK.
    Mr. Verboom. And it does not take long at a tanker load of 
milk a day.
    Mr. Ose. Mr. Yates, in the food processing business, one of 
the standards you have to meet deals with food quality, the 
ability to ensure that the processing system is clean or clear 
of disease or infections and what-have-you, is that correct?
    Mr. Yates. Absolutely, yes.
    Mr. Ose. All right. So the FDA works with you and the 
California Department of Food and Agriculture works with you 
just to make sure that the product coming out of the plants 
that your members run is fit for human consumption?
    Mr. Yates. It is safe and wholesome; yes.
    Mr. Ose. To the extent that you have an interruption and 
a--let us say Campbell's Food Plant down here in south 
Sacramento, let us say they lose power. They have a co-
generator, so they are probably not going to go down. But let 
us say they lose power. To the extent that they have lost 
power, just give me some sense of the impact on jobs at the 
plant and the farm that feeds the plant.
    Mr. Yates. Let us take, for example, a tomato--back to a 
tomato processing facility. Delivery of tomatoes to a tomato 
processing facility is a tightly orchestrated and scheduled 
endeavor. Typically, a load of tomatoes is at the plant no 
longer than 3 hours. In other words, from harvest to being 
stabilized is, on average, about 3 hours. Now, if that plant is 
down for 24 to 36 hours, first they have vessels filled with 
20,000 to 40,000 pounds of tomato product. As soon as power is 
lost, the aseptic or the sterility of that system is lost. That 
food, thousands of pounds of it, have to be emptied out when 
the power comes back on, because they have no power to get it 
out. Then that entire system has to be sterilized again. And 
then they have to start the plant up in a sterile condition.
    In the meantime, during that 24 to 36 hours, there are 
crops in the field that are not going to get harvested because 
of the tight schedule of harvest and delivery. It is going to--
as your question suggests, it is going to back up clear out to 
the field.
    More importantly, and I will go to the natural gas 
situation, let us say a plant is shut down for a week. Tomato 
processing is highly seasonal. There is approximately a million 
tons a week that would not get processed. That is nominally $50 
million that growers would not be paid. The energy it took to 
grow that crop, water pumping and so forth, would be lost. 
There would be a week worth of wages lost by food processing 
employees. Remember, this is an enterprise that is relatively 
short, 3 months, so many of those workers depend upon working 
every day during the season. That is a week's worth of wages 
lost. That is significant to those folks.
    On top of it, the California food processor would not have 
product to satisfy its customer's needs, and that product will 
likely be furnished by Chile, Italy, Greece, or some other of 
our global competitors, because we do work in a global 
    Mr. Horn. Mr. Chairman, if you will yield for a question.
    Mr. Ose. Certainly.
    Mr. Horn. Mr. Yates, I learned about 2 weeks ago that the 
last sugar beet processor had been closed. Is that true, and 
how difficult is that? And was there any effect of electricity 
in it?
    Mr. Yates. That is my understanding, that the last one is 
gone. I do not believe that electricity was the cause of that. 
Sugar beet processing is a refining process. It is very energy-
intensive, natural gas dependent. There were a number of other 
factors that have come to bear on the sugar beet industry in 
California, and if you want elaboration, I would be happy to 
provide it to you.
    We are--if they were in business, the Public Utilities 
Commission has proposed on-peak rates for electricity to raise 
by 545 percent, an increase of 30 cents per kilowatt hour. We 
simply cannot operate on that basis. We cannot shut down during 
those peak times, and it presents an extreme challenge of how 
we are going to cope with that kind of an outcome.
    Mr. Ose. I want to follow----
    Mr. Horn. I might add on the sugar, if you could provide 
something for the record, I grew up on a farm 17 miles from 
Spreckles Processing Plant in Salinas.
    Mr. Yates. I will certainly do that. The sugar beet 
industry in California, as you know, in years past was very 
vigorous and it provided a lot of jobs. It is very unfortunate 
that they are no longer in business in California.
    Mr. Ose. Mr. Yates, some of the suggestions that we have 
heard have to do with shifting load from say mid-afternoon to 
overnight. My understanding, during harvest season, is that 
your members are running their plants 24-hours a day; is that 
    Mr. Yates. That is correct.
    Mr. Ose. So shifting load is pointless.
    Mr. Yates. Shifting load is a very challenging prospect. 
Remember, and I am trying not to repeat, we are processing a 
huge volume of food that is harvested ripe for a very short 
period of time. So in order to get it all stabilized, they are 
running 24 hours a day. Of course, there are periods of 
shutdown for cleanup. I mean, it is just like your kitchen. You 
got to stop once in a while and clean it up.
    We have advanced and are advancing a proposal to shrink 
that peak period of time for perishable food processors. Go 
ahead and double the price for that time, but at least give us 
a better opportunity to avoid that high-price period. And we 
think there is a number of food processors that might be able 
to work out a deal with their labor force, with their growers, 
with their truckers, and everyone else that is dealing with 
getting all this food processed. At least we would certainly 
like to have that opportunity.
    Mr. Ose. I need to ask one other question. I want to go to 
Mr. Uhler on this. The State of California has been put on 
watch by Moody's as a result of the implications of the energy 
crisis we face. In a very real sense, it is my understanding 
that in the financial markets that will cause an increase in 
the bonding cost to the State of California. In other words, 
there will be a premium attached to bonds from the State of 
California to reflect that added risk. Am I understanding that 
correctly? What are the implications for the provision of 
government services?
    Mr. Uhler. You are understanding that correctly, and that 
will increase the cost of all the bonded indebtedness for the 
State. Apparently there is some question as to whether the 
markets can receive and absorb the level of revenue bonds, 
which are proposed to meet this electricity problem, and do so 
effectively. It is really riling up the bond situation for the 
State of California and for our taxpayers.
    Mr. Ose. My time has expired. I want to go back to Chairman 
Burton for a followup.
    Mr. Burton. I have a number of questions that I would like 
for you to answer as concisely as you can, because I want to 
have them for the record. The Governor is not releasing the 
figures that the State is paying for electricity. Is that 
information that taxpayers want to have and should have?
    Mr. Uhler. Correct. And in our written testimony we have 
asked for that, and numbers of individuals and members of the 
media have asked, and that has not been forthcoming.
    Mr. Burton. Has the Governor given a reason why that has 
not been publicized?
    Mr. Uhler. The stated public reason is that this will 
interfere with confidential negotiations for future power 
purchase contracts. But it seems to us that, since he is 
obligating taxpayers, the taxpayers have a right to know to 
what degree and in what direction.
    Mr. Burton. Thank you. Let me run through these questions 
rapidly here, and if you could answer them. In your testimony, 
Mr. Yates, you talk about the problems that processors will 
face in the event of a blackout. What actions is the food 
processing industry taking to try and cope with the predicted 
blackouts? You have talked about scheduling a little bit and 
the difficulty, but what alternative fuels are you looking at, 
if any? And so if you could answer that.
    Mr. Yates. Thank you. We are doing a couple of things. We 
were working with our legislatures and the administration to 
pave the way for food processors and others to utilize backup 
generation during a blackout period. That has been achieved.
    Mr. Burton. What alternative fuels are you going to be 
using, please?
    Mr. Yates. Propane for firing boilers. The other thing we 
are doing, and the industry, since this has not been a problem 
in the past, does not have--there is only about 5 to 7 percent 
of the industry that has backup generation. And this is backup 
generation that does not satisfy the entire electric 
requirements of the facility. It is minimal, it is enough to 
keep computers going, the control room going, and those sorts 
of things. So lights on for employee safety and those sorts of 
things. And the industry is--a number of food processors are 
looking at acquiring backup generation. Very few are looking at 
enough backup generation to run the entire facility. That is 
just too much.
    Mr. Burton. And the only other alternative fuel you 
mentioned there was liquified gas.
    Mr. Yates. That is one of the options. Diesel is another 
one. And I hasten to add----
    Mr. Burton. That is an EPA problem.
    Mr. Yates [continuing]. That both of those have limits. 
They have emission limits. We are not asking that those be 
eased. But we are asking eventually, let us comply with the 
offset requirements, give us some more time to do that, because 
it is practically impossible to do it in the time necessary for 
this summer processing season.
    Mr. Burton. In terms of using alternatives such as diesel, 
oil, or propane, the regulatory barriers that you are facing, 
as you just mentioned, are difficult, but you do not want them 
relaxed, you just want them to be offset?
    Mr. Yates. In our case, yes.
    Mr. Burton. In other areas, do they need to be relaxed? I 
mean, I know that in food processing--in the other areas, do 
you need to have a relaxation for a short period of time, 
either one of you?
    Mr. Uhler. Well, you know, I stated to the Congressman 
earlier that----
    Mr. Burton. I know you have stated, but do you have any 
facts that shows that there should be a relaxation of those EPA 
    Mr. Uhler. Well, only by empirical evidence of the shutdown 
of perfectly capable generators that have run out of hours. 
This is all arbitrary and artificial. To have people sit in the 
dark in their homes or in their factories in July because a 
local air quality management control district has arbitrarily 
shut down a generator is, in my judgment, absurd.
    Mr. Burton. I think I want--go ahead.
    Mr. Horn. Could I just ask one that fits on your question?
    Mr. Burton. Yes. I yield.
    Mr. Horn. As I drove into Sacramento this morning, I 
wondered, by seeing the sign over it, there is a fuel cell 
technology movement going. And to what degree could that be 
helpful, or is it--does not do enough?
    Mr. Uhler. You know, again, I have done only the normal 
reading on that, and there seem to be tremendous advances in 
fuel cells. Once that technology is refined, people can have 
that running their home or their business or whatever, but that 
is not going to solve this summer's problem and maybe not next.
    Mr. Horn. Mr. Chairman, if we could get a presentation from 
the fuel cell technology people as to where they are on this 
and what they can do.
    Mr. Burton. Since the State has begun purchasing 
electricity, your testimony, Mr. Uhler, notes that Wall Street 
has reacted negatively. How would a downgraded bond rating 
affect the budget of California, and does it negatively affect 
other programs that rely on the State to issue bonds?
    Mr. Uhler. Well, in driving up the interest cost on the 
bonded indebtedness, of course, that will harm the State. We 
have had huge surpluses which the State has spent over the last 
couple of years. The predicted surplus for the next year is 
probably ephemeral. We are probably eating into the money for 
actual programs at this point, but because of the secrecy and 
the lid imposed by the Governor's office, we do not know the 
specific details.
    Mr. Burton. OK, let me just ask a couple more questions.
    Mr. Ose. Mr. Chairman, Mr. Yates has something.
    Mr. Yates. Mr. Burton, may I clarify further your earlier 
question about alternative fuels. My response was relative to 
fuels to operate boilers. When it comes to the issue of 
utilizing diesel generators for electricity, there is, in my 
opinion, a number of arbitrary decisions that have been made. 
For example, there is 5,000 megawatts--it is my understanding 
there is 5,000 megawatts of emergency backup generation setting 
around the State, and the State refuses to turn it loose, but 
instead takes their chances on rolling blackouts.
    Mr. Burton. Why are they--is it because of environmental 
concerns that they are refusing to turn that loose?
    Mr. Yates. That is my understanding. And our----
    Mr. Burton. And there is 5,000 megawatts, you say?
    Mr. Yates. That is my understanding; yes.
    Mr. Ose. Mr. Chairman, would you yield for a minute?
    Mr. Burton. I would be happy to yield.
    Mr. Ose. Mr. Yates, 5,000 megawatts is a lot of megawatts. 
Hearing that anecdotally is one thing, seeing a list is 
another. Do you have a list?
    Mr. Yates. I believe we can obtain--a list I believe has 
been developed by the Air Resources Board. At least that is 
what has been represented to us by representatives from the 
California Resources Board, that there is 5,000 megawatts.
    Mr. Ose. We need to get that list.
    Mr. Yates. Now, modern backup generation----
    Mr. Burton. Who would have that list?
    Mr. Ose. Mr. Yates just said the Air Resources Board here 
in the State of California is the source of that list, source 
of that information.
    Mr. Burton. Are they keeping that secret or are they not 
letting that out?
    Mr. Yates. Not to my knowledge, no. And I believe the 
Governor's office has that kind of information.
    Mr. Ose. Well, how do we get it?
    Mr. Burton. Well, I know how we can get it.
    Mr. Ose. You are the chairman.
    Mr. Burton. Yes. We can take a hard look at how to get that 
    Mr. Ose. We will get that information. If you can tell us 
the name of the person who gave you that anecdotal information, 
we will be able to followup accordingly.
    Mr. Yates. I will certainly provide that to you. Thank you. 
And one last comment relative to this scare, fear of diesel 
generation. A modern, one-megawatt portable generator puts out 
as much emissions, if you will, as three trucks rolling down 
the highway. So people are making a big bogeyman out of this, 
and they ought to be taking a harder look at it. Thank you.
    Mr. Burton. Let me just ask a couple more questions so I 
can get these for our record, Mr. Chairman. How much of a role 
do you believe Federal and State environmental regulations have 
in restricting the supply of electricity? I mean, how severe is 
the controls affecting the supply?
    Mr. Yates. It is my observation, if I may, that all of the 
new power plants being proposed to be built in California are 
setting new records for cleanliness, not only in terms of their 
emissions, but their efficiency. They are so much more 
efficient, that the amount of emissions--not only are the 
emission limits very low, but the amount of emissions per 
megawatt are extremely low, and they are going to push out the 
old, dirty plants.
    Mr. Burton. Are they being held up for any reason since 
they meet the criteria that they should?
    Mr. Yates. It is my understanding that the expedited 
processes at the California Energy Commission, who is 
responsible for siting those, is proceeding at the high levels 
as expected.
    Mr. Burton. OK.
    Mr. Uhler. If I may add, Mr. Chairman, one of the things 
that we have recommended, and that the Governor has within his 
emergency powers, is to make the decision of the California 
Energy Commission binding, with respect to the siting of any 
particular plant, irrespective of local land use controls. And 
he ought to do that, because we now have problems at the local 
level, the NIMBY problem, ``not in my back yard.'' And yet we 
need to site those plants close to the user base, given the 
antiquated nature of our transmission system, and to expedite 
that process before the California Energy Commission.
    Mr. Burton. Mr. Chairman, I have a few questions I would 
like to submit for the record for Mr. Verboom on the dairy 
products, but if we could get those to him and he can just 
answer them.
    Mr. Ose. Without objection.
    Mr. Burton. Thank you.
    Mr. Ose. Mr. Chairman, just for your information, I want to 
go back to Mr. Yates. Current California Energy Commission 
requirements are that a generating facility in excess of 50 
megawatts must come before the Commission for review. I know 
that Assemblyman Cox has a legislative proposal that would 
raise that threshold from 50 to 125 megawatts as the threshold. 
The reason is that the technology for these turbines typically 
creates a turbine of 60 megawatts capacity. So, the 50 megawatt 
threshold is kind of pointless, because everything has to go. 
If we could get that to move forward, we would have a lot of 
these standby generators doubling their capacity without having 
to go through a lengthy review process. We will put that in the 
    Mr. Horn, anything else?
    Mr. Horn. When you ask for that figure, I would like to see 
it broken down in terms of hospitals, which already have 
generators, and then try to get it in the rest of the economy, 
    Mr. Ose. You are talking about the 5,000 megawatts list?
    Mr. Horn. Exactly, yes.
    Mr. Ose. All right.
    I want to thank these witnesses for joining us today. Your 
information has been solid, and I appreciate you taking the 
    Mr. Uhler. Thank you.
    Mr. Yates. Thank you.
    Mr. Verboom. Thank you.
    Mr. Ose. OK, we are going to go ahead and call up the next 
panel, and that would be Mr. Kevin Madden, Mrs. Loretta Lynch, 
Mr. Terry Winter and Mr. Larry Makovich.
    OK, if the witnesses would rise, please.
    [Witnesses sworn.]
    Mr. Ose. Let the record show the witnesses answered in the 
    Joining us on this panel, we will just move from my left to 
the right. The first witness is Mr. Kevin Madden, who is the 
general counsel for the Federal Energy Regulatory Commission. 
Mr. Madden, you are recognized for a 5-minute statement.


    Mr. Madden. Thank you, Mr. Chairman. I thank the committee 
and subcommittee for the opportunity to discuss the topic of 
electricity markets in California and surrounding States. As 
Mr. Chairman said, I am Kevin P. Madden. I am the general 
counsel of the Federal Energy Regulatory Commission. I appear 
today as a Commission staff witness, and I do not speak on 
behalf of the Commission.
    Electricity markets in California and throughout much of 
the West are in a state of stress, and they will continue to 
experience various serious problems throughout the coming 
summer. Wholesale prices have increased substantially. 
Consumers are being implored to conserve as much as possible, 
and utilities continue to face severe financial problems. PG&E 
has just filed for reorganization under Chapter 11 of the U.S. 
bankruptcy code last week.
    The Commission has aggressively been identifying and 
implementing market-driven solutions to the problems. Let me 
just highlight some of the recent actions we have taken to 
address these problems. Earlier this month, the Commission took 
strong action to mitigate prices in California's electricity 
markets for the periods of January and February. The Commission 
identified many transactions during these 2 months that 
warranted further investigation. The Commission required the 
sellers to either refund certain amounts or to offset those 
amounts against what is already owed them. They also require 
them to provide any additional information which they believe 
could justify their particular rates. The total amount of 
potential refunds for just those 2 months, January and 
February, amounted to $124 million.
    Also in March, the Commission issued an order seeking to 
increase energy supplies and reduce energy demand in California 
and in the West. The Commission implemented certain measures 
immediately. These include extending and broadening waivers for 
certain facilities under PURPA, enabling those facilities to 
generate more electricity without the restrictions that they 
usually have. We expedited the certification of natural gas 
pipelines into California and the West. Just this week, the 
Commission authorized Kern River Pipeline to provide 
approximately 300 MCF per day additional capacity into southern 
California; this is expected to come online in June or July of 
this summer. We also urged all licensees to review the FERC 
licenses that they hold in order to assess the potential to 
increase the generating capacity at those particular projects.
    The Commission also proposed and sought comment on what 
other measures it should employ to assess rates for 
transmission facilities and for natural gas facilities in order 
for them to be online to provide energy this summer.
    Finally, the Commission announced a 1-day conference with 
State commissioners and other State representatives from 
Western States to discuss the volatility of the price in the 
Western United States, as well as other issues needed to 
address those particular prices; infrastructure, for example. 
The conference is being held today in Boise, ID.
    On March 14th, the Commission ordered two utilities to 
justify the duration of the outages in 2000, April and May 
2000, at their California generating facilities. Those outages 
forced the California ISO to purchase more expensive power from 
the utilities for the generating facilities. Absent adequate 
justification, the utilities must make refunds in the amount of 
$10.8 million.
    On March 28th, the Commission also addressed a complaint 
filed by the California Public Utility Commission under section 
5 of the Natural Gas Act against a pipeline company and its 
marketing affiliate. While FERC found one part of the complaint 
unsupported, FERC ordered a hearing on whether the pipeline and 
its affiliate had market power; and if so, used that market 
power to drive up the prices of natural gas at the California 
border. The case is now pending before an administrative law 
judge. The Commission set this case on a fast track and a 
decision is due back to the Commission in 60 days.
    Finally, the Commission's staff, at the Commission's 
direction, has proposed a market monitoring and mitigation plan 
for California. This would require all sellers with uncommitted 
power to sell in the real-time market. The Commission is 
currently considering comments on this proposal filed by 
numerous entities, and expects to act on this in the near 
future for the summer.
    These actions, I believe, demonstrate the Commission's 
commitment to take all appropriate action to remedy the current 
imbalances in western energy markets. While some have accused 
the Federal Energy Regulatory Commission of being indifferent 
or even hostile to the concerns of California consumers, our 
actions prove otherwise. It is not true. We have pursued the 
remedies we believe will be most effective, not only in the 
short term, but also in the long term. No one should doubt our 
commitment to ensuring an adequate supply of energy for all 
consumers at reasonable prices.
    By itself, however, the Commission cannot contribute all. 
It can only contribute a small part of the solution to today's 
energy problems. A more comprehensive and permanent solution 
requires the involvement of the States and other Federal 
agencies and departments. In particular, California must do as 
much as possible to expedite the construction of newer power 
plants. I am encouraged by all the hard work and effort taken 
in recent months, but----
    Mr. Ose. Mr. Madden, are you about done?
    Mr. Madden. I am about done.
    Mr. Ose. Your time is about up here, so you need to wrap 
    Mr. Madden. I am encouraged by the action taken by the 
State of California and the other States, but we must be 
vigilant to ensure that these new facilities are built.
    Mr. Chairman, I will be happy to answer any questions. 
Thank you.
    Mr. Ose. Thank you.
    Our next witness is Ms. Loretta Lynch, who is the president 
of the California Public Utilities Commission. Ms. Lynch, you 
are recognized for 5 minutes.
    [The prepared statement of Mr. Madden follows:]
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    Ms. Lynch. Thank you, Mr. Chairman and Members.
    California's restructuring experiment has erroneously been 
called deregulation. Rather, California Federalized the 
regulation of its energy prices by allowing the utilities to 
sell off their generating plants to private merchant 
generators, converting retail relationships to unbundled 
wholesale relationships, which created a wholesale market for 
electricity that was then regulated by the Federal Government, 
not by California.
    To a much greater extent than was wise, California, under 
the Wilson administration, placed control of its essential 
economic infrastructure in the hands of the Federal Government 
and the Federal Energy Regulatory Commission. Federalizing 
control of California's grid has limited California's ability 
to protect our economy from price gouging and supply 
    To a much greater extent than was wise, California, under 
the Wilson administration, dismantled the integrated energy 
service delivery mechanisms in order to create business 
opportunities for speculators. The prior administration caused 
the utilities to sell off much of their generation to entities 
who now hold California hostage daily to extortionate price 
demands for electricity, a fundamental economic necessity that 
cannot be stored, and for which there is no effective 
    California, under the leadership of Governor Davis, is 
already pursuing structural reforms that will reduce our 
residences' and businesses' exposure to and dependence on the 
deregulated wholesale market. These include ending the practice 
of divesting utility-owned generation and selling it off to 
private marketeers, reacquiring control of the transmission 
system, and reforming the ISO and returning to a rational 
system of unit commitment and dispatching the grid.
    The California Public Utilities Commission took a very 
difficult action a few weeks ago when we raised retail rates by 
4 cents a kilowatt hour since January. Mr. Burton, that would 
equal a 60 percent increase in your district in Indiana. It may 
not be enough if the current price-gouging practices persist 
and remain unabated by Federal regulators.
    I have prepared an exhibit that is attached to my testimony 
that illustrates what has happened in the California wholesale 
pricing market. From April 1998, when the California market 
opened, to January 2000, wholesale prices remained at 
traditional levels, $30 to $35 per megawatt hour. But beginning 
in January 2000, wholesale prices began to climb, averaging 
about 60 percent above the previous year. Beginning in May 
2000, average prices climbed to over $100 a megawatt hour, 
reaching a peak of $166 per megawatt hour in August, 200 to 300 
percent above historic levels.
    On November 1st, the Federal regulators indicated an 
intention to abolish price caps in the California wholesale 
market and prices began a further upward spiral. On December 
8th, the FERC, in a secret order procured by Mr. Winter, 
without notice to a single California State policymaker or 
elected official, eliminated all price caps, and average prices 
rose to $377 per megawatt hour for the month of December, a 
level 10 times the historic average. Wholesale prices for 
electricity in California have remained at about that level 
since, and they bear absolutely no correlation to demand, since 
these prices are occurring right now at the lowest load levels 
of the year. It is significant that peak demand has not 
increased significantly in the past 4 years. The same plants 
are running that have served load in California for the past 30 
years, using the same fuels, and with the same pollution 
emissions profiles.
    But the practice of physical and economic withholding 
continually puts California on the ragged edge. Any shortage of 
generation to meet demand has been due to the failure of the 
merchant generators to provide sufficient supply, and the 
failure of past administrations to require that electricity 
supply be built. Prior to restructuring, California added over 
15,000 megawatts of new generation from 1980 to the mid-1990's. 
In addition, thousands of megawatts were obtained from 
aggressive conservation programs and new interstate 
transmission lines.
    During the 1980's, California added power plants, 
notwithstanding our appropriate environmental requirements that 
were then in place. However, all this development stopped in 
the mid-1990's when California, under the Wilson 
administration, unwisely decided to depend on the competitive, 
unregulated market.
    Under Governor Davis, California is now taking every action 
to expedite the development of new generation. We are 
restarting long-retired utility power plants; we are providing 
incentives for distributed generation and renewable energy 
projects; we are streamlining the permitting of large power 
plants that are much more efficient and cleaner-running than 
current plants. We are obtaining waivers from Federal 
regulators to allow qualifying facilities to increase 
generation capacity, and California is making a historic 
commitment of ratepayer and taxpayer moneys to provide $1.5 
billion in energy efficiency incentives to our businesses and 
families so that we can use electricity as wisely and as 
effectively as possible. California's energy efficiency 
commitments dwarfs comparable Federal commitments.
    However, all these changes under Governor Davis may not be 
sufficient to stem our problems we are facing this summer, 
particularly in light of suppliers' ability to withhold 
generation capacity. You know, we are experiencing the 
application of a strategy that was clearly articulated years 
ago by the merchant generators. And I would like to quote. ``We 
have a lot of experience dealing with summer peaks in 
dispatching plants.'' This is a quote from Mr. Oglesbee, who is 
President of Reliance Marketing Subsidiary. He says, ``When you 
operate on a merchant basis and sell into a power exchange, you 
can watch the price climb during the day. We might decide to 
hold our plant off the market at 12 noon, even if the price 
looks favorable, because we can get a better price at 4 p.m. We 
think we know a little bit about what will happen if we hold 
our plant out a few hours. We can play on that expertise.'' And 
my testimony has the quote from Mr. Oglesbee.
    What we realize is that the merchant generators will hold 
California over a barrel unless the Federal regulators do their 
job. The Federal Power Act provides for cost-based rates. The 
act requires just and reasonable wholesale rates, or else, 
under the statutes that Congress passed, those rates are 
unlawful. Where market power exists, all sellers must have 
cost-based rates. One part of the answer to California's 
dilemma is to move back to cost-based rates as quickly as 
possible, given the market that even the FERC calls 
dysfunctional. The Federal law requires it. If FERC is 
unwilling to enforce the laws on its own that are currently on 
the books, the Congress should direct the FERC to do so.
    I have additional testimony. I see my time is running 
short, so I would like to wrap it up. But I would like to be 
open to questions, especially about long-term contracts, 
because the committee had asked specifically for testimony 
about that. But I would like to address one final issue, which 
is the cost of natural gas in California. Wholesale natural gas 
is twice as expensive in California as anywhere else. This is 
entirely a function of the cost and lack of availability of 
interstate transportation.
    Again, the practice of withholding and price gouging, the 
classic symptoms of unlawful market power of the kind the 
Natural Gas Act was intended to prevent, is victimizing 
California without a remedy from the FERC. The remedy here is 
for Congress to require the FERC to reverse its ill-considered 
2-year regulatory exemption of the natural gas secondary 
market, and to re-regulate the secondary market for natural gas 
transport so that the infrastructure that consumers have built 
and paid for is fully utilized.
    Many fingers have been pointed over California's energy 
crisis, but the cause is simple and fundamental. The Federal 
market cops decided to leave the beat, leaving the market 
completely unattended. The Nation has seen this situation play 
out before in the 1920's, when electricity and natural gas 
providers kept the whole Nation over a barrel. That gaming and 
gouging led to the 1935 Federal Power Act that Congress passed, 
a statute that was designed to protect businesses and consumers 
from sellers who possessed market power. We face that situation 
again today, and Congress should require FERC to enforce the 
Federal statutes already on the books.
    Mr. Ose. Ms. Lynch, we are going to wrap up your----
    Ms. Lynch. Sure. I have submitted testimony with several 
    Mr. Ose. You have testimony?
    Ms. Lynch [continuing]. Responding to the questions the 
committee had asked me to prepare.
    Mr. Ose. We will submit your written statement for the 
record. We appreciate your giving it to us.
    Our next witness is Mr. Terry Winter, who is the president 
and CEO of the California Independent System Operator. Mr. 
Winter, I have been kind to Mr. Madden and Ms. Lynch, but I am 
going to give you 5 minutes.
    Mr. Winter. That is not unusual for me.
    Mr. Ose. All right.
    [The prepared statement of Ms. Lynch follows:]
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    Mr. Winter. Thank you, Mr. Chairman and Members of the 
    First off, I would like to explain what the ISO does. We 
are the operator of the transmission system, and we take 
schedules. We are not always privy to what all the prices are. 
Many bilateral contracts go through us that we never see, so 
oftentimes people are asking us to identify what all the costs 
are. We have no way of doing that. Our job is to perform the 
scheduling on the system, and to ensure that it operates 
reliably. And last but not least, we are the ones that, in the 
end, if there is not sufficient supply and we must interrupt 
firm load, we are the ones that make that order.
    There are four things that I would like to very briefly 
talk about and try to stay within my 5 minutes. The first, a 
comment on the bankruptcies that we have now faced; second is 
today's operation, what we go through; third is the summer load 
that we are looking forward to and fourth, market costs.
    My statement on bankruptcy is that one of the things that 
the operator needs desperately is some stability to what is 
going to happen during the day. And because of that, I think it 
is incumbent upon us to make sure that these companies that 
have moved into bankruptcy continue their attention on the 
operation, and I believe PG&E's first motion was to ensure that 
their employees would be paid, etc. I think that is a good 
start. But we also have many plans for transmission lines that 
they are building at the current time, and we need to ensure 
that they have the financial wherewithal to continue that 
building, because that will be part of our solution to serve 
the customers and the ratepayers of California.
    Today's operation, I do not think I can begin to explain to 
you all, without an hour or two, or actually have you out 
there, what it means to come in at 7 a.m. and sit down with the 
operators who are facing a 5,000 to 7,000 megawatt shortage 
that day as they move into their 7 a.m. timeframe. That means 
at that point we have to go out into the market and beyond the 
market to get all available generation. We face that every day. 
And this summer we had periods when we were actually 16,000 
megawatts short.
    Looking forward to this summer, forecasting is always a 
dangerous business, but I will tell you that we have done a 
rather pessimistic report, which we are paid to do, quite 
honestly, because we have to consider some of the worst cases. 
But that shows in June that we will be about 3,700 megawatts 
short on peak. Now, that decays as we move on into the summer 
because of new generation. There is approximately 2,500 
megawatts of generation that will be coming online in July and 
August of this year, so it moves down to around the 600 
megawatt timeframe or level.
    But it should be noticed that, while we have not factored 
in things like conservation and the impact that increased 
prices will have, we also, on the other side, have not looked 
at the worst possible heat, summer, we have not looked at the 
worst possible situation of import from out of State. To give 
you an idea, in 1999 we were importing 9,000 megawatts from 
other States. Last year we were importing between 5,000 and 
6,000. Right now, I am extremely lucky if I can get 1,000 to 
1,500 from out of State. And what that has resulted in is that 
we have to run in-state generation about 20 to 30 percent more 
than we ever have in the past.
    Moving on to markets, we were constantly asked how much we 
felt the market was being paid above what would be a normal 
competitive hourly rate in normal markets. Our figures show 
that there is a little over $6 billion cost that we cannot 
explain either through scarcity, cost of natural gas, cost of 
higher emissions, etc. We have filed those reports with FERC, 
and hopefully they will be able to review those and make their 
findings on those, because we do not always have all the 
information. But just in broad figures, that is about a 35 
percent increase over what we would expect in competitive 
markets, which allow for a portion of it to be paid above cost 
base just because of the lack of supply.
    With that, I will stop and hold to my 5 minutes.
    Mr. Ose. Thank you, Mr. Winter. The trap door will not open 
underneath you. [Laughter.]
    Our final witness is Mr. Larry Makovich, who is the senior 
director at Cambridge Energy Research Associates. Mr. Makovich 
for 5 minutes.
    [The prepared statement of Mr. Winter follows:]
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    Mr. Makovich. Thank you. When California passed its 
restructuring laws 5 years ago, it set a goal to move from 
regulation and toward the market. California would still 
benefit from a move to a market that works. Unfortunately, the 
power market in California was set up with serious structural 
flaws right from the start. These flaws made it neither 
possible nor profitable to build power plants when needed. 
These flaws were a siting and permitting process that creates 
costly and time-consuming barriers to new power plant 
development; a power market that paid generators to utilize 
their power plants, but did not pay them enough to have 
capacity in place to meet peak demand and retail prices that 
were delinked from wholesale prices. And by disconnecting the 
demand side from the market, it put utilities in an 
unsustainable position that has resulted in bankruptcy and 
supply reduction.
    The flawed market design was the first problem, but an even 
greater problem has been the complacency demonstrated when the 
evidence that the market flaws were playing out and creating a 
shortage. In answer to Congressman Burton's question, ``Was 
there evidence that this shortage was happening?'' The answer 
is clearly yes. The California economy grew 32 percent over the 
past 5 years, electric consumption grew 24 percent, and power 
generating capability declined. No one did anything year after 
year, while the State failed to site and permit the 1,200 
megawatts needed each year to keep supply and demand in 
    California ran out of capacity because it never set up a 
market to supply it. From 1996 through 1999 the California 
power market passed from supply surplus, to supply and demand 
balance, to a supply shortage, and the market clearing prices 
in California were clearly too low to support enough timely 
investment. California made a deliberate mistake to expect that 
the energy market alone, through either spot prices or energy 
contracts, would keep power demand and supply in balance in the 
long run. No other power market set up around the world relies 
solely on an energy market. California's energy market, as set 
up, did the job it was supposed to do. Prior to the shortage, 
the energy market was very competitive, paid generators to 
utilize their power plants efficiently, kept supply and demand 
in balance in the short run. But to do this, it had to clear on 
variable costs alone. The average annual wholesale price for 
power ranged from $14 to $31 per megawatt hour from 1995 to 
1999. This is a level that is half of what is necessary to 
support new power supply development.
    Clearly the market needed to pay for capacity to provide an 
additional timely payment to attract investment; however, the 
majority of stakeholders who set up the rules in California 
decided not to pay for capacity as long as reliability is free. 
What needs to be done in California to solve the problem falls 
into two categories; short-run actions to deal with the crisis 
and long-run actions to fix the market.
    In the short run, California needs to connect wholesale and 
retail prices. It needs to reduce power demand, and it needs to 
focus on developing new power supply. The question is, are 
there signs that things are being done? If 5,000 megawatts of 
diesel-fired generation is not being coordinated and plans 
being made to synchronize in that grid, there is clear evidence 
that the efforts needed to relieve this problem in the short 
run are not being done. Testimony has also made it clear that 
there needs to be flexibility in environmental regulations that 
are currently limiting power supply.
    In the long run, California needs to fix its market. It 
needs to establish a capacity market by mandating a capacity 
requirement and enforcing a deficiency penalty. It needs to set 
and enforce target levels of siting and permitting for new 
power plants, and meet those year after year. And it needs to 
create an independent and expert board to govern the market 
    The signs are again clear. California is doing only some of 
what needs to be done, and many current policies are not 
working. Keeping retail and wholesale prices delinked have led 
to bankruptcies, it has kept thousands of megawatts out of 
supply. Using the State's time and effort and resources to take 
over the transmission grid will further distort the market, and 
is taking the efforts away from increasing supply.
    The Department of Water Resources moving to long-term 
contracts at the top of the market is a mistake. These 
contracts have allowed California to push the recovery of 
current costs into the future. California will regret signing 
these commitments in the years to come.
    In addition, barriers to new supply remain. Even with all 
the attention and hoopla focused on new supply, we are looking 
at about 1,300 megawatts from last summer to this summer of new 
supply, which is just about enough to offset 1 year's growth. 
The Federal Energy Regulatory Commission is also making 
mistakes in the way it is setting price caps. It is creating 
the perverse incentive not to run power plants at peak demand.
    California needs to realize it competes in a worldwide 
market to attract capital for power development. It has created 
a negative and hostile environment to that investment, and it 
is moving to a very expensive and expansive public power 
    [The prepared statement of Mr. Makovich follows:]
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    Mr. Ose. Thank you, Mr. Makovich. I would like to recognize 
Congressman Horn to initiate questions for 10 minutes.
    Mr. Horn. Just a few to clarify a few things. President 
Lynch, as chairman of the California Public Utilities 
Commission, I am sure you did look at this whole situation over 
time. Did you ever work for the California legislature at all?
    Ms. Lynch. I did.
    Mr. Horn. You did? Was it at the time they were talking 
about deregulation?
    Ms. Lynch. No.
    Mr. Horn. When did they first discuss deregulation?
    Ms. Lynch. Well, they passed the bill in August 1996. I 
believe they were talking about it for a while before.
    Mr. Horn. Right. And as I remember, Steve Peace was the 
leader of that.
    Ms. Lynch. I believe that Senator Brulte is the author of 
the legislation.
    Mr. Horn. Really? Well, I guess everybody else saw it as 
Peace, who was a Democrat, and every single Member, Democrat 
and Republican, voted for that, I believe, as I remember the 
    Ms. Lynch. I was not there.
    Mr. Horn. OK, you were not there. Well, Mr. Chairman, let 
us get what the truth of it is in the record at this point as 
to did they all agree to it or did they not. But as I remember, 
they all agreed to it on deregulation.
    Mr. Ose. If the gentleman would yield.
    Mr. Horn. Yes.
    Mr. Ose. It is my understanding that AB1890, which is the 
legislation that implemented the restructuring, was at least in 
part authored by then Assemblyman Brulte, and that Senator 
Peace carried it in the Senate.
    Mr. Horn. OK.
    Mr. Ose. And, that it was adopted unanimously.
    Mr. Horn. And it was adopted.
    Mr. Ose. That is my understanding.
    Mr. Horn. That is right.
    Mr. Ose. We can check it out.
    Mr. Horn. So, that is one thing to clarify. Let me ask you 
about the situation, and we have a letter here from the law 
firm Swidler, Merlin, Sherif, Friedman in Washington. Is that a 
representation of the public utilities? I am just curious. We 
have a letter from them, and I just wondered do they speak for 
the California Public Utilities Commission?
    Ms. Lynch. No, we have our own independent legal staff.
    Mr. Horn. In Washington?
    Ms. Lynch. No, in California.
    Mr. Horn. I see.
    Ms. Lynch. And we have----
    Mr. Horn. Because we are talking about the Federal side, 
and I just wondered if you kept counsel on the Federal side.
    Ms. Lynch. No, we have State employees who are lawyers, who 
represent the California Public Utilities Commission in 
Washington at the Federal Energy Regulatory Commission.
    Mr. Horn. But, let me tell you what worried us, the $6.7 
billion were presumably potential excess cost. Now, the fact 
is, when you put all the figures out, you are talking about 6.7 
total overcharges for the independent systems operator, and the 
power itself, including ancillary services, from May 2000 until 
February 2001, that is 8 months. And $4 billion of the $6.7 
billion is from that, say a lot of people. I would like to know 
what Mr. Winter says on this. $3.1 billion is from the Federal 
commission and jurisdictional sellers, and then $1.3 billion 
occurred between October 2000 and February 2001, and that was 
several months. Mr. Winter, could you untangle this as to who 
did what to whom, and what it boils down to?
    Mr. Winter. OK. So that it is clear, Swidler is the 
representative of the ISO in Washington, DC, and does our 
filings with them.
    The report you are referring to was our comments to the 
FERC market monitoring program. If you look at the numbers, the 
first thing we were asked to do was to look at the total 
wholesale energy cost, excluding the utilities. And of that, we 
found that there was about $6.2 or $6.7, whichever number you 
referred to, that was what we would consider to be what you 
would expect if you had a working market. In other words, if 
you had a market that was working, and had hourly prices, you 
would expect a certain price. The price that Californians paid 
was $6.7 billion above that number.
    Now, that number is made up of several components, one of 
those being bilateral contracts that we do not have any 
knowledge of exactly what is included in those. So that is of 
the total savings, about $2 billion was extrapolated from what 
we saw in the market, which leaves us the $4 billion that is 
over--you used the term ``overcharged.'' I would say above 
market prices. Of that, a portion was the PX, part of it was 
the ISO real-time, and part of it ancillary services. The PX 
energy we have a good feel for, because as they were running, 
they had rates that were open to us, and so we could review 
    If you then break that $4 billion down, it amounts to 
approximately $3 billion that is in the jurisdiction of FERC, 
and about $1 billion that is non-jurisdictional. OK, now, if 
you go to the timing, because there was a lot of debate over 
when FERC could or could not do certain things, and if you look 
at the timeframe from May through September--and May is when we 
saw the cost start to go up--May through September, FERC 
jurisdictional was about $1.7 billion. FERC jurisdictional for 
the months of October through February was $1.3 billion, for a 
total FERC jurisdictional for that timeframe of $3 billion. So, 
I can submit this document. It is all in the report. And I 
assume that is what you are reading from those.
    Mr. Horn. Well, that is right. It seems to me that $1.3 
billion occurred between October 2000 and February 2001, and 
you say that is accurate?
    Mr. Winter. Yes.
    Mr. Horn. OK. Is there anything here that is not accurate? 
Because one thing is that the Federal commission has a very 
small role compared to the State commission.
    Mr. Winter. Well, I would not classify it as not accurate. 
The one we do not have information on are the bilateral 
contracts that are done outside of our knowledge.
    Mr. Horn. Now, who would know what those contracts amounted 
    Mr. Winter. The entities who entered into them, which were 
the generators and the utilities, and later on, of course, the 
Department of Water Resources.
    Mr. Horn. Well, did they file a document anywhere?
    Mr. Winter. Not that I am aware of, but I would not be the 
expert on that.
    Mr. Horn. Well, between the two of you, you ought to know 
whether it is Federal, State, or what. Or do they have to do 
anything? It just seems to me somewhere a regulatory commission 
ought to know what those amounts were.
    Mr. Winter. I would assume that FERC can get that 
information, but we do not have it.
    Mr. Horn. Well, how about it, Mr. Madden?
    Mr. Madden. Well, Congressman Horn, you asked a very 
interesting question. The six point----
    Mr. Horn. Usually when somebody says that, I give them a 
``C'' as a student. So, as a former professor, is this going to 
be more than interesting? [Laughter.]
    Mr. Madden. It is going to be more than interesting.
    Mr. Horn. OK, that is what we want.
    Mr. Madden. Using the $6.2 billion that the ISO submitted, 
I think around March 22nd, as a basis for people to read as 
excess refunds due consumers is somewhat shaky. We asked the 
ISO last week to provide us the details. What you have to 
understand is that the $6.2 billion covers a period from May 
2000 through February 2001.
    Mr. Horn. Eight months.
    Mr. Madden. It also includes non-jurisdictional money. And 
those are sales made by municipals or co-operatives such as 
Sacramento Municipal Utility District or Los Angeles 
Ddepartment of Water and Power or Federal Power Marketing 
administrators in the northwest, or other entities over which 
we do not have jurisdiction. We find for the first time that 
approximately $2 billion is associated with bilateral 
contracts, which is not subject to our refund order. We were 
dealing with a realtime market.
    So, Congressman Horn, to get to the bottom line, FERC asked 
the ISO to provide us the detail necessary to explain why or 
how they arrived at the $6.2. Today, for the first time they 
are trying to carve out the $6.2 billion. We can require the 
jurisdictional sellers--the jurisdictional sellers and the 
public utilities--to provide us that information. We have sent 
a data request to the ISO to provide us that information 
relative to both the jurisdictional and non-jurisdictional.
    Mr. Horn. So you have no problem with asking for those bits 
of information?
    Mr. Madden. I have no problem at all, sir.
    Mr. Horn. OK. Do you think the State commission ought to do 
that, also?
    Mr. Madden. Well, these are wholesale costs. They will be 
submitted to us. Of course, the California Public Utility 
Commission can provide its response, and I believe it has to 
some extent with respect to the ISO filing. But they are 
welcome to provide the comments, once the ISO provides us with 
the information we have requested.
    Mr. Horn. President Lynch, is your Commission going to ask 
for the ISO information?
    Ms. Lynch. We do have the ISO information. I applaud Mr. 
Winter's cooperation, now that we have new members of the board 
who are not stakeholders and not self-interested in the board. 
We had quite a bit of trouble, as an entity of the State of 
California, obtaining basic information from the ISO and the 
sellers in the fall, and we had to apply to FERC for help in 
getting that information, but we did not receive that help. But 
now that we have disinterested members on the ISO, after the 
Governor and the legislature changed State law, we have had 
much more cooperation.
    You noted, Congressman Horn, that the FERC has a small 
role. Actually, I think the FERC has the whole ball game 
because they control wholesale prices. We can ask for the 
information, and fight in court with the generators over 
receiving it, but we cannot impose price rationality in the 
system. That is entirely FERC's jurisdiction as the Federal 
    Mr. Horn. Is that correct, Mr. Madden?
    Mr. Madden. We have total authority over the wholesale 
rates, that is correct. We have requested that information from 
the ISO, and if we do not get the full details, we can and will 
request the information from the individual generators to the 
extent they are jurisdictional.
    Mr. Ose. Well, would you yield for a minute?
    Mr. Horn. Yes.
    Mr. Ose. Well, let me just--let us just jump in here. Mr. 
Winter, can you give the information to Mr. Madden, so we can 
cut this out?
    Mr. Winter. Yes. I find this very interesting, but I will 
not comment on that. Yes, they have the information that we 
have. The interesting thing is that we have no authority to get 
from the generators what their actual costs were, so all we can 
do is present to FERC our suspicions. Now, FERC is the one that 
has the authority to go to the generator and say justify your 
    Mr. Ose. OK, so we can get the information that you have to 
Mr. Madden?
    Mr. Winter. That is no problem. It has already been 
    Mr. Horn. And then I think President Lynch was going to 
note something here. You started a breath there, and I assume 
that is a paragraph, so what is--well, how do you feel about 
    Ms. Lynch. I think the important conclusion is that the 
ISO, using all of the information that was available to it, 
under the most conservative assumptions, found that the sellers 
overcharged Californians over $6 billion in less than a year. 
You know, in 1999, California paid $7.4 billion for power--for 
electricity. In 2000, we paid over $27 billion for electricity. 
That is $20 billion more in just 1 year for a 2-percent 
increase in demand. And to paraphrase David Freeman, even a 
blind pig can figure out that there is price gouging in that 
kind of market. But it does fall to FERC to demonstrate--to 
identify the gouging.
    Mr. Horn. You mentioned stakeholders, and how they have 
gone down to five from what you called, interested parties. 
Tell me about how that worked. Did you make recommendations to 
the Governor and advise him that, look, these people are just 
doing something for themselves?
    Mr. Ose. Mr. Horn, could we have a second round of 
    Mr. Horn. OK.
    Mr. Ose. All right. We will come back to that. I would like 
to recognize Chairman Burton for 10 minutes.
    Mr. Burton. Do you have the information from the generators 
that Mr. Winter alluded to?
    Mr. Madden. I do not know all the information that Mr. 
Winter alluded to. We have requested information from the 
generators from the January-February period in which we 
established a $124 million refund. We asked them to provide us 
with the cost data or accept the refund numbers. As to the 
October-November period, we have sent out a data request to the 
generators asking for cost data.
    Mr. Burton. Well, how long do you give them to get that 
information back?
    Mr. Madden. Seven days in one case.
    Mr. Burton. Seven days?
    Mr. Madden. Seven days.
    Mr. Burton. And when did you send the request out?
    Mr. Madden. We sent the request out for the October-
November period last week.
    Mr. Burton. Why did you not do that before that?
    Mr. Madden. The December 15th order that the Commission set 
which established the section 206 procedding required us first 
to look at the January to April period where we established the 
break point--a $150 review for megawatts. So, we focused on 
that first. We are now turning our efforts to the October-
December period.
    Mr. Burton. It seems to me--of course, I am a novice at 
this--that you ought to kick it into high gear and get that.
    Mr. Madden. Mr. Chairman, we are. We just had different 
rules apply in that period.
    Mr. Burton. We will talk to the head of the agency and find 
out why this is not getting done quicker. I mean, there is a 
problem out here that needs to be solved, and I think there is 
enough blame to go around.
    Ms. Lynch, you said, or maybe it was Mr. Winter that said 
that there was anticipated a shortfall peak in June of around 
3,700 megawatts.
    Mr. Winter. That is correct.
    Mr. Burton. Is that right? And that it might go down to 600 
megawatts shortfall around September.
    Mr. Winter. Correct.
    Mr. Burton. Have you taken into consideration the 5,000 
megawatts that could be produced through diesel power that is 
supposedly sitting around someplace in this State?
    Mr. Winter. Yes, that number was a little bit of a surprise 
to me. I was----
    Mr. Burton. Why is it a surprise to you?
    Mr. Winter. Well, because I know that there is generation, 
but we do not look at emergency generation.
    Mr. Burton. Why?
    Mr. Winter. Well, for two reasons. No. 1 is the operator. 
Let us say you have a hospital that has a 50 megawatt--or let 
us say it is a 10 megawatt generator. That generator only 
serves the operating room. And so----
    Mr. Burton. Excuse me. Let me interrupt. It just seems to 
me that, under the circumstances that you face here in 
California, you would get on the stick and find out where all 
that emergency power is so it could be utilized as quickly as 
possible when an emergency arises. And to start saying that you 
have not done that or you have not checked, you do not know 
what hospital is doing it and all those other things--now, 
obviously the hospital is going to use it for their own 
purposes in the event of a blackout. But according to the 
people we had on the previous panel, there is 5,000 megawatts 
of power out there someplace that could be utilized, and when I 
look at what you are looking at here next year or this summer, 
you are 3,700 megawatts short. And you do not even know if that 
5,000 megawatts is going to be figured into the equation. If 
that is out there, then you have got a problem that can be 
solved. If it is not, then you can do something else. But, you 
cannot tell us anything today.
    Mr. Winter. Well, what I can tell you is that even if you 
could identify 5,000, it is my belief that the majority of it 
would never be turned on because what the entity who has that 
generation would have to do is shut off half their business 
while they turned on just the emergency operating room.
    Mr. Burton. But, how do you know that?
    Mr. Winter. Well, because I have been in the business for 
40 years and I know----
    Mr. Burton. But have you looked into it? I mean, have you 
really done an analysis of it.
    Mr. Winter. Well, no, we have not done an analysis.
    Mr. Burton. Well, do you not think you should?
    Mr. Winter. I believe that the Energy Commission is looking 
at those numbers, as is the Governor's people, and when they 
identify how many megawatts are there and we can identify how 
many could actually solve the problem as opposed to not solving 
it, then we certainly would figure that into our equation.
    Mr. Burton. I do not know how everybody else feels, but I 
feel like everybody is pointing the finger at somebody else, 
and everybody is not doing the things that ought to be done to 
make sure that they have a complete analysis of where energy 
is, where alternative sources are, so they can get the job 
done, if possible, with what is out there. And you really do 
not know where the 5,000 megawatts they alluded to in the 
previous panel are. You say that it is probably in hospitals 
and every place else, but you really do not know.
    Mr. Winter. That is correct, I have not looked at it.
    Mr. Burton. But you will try to find out?
    Mr. Winter. Certainly.
    Mr. Burton. Do you know how long that will take?
    Mr. Winter. Well, I think the information resides in the 
Energy Commission, and so we will go----
    Mr. Burton. Can you talk to them tomorrow and find out?
    Mr. Winter. I can talk to them tomorrow.
    Mr. Burton. That would be great.
    Now, let me just ask you a question, Mrs. Lynch. Last 
summer, according to the records here, in April it was $26.56 
per megawatt, right?
    Ms. Lynch. I do not know what you are referring to.
    Mr. Burton. This is the chart you gave us.
    Ms. Lynch. Right, that is the average chart from the PX.
    Mr. Burton. OK. So that is what it was per megawatt in May?
    Ms. Lynch. On average.
    Mr. Burton. OK. That was in April. And then in May it 
jumped to $47.22, right?
    Ms. Lynch. On average, that is correct.
    Mr. Burton. On average. Well, about that time you had an 
offer to buy electricity at 5 cents per kilowatt hour, you did 
not buy it. Why?
    Ms. Lynch. Well, the Public Utilities Commission does not 
buy power, the utilities do. What the Public Utilities 
Commission does do is authorize the utilities to buy power.
    Mr. Burton. Did you authorize it?
    Ms. Lynch. Absolutely. Since I have been on the Public 
Utilities Commission, the utilities have asked 10 times for 
authority for bilateral or forward contracts, or the authority 
to participate in hedging products. Every single time the 
Public Utilities Commission has allowed the utilities to do so.
    Mr. Burton. Well, why did they not buy the electricity or 
sign the long-term contract for 5 cents per kilowatt hour?
    Ms. Lynch. I do not know the offer you are referring to.
    Mr. Burton. You do not know?
    Ms. Lynch. I know that many offers were made at various 
points in time. I do not know a specific offer made in May of 
    Mr. Burton. But looking at the jump, there was a quantum 
leap from April through--it almost doubled in May, and then it 
was more than double again in June, and then it continued up 
from there. What was the situation? We are going to talk 
tomorrow in San Jose to some of the utilities. But the reason 
they did not file for that was because there was so much 
interference from the staff at the Commission. That is not 
    Ms. Lynch. All I know is, every single time they asked for 
authority, we gave it to them. And in fact, the facts show 
    Mr. Burton. Did you give it to them in writing?
    Ms. Lynch. Oh, absolutely.
    Mr. Burton. Can I get copies of that?
    Ms. Lynch. Certainly. August 3rd we said you buy your full 
net short, your choice, your business decision, and the 
utilities in fact did purchase bilateral contracts. We moved 
with lightning speed. They asked us on July 21st for authority, 
and we turned it around in 2 weeks and gave them full authority 
2 weeks later. Then they started to buy, and they bought in 
August, in September, in October, in November. So I believe it 
is a canard to say that we stood in their way, because the 
facts show differently.
    Mr. Burton. They were buying at what rate?
    Ms. Lynch. They were buying at whatever rate they chose.
    Mr. Burton. I guess I am missing something here. There was 
an offer for long-term contracts at 5 cents per kilowatt hour. 
And you are saying that they did not purchase it, they did not 
sign agreements for that. Why would they not do that?
    Ms. Lynch. No, that is, I believe, Mr. Chairman, what you 
said. I do not know the specific offer you are referring to, 
because the utilities receive dozens, if not hundreds of offers 
in a month.
    Mr. Burton. So, I need to address that question to the 
utility, themselves?
    Ms. Lynch. I believe so. What the Public Utilities 
Commission did was give the utilities the authority to expand 
their business choices. They expanded their business choices to 
the full limit, and the utilities actually took advantage of 
some of that authority.
    Mr. Burton. Well, there is a difference of opinion, and we 
will get their side of the story tomorrow. They have said that 
the problem was that they could not get through the red tape or 
could not get through the staff at your office. But we will 
check into that tomorrow.
    I have more questions, Mr. Chairman, for the record. And I 
would like to ask some of those on the next round.
    Mr. Ose. We will come back.
    Mr. Burton. Thank you.
    Mr. Ose. Thank you, Mr. Chairman.
    Mr. Winter, I want to examine something here that troubles 
me greatly. Ms. Lynch, in her written testimony, talks about a 
December 8th order that you obtained from FERC eliminating 
price caps. December 8, 2000, and describes it as a secret 
order. Is that an accurate description?
    Mr. Winter. I think that is a little over-dramatic, but----
    Mr. Ose. How would you describe it?
    Mr. Winter. The way I would describe it is, on Wednesday of 
that week the prices--we have a situation where we had a price 
cap of $250. And what was occurring was that we quickly reached 
the $250, and people were then not selling us power until they 
would call us on the phone and say I am willing to give you the 
power, but the price is $300. When we make and go above price 
cap, what we are making is a bilateral agreement between the 
market and the ISO committed to that $300 price. We were 
completely inundated, because the price of natural gas at that 
time was rising to the $40, $50 at burner tip, and we could not 
get power into the system. So on Friday, what I did was, so 
that we could put these prices that we were having to pay under 
review of FERC, I did not remove the price cap, what I said was 
any money that we paid above the $250 price cap would now be 
subject to FERC review. Because I was already in the position 
that I was having to pay those to keep the lights on. So, that 
is what we did on the December 8th timeframe. We immediately 
filed that at FERC, and they turned that decision around that 
day and gave us authorization to make that part of our market.
    Mr. Ose. Were there parties who were excluded from that 
process? I mean, I am trying to reconcile your statement with 
Mrs. Lynch's testimony.
    Mr. Winter. Yes, I think we moved extremely fast. There is 
no doubt about that. Because I was in a situation where I 
literally could not make the phone calls that I had to in the 
operating room, and I would not have had the power. Therefore, 
I made the emergency filing with FERC and enacted it the next 
    Mr. Ose. Mr. Madden, your recollection is consistent with 
    Mr. Madden. My recollection is almost consistent with that. 
They made an emergency filing on that day saying that they 
needed power and they could not get the power at the $250 hard 
cap. They asked for a soft cap, in which to bid the prices. We 
have authority, under section 205 of the Federal Power Act, to 
waive the notice of provisions in situations like this. The 
Commission acted very swiftly on the filing, very swiftly, and 
issued the order so that the ISO could get power that day and 
the next day.
    Mr. Ose. Ms. Lynch, is it the word secret that is causing a 
problem here? Your testimony says that this was a secret order, 
and I am trying to find out how we get some collegiality, if 
you will, or call it whatever you want, in this process.
    Ms. Lynch. We found out about it after it happened. And as 
the head of an administrative agency, one process that I take 
extremely seriously is the requirement for public notice and 
comment. I think that is a fundamental tenet of due process 
that is required by the U.S. Constitution. And what happened 
there was a private entity, the ISO--actually the head of a 
private entity, without consulting or getting a vote of the 
board in a public process, went to FERC and privately asked for 
an emergency order. And FERC, without notice to a single 
California policymaker or elected official, granted that 
without the opportunity for anyone else in California to even 
comment, much less object.
    Mr. Ose. How do you reconcile that situation with the 
Governor's refusal to disclose information on power contracts?
    Ms. Lynch. The difference is the FERC is required to act 
under the Administrative Procedure Act, according to its 
process. The Governor is--or the Department of Water Resources 
is essentially in a market where arbitragers have the 
technological capacity and the expertise to take advantage of 
small bits of information in order to disadvantage California 
ratepayers. So, if you are in a business transaction where you 
are bidding against a bunch of other bidders, you want to make 
sure that the other bidders do not know the terms of your bid, 
because then they can outbid you. Essentially, Department of 
Water Resources is now in the business of buying electricity, 
and in that business situation, you do not want to hand over 
all the cards you possess to your business competitors. The 
difference here with FERC was that they were acting in their 
administrative capacity as a regulator, yet they failed to 
follow even the basic tenets of due process or notice.
    Mr. Ose. I cannot quite understand the difference, from a 
public policy standpoint, if you will, from ISO's action as you 
described, in a secret manner, that redounds to the adverse 
impact of California consumers and the inability of California 
taxpayers, from a public policy standpoint, getting information 
from the Governor's office about these contracts for forward 
delivery of power that uses taxpayer resources. I am afraid I 
am just a businessman, I am not an attorney. I do not quite 
understand the difference.
    Ms. Lynch. Well, certainly FERC failed to follow its 
Federal statutes and administrative mandates such that its 
action should be entitled to deference. Because if you fail to 
follow the process and do not allow any other comment, then 
your action should not be entitled to deference.
    But as a business person, I am sure you know the cutthroat 
world of business when you are competing on a price point or on 
a term of a contract. Notwithstanding that, DWR does not have a 
statute in which it failed to follow in competing in the 
business world to get the best price for California consumers. 
However, DWR has said that when that information is no longer 
business sensitive, it will provide that information to the 
public. The problem here is why should we put all of our cards 
on the table and allow the same sellers, who have continued to 
gouge the California utilities, to gouge the State.
    Mr. Ose. Mr. Madden, do you share the differentiation that 
Mrs. Lynch is describing here?
    Mr. Madden. I do not share that differentiation, 
whatsoever, and I would like to correct the record. The Federal 
Power Act, section 205, gives us full authority to act on a 
filing such as the ISO made that day without notice and without 
opportunity to comment. We followed the statute. It was an 
emergency situation. The ISO needed additional power.
    Mr. Ose. I want to move on to another subject.
    Mr. Horn. Could I, before----
    Mr. Ose. Certainly, Mr. Horn.
    Mr. Horn. I would like to follow this up a little and get 
the public administration aspects of it. Mr. Winter, who 
appointed you to the position of independent system operator?
    Mr. Winter. That was under AB1890. It is a not-for-profit 
corporation formed under the authority of AB1890, and under the 
corporate laws of California.
    Mr. Horn. And who appointed you?
    Mr. Winter. The board at that time.
    Mr. Horn. Which board?
    Mr. Winter. We had a stakeholder board.
    Mr. Horn. The original stakeholder board?
    Mr. Winter. That is correct.
    Mr. Horn. And there were what, 28 people on it?
    Mr. Winter. 27, 28.
    Mr. Horn. 27, 28. And the law then, which is a State law, 
had certain categories, I assume. Consumer, term----
    Mr. Winter. Yes. It was an attempt to be in a balance 
between consumers, suppliers, utilities, municipalities, 
generators, all of those were on the board.
    Mr. Horn. Did the Governor at that time make all of those 
appointments, or did the board meet and make the appointments, 
up to 28 or so?
    Mr. Winter. The way the process worked was, the State 
appointed an oversight board, and it was their responsibility 
to take the candidates and approve those, and then those were 
sent on to FERC for approval.
    Mr. Horn. So, in this case it was Governor Davis, was it, 
that put the people on----
    Mr. Winter. No, I believe that was done in the 1997 
timeframe, the first board.
    Mr. Horn. Well, is that Governor Wilson or who?
    Mr. Winter. I believe it was during that timeframe.
    Mr. Horn. OK. Somebody has to appoint them if they are not 
voting each other in.
    Mr. Winter. That is correct.
    Mr. Horn. OK. So that is the way it worked?
    Mr. Winter. Right.
    Mr. Horn. The legislature passed a law. The sitting 
Governor complied with the law and put in certain people.
    Now, the next Governor was worried, in the words of Ms. 
Lynch, with the interested parties maybe were too interested. 
So, they left five stakeholders there. And as I remember, he 
took the consumer person and left them there.
    Mr. Winter. Yes. Actually, the existing stakeholder board 
all retired, and the new board was appointed. Only one member 
of that new board was a past member of the old board.
    Mr. Horn. And that was presumably the consumer 
representative; is that correct?
    Mr. Winter. That was the consumer representative.
    Mr. Horn. Yes. The other four had no previous experience 
with electricity issues is what has been said. Is that true?
    Mr. Winter. I do not know whether they have experience with 
electric issues or not. Certainly they did not come from the 
energy side of the business.
    Mr. Horn. Well, some think that when the Governor took 
everybody away except the consumer representative, that he 
brought on people in the middle of a crisis without any 
expertise to deal with it. Do you agree with that or what?
    Mr. Winter. No. I think the board's position is to rely on 
their staffs to get up to date, and this board clearly has 
spent the time and the effort to get current on energy issues.
    Mr. Horn. So those staff members--how many staff members 
were there?
    Mr. Winter. I am not following staff members.
    Mr. Horn. Well, how many staff members came with the 
stakeholders' board, with the legislation authorizing that 
board, and was that also the board members, or was it the 
Governor? Because obviously another Governor felt that they 
served at his pleasure, which is often the way Federal boards 
are in Washington. So I am curious who picked the staff.
    Mr. Winter. Well, when you say staff, the staff of the ISO?
    Mr. Horn. That is right, the stakeholders' group and the 
ISO stakeholder board.
    Mr. Winter. Well, the stakeholder board picked the 
officers, who then, of course, selected the staff down through 
the organization. When the new board came in, it is their 
responsibility, of course, they had the choice of removing me, 
if that is what they wanted to do, and clearly they could 
change any of the staff people that they so desired.
    Mr. Horn. Let me ask you, Ms. Lynch. Did you help staff the 
board, because you are very close to the Governor, obviously? 
So, who put the board together, and who put the staff together?
    Ms. Lynch. I run the Public Utilities Commission, which is 
a State entity. The Independent System Operator is a private, 
not-for-profit corporation which is not a State entity. 
However, the Governor, under AB5X, which was passed in January, 
does appoint a financially non-interested five-member board. 
So, the difference there was that anyone who could have a 
financial interest or was employed by someone who could have a 
financial interest in the decisions made by the ISO could not 
then serve on the ISO board.
    The Governor appointed five independent members of the ISO 
board pursuant to AB5X. One of them was Michael Kahn, who was 
the past chairman of the Electricity Oversight Board of the 
State of California. And I would take issue with Mr. Winter 
that Mr. Kahn has considerable energy expertise forged in the 
heat of the recent crisis, and certainly is one of the premier 
experts on this issue and on the failures of the restructuring 
experiment in California.
    In addition, Mr. Guardino, who is the executive director of 
the Silicon Valley Manufacturers Group, I believe has made it a 
special expertise of his to understand just exactly how this 
energy crisis is affecting the Silicon Valley, and the key and 
critical component of California's business. So I think that 
Mr. Guardino also has considerable expertise, and I would take 
issue with Mr. Winter's statement.
    Mr. Horn. I am curious, who is the chairman of that board 
    Ms. Lynch. Mr. Kahn, who was the past chairman of the 
Electricity Oversight Board.
    Mr. Horn. OK. Are we going to have Mr. Kahn somewhere along 
between San Diego, Silicon Valley, and Sacramento?
    Mr. Ose. He was invited, but declined to appear.
    Mr. Horn. Well, so much for open things.
    Ms. Lynch. I believe that Mr. Winter is appearing on behalf 
of the entity that Mr. Kahn is the chair of.
    Mr. Ose. Would you yield?
    Mr. Horn. Yes.
    Mr. Ose. Mr. Madden, in terms of the replacement or the 
retirement, and the appointment of the new board for ISO, I 
heard that those appointments come to FERC. Did FERC have 
concerns about this based on this PX clearing price schedule? 
Did the FERC have concerns about what was transpiring?
    Mr. Madden. The Commission's December 15th order set a 
date, and I do not recall the date, where the board that 
existed prior to this new board would have to be reconstituted. 
We set up a procedure to have discussions and negotiations with 
the State as to the board composition. I believe those 
discussions never took place; I believe the Governor appointed 
the five board members. I cannot get into the further details, 
because there are pending matters before the Commission 
regarding this subject.
    Mr. Ose. OK. I see my time has long since expired. I would 
like to recognize the gentleman from Indiana for 10 minutes.
    Mr. Burton. Let me go through some of the questions that we 
have prepared for the record. And if I am redundant, I 
apologize, but we need to get these in the record so we, when 
we get back to Washington, can go through this very thoroughly.
    Mr. Winter, you said on an average summer day the level of 
demand varies, but it gets up to, you anticipate, around 3,700 
megawatts short. Now, what is the total megawatts on a summer 
    Mr. Winter. On a summer day, with a normal summer, we get 
up around 47,000 to 48,000, and when you add reserves our 
demand is around 50,000 megawatts.
    Mr. Burton. Around 50,000 megawatts. And that is the peak?
    Mr. Winter. That is the peak.
    Mr. Burton. And then it goes down, I guess, after June or 
    Mr. Winter. No, no. What happens is, when we get to July 
there is new generators coming on, so therefore the peak day 
stays pretty much at the 47,000 or 48,000 level, and as we add 
more generation, then, of course, our deficiency decreases.
    Mr. Burton. OK. Now, this summer what do you anticipate the 
supply level to be? You said it would probably be 3,700 
megawatts short. But what will the level be this summer? You 
said the demand would be around 50,000.
    Mr. Winter. Correct.
    Mr. Burton. What is the supply going to be? Do you have any 
projections on that?
    Mr. Winter. Well, the supply is made up of a lot of 
components. First is in-state generation, then there is out-of-
state generation that we can get.
    Mr. Burton. I just want a number. [Laughter.]
    Mr. Winter. Well, and I guess I am a little struggling on 
what you mean by a number.
    Mr. Burton. Well, if you are going to need 50,000 
megawatts, do you have any idea on how much you are going to 
    Mr. Winter. Yes, 3,000 less than that.
    Mr. Burton. So 47,000 megawatts?
    Mr. Winter. 47,000.
    Mr. Burton. That is very good. [Laughter.]
    OK. If a few key plants have breakdowns this summer because 
they are old and have been running at full capacity, what will 
that do? Do you have any projections on that?
    Mr. Winter. Yes. We have projected about 2,500 megawatts 
that would be off for emergency reasons, breakage, etc. If that 
suddenly was much higher, then the number would go up and we 
would be looking other places to try and obtain the power.
    Mr. Burton. And you do not have any idea what the odds are 
that would happen?
    Mr. Winter. Well, last year we saw numbers ranging from 
around 1,800 up to around 2,800 during the summer.
    Mr. Burton. So, you think that the 2,500 is a fairly good 
    Mr. Winter. We think that is a fairly good number.
    Mr. Burton. How frequently do you think California is going 
to have blackouts this summer? Do you have any rough idea on 
    Mr. Winter. No. I keep hearing all these numbers that 
supposedly we came up with, but we in fact did not come up with 
    Mr. Burton. Well, do you have any idea?
    Mr. Winter. No. No, we do not.
    Mr. Burton. So, you are just kind of driving in the dark?
    Mr. Winter. That is the way we have been driving for quite 
a while each day.
    Mr. Burton. Mr. Makovich, do you agree with that?
    Mr. Makovich. Well, 2 months ago in a study that we 
released on the California crisis, we did some fairly extensive 
computer simulation of this marketplace. Given the expected 
conditions for this summer, normal weather, a soft economy, 1.5 
percent growth in real GDP, an 8-percent outage rate on thermal 
plants, 80 percent of normal hydro, we are expecting 200 hours 
when there is no margin at all, and 20 hours of rolling 
blackouts because the shortage is greater than 4,000 megawatts.
    Mr. Burton. Now, over what period of time would the 20 
hours of rolling blackouts be?
    Mr. Makovich. That will be concentrated around the peak 
demand period, which is going to be that August-September 
    Mr. Burton. So you are talking about in a 24-hour day, 
there will be 20 hours of rolling blackouts? Is that what you 
are talking about?
    Mr. Makovich. Across that timeframe it will be necessary to 
institute a rolling blackout probably in southern California 
because of the load patterns for a cumulative outage across the 
summer of 20 hours.
    Mr. Burton. If I was a farmer, a milk producer like the 
gentleman who was here awhile ago, I would want to have some 
kind of a heads-up on when rolling blackouts were going to take 
place. Is there any prospects of that, to let them know when 
there is going to be a blackout. I was having dinner with some 
people the other night and right in the middle of dinner 
everything went black. There was no warning, whatsoever, and 
the whole area was black. So I just wondered, is there going to 
be any----
    Mr. Winter. Was that in California or Indiana?
    Mr. Burton. It was California. [Laughter.]
    It was near Carmel.
    Mr. Winter. OK. Let me quickly tell you the process that we 
go through, and then I think that will answer the question. No. 
1, if it is a distribution system problem that a transformer in 
your front yard blows up, then yes, that has happened and you 
are out of power.
    Mr. Burton. Sure. That happens everywhere.
    Mr. Winter. As the transmission operator, as we move into 
the morning we make all of our projections, and we go through a 
three-stage process. We start off with a stage 1, and that 
usually indicates that we do not have enough resources to cover 
our full reserves.
    As we eat into our reserves, we get to a stage 2, which is 
less than 5 percent reserves, and then a stage 3. When we 
announce a stage 3, that means that we in fact are moving into 
an area where we expect to drop load.
    There is notifications that go to each of the utilities. 
The utilities, in turn, notify their customers. And I believe--
and Loretta can correct me if I am wrong here. I think they 
also just recently passed that the utility had to give each of 
the blocks, which is a certain amount of load that is going to 
be dropped, a notification if they are next on the line. The 
    Mr. Burton. How far in advance would that notification be 
    Mr. Winter. Well, we are in an hourly market, so things can 
happen within the hour. We warn people early in the morning 
through the stages and through the notification of the PUCs.
    Mr. Burton. I understand this explanation you are giving, 
but how much time will people be given before there is a 
    Mr. Winter. If the blackout is because we have identified 
there is--and I am not trying to be evasive here, I am just 
trying to help you understand what we face every day. And that 
is that if we know, we send the warnings out. But literally in 
the hour that it can occur, we will not know until about 30 
minutes before that hour begins. Then, if we are faced with the 
loss of a large unit like we were the other day, then that 
drops to, you know, 15, 20 minutes is all the notice we can 
give because we just lost units and did not have sufficient 
supply to meet the demand.
    Mr. Burton. You are talking about a transformer or 
something like that?
    Mr. Winter. Or a generator.
    Mr. Burton. Or a generator.
    Mr. Winter. I mean, we have a large generator that goes 
    Mr. Burton. I was talking about in the normal course of 
things, the rolling blackouts because of shortages. In the 
normal course of things, not the emergencies, how much time 
will these people be given? Do you have any idea?
    Mr. Winter. The problem is, we are operating on such a thin 
margin here that we can predict immediately or in the morning 
that we are going to have plenty of supply, but then we lose a 
unit. You are calling that an emergency; I call that an 
everyday operation, you know.
    Mr. Burton. OK. I guess I cannot get the answer to that 
    Ms. Lynch. Chairman Burton, if I may.
    Mr. Burton. Yes.
    Ms. Lynch. The Public Utilities Commission did just change 
the standards, because you are absolutely right, people deserve 
to know. And even a half an hour's advance notice means you can 
turn off your computer, you can shut down your business 
process, you can make plans to run your backup generator. So, 
what the Public Utilities Commission said to the utilities is, 
you must notify in two ways. First, if you know that we are 
tight in the morning, then tell folks you are next up to bat, 
so that people can know during the day that there is a chance 
that their block is going down. And then second, when you know 
that block is going down, tell them in advance. The utilities 
get a half an hour's notice, and often the ISO has more notice. 
So, folks deserve at least a half an hour.
    Mr. Burton. I see. I understand. It just seems if there is 
even a remote possibility that there was going to be a 
blackout, you would give them the heads-up, and if it did not 
occur, so much the better.
    Mr. Winter. Right.
    Mr. Burton. Mr. Madden, in December FERC issued an order 
imposing what has come to be known as a soft price cap. If a 
generator charges more than $150 per megawatt hour, they have 
to file with FERC. Have you explained that yet, how that works?
    Mr. Madden. I did not get into the breakpoint analysis, no. 
No, Mr. Chairman.
    Mr. Burton. Well, do you want to real quickly explain that 
so that we would have that on the record.
    Mr. Madden. In the December 15th order, the Commission 
established, going forward from January 1, that there would be 
a breakpoint analysis in which sellers who bid in below 150 
would get the market clearing price. So even if you bid in at 
100, you would get 150. For those bids above 150, the 
Commission required that the sellers provide transactional data 
to support the basis of their bid.
    Mr. Burton. And how long does that take for that to be 
approved or disapproved?
    Mr. Madden. We are required to issue--in terms of whether 
or not the refund obligation accrues as to those transactions, 
within 60 days at the most.
    Mr. Burton. OK. How did they arrive at this threshold of 
    Mr. Madden. Prior to that period we had a soft cap 
effective December 8th because of discussions we had on the 
emergency filing with the ISO. Prior to that day, we had a 250 
price cap. There was a concern the Commission addressed, that 
we will go do an initial screen, and they felt that 150 was an 
appropriate figure at that point for just an initial screen.
    Mr. Burton. So the goal of the soft price cap is to keep 
prices down?
    Mr. Madden. Well, the goal----
    Mr. Burton. Is that the goal of it?
    Mr. Madden. The goal is to provide the necessary supply 
where you need it, and at the same time review the 
transactions--the bids that come in--to ensure that the rates 
are appropriate. That was one of the key things we did in our 
March 9th order.
    Mr. Burton. So, you reviewed that. And the goal, then, 
ultimately, is to keep the price as low as possible?
    Mr. Madden. Well, attracting supply, necessary supply.
    Mr. Burton. OK. And is that working?
    Mr. Madden. It depends on what one believes is the 
appropriate price. We, in our March 9th order, determined from 
the January period that the appropriate price would be $273. At 
which point those transactions which occurred higher than that, 
the sellers would be required to either refund those moneys, or 
show that their actual costs were higher than that. And the 
basis for that is that we looked at the gas prices in January, 
which were $12.50 on average. We looked at the NOx 
cost, which is $22.50, and we looked at the average pounds 
taken for a combustion turbine, and we arrived at a $273 price.
    Mr. Burton. If I might ask one more question. I will have 
more questions in the next round.
    Mr. Ose. Certainly.
    Mr. Burton. Mr. Winter, you requested FERC's December 
order; is that right?
    Mr. Winter. Well, the December 8th order. The December 15th 
order was one that was a followup, I believe, to their November 
decision and was a final order in December?
    Is that correct, Mr. Madden?
    Mr. Madden. No, the November order was a draft order where 
we sought comments on the remedies proposed, and the December 
15th order is the initial order, and that is on rehearing.
    Mr. Burton. So, you did order that December----
    Mr. Winter. 8th.
    Mr. Burton [continuing]. 8th order. Why?
    Mr. Winter. Well, as I explained before, I was suddenly----
    Mr. Burton. If I missed it, I am sorry. I do not want you 
to be redundant, but----
    Mr. Winter. Yes. I just explained that I had seen the 
prices go way above the price cap of $250, and I was not able 
to get power to serve the load.
    Mr. Burton. So it was an emergency?
    Mr. Winter. Yes.
    Mr. Burton. OK. I will come back for questions later.
    Mr. Ose. I would like to followup on Chairman Burton's 
question--if I understand correctly, there has been a 
suggestion that your December 8th application to FERC for 
emergency increase in the price of power was inappropriate. My 
basic question is whether or not you had the authority to make 
that December 8th request to FERC. Did you have the authority 
to make that request?
    Mr. Winter. Clearly, under the other board, yes, I did.
    Mr. Ose. What do you mean the other board?
    Mr. Winter. The Stakeholder Board that was in effect at 
that time. Anytime the market has a tremendous change--in other 
words, in 1998 we had a bid of----
    Mr. Ose. My question deals more with procedurally. You were 
fully authorized under State statute to make that request of 
    Mr. Winter. Yes, in emergency situations I have the 
authority to do that.
    Mr. Ose. So nobody came to you beforehand and said do not 
do this? They actually said quite the opposite, they said we 
need to do this, or did you make that judgment?
    Mr. Winter. No, I made that judgment based on what was 
going on on the floor, and my inability to serve the load of 
    Mr. Ose. And that was well within your statutory authority 
under AB1890?
    Mr. Winter. I do not know what AB1890 says, but as the 
operator of the system, that is clearly in my authority. And 
under the FERC tariff, I have the authority to do that in 
    Mr. Ose. OK. I want to recognize Mr. Horn for 10 minutes.
    Mr. Horn. This is probably going over one of the colleagues 
here, but we might as well look at it. How vital is the open 
communication and cooperation between agencies? I would ask Ms. 
Lynch what tools does the California Public Utilities 
Commission use to communicate and coordinate efforts with other 
agencies, including the California Energy Commission? Is there 
communication, and what is their role in relation to your role?
    Ms. Lynch. Sure. The California Energy Commissionsites 
power plants, and also does research work on power trends, so 
they publish reports and such about consumption, supply, and 
power plants in California. The Public Utilities Commission 
regulates the investor-owned utilities in the provision of 
power in California. The Federal Energy Regulatory Commission 
regulates the wholesale price of power charged by the private 
generators who own power plants that are not utilities. We have 
quite a good working relationship with the other State entities 
in California that have jurisdiction over energy matters.
    Mr. Horn. Does the California Energy Commission make 
recommendations to you on the need for power, or is that simply 
left for the community, the California Public Utility 
Commission that you chair?
    Ms. Lynch. No, the power siting--power plant siting 
authority resides in the Energy Commission. And the Energy 
Commission for decades participated in integrated resource 
planning, to plan out the power needs of the State. In the 
Wilson administration, the State stepped back and said the 
State is not going to take a look at the power needs overall in 
California. We will leave that to the market. So there was a 
dearth of planning and building for critical years in the 
1990's. As the power consumption rose, the State stepped back, 
for ideological reasons, and that is one of the reasons we find 
ourselves in the pickle in terms of supply that we have today. 
Governor Davis stepped forward, and Governor Davis is pushing 
the private market to build those power plants, streamlining 
all the environmental regulations, getting every obstacle 
possible out of the way to get more supply, because for the 
past 8 years the prior administrations did not do the job to 
ensure supply for California. They let the market do it, and 
the market failed.
    Mr. Ose. Would the gentleman yield?
    Mr. Horn. Yes.
    Mr. Ose. The California Energy Commission has a Web site, 
and on that Web site it posts its projections for power demand 
at some point in the future. These projections commenced being 
developed in 1988 for the year 2001. The projections by the 
California Energy Commission since 1988 have consistently shown 
a demand for power in excess of 50,000 megawatts. It is 
biannual. Every 2 years it updates the projections. So it has 
been a continual stream, we are going to need 51,000, 52,000 
megawatts of power in the year 2001.
    Mr. Horn. Now, let us say that the figure is right. What 
you are telling me is, it is a commission that is not doing 
much of anything. And could your own Commission be able to pass 
onsites? And I take it it does, does it?
    Ms. Lynch. Well, Mr. Horn, actually I am not saying that 
the Energy Commission is not doing anything. I applaud the 
Energy Commission's efforts over the past 2 years to streamline 
their processes. And, in fact, they have 16 plants through the 
permit process, and 9 of them--it might be 6, I am actually 
forgetting the number right now--are currently under 
construction. That is more plants under construction and 
permitted in the State of California in the past 2 years than 
in the prior two administrations combined. So the California 
Energy Commission is turning cartwheels to make sure we have 
got enough supply in California. The problem is, you cannot 
build a plant in just a couple of months. It takes a while to 
attract the investment, to get the folks to go through the 
process. They are going through the process now. The problem 
with it was in the past.
    Mr. Horn. Just for the record, I assume all of Governor 
Davis's appointees are on the California Energy Commission? 
Those are pleasure appointments, are they, of the Governor?
    Ms. Lynch. No, they are term appointments.
    Mr. Horn. They are term?
    Ms. Lynch. And he received his third majority appointment 
in January 2001.
    Mr. Horn. What is the total number?
    Ms. Lynch. A total of five.
    Mr. Horn. Five. So he now has a majority on that as of 
    Ms. Lynch. That is correct.
    Mr. Horn. OK. Now, what is the role, if any, Mr. Madden, at 
the Federal Energy Regulatory Commission? Do you also pass on 
some of these selections for sites and development of 
electricity and power?
    Mr. Madden. The Federal Energy Regulatory Commission has no 
jurisdiction over the siting of transmission facilities.
    Mr. Horn. That is just up to each State?
    Mr. Madden. It is up to the particular States, yes.
    Mr. Horn. OK. We are talking really about cooperation and 
communication with Ms. Lynch. The California Independent 
Systems Operator, Mr. Winter?
    Mr. Winter. Yes.
    Mr. Horn. So do you talk to each other?
    Ms. Lynch. I think we do now more than we have in the past. 
Although this summer, when we had energy issues when there was 
a blackout on June 14th, Mr. Winter was quite helpful and 
cooperative. The problem really was the ISO tariffs, which 
prevented governmental agencies from getting the same 
information that market participants could get.
    Mr. Horn. Chairman Burton noted that there is a lot of 
finger-pointing in all directions, and you are saying that you 
do not have that much finger-pointing unless you are perhaps 
here. I do not know. So here he is, and you can talk to each 
    Ms. Lynch. And I certainly talk to the members of the board 
of the ISO on a regular basis. As you all know, as a private 
corporation in the State of California, it really does fall to 
the board to set the policy direction for the ISO.
    Mr. Horn. Are you automatically, or the person in your 
position automatically a member of that group?
    Ms. Lynch. No, I am not at all.
    Mr. Horn. You are not. So there is no linkage, generally. 
And it just has to be whether people talk to each other or do 
    Ms. Lynch. I think that Governor Davis ensures that his 
appointees work together.
    Mr. Horn. Yes. The California ISO, namely Mr. Winter, 
investigated evidence of market abuse--I believe you did this, 
is that correct--and reported its findings in a report issued 
in March 2001?
    Mr. Winter. That is correct.
    Mr. Horn. And they project that power generators have 
overcharged California by $6.2 billion between May 2000 and 
February 2001. And, the Federal emergency commission determined 
that California was overcharged $1.3 billion. While some of the 
discrepancy can be explained by technical jurisdictional 
reasons, what are the other factors that contribute to such a 
large discrepancy?
    Mr. Winter. The other discrepancies between the----
    Mr. Horn. The idea of $6.2 billion overcharged.
    Mr. Winter. Well, I think people have exercised market 
power and driven the prices up by so doing it.
    Mr. Horn. You do not think it is the market that did it. I 
mean, in terms of the $6.2 billion, who came up with that? 
Apparently there are various other items that I noted earlier.
    Mr. Winter. Right. The way we arrived at the $6.2 billion 
is we would take a unit, much as the FERC had done, determine 
what its heat rates were, factor in the price of natural gas 
during this timeframe, factor in the cost of emissions, and 
arrive at what we call a cost-based rate. Then we allowed the 
market to have some bit of flexibility, and then everything 
above that which we are calling the competitive market price, 
we considered to be overcharge, if that is the term I believe 
you are using.
    Mr. Horn. How about the Federal commission in terms of 
putting the pieces together on whether gouging occurred or did 
not occur?
    Mr. Madden. Congressman, are you referring to the $6.2 
    Mr. Horn. Right, the $6.2 billion.
    Mr. Madden. Well, as we----
    Mr. Horn. Because that is the figure the public heard. That 
is why I am going after that.
    Mr. Madden. As we discussed earlier, the $6.2 billion 
figure was that which the ISO submitted. As I recall now, the 
ISO recognizes that, of the $6.2 billion, a substantial portion 
of that is non-jurisdictional to FERC.
    Mr. Horn. That would be the 47 percent that is non-
    Mr. Madden. I do not know what the numbers are. Another 
portion of that would be prior to October 2nd, 2000, in which 
the Federal Energy Regulatory Commission has no authority to 
require refunds pursuant to the November draft order and the 
opinion that is taken there. He also mentioned that a 
substantial portion--I do not know how much--referred to 
bilateral contracts or involved bilateral contracts. That is 
where you had a mutual agreement between the parties. That is 
not subject to refund. The realtime spot market is subject to 
    He also mentioned how he factored in the cost, and he 
mentioned a thermal unit. We factored in, for the committee's 
information, a CT, combined turbines, which has a higher 
inefficient rate than does usually a thermal. He factored in 
gas costs and NOx costs, but I do not, and this is 
why we requested information asking what those costs were.
    Mr. Horn. Now, you get the Bonneville Power Authority 
records, I suspect, since that is a Federal entity. Do they 
file with you as to what they are generating?
    Mr. Madden. Well, the PMA Bonneville is non-jurisdictional 
to us. It is a non-jurisdictional seller. Although, under a 
limited portion of the act, we can review the actual rates they 
charge in very limited circumstances.
    Mr. Horn. Now, I take it that the municipal utilities such 
as those of the city of Los Angeles, Department of Water and 
Power, do you have or do not have jurisdiction over them?
    Mr. Madden. We do not have jurisdiction over entities like 
that. We have no jurisdiction, for the most part, over 
municipals and co-operatives. If you look behind the $6.2 
billion figure, a substantial amount of those alleged refunds 
or overcharges are associated with entities over which we do 
not have jurisdiction.
    Mr. Horn. Would anything be in the Department of Energy 
where they might collect those records?
    Mr. Madden. The U.S. Department of Energy has no 
jurisdiction over the co-operatives or municipals. It does have 
jurisdiction--or it oversees the Bonneville Power 
Administration--as it oversees the other power marketing 
administrations. You have to look at the organic statutes or 
the charters that created the co-operatives or municipals 
within each particular State.
    Mr. Ose. Would the gentleman yield?
    Mr. Horn. I was going to say the chairman is an expert on 
some of the figures of Federal dams, so you ought to put that 
in the record.
    Mr. Ose. I actually want to followup on where you were 
driving as it relates to the municipals, in particular. I 
believe the ISO, on occasion, purchases surplus power from the 
municipals for distribution elsewhere.
    Mr. Winter. I am not sure what you mean by distribution 
elsewhere. But yes, to serve the ISO grid, we get power from 
Department of Water and Power clearly to distribute to other 
people in the State of California.
    Mr. Ose. Now, we just heard Mr. Madden say that FERC has no 
jurisdiction over such entities. Would you kindly share with us 
your recollection of the prices being paid by the ISO for that 
    Mr. Winter. From the Department of Water and Power?
    Mr. Ose. As an example, yes.
    Mr. Winter. Well, clearly we were paying the market price 
to everyone, which at the point that we went over the $250 
price cap, those would range all the way from $250 up to 5 or 
$600. I cannot remember exactly.
    Mr. Ose. Who has jurisdiction over the prices charged by 
municipals selling into the wholesale market?
    Mr. Winter. I assume their governing agencies, be that a 
city council and Department of Water and Power, I would assume.
    Mr. Ose. But they are not subject to FERC's jurisdiction?
    Mr. Winter. No, they are not.
    Mr. Ose. They are non-jurisdictional. Ms. Lynch, are they 
subject to PUC's jurisdiction?
    Ms. Lynch. No. We have jurisdiction over the retail rates 
charged by investor-owned utilities, not municipal utilities.
    Mr. Ose. From your recollection, Mr. Winter, of this 
report, did you break out, for instance, either in the 
aggregate or by individual municipal entity, how much of this 
$6.2 billion in overcharges were made?
    Mr. Winter. I believe there is a confidential attachment 
submitted to FERC, but I have not seen it myself.
    Mr. Ose. You know, I am getting tired of being told I 
cannot have information. I suspect there are people in this 
State who share that opinion.
    Mr. Madden. Mr. Chairman, I will be glad to provide that 
information. I assume, if it is cumulative data, we have to 
decide that issue in any event because we have the filing at 
the Commission, and we have to look at the----
    Mr. Ose. You have to separate it out somehow.
    Mr. Madden. We have to separate it out and compare it to 
what we have done, for example, in the March 9th refund order. 
So, I will be glad to provide the committee with that 
    Mr. Ose. We will be in contact with you.
    Mr. Madden. Thank you.
    Mr. Ose. I will yield back to the gentleman from Long 
    Mr. Horn. I yield back to you. I believe we have a third 
    Mr. Ose. Yes.
    Mr. Horn. OK.
    Mr. Ose. I believe it is my 10 minutes?
    I want to examine a couple of things, if I might. I want to 
go to the issue of long-term contracts, because it seems to me 
that the opportunity to hedge exposures, either by PG&E or 
Southern California Edison, or San Diego, offers the 
opportunity to effectively eliminate the uncertainty or the 
lack of supply that might otherwise occur. It is my 
understanding that AB1890 did not require the utilities to 
purchase all of their electricity through the PX, is that 
correct? Does anybody know the answer to that? There is no 
specific language in 1890 that says the utilities must buy from 
the PX.
    Ms. Lynch. I believe that is true. I believe that was the 
decision of my predecessors in order to create the PX and have 
it up and running, that they required the utilities to buy 
through the PX.
    Mr. Ose. So, PUC adopted a rule that said investor-owned 
utilities must buy through the PX?
    Ms. Lynch. Yes, the past PUC.
    Mr. Ose. The past PUC.
    Mr. Madden. Mr. Chairman, they must sell into and buy from.
    Mr. Ose. It is a buy-sell deal. Correct. Has this PUC ever 
examined whether or not to revoke that requirement?
    Ms. Lynch. Yes, we did.
    Mr. Ose. And what was your determination?
    Ms. Lynch. At the time, based on conversations I had with 
Republican legislators who were active in creating the PX, they 
asked us to keep that buy-sell requirement.
    Mr. Ose. Did you talk to any Democratic legislators?
    Ms. Lynch. I did, actually. I believe Senator Peace asked 
me to keep that requirement, as well.
    Mr. Ose. So it was bipartisan?
    Ms. Lynch. At the time last--I believe it was June. 
    Mr. Ose. I appreciate your making that clear.
    Ms. Lynch. Nonetheless, the PUC voted to allow the 
utilities to not buy and sell exclusively through the PX in 
June, and the legislature changed that in a bill at the end of 
    Mr. Ose. How did you vote on that issue?
    Ms. Lynch. I voted to keep the utilities buying and selling 
through the PX.
    Mr. Ose. OK. So you were asking that, if you will, the 
transparency issue be maintained?
    Ms. Lynch. That is correct. And at the request of 
legislators who were there at the time AB1890 passed, with 
their understanding of what their intent was.
    Mr. Ose. I will just come back to my earlier point. I do 
not understand why it is every time I ask about the PX or the 
ISO or something like that, I hear this mantra of disclosure, 
disclosure, disclosure. And yet when I ask the question and 
when my constituents ask me why we cannot find out what 
commitments the Governor is making of the State of California's 
treasury, I am told I am not qualified to hear that. Now, who 
is it that I have to ask to get that information? Does anybody 
know? Do I have to issue a subpoena from this committee to get 
that information?
    Mr. Madden. Mr. Chairman, as I mentioned earlier, the 
Commission has asked the ISO to provide that information. If 
they cannot get that information, I can assure you that this 
Commission will ask the generators who have entered into those 
negotiations with the State to provide us with the information. 
I will have to go back and review the law, but I could probably 
provide that under confidentiality to the committee.
    Mr. Ose. Do I understand these contracts that are being 
considered by the State of California to be long-term 
    Mr. Madden. As I understand it, and I am not an expert in 
the area, there is a combination of short-term, mid-term, and 
long-term contracts with different types of provisions.
    Mr. Ose. So you have different exposure?
    Mr. Madden. That is correct.
    Mr. Ose. All right. Ms. Lynch, are those contracts subject 
to PUC review?
    Ms. Lynch. No.
    Mr. Ose. Because?
    Ms. Lynch. Because AB1X transfers the just and 
reasonableness review of the power purchases to the Department 
of Water Resources from the PUC.
    Mr. Ose. Who is held accountable for that decision? If the 
DWR makes a decision that something is unjust or unreasonable, 
or something conversely, at a price is just or reasonable, 
exactly how do the voters of this State hold someone 
accountable? Does anybody have the answer to that question?
    Ms. Lynch. The PUC does not have the jurisdiction to review 
that question.
    Mr. Ose. OK. In terms of DWR's contracts?
    Ms. Lynch. That is correct.
    Mr. Ose. OK. Let me go back to my original question. In 
March 1999, Southern California Edison filed with the PUC for 
authority to enter into bilateral contracts as part of a pilot 
program designed to provide market stability and increase 
supply. Now, if I am correct, that is prior to when you were 
made President of the PUC.
    Ms. Lynch. It is prior to my membership on the PUC.
    Mr. Ose. OK. In July 1999, the PUC rejected that request 
from Southern California Edison because, in effect, as you said 
earlier, forcing the buy-sell transaction through the PX 
provides transparency, mitigates market power, and reduces 
regulatory burden. Now, since you have gotten there, Ms. Lynch, 
my question is whether you have any comments about forcing the 
IOUs into or through the PX, and the consequences of that 
    Ms. Lynch. Well, the IOUs asked for additional authority to 
buy various hedging products that were available through the 
PX, and we granted that authority. And then, in addition, the 
utilities asked for additional authority to enter into direct 
bilateral sales only scheduled through the PX, but not 
purchased that way, and we granted that authority. So, from 
that perspective, the utilities had the full panoplies of tools 
in their toolbox to hedge their risk. I think what no one could 
have foreseen was the dramatic upward spiral of the market 
prices, as demonstrated by the chart in front of you that I 
have provided, because I believe no one could have foreseen 
that the price caps would have been blown out as they were.
    Mr. Ose. I want to yield for a question from Mr. Burton.
    Mr. Burton. Yes. There was an article in the San Francisco 
Chronicle. I want to read you just a little bit of this and 
maybe you can explain this to me. It says, ``On July 21st, 
Edison and PG&E filed emergency requests,''--this is last 
year--``with the PUC seeking authority to sign longer-term 
contracts directly with generators to protect themselves from 
surging prices. Their cause appeared to be bolstered by the 
August 2nd report that Davis,''--I presume the Governor--
``requested from the PUC and the Electricity Oversight Board 
which clearly said the State spot markets were exacerbating 
price spiking, and that contracts between the utilities and 
power producers were needed. Sources say some State economists 
feared that signing a 5-year contract at $50 per megawatt hour 
could harm the economy. The day after the report was released, 
the PUC voted to let the utilities sign bilateral contracts 
through December 31, 2005 subject to a review of 
reasonableness. But the utilities now say that the vote was 
meaningless because the Commission's staff refused to 
preapprove contracts as reasonable after a 30-day review, as 
the Commission's order directed.''
    And what I have been told is that the utilities were very 
concerned because the contract--the long-term contract was 
subject to a review of reasonableness. So if they signed a 
long-term contract at $50 per megawatt hour, and the price on 
the spot market started dropping below that, they were locked 
into the $50 per megawatt hour, and they could be socked with a 
demand for return. And they did not think that was reasonable, 
because they were assuming risk, and if the price dropped they 
were up the creek, because they would have to refund a lot of 
    Why is it your office did not allow them to sign a long-
term contract without subject to a review of reasonableness 
down the road?
    Ms. Lynch. Sure.
    Mr. Burton. For instance, I am a small businessman. I enter 
into a contract and they say it is subject to a review of 
reasonableness. And 5 years down the road, after I have signed 
the contract in good faith, they say you could have gotten it 
at $40 per megawatt hour. And then I am supposed to return that 
large amount of money, and it could cost me a ton and put me 
into bankruptcy. So, why was that reasonableness clause not 
allowed to be taken out?
    Ms. Lynch. On a unanimous vote 2 weeks after the utilities 
asked for the authority to enter into bilateral contracts, the 
PUC did give the utilities the authority to enter into 
bilateral contracts, and then they entered into bilateral 
contracts. I am prevented, for confidentiality reasons, of 
telling the public exactly what they entered into, but I can 
tell you they entered into significant bilateral contracts. 
What the PUC did----
    Mr. Burton. It was a lot more, though, than the $50 per 
megawatt hour?
    Ms. Lynch. Some of them have been, yes.
    Mr. Burton. Well, but prior to that time, if that 
reasonableness clause had not been in there, they could have 
gotten it at $50 per megawatt hour.
    Ms. Lynch. And some of them they did, and some of them they 
did less than that. I cannot discuss the specifics, but it was 
a full range of prices. But I will----
    Mr. Burton. Excuse me just 1 second. The chairman of the 
subcommittees and the people who are watching are seeing that 
everything is under the veil of confidentiality. We cannot get 
this and we cannot get that. We represent the Congress of the 
United States and Federal agencies that participate in some of 
these processes. We want that information. And if I have to 
subpoena that information from you, I will do it. So, I want 
you to give it to us. Now, if it is something that should not 
be in the public domain, then we will honor that. But, we want 
to see that information. And to be pounded time and again after 
coming out here and having hearings, I do not want you to tell 
me we cannot have that information because of confidentiality. 
I want it.
    Ms. Lynch. I would be happy to give it to you if I had it. 
You can get it from the utilities. I, as a regulator, cannot 
give their confidential information without their permission. 
So I would be happy to give it to you confidentially. If you 
would like it out in public, you can ask them for it. It is 
theirs to give.
    Mr. Burton. OK. But I want to find out about this 
reasonableness clause.
    Ms. Lynch. Sure.
    Mr. Burton. You say that that reasonableness clause was 
done away with so that they could go ahead and enter into these 
long-term contracts without additional risk. But, what I have 
been told is that it was after the cow was out of the barn and 
the $50 rate that they could have gotten for long-term 
contracts was then going up, skyrocketing up. And if they 
entered into long-term contracts, it was at a much higher rate 
because you kept that reasonableness clause in there until the 
$50 rate was no longer available.
    Ms. Lynch. Well, the reasonableness clause is still in 
there, and they did sign contracts below $50 in some instances. 
But why we kept the reasonableness clause in there is because 
every other State also has a reasonableness review. That is the 
fundamental basis of a regulated entity.
    You, as a small business person, do not get a guaranteed 
profit, which is what State law gives to the utilities. They 
get to recover their cost, guaranteed, no doubt about it. The 
only check on that cost recovery is a reasonableness review. 
And the Public Utilities Commission of the State of California 
had good reason to continue what every other State today still 
does, which is a historical fact pattern which showed abuses in 
the past between the utilities contracting with their 
    Mr. Burton. I understand. And there may be some 
justification for price gouging by the utilities. But the fact 
of the matter is, if you look back at the thing that you gave--
    Mr. Ose. No, no, Mr. Chairman. You want to say there may 
have been some justification for the reasonable review due to--
    Mr. Burton. OK, due to. OK. [Laughter.]
    But let us just take a look here. You could see from your 
chart here that the price per megawatt was jumping at a 
dramatic rate. And they were saying, you know, we can lock this 
thing in at $50 per megawatt hour, and because of this 
reasonableness clause in there, they were worried that they 
were going to really lose their shirt if they signed it at that 
time. And it seems to me that is something that was a 
reasonable thing for them to be concerned about.
    Ms. Lynch. Well, every State has a reasonableness review in 
order to protect the ratepayers, and as does California. What 
we did is not just for long-term contracts, it is a 
reasonableness in their actions, so that they do not go out 
and, you know, buy very expensive nuclear power that is 100 
times what the original cost was because they have the 
guaranteed rate of return.
    Mr. Burton. Well, let me just make one more point. You did 
not work with them on this, and it seems to me you should have, 
and instead of being able to get it at $50 per kilowatt hour, 
in December it was up to $377 per kilowatt hour. So you could 
see from this chart that it went from $31.18 per kilowatt hour, 
up to $47.22 in May per kilowatt hour. And then in June it 
jumped to $120 per kilowatt hour. And the discussion, according 
to this article, was in July, after it had already jumped to 
over $120 per kilowatt hour, and they were trying to negotiate 
for $50 per megawatt hour. And you would not do it.
    Ms. Lynch. We did. We let them in 2 weeks time, which is 
lightning speed for the PUC. We gave them full authority up to 
their full average net short, and guess what, they actually 
contracted for power. What they did not do was fill up their 
full net short, because nobody was going to believe at the time 
that the FERC was going to blow out the price caps, and the 
average price of power every day of every hour in December was 
    Mr. Burton. Right.
    Ms. Lynch. [continuing]. After FERC blew out the price 
caps, and the generators had a field day with California's 
    Mr. Ose. Mr. Chairman, may I reclaim my time? I would be 
happy to give----
    Mr. Horn. I just have one question on this issue.
    Mr. Ose. Certainly.
    Mr. Horn. Is the California Utilities Commission under the 
Ralph Brown Act? Are you familiar with that?
    Ms. Lynch. The public process, yes. The Public Meetings 
Act, yes.
    Mr. Horn. Yes. Well, the fact is that, sure, you do not 
make it public until the decision is made, but once the 
decision is made, you can answer the chairman's question. It is 
no violation of law that I am aware of under any State agency. 
So, why do you not answer him?
    Ms. Lynch. Oh, sure, all of our decisions are public, and 
they are public before we vote on them, as was our August 3rd 
decision which allowed the utilities to bilaterally contract up 
to their full power needs on average. And that is out there, 
and I would be happy to provide you--we can messenger it over 
right now with those decisions.
    Mr. Horn. Well, but you were saying you cannot because of 
all the industry and such that. Once they are on the market and 
they have done it, you could have released that afterwards. I 
can realize you could not do it, because that might affect the 
market in another way, which is bonds, stocks, and so forth.
    Ms. Lynch. Well, the statute says that the utilities are 
entitled to keep the information confidential when they are 
buying and thereafter. For instance, they bought power ahead in 
the market. What disadvantages the utilities as a buyer is if I 
release how much power they bought, because then all the 
generators can figure out how much power is left that they need 
to buy. So if the utilities do not have to play all of their 
cards, then the generators do not know if they need to buy a 
lot or a little. So the generators, then, will bid more 
competitively if they do not know exactly the utilities' needs, 
which is why I cannot give to the public the utilities' 
business confidential data.
    Mr. Horn. Well, I do not know why not, because now they are 
in bankruptcy and everything else. It seems to me it ought to 
all be on the record.
    Ms. Lynch. Well, if they would like to waive the 
confidentiality provisions, they can provide the data and I 
could then provide it to you. But right now, the way their 
business confidential data works, is because I have special 
access as a regulator to their business confidential data, I 
need to keep it confidential unless, you know, we have a prior 
conversation about that with the utilities.
    Mr. Burton. Will the gentleman yield to me?
    Mr. Ose. I would.
    Mr. Burton. Mr. Makovich, as I understand it, and I think 
you are totally familiar with this, when they were concerned 
about this review of reasonableness, they wanted to have what, 
20 percent as a percentage that they should be accountable for, 
and the Commission wanted only 5 percent, is that correct?
    Mr. Makovich. Outside of a reasonableness range, yes.
    Mr. Burton. Yes. OK, is 5 percent, as the Commission wanted 
it to be, a reasonable standard for this kind of a problem 
across the country?
    Mr. Makovich. No. Long-term power prices are very, very 
hard to predict, and to enter into a long-term contract of the 
type that have been signed, 4 to 20 years, that kind of a 
margin of error is far too low.
    Mr. Burton. What would be a reasonable margin of error?
    Mr. Makovich. Well, my testimony has been I think long-term 
contracts are not the right solution to this problem. They are 
not going to solve this shortage problem. There is a liquid 
futures market for power now that goes out about 12 to 18 
months, so it is very, very clear what the market expectation 
is for power.
    Mr. Burton. And what is that?
    Mr. Makovich. Everywhere else in the United States it 
ranges from $20 to $30, depending upon the month, up to maybe 
$100. In California it is in the $300 to $500 range as we look 
out across the next year.
    Mr. Burton. I am not sure I understand that. Maybe I am 
missing something here. But as I understood it, the utilities, 
when they went to the Commission, wanted a 20 percent----
    Mr. Makovich. Right, reasonableness standard.
    Mr. Burton. [continuing]. Reasonableness standard.
    Mr. Makovich. Right.
    Mr. Burton. And 5 percent was what the Commission wanted.
    Mr. Makovich. Right. Even the 20 percent is probably a 
    Mr. Burton. I understand. But the utilities were willing to 
do that. And because they could not get that, they did not lock 
    Mr. Makovich. Right.
    Mr. Burton. [continuing]. The rate at $50 per megawatt 
    Mr. Makovich. Right.
    Mr. Burton. Why is it that the Commission would not go 
along with that 20 percent, which sounds like it is a fairly 
reasonable standard, instead of the 5-percent which they were 
standing fast on?
    Ms. Lynch. Well, as Mr. Makovich just demonstrated, many 
economists actually objected to our decision to give them long-
term contracting authority on a bilateral basis whatsoever. So 
it was striking a reasonable balance at the time given the 
market, because many people, like Mr. Makovich, would probably 
criticize the decision of the Public Utilities Commission to 
give the utilities full-throttle ahead on buying whatever they 
would like to meet their next short. So, from that perspective, 
I think that the Commission probably went over what some 
economists thought was prudent at the time.
    What we wanted to do was give the utilities the flexibility 
to run their business as they saw fit, and they did buy power 
at 5 cents, some less and some more over time. So I think that 
the assumption that they did not buy at all is actually not 
proven true by the facts. But the utilities have the specific 
facts that I would encourage them to share with you.
    Mr. Burton. We are going to talk to them tomorrow, I think. 
Is that correct?
    Mr. Ose. Yes.
    Mr. Burton. OK. Thank you, Mr. Chairman.
    Mr. Ose. I want to go back to a question I have. In terms 
of the long-term contracts themselves, have you had any direct 
communication with utility executives advising for or against 
using long-term contracts?
    Ms. Lynch. Well, the way the Commission works is, the 
utilities bring in an application and then there is a pending 
matter before us the parties can comment on. So I have 
certainly seen their materials as they have, you know, 
presented as a party to me, and considered those materials 
carefully when we gave them the authority that they requested.
    Mr. Ose. My question was whether or not you have had any 
communications with utility executives advising for or against 
long-term contracts?
    Ms. Lynch. I do not understand advising for or against. Do 
you mean giving them my policy pronouncement?
    Mr. Ose. Have you talked with utility executives, privately 
or publicly, in favor of or against the use of long-term 
    Ms. Lynch. Well certainly publicly by my votes and 
statements regarding my support for long-term contracts. And 
privately, I do not recall.
    Mr. Ose. Now, if I understand your support, the caveats are 
that they go through the PX, and that they be within the 5-
percent margin that Mr. Makovich was talking about.
    Ms. Lynch. For preapproval. But they would always just be 
subject to the normal reasonableness review that all other 
States give to essentially any procurement actions of the 
utilities. So the retrospective reasonableness approval or 
review is a function of what a prudent utility would do at the 
time when faced with those facts at the time. So it is a 
question in time. It is not that you can apply tomorrow's 
standards to today's actions. You apply today's standards to 
today's actions, as all the other States do.
    Mr. Ose. Are you familiar with Doug Long's letter to the 
two utilities objecting to their methodology for entering into 
long-term bilateral contracts?
    Ms. Lynch. I know there is lots of correspondence that goes 
between my staff and utilities on a variety of matters. I do 
not know which particular letter you are referring to.
    Mr. Ose. Well, Doug Long is the gentleman on the California 
Energy Division who apparently has staff jurisdiction over the 
question of forward contracting. Am I correct on that?
    Ms. Lynch. He is one of the managers in the Energy 
    Mr. Ose. OK. Now, it is my understanding, from feedback I 
have had directly, that he has opposed very, very strenuously 
on the methodology put forward by the utilities to try and 
hedge their exposures. Is that consistent with your 
    Ms. Lynch. My understanding is the Commission made a 
decision which is then the policy of the regulator to allow the 
utilities to move forward consistent with reasonableness 
reviews that are in place in every other State.
    Mr. Ose. OK. One of the questions I have as a business 
person is, I like to think of certainty when I am entering into 
an application in front of a government agency. We have heard 
back and forth, is this one reasonable, is that one not 
reasonable. The question I have is, was there ever a point at 
which the PUC undertook to define in a prospective basis what 
was reasonable and what was not reasonable?
    Ms. Lynch. Actually, yes. Based on--and I am not recalling 
specifically why I thought the utilities wanted further 
guidance, but it could well have been a conversation. I just do 
not recall.
    Mr. Ose. Did that occur in August, September, March? I 
mean, how long are we talking about?
    Ms. Lynch. In the fall. Because by November, I decided to 
go ahead and provide additional guidance which I put for a vote 
of the Commission in December. So I put it on our agenda, 
essentially, for additional guidance at the time.
    Mr. Ose. Are those reasonable standards now adopted by the 
    Ms. Lynch. They are not, because at that point I believe I 
put it on for a vote right at--well, we put it on before we 
knew, I think, or right around the time that the FERC blew out 
the price caps. And so the anticipation was that it would be at 
least under the soft caps that the FERC had proposed. The 
actuality then, when prices shot up five times in 5 days in the 
California market, that volatile market then outstripped the 
parameters that I was proposing.
    Mr. Ose. Let me go back to the standards; I think that was 
the basis of my question, not what FERC did or did not do. If I 
understand correctly, then, the PUC still has not issued a 
final determination for use by the investor-owned utilities as 
to what is or is not a reasonable standard for forward 
    Ms. Lynch. The reason I mentioned FERC is because the 
market determines--we have to understand the market to be able 
to determine what is reasonable, and the market has been so out 
of whack in California----
    Mr. Ose. OK, let us cut through all that. Has the PUC 
issued standards for reasonable or unreasonable forward 
contracts for use by the investor-owned utilities?
    Ms. Lynch. We issued our original standards in August. I 
provided some additional further guidance that I put on the 
agenda, and thereafter the utilities stopped buying on the 
spot. So it was essentially useless for the utilities, since 
they were not buying on the spot anymore.
    Mr. Ose. Are those standards final?
    Ms. Lynch. No, they are not.
    Mr. Ose. So, you have not completed the process?
    Ms. Lynch. Well, it is really the market outstripped our 
ability to determine what was reasonable in California.
    Mr. Ose. Going back to my question, you do not have 
standards defining what is or is not reasonable in terms of 
forward contracts for the investor-owned utilities?
    Ms. Lynch. No, we do have initial standards that we adopted 
and put in place unanimously on August 3rd.
    Mr. Ose. Are they final?
    Ms. Lynch. Yes, those are final.
    Mr. Ose. They have binding protection, safe harbors for the 
investor-owned utilities?
    Ms. Lynch. There are some safe harbors, yes. But they 
wanted further guidance. And we have not refined with further 
    Mr. Ose. Do you have final standards defining what is or is 
not reasonable for long-term contracts for investor-owned 
    Ms. Lynch. Yes. Our August 3rd standards are final. We 
could do additional refinements, which I proposed, which we 
have not finished. But we have guidance that we adopted on 
August 3rd. The utilities wanted additional guidance. We 
started designing additional guidance and then they dropped out 
of the market.
    Mr. Ose. Just a moment.
    Mr. Horn. Could we get when August is? Which year?
    Mr. Ose. August 2000.
    Mr. Horn. Excuse me.
    Mr. Ose. August 2000.
    Mr. Horn. OK.
    Mr. Ose. Mr. Makovich, in terms of the buy-sell provisions 
of the PX, would you care to offer any insights as to the value 
of directing those contracts through the PX? Do you have any 
opinion on that?
    Mr. Makovich. Right. Well, in retrospect, the $50 per 
megawatt hour would have been a good deal for utilities to be 
able to lock into. People have then looked at that and said, 
well, the problem to this whole crisis is if the utilities had 
simply been allowed to lock into long-term contracts, we could 
have avoided this whole mess, and I think that is not right. 
That is wrong. And the reason for that is, if you allowed 
people to sign long-term contracts, let us say that voluntarily 
80 percent of electric demand was covered under long-term 
contracts, the problem you have got then is those contracts are 
supplied from both existing plants--actually, the contracts 
that have been signed are mostly from existing plants. You are 
not building any new power plants. If you then end up with a 
shortage--and that is what we have got, we are fundamentally 
short of power plants--you cannot enforce on residential 
customers those that are covered by long-term contracts and 
those that are not.
    So, unless the long-term contracts are mandated to cover 
120 percent of the market to also provide you a reserve, they 
are not going to be the mechanism that builds enough capacity. 
If they did, if long-term contracts--assume that you got 120 
percent voluntarily. The evidence is, if you do not have a 
shortage, the spot market clears on the basis of fuel and 
variable costs alone. Energy traders would then attack the 
long-term contract market. They would sell long, buy off the 
spot market, and arbitrage out any capacity payment that would 
be involved in those long-term contracts. And the only way to 
prevent them would be to have a shortage that disciplined that 
    Mr. Ose. OK, you are going to have to speak in a language I 
understand and can communicate with.
    Mr. Makovich. OK.
    Mr. Ose. Does that mean prices to consumers are higher or 
    Mr. Makovich. Prices to consumers would, I think, be 
terribly higher if you force long-term contracting. Remember, 
50 percent of the stranded costs, when we started this whole 
process in California, were long-term energy contracts signed 
at what people thought would be reasonable rates out in the 
future, which were the PURPA contracts.
    Mr. Ose. If the IOUs had the option of entering into long-
term contracts to meet the load that they are historically 
familiar with----
    Mr. Makovich. Right.
    Mr. Ose. [continuing]. Does the same conclusion hold?
    Mr. Makovich. No. The right type of long-term contract 
would be to require people that serve electric customers to 
sign capacity contracts. There is no reason to commit to the 
energy--to the utilization of the power plants. They need to 
pay people to have enough capacity to meet those future peak 
loads, and then simply have the option to run those power 
plants to produce the energy that they need.
    Mr. Ose. So, a request from a power--or an IOU, such as 
PG&E or Southern California Edison or San Diego, have the 
hedging tool that a forward contract provides be available but 
not mandate----
    Mr. Makovich. Right.
    Mr. Ose. [continuing]. You think it would lead to lower 
    Mr. Makovich. If you required people that produced--that 
served customers with electric energy, if they were required to 
also have enough capacity to meet their peaks, then you would 
create a market in which long-term contracting for capacity 
would be the mechanism by which that capacity payment is made. 
And then you are paying people to have enough capacity so you 
do not have a shortage.
    Mr. Ose. Thank you. I understand that.
    Mr. Makovich. OK.
    Mr. Ose. I have one final question, Ms. Lynch, the PUC 
recently recharacterized a certain amount of capital that PG&E 
or Southern California Edison or San Diego to change it from 
stranded investment to, if I understand correctly, advance 
payment for future power purchases. I am trying to figure out 
why that happened. I mean, explain that to me, if you would. 
What is transpiring there?
    Ms. Lynch. It is an accounting--it is a regulatory 
accounting treatment where, under the auspices of AB1890, two 
accounts were set up. One was for payment of their stranded 
assets, and one was for payment of their--I like to 
characterize it as operating costs versus capital costs.
    Mr. Ose. OK.
    Ms. Lynch. Although I think that is oversimplifying it. The 
former PUC said you can essentially accelerate the depreciation 
of your capital assets in three ways. You can make a profit off 
the rates that are charged, and essentially match that up 
against an accelerated depreciation schedule. You can sell off 
your plants, and the profits used from that would also 
accelerate depreciation. And then you can also--there was the 
revenue from the ratepayer. There was the revenue that they 
made themselves from their retained generation, because they 
were selling that retained generation in the market. And then 
there was the plant sales. So three different revenue streams 
that could pay off their capital costs on an accelerated basis.
    Mr. Ose. In fact, reduce to zero the basis that they had in 
those plants?
    Ms. Lynch. That was the goal of AB1890. And the bargain was 
that they got to accelerate the depreciation of their capital 
costs, which many people at the time thought were stranded 
assets, in order to assume the risk, on a going-forward basis, 
of their power purchases, of their operating costs.
    So, rather than having the guarantee of the regulatory 
compact, that their costs would be covered, they took a 
bargain. They said we will get money up front for accelerated 
depreciation of capital if we take the back end risk of power 
purchase liabilities.
    What the PUC did, in essence, was say, hey, wait a minute. 
Some of those revenues that you originally counted against 
accelerating your capital cost recovery were actually operating 
revenues. You got money from the ratepayers in their bills 
which--on an ongoing basis. You also got money from selling 
your own generation into the market. And that, in fact, your 
power purchase liabilities should be netted against your power 
purchase revenues before you get to transfer all those revenues 
over for accelerated depreciation of your capital costs.
    So what the PUC said was, it is time to true-up the books. 
It is time to net out your operating costs and revenues before 
you just take the revenues and match them against your capital 
costs. Because, essentially, you are prepaying your mortgage 
before you pay your power bill or your light bill or your 
grocery bill. So we were saying you have got to pay your bills, 
your operating costs first, and then if you have money left 
over, you can prepay your mortgage. But you do not get to 
prepay your mortgage, and then come back to the ratepayers and 
say please help me with my monthly bills.
    Mr. Ose. The PUC made this determination recently, if I 
    Ms. Lynch. On March 27th.
    Mr. Ose. It would seem to me that the logic that you have 
just elucidated would also have held prior to the investor-
owned utilities advising folks that they had recovered their 
entire stranded costs. I am trying to understand why this 
decision was not made last year at this time, instead of 6 
months after the investor-owned utilities had advised everybody 
that they were ready to be free of 1890.
    Ms. Lynch. Well, the investor-owned utilities came into the 
Commission and applied for what they called a rate 
stabilization plan in October. And in that proceeding 
thereafter, some consumer groups came in and said hey, wait a 
minute. When we are looking at the true-up of all the 
accounting, you should make sure that operating costs are 
netted against operating liabilities before you apply them to 
capital costs. And so the PUC had a public proceeding where we 
took evidence from all sorts of parties and had lots of 
hearings from the period of October through March before we 
made the decision. So we did have evidentiary hearings and had 
full opportunity for public comment before we made the 
decision. But the decision--the question arose in October, and 
we fully vented it in public over the intervening months. But I 
will say this, we did take a little bit longer time in that 
decision because we put to the head of the pack the question of 
a rate increase. And so we originally granted a rate increase 
in January, and that did take precedence to this accounting 
true-up question.
    Mr. Ose. Is this recharacterization the substance of the 
lawsuits in Federal court right now between the IOUs and the 
    Ms. Lynch. Well, I have to say the utilities have thrown in 
the kitchen sink in claims, and so I am not exactly sure of 
their list of claims today. I would have to go back and check.
    Mr. Ose. Well, I mean, is this one of them?
    Ms. Lynch. This well could be one of them. The essence of 
their claim is that they should be entitled to recover whatever 
they pay for power purchase costs, regardless of how much they 
got to prepay their mortgage in the past.
    Mr. Ose. They are taking the position, under 1890, that 
they have recovered their stranded costs, and therefore should 
be relieved of the subsequent or the precedent requirements 
    Ms. Lynch. They are taking the position that they do not 
have to true-up their operating costs before they transfer 
operating revenues over to the capital side.
    Mr. Ose. You are arguing over definitions of what is an 
operating cost versus a capital cost, is that what you are 
    Ms. Lynch. It is an accounting treatment question. But I 
think that the utilities filed rate doctoring case actually 
involves much more than the accounting treatment. It involves 
the fundamental principle of whether a State, under State 
jurisdiction to control the retail rate paid by the ratepayer, 
has authority to shape the rate over time, and whether a State 
has the authority to pass a statute like AB1890 which gave a 
bargain and a risk to the utilities, or whether, instead, when 
the Federal Government allows market rates on the wholesale 
level to fluctuate, whether the State has to pass those 
volatile costs through in realtime without shaping the retail 
rate. So it is a larger policy question that is really at issue 
in the filed rate doctrine case.
    Mr. Burton. I have two quick questions. I hope they are 
quick. We heard from the other panel about the high cost of 
natural gas and how it has driven the costs of their businesses 
through the roof. In California, you have some substantial 
supplies of natural gas in the ground. What is the position of 
the administration, or do you know, on allowing the research 
and exploration for these reservoirs of natural gas to help 
create an increase in supply so that the cost can be going 
    Ms. Lynch. I just speak for the Public Utilities Commission 
or for myself, as a commissioner. Certainly the Public 
Utilities Commission has done everything in its power to 
increase capacity for natural gas in California, and its 
storage. So, for instance, early last year----
    Mr. Burton. I am not talking about storage, I am talking 
about exploration.
    Ms. Lynch. The Public Utilities Commission does not do 
    Mr. Burton. Well, I would like to maybe have somebody 
address that question to the administration, because you have 
reservoirs--according to some geologists that we know--in 
California of natural gas that could be tapped to increase the 
    Let me ask one more question of Mr. Madden from FERC. How 
much could the California utilities have saved if they had not 
been prevented by the CPUC from entering into forward 
contracts? And can you give us an answer to that, for sake of 
the record?
    Mr. Madden. I will provide my answer. I have already 
provided my answer to the committee, but I need to step-back so 
everyone will understand this. When we had the restructuring in 
California, the CPUC required the utilities, for the most part, 
to divest their thermal plants and CT plants; they kept their 
hydro, nuclear, except a couple of their plants. That was 
approximately 20,000 to 25,000 megawatts. Those plants were 
bought by numerous generators at premium prices, which helped 
the California utilities buy down their stranded costs.
    As part of that structure, the utilities had to sell into 
and buy from the PX. And I do not know for a fact--I assume Ms. 
Lynch knows better--there is a per se prudence established in 
California that if you buy in the spot market, you are going to 
be per se prudent. And I also believe that there were some 
restrictions initially set by the CPUC on utilities as to the 
level or the amount of bilateral contracts they could have 
versus their overall portfolio. So, essentially, most of the 
market in California was in the spot market, because there was 
very little, if any, bilateral forward contracts. It has 
increased today. I think it might be 10, maybe 15 percent. That 
compares to a number of other States, I must say, that never 
required the divestiture of the utilities' facilities. And if 
they did, they allowed the utilities to buy back the power for 
a certain period of time. So with that perspective, let me try 
to answer your question.
    Now, if we look at, for example, an entity wanting to 
purchase a forward contract last year, and the forward 
contract, let us say, was to start in May and they were looking 
for a price in April. There is some transparency out for 
California, and they can look at what the prices are, for the 
next month, for a 30-day service at Palo Verde or the 
California-Oregon border.
    So when responding to the question of the committee, we 
looked at the amount it would charge for a megawatt hour of 
electricity last April for May delivery was $32 a megawatt 
hour. Then we looked at the recent filing that the Cal ISO 
submitted dealing with the $6.2 billion. They state for the May 
spot price in California, they averaged it at approximately $58 
a megawatt hour.
    So if you subtract the $32 that you could have paid from 
the $58 that the spot was going for, we arrived at a $26 
megawatt-hour differential. Now, if you take the transmission 
load in California on a given day in May, you can approximate 
it is about 19 million, almost 20 million. If you look at the 
20 million that is on the load times the differential of $26--
the difference between the $32 and the $58--for May alone, if 
utilities bought on the spot for the delivery, they would have 
saved approximately $520 million for May.
    Mr. Ose. If I understand, at the time in California, the 
power distributors were required to buy at the price set by the 
PX on any given day. So, it might well have been the $58 price. 
I mean, their buy-sell requirement forced them into the PX to 
buy, is that correct?
    Ms. Lynch. Well, what happened was, under the FERC rules, 
the highest priced bidder, that price was paid to everybody. 
And that was the PX price. Now FERC has changed that rule 
somewhat by saying essentially up to $150 everybody gets the 
same price, and then you file some paperwork and you get a 
higher price. But at that point----
    Mr. Ose. FERC defined the rules for the PX?
    Mr. Madden. Mr. Chairman, I believe Ms. Lynch is incorrect. 
We had a filing by the ISO, a tariff filing under section 205 
of the act to implement the restructuring. The FERC reviewed 
that, received comments from the CPUC and from other parties, 
who I believe also supported it. They were required to pay the 
market clearing price established at the PX at that time. But 
this was not FERC alone. It was the submission by the ISO, and 
support and comments from other entities.
    Now, Chairman Burton, I was also asked by committee to get 
an idea of, if we look at a big city in California, how much 
could we save? Well, Secretary Abraham testified last month at 
the Senate hearing. He noted that there was an offer by Duke to 
provide San Diego its entire load for a year at 55 megawatts an 
hour. I do not know the terms and conditions of that offer, 
other than the price. There may be some added provisions in it. 
But if you look at the load of San Diego, what its needs are, 
and you multiply that times the price that Duke was going to 
offer San Diego to meet its needs, San Diego, alone, would have 
saved $5 billion.
    Mr. Burton. $5 billion?
    Mr. Madden. $5 billion. This is somewhat hindsight. I do 
want to make a comment that, contrary to some on the panel, I 
do believe in entities or IOUs having a mixed portfolio of 
contracts, spot, short, medium, and long. This does indicate 
that, based on hindsight, had they done this, this is how much 
the consumer would ultimately save.
    Mr. Burton. OK, let me ask a few more questions, then I 
will let my colleague from California, Mr. Horn, finish up.
    This is on the issue that FERC, ``Blew out the price 
caps.'' Mr. Winter, on December 7th you made an emergency 
request to FERC to relax the hard price cap, is that not 
    Mr. Winter. That is correct.
    Mr. Burton. Is it not correct, because not enough bids were 
coming in and the system was going to collapse?
    Mr. Winter. That is correct.
    Mr. Burton. Going into this summer we are being told that 
there is a shortage of 3,000 megawatts. Mr. Winter, what would 
happen, under these circumstances, if FERC imposed a hard price 
cap? Would the threat of blackouts get worse or better?
    Mr. Winter. I think it would probably get worse, because if 
the price cap was below what other States could provide at 
their cost, then we would end up being unable to get that 
power, and therefore would have to cut the load.
    Mr. Burton. OK. Mr. Makovich, would hard price caps produce 
more or fewer blackouts this summer?
    Mr. Makovich. Price caps, as currently set, either soft or 
hard, are making it worse, so they are going to extend the 
hours of outages.
    Mr. Burton. And Mr. Madden, do you want to answer that same 
    Mr. Madden. I cannot get into specifics because the issue 
is before the Commission in a number of hearings. But, my 
personal opinion is that hard caps do not provide the supply 
and the incentive for the need for power, for the need for 
    Mr. Burton. So your answer is pretty much the same as Mr. 
    Mr. Madden. That is my personal opinion.
    Mr. Burton. OK. Mrs. Lynch, what would a hard price cap do 
this summer with a 3,000 megawatt shortfall?
    Ms. Lynch. It is Ms. I am not married.
    Mr. Burton. OK. I am sorry.
    Ms. Lynch. That is OK.
    Mr. Burton. Forgive me.
    Ms. Lynch. I would join with economist Frank Wallach from 
Stanford and Chris Woodruff from southern California, and even 
Paul Krigman in the New York Times who say that price caps in a 
dysfunction market where there is no competition are needed as 
a market mitigation measure. The problem here is folks 
withhold. The sellers and the generators withhold. And if you 
do not discipline the sellers, then they have no incentive not 
to withhold, and then bid in right when the price gets to the 
very highest level. So even conservative economists like Paul 
Krigman of the New York Times saying in this market, with this 
level of dysfunction and market power evidenced, price caps are 
a necessity.
    But I would go farther and say in fact what we need is 
cost-based pricing. We need cost-based pricing as a market 
mitigation measure, so that the sellers have to prove up their 
cost, and then gain a reasonable profit, rather than the many 
hundreds of times of profit that they are sucking out of the 
California economy.
    Mr. Burton. So you disagree with your colleagues at the 
    Ms. Lynch. Certainly as to that effect, that is right. But 
I do agree with the vast majority of economists who have 
studied this market, in particular.
    Mr. Madden. Chairman Burton, could I add?
    Mr. Burton. Yes.
    Mr. Madden. As I note in my direct testimony, the 
Commission staff has prepared a market mitigation plan to go 
forward. And hopefully the Commission will bless that plan or 
approve some type of plan going forward in terms of addressing 
the current concerns of outages, the pricing at key times, the 
need for confidential information from the generators, and the 
questions of the requirement that generators be required to 
schedule and provide the service, if in fact they have the 
megawatts. We are receiving comments on that. So the concerns 
that are being raised as to manipulation, withholding, and 
market power are indeed going to be addressed in the very, very 
near future by the Commission.
    Mr. Burton. Give me a timeframe.
    Mr. Madden. I would say we are on schedule. The Commission 
noted in its December order, by May 1.
    Mr. Burton. OK. Thank you, Mr. Chairman.
    Mr. Ose. Mr. Horn.
    Mr. Horn. Miss Lynch----
    Mr. Burton. Ms. Lynch.
    Mr. Horn. Ms. Lynch, the latest--well, I called her 
president to start with. Is it a president or chairmanship?
    Ms. Lynch. It is a president.
    Mr. Horn. President. We will go back to president then. 
When was the latest increase per kilowatt hour put at 3 
percent? Did the Commission do that?
    Ms. Lynch. 3 cents a kilowatt hour.
    Mr. Horn. 3 cents per kilowatt hour.
    Ms. Lynch. I wish it were 3 percent. We voted an additional 
3 cents on March 27th. On January 4th, we voted a 1 cent 
increase, which was on average--a 1 cent increase is, on 
average, a 9-percent increase.
    Mr. Horn. How did you come to that determination?
    Ms. Lynch. Through an evidentiary record where we hired 
independent auditors to look at the utilities and their 
affiliated companies' books and records, and then also allowed 
all parties an opportunity to present information about how 
much was needed in order to buy power in California.
    Mr. Horn. Apparently it was issued, right?
    Ms. Lynch. Yes.
    Mr. Horn. OK. Now, did it result in $45 million a day being 
spent on purchasing electricity? Did it help do that?
    Ms. Lynch. Well, whatever is spent is spent in the 
California market. The question is who is going to pay for that 
power purchase. And so what the Commission did was say the 
ratepayers of the investor-owned utilities in Southern 
California Edison and PG&E territory will bear the burden of 
paying the exorbitant wholesale prices to the extent of a total 
of a 4 cent increase on the kilowatt hour rate.
    Mr. Horn. Do you think the explanation could also be that 
the rate increase would be allocated between the State and the 
small generators? Obviously the utilities would get some of it, 
but a lot of it would have been to get some money in the pot 
for everybody, I would think.
    Ms. Lynch. Absolutely, Mr. Horn.
    Mr. Horn. Yes.
    Ms. Lynch. And, in fact, when we ordered the additional 3-
cent rate increase, we also ordered the utilities to pay those 
small generators who were not being paid. I was quite 
disturbed, and my colleagues as well, that the utilities had 
stopped paying those small generators who are so key and 
critical to our reliability needs. So they are starting to pay. 
The order was, as of April 1st, you shall pay those small 
generators what is owed for the power produced by those 
    Mr. Horn. Thank you, Mr. Chairman.
    Mr. Ose. I want to followup on something. Mr. Madden, if I 
understood you correctly, you said that FERC's jurisdiction 
extends to roughly half of the market in California.
    Mr. Madden. I do not believe I said half, but we do not 
have a substantial amount of jurisdiction over the energy that 
is sold into California because of municipals and co-
operatives. It is about 50 percent, we do not have jurisdiction 
over 50 percent of the market West-wide.
    Mr. Ose. OK. Energy Secretary Abraham advised me that it 
was 47 percent non-jurisdictional in terms of the California 
market specifically.
    Mr. Madden. Chairman, I just do not have that figure. You 
have to look at how much energy is generated, and I just do not 
have it. It is a substantial amount. It is 40 percent, maybe. I 
do not have the exact figure.
    Mr. Ose. Well, my real question is actually for Mr. 
Makovich, and that is that if FERC only regulates 40 to 50 
percent of the wholesale power market in the West or in 
California, what is the consequence of putting caps on that 
portion of the market?
    Mr. Makovich. Right. The price caps are a very, very 
limited tool under the best of circumstances. If you can only 
impose it on half the market, you are likely to create far 
worse distortions than any kind of gain you are going to get 
from these price caps. As Terry mentioned, you are going to be 
giving people the incentive, for example, to move power to an 
area of higher return; to export it from California to Palo 
Verde to get a better return. And we saw that happen when we 
had these soft price caps in effect.
    Mr. Madden. Mr. Chairman, as I mentioned, 50 percent of the 
energy produced in the West is non-jurisdictional to the 
Commission. And, of course, the issue has come up in a number 
of dockets, and I cannot talk about the merits, but I can tell 
you my views on that. It is very difficult to put a cap, as you 
mentioned, on only half the market, when the other half of the 
market is not capped. We saw that problem with gas 15 years ago 
when we regulated the intrastate side. Actually we did not 
regulate the intrastate side, but regulated the interstate 
side, and the interstate side of the market went to the 
intrastate side of the market.
    Second of all, we have substantial amount of bilateral 
contracts in the West. Do you want to undo those contracts? If 
you had a cap and if those contracts exceeded the cap.
    The third thing is you really do not have a spot market in 
the West as you do in California. So you do not have the 
control; you do not have the transparency you would need to do 
that. That said if a cap adds to or increases supply and 
decreases demand, maybe you should look at it. But it has to 
occur first.
    Mr. Ose. Ms. Lynch.
    Ms. Lynch. California did have price caps up until November 
1st, and the ISO voted an effective price cap of $250 a 
megawatt hour last July. So it is not as if we have not had 
experience with a market that actually worked somewhat under 
the prior caps. It is really the FERC's unprecedented action, 
beginning with their draft order in November and then 
continuing and extending more and more that has caused this 
issue and the bleeding of the California economy because of 
these outrageous wholesale prices. But it did work before. 
Perhaps imperfectly, but certainly much better than it works 
today with nothing, no protection for the California businesses 
or consumers.
    Mr. Burton. May I make one final comment?
    Mr. Ose. You may, Mr. Chairman.
    Mr. Burton. I just want to make one final comment. I think 
we are about through with this panel.
    Mr. Ose. We are.
    Mr. Burton. It is apparent, I think, to anybody who has 
taken a hard look at this, you need more generation in this 
State, you need more power plants and you need them online as 
quickly as possible. So, I hope that there is something worked 
out between the environmental organizations in this State and 
the utilities and the government so that they can get on with 
generating enough electricity to take care of the need. Because 
if you do not do that, this problem is going to get worse and 
worse and worse. I think that is what you mean, is it not, Mr. 
    Mr. Makovich. Yes.
    Mr. Burton. Yes. Thank you.
    Mr. Ose. I want to thank the witnesses for coming. It has 
been a long panel, and I apologize. But you have so much 
information that we would like to glean from you, we could 
probably go another couple of hours. But we will not. So, 
anyway, thank you all for coming.
    We are going to take a 5-minute recess, and then we will 
have the third panel join us.
    Mr. Ose. OK, we are going to reconvene. I want to welcome 
our third panel. That would be the Honorable J. William 
McDonald; Mr. Brian Jobson; Ms. Becky Dell Sheehan and Mr. 
Thomas Stokely. And, as with the first two panels, we are going 
to swear you in. So if you would rise, please.
    [Witnesses sworn.]
    Mr. Ose. Let the record show the witnesses answered in the 
    As you have seen in previous panels, we have an opportunity 
for each of you to make an opening statement of no more than 5 
minutes in length. So we will start with Mr. McDonald. You are 
recognized for 5 minutes.


    Mr. McDonald. Thank you, Mr. Chairman. I do have a written 
statement, and I will simply summarize it at this point.
    Reclamation, as you may know, is the second largest 
hydropower utility in the United States. We have 194 generating 
units in 58 power plants throughout the 17 Western States with 
an installed capacity of just a little less than 15,000 
megawatts. While our power plants are located throughout the 17 
Western States, I will limit my remarks today to those parts of 
our system that are available to provide power to California.
    Before I do that, though, let me review very quickly the 
six basic conditions under which our power plants are operated. 
The first, of course, is that in a hydropower system water is 
the fuel. While it has the distinct advantage of being an 
annually renewable fuel, it is also finite and highly variable 
from year to year. That is always the underlying condition in 
which a hydropower system operates.
    Second, I would emphasize, in the context of our Federal 
power plants, that even if water is physically available in 
storage, the annual amount that is available to actually 
release through a power plant is governed by a complex set of 
laws in all instances. I would, generally speaking, break those 
into three. There are instances in which by virtue of 
international treaties, interstate compacts, and judicial 
decrees of the U.S. Supreme Court, the amount of water that is 
delivered on an interstate or international basis is governed 
by those institutional arrangements.
    There often are Federal statutes which govern project 
operations and the parameters within which we operate. And 
finally, every project is, of course, individually authorized. 
Without exception, power is always a secondary purpose, not the 
primary purpose of any Reclamation project.
    Third, it is in that context that, as we schedule releases 
of water, they are always governed by water user demands, since 
water supply is the primary purpose of our projects, both for 
irrigation, and municipal and industrial purposes.
    Fourth, to the extent that we do generate power, it is 
always first used for project purposes; for example, the 
pumping of irrigation water supplies. It is only power that is 
surplus to project use that is available for marketing. With 
respect to that marketing, to take a very complex system and 
simplify it, I would make three main points.
    First of all, the marketing is always done by the Western 
Area Power Administration or the Bonneville Power 
Administration, which are components, of course, of the 
Department of Energy. It is they who do the contracting and 
purchase all replacement power that is needed pursuant to those 
contracts. Second, they obviously enter into those contracts in 
accordance with Federal law. And finally, I would note that in 
general they contract to sell more capacity than is available 
on an assured basis year in and year out given the vagaries of 
a hydropower system. And it is expected, and it always has 
been, that they, too, will be in the marketplace buying power 
from time to time to cover the firm contractual commitments 
that they have entered into when we are in low water years.
    Fifth, there are transmission constraints. I will not try 
to describe those at length here--there is a map associated 
with my written testimony--but will simply point out that even 
if Reclamation can generate energy, we cannot necessarily get 
it at all times to the right place given system constraints. We 
are not an owner or operator of any transmission, so that is 
beyond our control.
    And finally, in this contemporary climate we operate with 
certain environmental considerations and respect for tribal 
trust assets. That most often comes in the form of downstream 
riverine environments and aquatic species that are of interest 
under a number of Federal laws. That largely translates into 
some limitations in certain instances on peaking power, that is 
to say, on instantaneous capacity, but not on total energy 
generated over time. That is because, except in a flood control 
circumstance, almost all water that we have available to us 
eventually runs through our power plants.
    Let me turn now to the three major systems that are 
available to benefit California, touching very briefly on 
those. With respect to the Central Valley Project, we have 
about 2,000 megawatts of installed capacity. About 75 percent 
of the energy generated is surplus to project use. The other 25 
percent is used for project pumping. All of that surplus energy 
is under contract by Western to users in California, 
principally in northern California.
    For this summer, we face a forecasted runoff of only about 
60 percent of average. We therefore think power generation will 
be only about 80 percent of average this summer. In that 
context, obviously, we will not be able to contribute, for lack 
of fuel, as much as we otherwise might. We are doing three main 
things, within that context, to try to help the California 
situation with the Central Valley Project. First of all, we 
have moved all maintenance forward so all units will be back 
online by the first of June. I might say, as a footnote, no 
planned outages this winter in any way impacted generation 
capacity because we lacked water to move through the remaining 
units that were up and running.
    Second, we have been and will continue to shift project 
pumping to off-peak hours as much as possible, working in 
cooperation with the State water project, although there are 
some significant limitations on our ability to do that.
    Finally, we will, of course, work with the California ISO 
and Western to optimize the scheduling of releases of our water 
for peak periods within the physical and operational 
constraints of our reservoir operations and our contractual 
deliveries to our irrigation and municipal and industrial 
    Let me turn next to the lower Colorado River dams, by which 
I mean Hoover, Parker, and Davis Dams and power plants, all of 
which are located on the Colorado River straddling the Nevada-
Arizona California-Arizona borders. These plants have about 
2,400 megawatts of installed capacity amd are operated within a 
very complex institutional system governed by the ``Law of the 
Colorado River'' that essentially dictates the annual release 
of water through the power plants on a monthly schedule.
    Two things I would emphasize in that context. To the extent 
there is surplus power, 50 percent of it, by law, is sold to 
California. Southern California entities are the beneficiaries 
of Hoover, Parker, and Davis. All of that power is under 
contract pursuant to Federal statutes.
    Finally, again with respect to maintenance, we have 
accelerated all maintenance, and will have all units that were 
otherwise regularly out for maintenance this winter back on 
line by the first of June.
    The Federal Columbia River Power System is the third major 
system one that can provide power. When I talk about the 
Federal Columbia River Power System, I am talking about the 12 
Corps of Engineer facilities and the two Reclamation power 
plants that operate as an integrated system for hydropower and 
flood control in the Columbia River Basin. Historically, 
California has peak demand in the summer, and the Pacific 
Northwest and British Columbia Hydro would sell power to 
California in the summer. Vice-versa, the Pacific Northwest 
peak load condition is in the winter. California would 
typically sell to the Pacific Northwest in the winter. That is 
not going to be possible this summer. Basically, we are at a 
near record drought of only 50 percent of average this year, 
and all power generated by the Federal Columbia River Power 
System is going to be required by the Bonneville Power 
Administration to meet its contractual commitments to its 
contractors, and even then, it is likely to face shortages and 
have to purchase additional power in the marketplace.
    We are also quite concerned, in the face of the drought, 
about conserving fuel, or water, as best we can because our 
reservoirs are at historically low levels. As we go into the 
November-December timeframe, if a normal water year does not 
materialize, the Pacific Northwest will be in worse condition 
than we are presently.
    Mr. Chairman, with that, I will conclude my oral comments 
and be glad to respond to questions.
    Mr. Ose. Thank you, Mr. McDonald.
    Our next witness is Mr. Brian Jobson, who is the principal 
power contract specialist for the Sacramento Municipal Utility 
District. Mr. Jobson, 5 minutes.
    [The prepared statement of Mr. McDonald follows:]
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    Mr. Jobson. Good afternoon Chairman Ose and Chairman Burton 
and Congressman Horn. I am here representing the Sacramento 
Municipal Utility District to testify on the power supply 
reductions that could result from restoring fisheries on the 
Trinity River in the way prescribed by the record of decision 
that mandates increased flows to the Trinity River. But before 
I get into that, I want to make a note about the Federal 
agencies involved in SMUD's power supply from the Federal 
    As they are under your purview, I think it is important 
that you know that the cooperation that we have received in 
making as much power available from the CVP has been 
phenomenal. And this is by both the Bureau of Reclamation and 
the Western Area Power Administration. We have advanced 
customer funds, tens of millions of dollars, to rewind units, 
repair tunnels, avoid bypasses of power plants, add 
transformers at transmission stations and replace any other 
facilities that are in need of it, and as was mentioned by Mr. 
McDonald, accelerated on maintenance necessary to make sure all 
facilities are in service. At all levels in these organizations 
the cooperation has been terrific.
    Getting on to the Trinity River issues. On October 19th, 
1999, the Department of Interior's Fish and Wildlife Service 
and Bureau of Reclamation released for comment the Trinity 
River Environmental Impact Statement report. The report's 
preferred method for restoring fishery habitat of the Trinity 
River relies on dramatically increased water releases from 
Trinity Dam to create a more natural flow regime. The Fish and 
Wildlife's preferred flow schedule will result in reduced 
availability of power generation from the Central Valley 
Project, degrading the reliability of California's electric 
system, and driving up the price of power to consumers. This 
comes at a time when California is suffering an electricity 
crisis, as you have heard, with rolling blackouts and dramatic 
price spikes that threaten the economy of California, the West, 
and the Nation as a whole.
    Specifically, the proposal would result in approximately 
250,000 megawatt hours of hydroelectric energy forgone in an 
average year if interior's alternatives are implemented. This 
is enough energy to meet all the needs of 31,000 households for 
a year, or to meet all the needs of the State of California on 
a summer afternoon for about 6 hours. The capacity lost in a 
critically dry year, which is when hydroelectric capacity 
should be measured, would be about 150 megawatts. And when 
combined with the power impacts of implementing the Central 
Valley Project Improvement Act, which has been largely 
implemented, the total reduction would be approximately 325 
megawatts, as has been documented by the Western Area Power 
    Interior's proposed flow decision would also reduce water 
supply to CVP supplied farms and cities, and raise temperatures 
in the Upper Sacramento River, increasing mortality to juvenile 
salmonids that are supposed to be protected by the Endangered 
Species Act.
    SMUD contends that many of these adverse impacts are 
largely avoidable if the Trinity River restoration proposal is 
amended to include non-flow habitat maintenance measures to 
conserve water, essentially getting good results by using less 
water. For instance, SMUD has suggested in its comments on the 
EIS/EIR various alternative ways of restoring the fishery. 
Modifying interior's proposal, for instance, by controlling 
revegetation of gravel bars used for spawning by manual 
measures, hand crews or light equipment, rather than keeping 
them flooded for weeks at a time to prevent the seeds from 
    Another example, we have suggested constructing silt traps 
on tributary streams to reduce siltation in the river, as has 
been done at Grass Valley Creek, rather than relying on very 
high flows to entrain the silt to be deposited downstream in 
the Trinity River flood plain or the Klamath River further 
    Most remaining features of the Interior restoration plan 
are retained in our power alternative, including pulse flows, 
but at a reduced magnitude and duration. And while the power 
alternative will result in some loss of hydroelectric 
generation and water supply, the loss would be roughly 70 
percent reduced from Interior's alternative. In addition, 
adverse impacts on Sacramento River and Delta endangered 
species would be less under the power alternative. These ideas 
were rejected by Interior under the prior administration. At a 
time when the State of California is desperately in need of 
more power production, it seems incomprehensible to SMUD that 
the Federal Government would act in a counterproductive manner 
by taking power resources off line when better and less drastic 
alternatives exist.
    In the interest of time, I do not want to dwell on each and 
every concern SMUD and other power users like NCPA have with 
the EIS/EIR, or spell out in detail the scientific flaws and 
procedural infirmities with which the Endangered Species Act 
compliance and the National Environmental Policy Act compliance 
were completed. These are identified in documents that are of 
record already, and these are issues that are being litigated 
    The good news is that it appears that the Department of 
Interior in this new administration will have the opportunity 
to revisit this decision. And I will point out that there are 
more agencies involved within Interior than the Bureau of 
Reclamation, who is the only one represented here.
    In light of SMUD's history as an environmentally conscious 
utility, and its own belief the Trinity River fishery should be 
restored, SMUD and other CVP power customers, like the Northern 
California Power Agency, sincerely hope that interior will 
reconsider the power alternative during its preparation of the 
supplemental environmental impact statement report that it 
appears the Federal court will require.
    SMUD is willing to work with interior to modify the power 
alternative to address legitimate concerns that may be raised. 
We hope that interior will engage in a meaningful dialog with 
SMUD and other power and water customers to develop a final 
restoration plan that minimizes impacts on water and power 
supply, and on the Sacramento River fisheries while restoring 
Trinity River fishery habitat. Any assistance the committee can 
provide will be greatly appreciated.
    Mr. Ose. Thank you, Mr. Jobson. We will be back to you with 
questions after we get through the other statements.
    I would also like to welcome today Ms. Becky Dell Sheehan, 
who is the principal power contract specialist for the 
California Farm Bureau. Welcome, Ms. Sheehan, for 5 minutes.
    [The prepared statement of Mr. Jobson follows:]
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    Ms. Sheehan. Thank you, Mr. Chairman. Actually, if I could 
clarify the record, my title is mistaken. I am an associate 
counsel, and I work primarily with water and land use issues.
    Mr. Ose. We are interested in accuracy and we will make 
that correction.
    Ms. Sheehan. Thank you. Thank you, Mr. Chairman.
    My name is Becky Sheehan, and I am Associate Counsel for 
the California Farm Bureau Federation. The California Farm 
Bureau Federation represents approximately 40,000 farm and 
ranch families, constituting approximately 80 percent of 
California's production agriculture. Farm bureau members have 
been paying more than $650 million annually for their electric 
service, and with the recent rate increases, they will be 
paying more than $900 million. When this year is compared to 
last, our members' energy costs will have risen approximately 
$250 million.
    The State of California cannot afford any further 
reductions in energy and water supplies this year or in the 
near future. The Trinity River Fishery Restoration decision 
will have impacts that were not adequately considered in the 
decision's joint environmental documents. The current Trinity 
decision will exacerbate a crisis that has already begun to 
jeopardize the future of agriculture in California. 
California's farms provide a resource of State, national, and 
worldwide importance. As such, the lead agencies should 
supplement the existing environmental document and consider the 
Trinity decision's impacts in light of the current energy 
    The current energy crisis and the ongoing water crisis are 
intrinsically linked, with a shortage of one increasing the 
cost and the availability of the other. This year in California 
we will have probably a dry or critically dry water year which 
will limit our ability to produce hydropower, which is the 
flexible and reasonably priced energy source California relies 
upon to cover our peak energy periods. At the same time, our 
usual dry year alternative, groundwater, that will be necessary 
to use to sustain California during a long, hot, and dry summer 
will be very difficult to draw upon because the high energy 
cost may make pumping groundwater cost prohibitive.
    Farmers and ranchers cannot pass the higher cost of doing 
business on to the consumer. While agriculture is an important 
business in California, the farms and ranches are predominantly 
family operations with very small profit margins. Our farmers 
and ranchers cannot slash their overhead and ride out tough 
financial times because there is no large overhead to cut. As 
such, if all market indicators are proven correct, we will lose 
substantial agricultural resources this year because of the 
combination of the energy crisis, the dry water year, and the 
regulatory drought.
    The Trinity decision is another example of an ill-
considered government policy that will sacrifice our valuable 
agricultural resources without truly considering and mitigating 
these impacts as required by State and Federal law. The final 
environmental document does recognize that the Trinity decision 
will cause significant groundwater impacts due to overdraft, 
that agricultural production will be lost, and that 
agricultural lands will be fallowed. However, the magnitude of 
these impacts is not properly recognized. The agency's 
recommended mitigation for these impacts is the full 
implementation of the CALFED Program and the Central Valley 
Project Improvement Act. This is entirely inadequate, as these 
programs will have additional negative impacts to our 
agricultural resource base. While Farm Bureau is not opposed to 
the CALFED Program--in fact, we have been actively involved 
since its inception and continue to be so involved--we do have 
substantial concerns about the current programs significant and 
unmitigated impacts upon California's agricultural land and 
water resources.
    Finally, the Farm Bureau has grave concerns about the 
underlying science and policy decisions that were made relating 
to fish biology; in particular, the Trinity decision's 
temperature impacts on threatened and endangered fish in the 
Sacramento River. Several listed species within the Sacramento 
River are being sacrificed in order to improve fish populations 
within the Trinity River. We are concerned that the regulatory 
agencies have not sufficiently considered these impacts or 
developed policies to maintain the appropriate temperatures in 
the Sacramento River during the implementation of the Trinity 
decision. Thank you.
    Mr. Ose. Thank you, Ms. Sheehan.
    Finally, on our third panel, I would like to welcome Mr. 
Thomas Stokely who is the senior planner for the Trinity County 
Planning Department. Thank you for joining us. You are 
recognized for 5 minutes.
    [The prepared statement of Ms. Sheehan follows:]
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    Mr. Stokely. Thank you, Mr. Ose, and thank you, Mr. Burton 
and Mr. Horn. I would also like to thank our representative, 
Wally Herger, and Mr. Thompson as well, for getting me here 
    Mr. Ose. Well, I will tell you that Mr. Thompson twists my 
arm, so he is very effective.
    Mr. Stokely. He did? OK. [Laughter.]
    It is an honor to be here. As you said, I am a senior 
planner with the Trinity County Planning Department, and I have 
worked on restoration of the Trinity River since about 1989. I 
am Trinity County's lead agency representative for the EIS/EIR 
that the other witnesses referred to, and I have been working 
on that project since 1994.
    The main points I would like to make today are that the 
Federal court system is dealing with the Trinity River flow 
decision, limiting its impacts this year on power, and it will 
actually provide some minor benefits to power production this 
summer. Second, delaying implementation of the Trinity River 
flow decision will not assist in dealing with the energy crisis 
during the year 2001. And third, the evaluations in the Trinity 
River EIS/EIR actually show some power benefits from 
implementing the preferred alternative, particularly for future 
years, which helps to offset some of the negative impacts of 
the power implications involved in the Trinity River record of 
    As far as the courts are concerned, on March 19th Federal 
Eastern District Court Judge Oliver Wanger issued a verbal 
preliminary injunction which limited increases in the Trinity 
River this year to a critically dry year flow, which is an 
increase of 28,600 acre feet. The no-action alternative is 
340,000 acre feet. So that would put the flows down the river 
this year at 368,600 acre feet.
    Therefore, even if the year were to go to a dry year--
which, as I understand it, it is a critically dry year now. If 
it were to go to a dry year, the river would not receive the 
prescribed flows in the record of decision, which would be 
113,000 additional acre feet. And in addition to that, he has 
directed that a supplemental environmental impact statement be 
prepared that would deal with the energy crisis in California, 
as well as issues related to the Endangered Species Act.
    And I might add that the Bureau of Reclamation has filed 
declarations in Federal court which indicates that this 
additional water going down the river this year will not come 
out of any CVP water contracts, it will come completely out of 
storage at Trinity Lake, which is not something that we are 
very happy about in Trinity County, but it actually is to the 
advantage of some of the other panelists and their constituents 
    The additional in-stream flows will come out of Trinity 
Lake storage, and the relationship of that to power production 
is that the additional 28,600 acre feet of water that is going 
down the Trinity River this year that would not otherwise be 
going down the river in the absence of the record of decision, 
will in fact generate power at the Trinity Dam Power Plant at 
about 400 kilowatt hours per acre foot. That is approximately 
11,000--or, excuse me, 11,440,000 kilowatt hours of energy that 
is going to be in addition to what would have otherwise 
occurred this year in absence of the Trinity River flow 
    In addition to that, there are also some other benefits 
that we did not analyze in the EIS/EIR. There is a long-term 
average--the EIS/EIR estimates a long-term average reduction of 
7 megawatts. However, there are some other issues that make it 
not as big as it could have been otherwise. The first one is 
actually an issue that affects power generation this summer, 
and that is, in the past the timing of exports from the Trinity 
River to the Sacramento River has been in the spring months and 
the early summer months, and that was to protect the winter run 
chinook on the Sacramento River.
    Because of temperature concerns in the Trinity River, what 
has occurred as a result of the preferred alternative is the 
timing of the exports has shifted from the spring months to the 
summer months, and in fact, the peak of the exports or the 
generation from the Trinity River division will now occur in 
July, August, and September, and into early October of this 
year and also in future years. So instead of generating a lot 
of power during the spring months when it is generally not 
needed, it will, in fact, be generating power during the peak 
demand of the summer months. And that is an issue that will 
occur this year.
    Another issue for future consideration, but not necessarily 
relevant this year, is that the record of decision does result 
in a reduction of water contract deliveries, and in particular, 
south of the Delta. For instance, as I mentioned in my 
testimony, it takes 615 kilowatt hours of energy to pump water 
up into San Luis reservoir to provide water for the Westlands 
Water District, which is one of the plaintiffs in the 
litigation. And with a reduction of water deliveries to 
Westlands, there is a savings of that 615 kilowatt hours per 
acre foot, so that helps offset some of the reduction in 
generation from the flow decision.
    A third consideration is that the analysis in the document 
looked at power plant bypasses as a means of complying with 
temperature requirements in the Trinity River. And what we 
actually found is that the preferred alternative has a 9.4 
percent frequency of power plant bypasses at Trinity Dam, 
whereas the no-action alternative actually has a 13.8 percent 
frequency of power plant bypasses. This is primarily because 
the temperature compliance in the Trinity River is much 
improved under the preferred alternative, and therefore it 
results in less of a need to bypass the power plant at Trinity 
Dam. Whenever that has been done in the past, it can lead to up 
to an 85 megawatt reduction in power production because of the 
loss of generation at Trinity Dam.
    So, I would just like to conclude that the record of 
decision will have minor but beneficial impacts to California's 
power supply this year. A Federal court is dealing with the 
issue. It is my understanding that the Interior Department and 
probably Trinity County will be issuing a supplemental 
environmental impact statement and report, and will be looking 
at the power crisis, as well as issues of endangered species. 
Thank you very much.
    [The prepared statement of Mr. Stokely follows:]
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    Mr. Ose. Thank you, Mr. Stokely.
    I want to thank all the witnesses for their brief 
summaries. I would like to recognize the gentleman from Indiana 
for 5 minutes.
    Mr. Burton. I have to tell you, Mr. Chairman, I am not 
familiar with the Trinity River or the problems therein. And I 
think I will let you ask the questions, and I will just 
observe. As we go along, if I have questions, I will ask you to 
yield to me.
    Mr. Ose. All right.
    Mr. Burton. Thank you.
    Mr. Ose. Thank you, sir. Mr. Horn.
    Mr. Horn. Thank you, Mr. Chairman. This is just a general 
question of the Bureau of Reclamation. Without endangering 
species' habitat or environmental protections, is there a way 
to increase generation from hydroelectric facilities?
    Mr. McDonald. Probably the only fair answer is that it 
would be a highly site-specific circumstance that would depend 
on the species you are dealing with, and the hydrology and 
hydraulics of the riverine environment you are dealing with. 
There certainly are places I can point to where we have had 
those kinds of opportunities by working with the riverine 
environment, perhaps with the mechanical manipulation of 
vegetation, that kind of thing. There are other instances I can 
point to where that could not be done. We simply had to change 
power plant operations to achieve the required legal protection 
of endangered species.
    Mr. Horn. Well, you have just given us a safe method on at 
least one situation. How do we implement them, and how do we 
spread that along in different rivers?
    Mr. McDonald. Again, it is a highly case-specific 
situation. There are some instances in which, even though we 
might have had to change power plant operations, we would have, 
by virtue of generator upgrades, for example, we have recovered 
lost capacity. In other situations, we can move water around in 
terms of its monthly scheduling, and recover generation that 
might have otherwise been forgone.
    In general, as I testified to, I would emphasize that 
seldom do we actually bypass a power plant. The issue is more 
one of whether we can meet peak loads because we might have to 
dampen out a historical peaking operation compared to current 
    Mr. Horn. How does the system work here on all the 
different things that the different Federal agencies think very 
dearly about, whether it be fish and wildlife, reclamation, 
Corps of Engineers, all the rest of it? How do we make 
decisions on this?
    Mr. McDonald. In the context of Reclamation as an action 
agency, quote, unquote, under the Endangered Species Act, 
having legal obligations under section 7(a)(2) to not cause 
jeopardy to a listed species, or to adversely impact critical 
habitat, the process calls for consultations with the relevant 
agency, which might be the National Marine Fisheries Services, 
or Fish and Wildlife Service. We go through those consultations 
extensively on operating projects, utilizing the best available 
scientific information about species. These tend to be very 
case-specific circumstances that we have to sort through 
project by project.
    Mr. Horn. Does that mean that the decision is not made here 
in the region? If there is a real difference, it goes back to 
Washington, DC, and they get those people around the table? Or 
do they?
    Mr. McDonald. Anything that I have ever personally been 
involved in has been a decision at the regional level among 
regional directors of Reclamation, Fish and Wildlife Service, 
and National Marine Fisheries Service.
    Mr. Horn. And they try to get a consensus out of the group, 
is that it? And then what happens? What is the directive?
    Mr. McDonald. Certainly Reclamation's perspective as we 
work with the consulting fishery agencies is to make our views 
known and present the science as we understand it. It is our 
obligation to start with a biological assessment. We will 
defend what we understand to be the best science, and work with 
the fishery agencies to try to understand their requirements 
and their interpretation of the jeopardy standard under section 
7(a)(2). In particular, we work with ways to be sure that 
reasonable and prudent measures are not burdensome on a 
project, or if we are causing jeopardy and have to go to a 
reasonable and prudent alternative, to have a reasonable and 
prudent alternative that meets the conditions of the act and 
the regulations as to being, indeed, reasonable and prudent.
    Mr. Horn. Which agency has the domination over saying OK, 
folks, we have talked about this for 3 years, can we get this 
thing moving?
    Mr. McDonald. It is always the action agency as a matter of 
law. The statute has a prescribed time line which the action 
agency can require of the fishery agencies. At the end of the 
day it is our decision, not theirs.
    Mr. Horn. You say it is your decision.
    Mr. McDonald. As the action agency.
    Mr. Horn. As the action agency. And I gather there has been 
several rules issued through the Bureau of Reclamation that 
reduce generation capacity for the benefit of environmental 
protection. So that would have been made by your particular 
area, is that correct?
    Mr. McDonald. Yes.
    Mr. Horn. Yes. And are there any areas in the process that 
allow for future forecasting of growth in electricity demand as 
one of the factors, or for emergency plans for increased 
generation? So is that in the law in any way electricity, or is 
it sort of oriented primarily to species?
    Mr. McDonald. The standards of section 7(a)(2) of the 
Endangered Species Act, Congressman, do not permit an economic 
analysis. It is strictly a scientific analysis relative to 
jeopardy of the species. We certainly always, as an action 
agency, try to understand those impacts. Instances that come to 
my mind are those such as the decisions made in 1996 at Glen 
Canyon Dam, where we did build into our final decision, based 
on the biological opinion, emergency criteria that allow us, on 
occasion, to operate outside the boundary of the biological 
opinion if we face a system emergency.
    Mr. Horn. Now, does the Environmental Protection Agency in 
Washington or the region, do they have a say in any of this?
    Mr. McDonald. The Environmental Protection Agency is not 
the regulatory agency. That is either Fish and Wildlife Service 
or NMFS. But to the extent that you can have water quality 
parameters as a factor in the health of an endangered or 
threatened listed species, then EPA can be involved. That will 
always tie back into the water quality standard of the water 
body that you are dealing with.
    Mr. Horn. Yes. I have a lot of respect for Fish and 
Wildlife, but I do not have any respect, frankly, for the on 
science within EPA. When we put it in the law, they refused to 
bring it to the floor back in 1993. And, you know, we have 
referred things to the National Academy of Sciences, and that 
helps, because they do have scientific people. But some 
agencies, I have a feeling that they just do not really think 
much about science, and that worries me. Now, do you run into 
that, where some agencies seem not to really have a decent 
scientific analysis?
    Mr. McDonald. I would not characterize it that way. I think 
the challenge that the ESA always presents to executive branch 
agencies is that it is an absolute requirement to avoid 
jeopardy, and in that context, you have to work with the best 
available science. Often in the biological sciences the best 
available science is full of risk and uncertainty that cannot 
be reduced beyond a minimum that leaves a lot of judgment as to 
indeed what is required by the species.
    Mr. Horn. You seem to be very knowledgeable about the law 
on that, and you noted that electricity and economics are not 
part of it. I take it that----
    Mr. McDonald. Not part of a jeopardy standard. No, sir.
    Mr. Horn. Yes. Did anything else go? Because it used to be 
that you could not build a dam unless there was certainly an 
economic analysis that you could pay back the money for that 
dam. And you had to go through very specific things in the 
1950's and 1960's in terms of crops and what this will mean and 
so forth.
    Mr. McDonald. Sure.
    Mr. Horn. Did all of that go out?
    Mr. McDonald. Those are not requirements of the Endangered 
Species Act under section 7(a)(2).
    Mr. Horn. Well, does it have--is it existing still in 
Reclamation law?
    Mr. McDonald. Certainly if Reclamation were authorized by 
Congress to do a feasibility study of a new project, we would 
apply those economic justification criteria, or, as we call 
them, the benefit cost analysis, which tries to capture 
benefits and costs in dollar terms to society as a whole.
    Mr. Horn. Well, would that not put on the table the matter 
of economics, electricity, etc?
    Mr. McDonald. Sure, if we were planning a new project, it 
    Mr. Horn. OK. So it is not completely thrown overboard.
    Mr. McDonald. No, sir.
    Mr. Horn. OK. Thanks, Mr. Chairman.
    Mr. Ose. Thank you.
    Mr. Jobson, in terms of the Trinity River decision that 
Judge Wanger has taken under his jurisdiction, Mr. Stokely was 
talking about the positive or negative impacts in terms of 
power generation that will result from the verbal injunction 
that Judge Wanger--actually, it is not a verbal. It is actually 
written. It is a temporary injunction that has actually been 
    Mr. Stokely. It is my understanding it is a preliminary 
injunction and he issued a memorandum of opinion. But I have 
not seen a preliminary injunction, itself, yet. But he issued--
    Mr. Ose. I actually read it, and I read it as a preliminary 
injunction pending a final. Anyway, the point of my question is 
whether or not you agree with Mr. Stokely's conclusions about 
the impacts on power supply?
    Mr. Jobson. No, sir, I do not. We see that differently, and 
I will explain. First of all, in 2001 the judge did limit the 
releases to that which would be made in a critically dry year, 
rather than in a dry year, which I agree with Mr. Stokely.
    Mr. Ose. 28,600?
    Mr. Jobson. Right. And should it have been a dry year this 
year--and it has not been determined yet--that would have saved 
approximately 90,000 megawatt hours. The reduced flow would 
have conserved 90,000 megawatt hours, which is a substantial 
amount of electricity.
    The fact that Reclamation has determined that these 
additional releases to the Trinity, even if it is only 28,000, 
will be made solely from storage merely delays the impact on 
power and water. It means that Trinity reservoir will be lower. 
It means that the power plant will therefore have less capacity 
and produce less energy and it means that we will likely not 
recover its full storage next year or will be less likely to. 
So those are delayed impacts, they are not benefits.
    In addition, any generation that will be added at Trinity 
Power Plant as a result of this 28,000 acre feed, generation at 
the remaining Trinity River division plants, Carr and Spring 
Creek Power Plant, and at Shasta Power Plant--I mean, excuse 
me, at Keswick Power Plant in the Shasta division will be lost, 
because the releases from Trinity will not be diverted across 
to the Sacramento River, they will go down the Trinity River.
    Mr. Ose. Before you leave that issue, is that a one-for-
one? I mean, I am trying to understand. I understand you cannot 
drink the water twice, so to speak.
    Mr. Jobson. No. I understand.
    Mr. Ose. But is it a one-for-one? If you go down Trinity, 
you lose 1 megawatt hour, or if you go down the other way--I 
mean, is it a one-for-one?
    Mr. Jobson. Let me explain.
    Mr. Ose. All right.
    Mr. Jobson. In either case the water is released at 
Trinity, and it generates approximately 400 kilowatt hours an 
acre foot at Trinity Power Plant. However, after that, going 
down the Trinity River there is a very small, almost 
inconsequential power plant at Lewiston Dam. But, basically you 
are dealing with about 400 kilowatt hours per acre foot as a 
generation in that alternative.
    If it is diverted to the Sacramento River, an additional 
1,100 kilowatt hours per acre foot will be generated on top of 
the 400, due to generation at Judge Carr, Spring Creek, and 
Keswick Power Plants. So, it is about a three-to-one 
difference. A total of 1,500 kilowatt hours per acre foot if it 
is diverted to the Sacramento River, and 400 kilowatt hours 
plus change at Lewiston it if is released to the Trinity River.
    Mr. Ose. Do you agree with that, Mr. Stokely?
    Mr. Stokely. I agree with his numbers. The only thing I 
disagree with is that the water that will go down the river 
this year will come out of storage. As I understand it, it is 
not water that would have been sent over to the Sacramento 
River to produce that 1,100 kilowatt hours per acre foot, it is 
water that is coming out of storage, and if we do not have a 
wet winter next year, there may be or there will be an impact 
next year. If we have a wet winter and we have what we call 
safety-of-dams releases, there will virtually be no impact in 
future years because the reservoir will fill up, but we do not 
know that.
    Mr. Ose. I am just trying to get clear in my mind, as we 
move forward to try and find solutions, is it a one-to-one 
swap, is it a one-to-two, is it a two-to-one. And I 
appreciate--I mean, you guys are agreed on that ratio, though, 
in terms of the power generation?
    Mr. Stokely. Yes.
    Mr. Ose. OK.
    Mr. Jobson. There were a couple of other areas that I found 
that I viewed differently. Characterizing the capacity lost as 
an average of 7 megawatts is misleading. Capacity is measured 
in dry years by hydroelectric plants as their capability to 
produce in dry years, standard industry approach. An average 
capacity is almost a contradiction in terms. Capacity is 
measured on what can be relied on in all circumstances, and 
with a hydro project, in dry circumstances. That impact on the 
Trinity River decision is 150 megawatts in a critically dry 
year and the cumulative impact, with implementation of CVP 
Improvement Act, is 325 megawatts in a critically dry year. 
That is how the capacity should be measured.
    Mr. Ose. So, in terms of a system-wide situation, the 
record of decision signed by the secretary in a critically dry 
year would cost us 300-and-some-odd megawatts of power 
    Mr. Jobson. That is the cumulative impact with Trinity and 
CVP Improvement Act.
    Mr. Ose. OK.
    Mr. Jobson. CVP Improvement Act has been implemented, so 
that is the number, but if you just look at the increment of 
Trinity, it is 150.
    Mr. Ose. Let us focus just on the Trinity, because that is 
what Mr. Stokely came to testify about.
    Mr. Jobson. 150 megawatts.
    Mr. Ose. OK, great.
    Mr. Jobson. The other thing I would point out is that I 
think the timing benefits of moving generation around are 
overrated, that there are still impacts--adverse net 
significant impacts on power of the secretary's decision, 
unless it is substantially changed when he revisits his 
decision in the supplemental environmental document. And we 
hope that this administration will employ a more open process 
where our alternative--the power alternative is given a much 
more fair shake. We took a lot of time and hired experts, PhDs 
in their field, to develop an alternative that employs water 
conservation as well as fishery restoration, and we hope this 
administration gives it a fairer shake than the last one did.
    Mr. Ose. My time has expired. Mr. Horn.
    Mr. Horn. I yield back.
    Mr. Ose. OK, I have more time. Ms. Sheehan, I just want to 
visit with you about the consequence to the members of the Farm 
Bureau that is likely to occur this summer, and for that matter 
beyond. To the extent that we do not have enough power, from 
your perspective, what are the consequences to the agricultural 
community up and down this State?
    Ms. Sheehan. Well, as you know, agriculture is having a 
real tough go of it right now. The industry is under a lot of 
pressure. The agricultural markets are struggling. Agricultural 
regulations are getting stricter every year. We have had 
numerous decisions reducing the water that is available for use 
by agriculture. Water has been converted from agricultural use 
to environmental purposes.
    Now with the energy crisis on top of all these other 
stresses on the industry, it is already becoming too much for 
many of our farmers, and a lot of people are looking for 
relief. Once we lose our valuable agricultural infrastructures, 
our agricultural land is going to be converted to urban uses. 
We are going to lose our industry, our agricultural industry. 
We have already lost many packing plants. It is a steamroller 
effect. Once you start losing the processing plants, even 
though the land is there, you cannot make any kind of 
profitable agricultural use of the land.
    Mr. Ose. It is interesting. As I drive up and down the 
valley, one of the dynamics that I see at play is that, for 
whatever reason, things change. I mean, it is a very dynamic 
economy. As it relates to our rice growers, by virtue of a 
decision taken by the legislature, they have moved away from 
what I would call a traditional rice burning or rice straw 
burning template, to using water to deteriorate the straw in 
the fields. I have to admit that I look at the water in those 
fields, and I see power behind the dams. I am wondering about 
the tradeoffs, whether or not that particular issue was ever 
considered in the context of the original legislation for 
particulate matter from the rice straw burning.
    Ms. Sheehan. I do not believe it was, but it is not my area 
of expertise. I was not involved in making this decision. I was 
not involved in the development of this legislation. The energy 
situation is so new right now, I do not think it was on 
anyone's radar screen even a year ago. So, I do not believe 
that impact was considered.
    Mr. Ose. I am trying to find the right balance, is what--I 
mean, Trinity River, Sacramento River, Shasta, all of these 
different components play a piece here. To the extent we have a 
surplus of this and a deficit of that, how do we use the 
surplus to meet our deficit? I just cannot help driving up and 
down I-5 looking at the rice fields. My gosh, that is power 
behind a hydro dam.
    So, Mr. McDonald, over on the Colorado, is that Bureau or 
Corps of Engineers operated?
    Mr. McDonald. If you are talking power plants, they are all 
Bureau of Reclamation.
    Mr. Ose. OK. First of all, I want to pay a compliment to 
you and provide a little constructive feedback, if I might. 
Your Web site is very informative.
    Mr. McDonald. Oh, thank you.
    Mr. Ose. I appreciate being able to go there.
    Mr. McDonald. I will pass that on to our computer gurus.
    Mr. Ose. The constructive feedback I would give you is that 
the totals you have on the 58 different plants are aggregates 
for the month rather than--there is no place I can go and say 
well, what are we producing today.
    Mr. McDonald. Oh, I see what you mean.
    Mr. Ose. It would be helpful to me, watching the power 
situation in the West, to have kind of like today's production, 
month-to-date number, with a historical perspective. So I pass 
that on as constructive feedback.
    Mr. McDonald. Fine. I will see if it is doable.
    Mr. Ose. Now, the issue in particular on the Glen Canyon is 
that last May or June, if I recall, we came across a piece of 
legislation that was passed through Congress and signed by Bush 
41 to implement a low flow of release experiment from Glen 
Canyon. I have to admit some respect for--significant respect 
for the people who crafted the legislation, because imbedded in 
the legislation is authorization for the Secretary of the 
Interior, under emergency conditions of one sort or another, to 
waive the requirements of the low flow experiment, and ramp up 
the generation from Glen Canyon. Are you familiar with this 
particular issue?
    Mr. McDonald. Yes.
    Mr. Ose. I noticed in your testimony you have a chart here. 
It has got both Hoover and Glen Canyon.
    Mr. McDonald. Yes.
    Mr. Ose. What I am trying to figure out is the conditions 
under which the Department now waives the continuation of the 
low flow release experiment. In other words, is it a stage 3 in 
Sacramento--or in California? Is it a stage 3 west of the 
Rockies? Are there any definitions so that when we get to a 
certain point it is automatic, rather than having to be a new 
administrative act?
    Mr. McDonald. There are definitions, Congressman. They are 
spelled out as part of the 1996 decision on the operation of 
Glen Canyon Dam. Basically, we will deviate from the 
requirements of that decision in instances in which a system 
has crashed and needs to be brought back up, there is a loss of 
transmission and we need to stabilize the system, or there is a 
loss of generation and the system needs to be stabilized.
    There are a series of criteria that are actually set out in 
that decision. If I could summarize those briefly. Basically, 
Western Area Power Administration, the marketer of the power, 
has to decide that the utility that is seeking assistance--and 
in the context of California it is the ISO that calls up 
Western--has exhausted all their reserve capacity, that there 
are no non-firm energy sales out there to be had, that all 
interruptible loads have been shed, and that a blackout 
condition on the system is imminent, which in the context of 
stage 3 brings us below a reserve of 1\1/2\ percent. If that 
kind of request is received from the ISO, as it has been 
several times in the last several months, and if--and this is 
the biggest if--there is transmission capacity available from 
Glen Canyon Dam into southern California, we, Reclamation, have 
responded. In my written testimony I identify the four times 
where transmission capacity was found by Western, we could 
sneak electrons through Arizona, if you will, and we were able 
to get power to California. In the other instances there was 
simply no transmission capacity.
    Mr. Ose. This brings me to my fundamental question, and 
that is, as we look for solutions to California's energy 
crisis, I mean, power is often fungible within certain 
parameters. I mean, power from Glen Canyon can go east or west, 
north or south under certain parameters. How do we make it 
possible so that in a situation of an emergency nature we can 
run Glen Canyon up or run Hoover up and get that power in here?
    Clearly you have indicated we need transmission lines or 
transmission capacity. Yet, you have also indicated the Bureau 
does not own transmission capacity. Are there programs that we 
could undertake or policies we could adopt that would 
facilitate the creation of that transmission capacity?
    Mr. McDonald. Two comments. First of all, transmission is 
not a constraint at Hoover. There is ample capacity, 
transmission capacity, to move power generated from the Hoover-
Parker-Davis complex into southern California. There is 
essentially no limitation at Hoover on our peaking ability, 
because the two downstream reservoirs provide re-regulation of 
releases from Hoover. The limitation at Hoover is the 
interstate compact and the international treaty which we have 
to observe or we are wasting California's water. At Glen Canyon 
it is a different situation.
    Mr. Ose. Do not do that. Do not do that.
    Mr. McDonald. I understand. At Glen Canyon, a different 
situation. We lack the transmission capacity. It would take a 
private utility or Western Area Power Administration, with 
congressional authorization, to construct new transmission 
capacity. But it would also take some changes in Federal law 
that I need to point out.
    Glen Canyon was authorized and is operated pursuant to the 
Colorado River Storage Project Act of 1956. Pursuant to that 
act, the surplus power from not just Glen Canyon, but the whole 
of the Colorado River Storage Project system is marketable to 
customers in Wyoming, Colorado, Utah, New Mexico, Arizona, and 
Nevada, and only in those States. All of this surplus power is 
in fact under contract, and there is nothing else available. 
All Glen Canyon can do, even if there were transmission 
capacity, in the context of those Federal statutory 
requirements, is run some water through the generators on a 
peaking basis, losing water that would otherwise be held to 
generate for those customers. Then, Western has to go out on 
the market and buy replacement power which those customers have 
to pay for. So essentially, Glen Canyon is simply not available 
except in the kind of very constrained emergencies that we have 
already, and will in the future, continue to respond to.
    Mr. Ose. In terms of those other States into which Glen 
Canyon might send power under the compact, are there 
alternatives for California? In other words, I mean, it is the 
fungible nature of the electricity I am trying to get to. Maybe 
this person is generating capacity into California and the 
market changes, and then he is going to--that person is going 
to go there and somebody else is going to fill the gap. Are 
there things we can do operationally to maximize the 
fungibility of the power? In other words, send Glen Canyon east 
and bring somebody else west?
    Mr. McDonald. Sure, it is certainly fungible. It basically 
boils down to the transmission constraint. If you use that 
water at Glen Canyon to generate power for other than Western's 
customers, then Western has got to go into the marketplace. The 
volatility of the marketplace, of course, has got them up 
against the same problem that the private utilities in 
California are up against.
    Mr. Ose. Well, that is at the heart of the question because 
Western delivers to any number of smaller retailers here in 
California, whether they be municipalities or otherwise.
    Mr. McDonald. That is correct.
    Mr. Ose. The price of alternative or substitute power on 
the spot market is absolutely hammering them in trying to 
replace that. So, again, I am looking for suggestions as to 
what we can do at the Federal level, even if it is Glen Canyon 
or Hoover or somewhere else, to facilitate the delivery of 
power into California for those gaps. You are saying very 
clearly you need transmission facilities?
    Mr. McDonald. Transmission and interties are probably the 
two keys.
    Mr. Ose. OK. It does not matter whether they go north, into 
northern California, or into Nevada or Utah. The market will 
just level that all out in terms of providing extra power where 
it is needed?
    Mr. McDonald. If we continue to have that kind of market 
into the future. Obviously, that is the subject of your 
hearings and what California State agencies may do as they 
address all of these issues. But headed in the direction it is, 
yes, it becomes a more fungible product.
    Mr. Ose. My time has expired. Mr. Horn.
    Mr. Horn. Just one question that relates to Hoover Dam, Mr. 
    Mr. McDonald. Yes.
    Mr. Horn. Has the argument--when they formed the 
percentages between Nevada, Arizona, and California, it was a 
very dry period of years. Has the Bureau of Reclamation looked 
at that in terms of what the percentage would--the percentage 
would remain the same, but there would be a lot more based on 
how wet the history was when that was put into the treaty or 
compact between these States.
    Mr. McDonald. I think there are two different issues there, 
Congressman. The amount of water apportioned among the States 
is based on the 1922 Colorado River Compact. With the virtue of 
hindsight, they did look at a period of record that was 
probably one of the wettest periods on record. The States have 
never chosen to attempt to renegotiate that deal.
    The power issue is different. That is not imbedded in the 
compact, it is an act of Congress that directed the marketing 
of power, 50 percent to California, 25 percent each to Arizona 
and Nevada. That did not turn on the history of the water 
supply in the Colorado River.
    Mr. Horn. What year was that power----
    Mr. McDonald. That is provided for by the authorizing 
legislation for Hoover Dam. So, the authorizing act of 1928.
    Mr. Horn. Yes. Well, you have got Las Vegas that has 10,000 
people coming in--depending on who you talk to--a week, a 
month. And added up to a year or so, I think you will find 
there will be a pressure for water out of Hoover Dam. I do not 
know what Reclamation is seeing in Nevada that might help that 
situation, because they are going to really be up against it. 
Arizona has not really started to get its share of the water. 
It is available, but they have not used it that much. So, what 
does Reclamation think looking ahead?
    Mr. McDonald. To give a short answer to a very complicated 
situation, the issue of the use by California of its compact 
entitlement and its apportionment under the Supreme Court 
decree of 1963 in Arizona v. California has been the subject of 
much discussion in the last several years, leading to a 
decision that the Secretary of the Interior just made late last 
year, under his statutory authorities, relative to bringing 
California back down from its current use of about 5.4 million 
acre feet a year, to its entitlement of 4.4 million acre feet a 
year. Associated with that was another Secretarial decision, 
under Federal statute, as to how, when there are surplus 
conditions in the Colorado River system, the Secretary will 
arrive at a decision to declare that surplus. So, in fact, the 
longstanding dispute among the seven States has been, I hope, 
knock on wood, brought to a conclusion in just the last several 
    Mr. Horn. Well, we have our friends in Mexico that----
    Mr. McDonald. Who are raising a number of new issues that 
will take our attention for a number of years to come, I am 
    Mr. Horn. Yes. Well, we have got two Presidents that like 
each other for the first time in history, and I know the 
Mexican people certainly would like to have a little better 
situation than we have, and it is a lot better than it was in 
the 1950's and 1960's when we were just sending salts and all 
the rest down to kill some of their plants. And I think a lot 
of that has been slowed down and stopped, has it not?
    Mr. McDonald. The United States is complying with what we 
call Minute 242, which deals with water quality. Minute 242 of 
the International Boundary and Water Commission. We have 
complied with that minute every year since it was agreed upon 
by the two governments. So we are meeting the water quality 
standards for salinity.
    Mr. Horn. Mr. Chairman, I would like to have the 
Secretary's decisions that were referred to by the 
commissioner, and put them at this point in the record.
    Mr. Ose. Without objection.
    Mr. McDonald. Be glad to.
    Mr. Horn. I yield back.
    Mr. Ose. Let me go back to transmission questions. Down in 
the south part of the valley--and I do not know who might be 
able to answer this--Path 15.
    Mr. Jobson. I can speak to that.
    Mr. Ose. Apparently we have two-thirds of the capacity we 
need for transmission at a certain point.
    Mr. Jobson. There is a bottleneck on the north-south 500 KV 
inter-tie in California called Path 15, and it is a spot where 
there are two, rather than three, 500 KV lines. A third one is 
necessary in order to relieve the bottleneck.
    Mr. Ose. How do we get it?
    Mr. Jobson. Well, it needs to be designed, constructed, and 
built. The Transmission Agency of Northern California had 
offered to go forward, and if forwarded money from the State of 
California, as I understand it, go forward and get the 
biological studies done this spring as soon as possible, and 
take a leadership role in facilitating the construction of that 
line, so long as there were interested parties with the funding 
to do it.
    Historically, the TANC, the Transmission Agency of Northern 
California, and the Western Area Power Administration have 
played a lead role in building the last 500 KV upgrade on the 
north-south inter-tie, and that is the COTP, California-Oregon 
Transmission Project. I think the publics will stand willing 
and ready to contribute whatever services we can to resolving 
that bottleneck, as it will help resolve a portion of the 
reliability problems in the State.
    I did also want to mention, with respect to public power, 
that a topic came up in the last panel about supplying 
information and municipals' role and that type of thing. And if 
it pleases the chairman, I want to add a bit to the record on 
    Mr. Ose. Feel free.
    Mr. Jobson. SMUD and other municipals have made it clear 
that we will voluntarily comply with any caps that apply to all 
market participants. We largely are buyers. We are consumer 
representatives. We serve load. We will voluntarily comply with 
those caps, and voluntarily provide any other information that 
other market participants are required to provide. So we do not 
believe the jurisdictional differences will be a constraint to 
our participation in resolving these problems.
    Mr. Ose. Let me dwell on that for a moment. In terms of 
SMUD's efforts to acquire long-term source supply for that 
portion that they do not generate themselves----
    Mr. Jobson. Right.
    Mr. Ose. [continuing]. How long does it take you to 
finalize it? SMUD is not subjected to PUC's directive on long-
term contracts?
    Mr. Jobson. Correct. We have a number of long-term 
contracts, the largest of which is with the Central Valley 
Project. But we have a number of other contracts, and are 
developing others as we speak, to mitigate our long-term risk. 
We have continued to do that, and are stepping up some of those 
efforts. So, how long does it take? Say you are talking a 10-
year contract, that can be brought from beginning to end in a 
period of 6 months or less, if necessary.
    Mr. Ose. Do they work pretty well?
    Mr. Jobson. Yes. We have had long-term contracts with 
suppliers in the Northwest which we have imported over our COTP 
line for years, many years, with a variety of suppliers.
    Mr. Ose. But it is an option that is available to SMUD, it 
is not a mandate?
    Mr. Jobson. Definitely.
    Mr. Ose. It is just an option?
    Mr. Jobson. No. It is a tool that one uses to diversify 
ones risk.
    Mr. Ose. Right.
    Mr. Jobson. And not keep all your eggs in one basket. So 
SMUD, for instance, generates about half the power we serve to 
our customers. We buy the other half from a variety of long and 
short-term contracts, primarily longer-term.
    Mr. Ose. Different trenches?
    Mr. Jobson. Yes, exactly.
    Mr. Ose. All right.
    Mr. Jobson. Risk diversification. That is what it is. But 
our regulatory scheme is different from the investor-owned 
utilities. We are directly accountable to our customer owners 
through an elected board. They approve these decisions. And so 
it is a little more, I think, timely and easy to reflect the 
local community's desires.
    Mr. Ose. I doubt if your cash-flow requirements differ 
greatly from the IOUs, though you have got to have cash to pay 
your bills.
    Mr. Jobson. Definitely.
    Mr. Ose. And, you have got to hedge your risks to make sure 
you minimize your exposure.
    Mr. Jobson. Right. We also approve our own rate increases 
rather than going to the PUC. So that helps somewhat with 
respect to the cash-flow. But, you know, the other large 
difference is we operate without profit. We pass through 
whatever our power costs are. It has allowed us to not raise 
our rates in 10 years, although you will see that changing here 
in the next few months.
    Mr. Ose. Your rates are higher or lower than the investor-
owned utilities at present?
    Mr. Jobson. Lower.
    Mr. Ose. Yours are lower?
    Mr. Jobson. Correct.
    Mr. Ose. By what percent?
    Mr. Jobson. It is not my field of expertise, but I would 
estimate approximately 20 percent.
    Mr. Ose. So, if I read the testimony correctly, the 
investor-owned utilities you are given a profit margin of 11.6 
percent, and you are 20 percent below them?
    Mr. Jobson. Approximately. It may even be more than that, 
especially with what is going on lately. This is a realtime----
    Mr. Ose. Is there a connection between the optional tools 
that are available to you as opposed to the investor-owned 
utilities, and the ability of you to provide bargain-basement 
    Mr. Jobson. I think it is an advantage to have regulatory 
flexibility and direct accountability to your ratepayers, so 
that, for instance, we do not have to do what Los Angeles does. 
We do not have to adhere to a set of requirements from a common 
regulator, as Los Angeles--like, for instance, Edison and PG&E 
do to the Public Utilities Commission. We are directly----
    Mr. Ose. DWP does not, either, though.
    Mr. Jobson. No. That is what I am saying. L.A. is 
responsible to its customer owners through its city council or 
whatever mechanism it has, and SMUD is responsible to our 
customer owners. The same with Northern California Power Agency 
cities. We have more flexibility, and are able to tailor our 
risk management, our rates, our resource decisions directly to 
what we feel and our customer owners feel is appropriate. SMUD, 
for instance, has a high amount of demand-side management, 
environmentally friendly resources, renewables, because that 
reflects what our customers think is the right thing to do. And 
they express that through a vote, and they elect board members, 
and we immediately, within our own district, make these 
    Mr. Ose. All right.
    Mr. Jobson. We think that is a better model, and we think 
our rates over the last--as long as we have been in business, 
reflect that.
    Mr. Ose. You like having those tools available at your 
option to use?
    Mr. Jobson. Definitely. And we like having the 
accountability to our ratepayers directly for it.
    Mr. Ose. So you tell your ratepayers the contracts you 
enter into, so that they know and can vote accordingly?
    Mr. Jobson. All long-term contracts are approved by the 
board. The board is elected by the people, and they are 
approved in open, public meetings.
    Mr. Ose. How long of a timeframe between the time you enter 
into the contracts and the time you disclose the basis of the 
    Mr. Jobson. Once the contract is approved by the board it 
is a public document. The time between which negotiations start 
and it gets approved could vary anywhere from 1 to 6 months, or 
considerably longer, depending on how hard it is to negotiate a 
deal. But, depending on the urgency, it can be done within a 
matter of months, a few months.
    Mr. Ose. Once you commit the ratepayer, you disclose it?
    Mr. Jobson. Before we commit the ratepayer, we disclose it 
to the--the board's decision is what commits the utility.
    Mr. Ose. OK.
    Mr. Jobson. And the board's decision is made in an open 
meeting. And once the decision is made, it is a public 
    Mr. Ose. All right. Mr. Horn.
    Mr. Horn. It is all yours.
    Mr. Ose. All right. You are finished?
    Mr. Horn. Right.
    Mr. Ose. All right. Mr. McDonald, do you have any sense of 
the cost to complete path 15--or for that matter, Mr. Jobson--
of the cost of putting that third 500 KV line in there?
    Mr. McDonald. I have no idea. Reclamation is not in the 
transmission line business anymore.
    Mr. Ose. OK. Mr. Jobson.
    Mr. Jobson. I can tell you that the California-Oregon 
Transmission Project cost about $480 million. Now, that is a 
substantially larger, longer project. But I would think it 
would be on the order of--you know, this is a guess--$200 
million, something like that. We can get back to you with facts 
on that. It has been costed.
    Mr. Ose. I would be interested in what you would estimate 
the cost of construction for removing this bottleneck would be? 
All right?
    Mr. Jobson. We will refine that $200 million estimate with 
contact with your staff, if that is OK. But that would give you 
an order of magnitude of what we are talking about. So I do not 
know how many days of power supply that is in California today, 
but it is not very many.
    Mr. Ose. Let us think in terms--at some point we have to 
have this solved. How do we get there? That is what I am trying 
to get to.
    Mr. Stokely, on the Trinity River issue--and I am willing 
to be corrected on this. I am asking because I do not know the 
    Mr. Stokely. Sure.
    Mr. Ose. The record of decision selected an alternative 
that it is my understanding was not the preferred alternative.
    Mr. Stokely. It did select the preferred alternative, which 
is the Trinity River flow evaluation, plus additional watershed 
restoration work. So the record of decision did select the 
preferred alternative.
    Mr. Ose. What is the reason--I mean, again, I read Judge 
Wanger's preliminary injunction, and he was not too subtle 
about his concerns there. I am trying to understand, were there 
things beyond just release of water that Judge Wanger thought 
should have been incorporated into the selected alternative?
    Mr. Stokely. No. Actually, I believe on page 54 of his 
memorandum he indicated that the two issue areas he was ruling 
on that had a chance of success or had merit at a full trial 
are the issue of the impacts of the two biological opinions on 
water and power in California. That is, the National Marine 
Fishery Services' biological opinion on the Sacramento chinook 
species, as well as the steelhead in the Central Valley and the 
Trinity River coho. And in addition to that, the U.S. Fish and 
Wildlife Services' biological opinion on various species under 
their jurisdiction.
    Primarily, one of the main areas that he ruled on was that 
the biological opinions came out concurrently with the final 
EIS/EIR, so there was no analysis of the effects of those 
biological opinions on the operations of the CVP. And then, in 
addition to that, he basically said that the issues related to 
the power crisis in California necessitated preparation of a 
supplemental EIS.
    Mr. Ose. Now, this is still before Judge Wanger, so there 
may be additional rulings and the like to refine the ultimate 
disposition of this matter?
    Mr. Stokely. Again, maybe Mr. Jobson can correct me, but it 
is my understanding that memorandum he issued was sort of the 
framework for the preliminary injunction, and then he ordered 
the plaintiffs to prepare the actual primarily injunction 
itself. And as far as I know, he has not signed that order yet, 
but it is pretty well laid out.
    The two issue areas that I am aware of that he ruled did 
not have a high likelihood of success at a full trial, I think 
there is three of them, and two of them that I can remember. 
One is the issue of alternative development. He basically 
ruled, on page 54 in a footnote, that was not likely to prevail 
in a full trial. And the other issue was the concept of the 
healthy river, which was incorporated.
    Mr. Ose. I did notice he told the plaintiffs, if I recall, 
the first challenge he did not think would stand review, but 
the second--I thought it was very interesting the way he 
juxtaposed it. Anyway, Mr. Jobson.
    Mr. Jobson. Mr. Stokely and I do not interpret that 
memorandum the same way with respect to the characterization of 
what issues may prevail and which may not. I think the salient 
point from the memo is that there were two things that had to 
be demonstrated in order for an injunction to be issued. One 
was irreparable harm if it is not issued, and the other one is 
a likelihood of prevailing on the merits on any of the issues 
raised. He concluded that there was sufficient merit on some of 
the issues, and did not rule on the merit of the other issues. 
That is our feeling about the memo. Although it will be the 
order that will be the one important ruling document that he 
issues, so it may not be an important distinction.
    Mr. Ose. All right. I have one final thing, Mr. Horn, if 
your patience abides.
    Mr. Horn. My patience is long-going.
    Mr. Ose. All right. Well, you have been patient for 2\1/2\ 
years. I appreciate it.
    Mr. Horn. You have been patient in my hearings, so go to 
    Mr. Ose. One of the things my staff and I are giving 
consideration to is legislation obviously. One of the pieces of 
legislation we are giving specific consideration to is trying 
to find a way under which--the circumstance in which a Governor 
declares an emergency to authorize either the Secretary of the 
Interior, in the case of the Bureau, or the Secretary of the 
Army, in the case of the Army Corps of Engineers, the 
discretion to waive restrictions on operations of facilities.
    Do any of you have any input as to how that might 
transpire? Mr. Stokely.
    Mr. Stokely. In the Trinity River record of decision it 
does reference development of an emergency operations plan for 
the Trinity River division of the CVP. And as I understand it, 
Reclamation submitted a plan to the court as part of the 
evidentiary proceeding in the--I do not really know the status 
of that particular plan. Maybe Mr. McDonald could explain it 
more. But as I understand it, the Trinity River Division has 
already operated under emergency criteria to provide power to 
California during some of the stage 3 alerts. And, as I read 
it, it basically allowed them several hours, if there was a 
request similar to what Mr. McDonald had described with the 
Colorado River project, if there was a request for power 
because they knew there was going to be a shortfall, that the 
project would be allowed to release water to generate 
additional power. I really do not know any more than that, but 
there is apparently some sort of an emergency operations plan. 
I maybe did not answer your question completely, but----
    Mr. Ose. Maybe my question more specifically is, using the 
threshold of a declaration by the Governor to determine the 
circumstances under which the Secretary of either Interior or 
Army would then be able to act. Is that an appropriate 
standard? That is, for the Governor's determination?
    Mr. Stokely. I am really not prepared to answer that 
    Mr. Ose. OK. Ms. Sheehan.
    Ms. Sheehan. I am sorry, I do not know the answer.
    Mr. Ose. OK. Mr. Jobson.
    Mr. Jobson. The concept of mitigating lost power by having 
emergency procedures is at best limited, and at worst 
delusionary. Any water that is expended in an emergency 
reaction will then not be available for future use. And so it 
is kind of mortgaging your future with your present. So it 
should be viewed carefully. And I will note a distinction. In 
Glen Canyon you will have a situation where there is a lot of 
undispatched capacity which could be used. In the CVP, because 
we have regulating reservoirs, there is not a lot of 
undispatched capacity unless you start dipping into your future 
supplies. And if you did that every time there was an emergency 
in California, by the end of the year you would have no water 
left for next year.
    Mr. Ose. You are eating your seed corn, is what you are 
telling me?
    Mr. Jobson. Exactly. So I think the important thing is to 
make the right decision on Trinity, one that includes water 
conservation wherever possible, so that we do not have to 
delude ourselves with the fact that emergency procedures might 
work. It is just a mortgage, is all it is.
    Mr. Ose. Mr. McDonald, do you share that cautionary note?
    Mr. McDonald. You know, the usual duck for those in the 
executive branch, until the administration would take a 
position, I cannot really comment. I think Brian makes a fair 
point on the mechanics, though----
    Mr. Ose. OK.
    Mr. McDonald [continuing]. Just as a matter of fact. The 
other thing I would observe is, where we have made decisions 
already and have some set of criteria in place such as we have 
at Glen Canyon Dam or we are working on, as Mr. Stokely pointed 
out for Trinity, you need, as you craft language, to be precise 
about whether you are intending to overcome some such 
preexisting criteria that have been decided upon.
    Mr. Ose. Right.
    Mr. McDonald. And if so, under what circumstances, if not, 
under what circumstances.
    Mr. Ose. Right.
    Mr. McDonald. I otherwise think you might create 
substantial confusion.
    Mr. Ose. All right. I want to thank the four of you for 
joining us today. We very much appreciate your participation, 
as we did the previous panels. We are going to leave the record 
open for 10 days here. We are headed from here to San Jose. We 
will convene tomorrow morning at 10 a.m. in San Jose. And with 
that, we are going to adjourn.
    [Note.--The report referred to entitled, ``California's 
Electricity Options and Challenges, Report to Governor Gray 
Davis,'' may be found in subcommittee files.
    [Whereupon, at 4:17 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 





































                     AND WHERE DO WE GO FROM HERE?


                       WEDNESDAY, APRIL 11, 2001

                          House of Representatives,
                            Committee on Government Reform,
                                                      San Jose, CA.
    The committee met, pursuant to notice, at 9:44 a.m., in the 
Loma Prieta Ballroom, San Jose State University, One Washington 
Square, San Jose, CA, Hon. Dan Burton (chairman of the 
committee) presiding.
    Present: Representatives Burton, Horn, Ose, Lofgren, Lee 
and Honda.
    Staff present: Kevin Binger, staff director; Caroline 
Katzen, professional staff member; Robert Briggs, chief clerk; 
and Elizabeth Mundinger, minority professional staff member.
    Mr. Burton. Seeing a quorum the committee will come to 
    I ask unanimous consent that all Members' and witnesses' 
written opening statements be included in the record, and 
without objection so ordered.
    I ask unanimous consent that all articles, exhibits and 
extraneous or tabular material referred to be included in the 
record, and without objection so ordered.
    I ask unanimous consent that Members of Congress who are 
not members of the committee be allowed to participate in 
today's hearing, and without objection so ordered.
    I ask unanimous consent that all questions submitted in 
writing to the witnesses and their answers be included in the 
    I ask unanimous consent that questioning in this matter 
proceed under clause 2(j)(2) of House rule 11 and committee 
rule 14 in which the chairman and ranking minority member 
allocate time to members of the committee as they deem 
appropriate for extended questioning, not to exceed 60 minutes 
equally divided between the majority and minority. Without 
objection so ordered. We will however try to stay to the 5-
minute rule early on so that we can accommodate Mr. Hebert, but 
we will go around as many times as we need to go around.
    I want to welcome everyone to our second day of hearings on 
the energy crisis here in California. I am going to keep my 
opening statement fairly brief because our first witness, Mr. 
Hebert, is under some time constraints and even more time 
constraints since we are running a little late, and I want to 
have as much time as possible for the Members to ask questions.
    I want to say a couple of things about yesterday's hearing 
in Sacramento. We came out here because there is a problem. We 
want to understand it, we want to be a part of the solution. We 
did not come to point fingers; we came here to listen and to 
learn. We wanted to see if there were ways the Federal 
Government and the State government could work together to get 
past and through this crisis.
    We want to play a constructive role. This summer, Congress 
is going to have a serious debate about our country's energy 
policies. If there are ways we can help, we want to do that. 
But first, we need to understand the problems. We are trying to 
take a balanced look at all sides of this equation. Today, we 
are going to hear from the chairman of the Federal Energy 
Regulatory Commission, Mr. Hebert. We are going to hear from 
the utilities. Tomorrow, we are going to question the energy 
producers. I think we are going to have a well-rounded debate.
    What is becoming clear to me is that when you boil it all 
down, the root problem here is supply and demand. One of our 
witnesses yesterday was an independent energy analyst. He told 
us that over the last 5 years, California's economy has grown 
by about 32 percent, but at the same time, energy generation in 
the State actually fell. So you had a tremendous increase in 
demand and supply was not keeping pace.
    A new power plant has not been completed in this State in 
the last 12 years--I think that is accurate.
    The head of the ISO told us yesterday that he expects to 
have a 3,000 megawatt-hour shortage during peak periods this 
summer and that is very serious. Everyone agrees that more 
generating capacity is needed, but that is going to take some 
time. The question is, how do we manage the situation in the 
    Some people say price caps are the answer. We will not have 
any demonstrations here today because we want to get through 
this. So if people want to demonstrate, I suggest you do it out 
outside. If we have to, we will have the police remove you. I 
am going to keep order in this meeting. So if you want to hear 
what is going on, be patient and listen because we are going to 
hear all sides.
    Some people say price caps are the answer. They want the 
FERC to impose price caps. My concern is that price caps for 
California may cause power to be diverted to other States where 
sellers can get better prices. Three out of our four energy 
experts who testified yesterday said that if FERC reimposed 
price caps tomorrow, it would lead to more blackouts this 
summer. In fact, the head of the ISO, Mr. Winter, testified 
that he made an emergency request to FERC last December to 
relax the price caps to avoid a collapse in the system. So I do 
not think the price caps are a panacea. But we are going to 
continue that discussion today with Mr. Hebert from FERC.
    We also had a long discussion yesterday about long-term 
contracts. The major utilities have said that they tried to 
enter into long-term contracts last summer. They said that they 
could have locked in a long-term rate of 5 cents a kilowatt 
hour. That would have saved billions of dollars. But they said 
that red tape at the Public Utilities Commission stopped it 
from happening.
    Ms. Lynch said that the Commission did not stand in their 
way, but I got the impression that we were only getting one 
side of the story. Today, we will ask California Edison and 
PG&E what happened from their perspective.
    This is no small issue. The general counsel from FERC 
talked about long-term contracts yesterday. He said that if San 
Diego Gas and Electric had entered into a long-term contract a 
year ago, they would have saved roughly $5 billion last year. 
So I think it is worth taking some time to get to the bottom of 
    We are going to hear from two alternative energy producers. 
Most of these facilities across the State had to shut down 
because they were not being paid. This contributed directly to 
blackouts this spring. If they do not begin receiving payments 
soon, this will make the electricity shortage this summer even 
    We also have a number of other issues to discuss. PG&E has 
declared bankruptcy. Cal Edison has agreed this week to sell 
their transmission grid to the State to get out of debt. We 
want to discuss those issues and others.
    At this point, I want to stop my opening statement so we 
can get on with the questioning and I want to thank our 
witnesses for being here, and I look forward to your testimony. 
And if other Members have opening statements, I will yield to 
them. Ms. Lofgren, do you have an opening statement?
    [The prepared statement of Hon. Dan Burton follows:]
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    Ms. Lofgren. First, Mr. Chairman, I have a statement I will 
submit for the record, but I would like to thank the chairman 
for allowing me to participate in this hearing even though I am 
not a member of the committee and welcome you to the 16th 
Congressional District.
    Mr. Burton. You have a beautiful city.
    Ms. Lee.
    [The prepared statement of Hon. Zoe Lofgren follows:]
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    Ms. Lee. Thank you, Mr. Chairman, I too want to thank you 
for allowing me to participate in today's hearing and I want to 
thank our witnesses for coming today to discuss this crucial 
issue. I would like to submit my statement for the record.
    This crisis is not a Democratic crisis, nor is it a 
Republican crisis; it is a crisis that affects all consumers 
and it is going to require bipartisan solutions.
    And thank you again for conducting this hearing.
    Mr. Burton. We agree with that, and thank you for your 
    Mr. Ose.
    [The prepared statement of Hon. Barbara Lee follows:]
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    Mr. Ose. I do want to explore this article in the LA Times 
this morning about the alleged price gouging from the 
municipalities, so I am hoping some people can provide feedback 
on that.
    I will submit my statement for the record.
    Mr. Burton. Thank you.
    Mr. Horn.
    Mr. Horn. Thank you, Mr. Chairman. I will waive the right 
of an opening statement so we can get down to questions and 
    Mr. Burton. Mr. Representative Honda.


    Mr. Honda. Thank you, Mr. Chairman. I just want to welcome 
you to San Jose and thank you for holding the committee 
    I will submit my questions and my statements in writing 
also, but I just wanted to reiterate some of the positions that 
many of our colleagues have taken, Mr. Chairman, that we are 
looking for not only long-term solutions, but short-term; and I 
think one of my concerns is a short-term solution that we have 
talked a lot about and that is the temporary capping of prices 
and with a deadline, sunset, on that.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Michael Honda follows:]
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    Mr. Burton. Thank you, Congressman.
    Mr. Hebert, would you please rise?
    [Witness sworn.]
    Mr. Burton. Do you have an opening statement, sir?
    Mr. Hebert. Yes, I do, Mr. Chairman.
    Mr. Burton. Proceed.


    Mr. Hebert. Thank you. And let me introduce, before I 
start, our general counsel, to my left, to your right, sir, 
Kevin Madden, who I believe testified before you yesterday.
    Mr. Burton. Welcome, Mr. Madden again.
    Mr. Madden. Thank you, Mr. Chairman.
    Mr. Hebert. Thank you for the opportunity to appear here 
today to discuss the topic of electricity markets in California 
and surrounding States.
    Electricity markets in California and through much of the 
West are in a State of turmoil and they will continue to 
experience very serious problems throughout this coming summer. 
Wholesale prices have increased substantially, consumers are 
being implored to conserve as much as possible, and utilities 
continue to face severe financial problems. Last Friday's 
announcement of Pacific Gas & Electric Co., that it has filed a 
reorganization under Chapter 11 of the U.S. Bankruptcy Code 
represents only the latest and the most obvious example of this 
    The Federal Energy Regulatory Commission has aggressively 
identified and implemented market-driven solutions to problems 
by stabilizing wholesale energy markets; by identifying 
additional short-term and long-term measures that will increase 
supply and delivery infrastructure, as well as decrease demand; 
by promoting the development of a west-wide regional 
transmission organization, understanding that we have a natural 
market that works in the West; and by monitoring market prices 
and market conditions.
    Let me highlight just some of the recent actions we have 
taken to address these problems. Early last month, the 
Commission took action to mitigate prices in California's 
electricity markets in January and February of this year. The 
Commission identified many transactions during these 2 months 
that warranted further investigation. The Commission required 
the sellers to either refund certain amounts, or offset these 
amounts against amounts owed to them, or provide additional 
justification for their prices. The total amount of potential 
refunds for these 2 months is $124 million.
    Also in March, the Commission issued an order seeking to 
increase energy supplies and reduce energy demand in California 
and the West. The Commission implemented certain measures 
immediately, including encouraging sales of backup or onsite 
generation and sales of demand reductions; extending and 
broadening waivers for certain facilities under the Public 
Utility Regulatory Policies Act of 1978, enabling those 
facilities to generate more electricity; expediting 
certifications of natural gas pipelines into California and the 
West; and for example, Mr. Chairman and members of the 
committee, we issued one just the other day, the Kern River 
Project. We got that filing out in 3 weeks, something 
absolutely unheard of at the Federal Government and 
specifically at the FERC.
    Urging all licensees as well to review the FERC-licensed 
hydroelectric projects in order to assess the potential for 
increasing generating capacity.
    The Commission also proposed and sought comment on other 
measures such as incentive rates for new transmission 
facilities and natural gas pipe facilities completed by 
specific dates.
    And finally, the Commission announced a 1-day conference 
with State commissioners and other State representatives from 
Western States to discuss price volatility in the West as well 
as other FERC-related issues, related and identified by the 
Governors of the Western States. That conference was held 
yesterday in Boise, ID.
    On March 14, the Commission ordered two utilities to 
justify the duration of outages at their California generating 
facilities. The outages forced the California ISO to purchase 
more expensive power from the utilities' other generating 
facilities. Absent adequate justification, the utilities must 
make refunds, again, of over $10 million.
    On March 28, the Commission addressed a complaint by the 
California Public Utilities Commission against a pipeline 
company and its marketing affiliate. While the FERC found one 
part of the complaint unsupported, the FERC ordered a hearing 
on whether the pipeline and its affiliate had market power, and 
if so, used it to drive up natural gas prices at the California 
border. The case is now pending before an Administrative Law 
    These actions and many others I have not discussed, Mr. 
Chairman, demonstrate the Commission's commitment to take all 
appropriate actions to remedy the current imbalances in the 
Western energy markets.
    While some have accused the Commission of being indifferent 
or hostile to the concerns of California consumers, our actions 
prove otherwise. We have pursued the remedies we believe will 
be most effective, not only in the short term, but also in the 
long term. No one should doubt the Commission's commitment to 
ensuring an adequate supply of energy for all consumers, at 
reasonable prices. By itself, the Commission can contribute 
only a small part of the solution to today's energy problems. A 
more comprehensive and permanent solution requires the 
involvement of the States and other Federal agencies and 
    As long as we keep moving toward competitive and regional 
markets, I am confident that the present energy problems, while 
serious, can be resolved.
    Mr. Chairman and members of the committee, I thank you for 
your hard work and I thank you for helping us shed light on 
this subject.
    [The prepared statement of Mr. Hebert follows:]
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    Mr. Burton. Thank you, Chairman Hebert.
    We will start with 5-minute rounds for questioning and we 
will have both sides stick with that rule.
    Yesterday, the committee heard testimony from the president 
of ISO, Terry Winter. He said that on December 7, he made an 
emergency request to FERC to relax the hard cap because the ISO 
was not receiving enough bids to avoid collapse of the grid at 
the hard price cap. Is this why FERC issued the emergency order 
to relax the hard price caps?
    Mr. Hebert. Yes, it is, Mr. Chairman, but just to add a 
little piece to that.
    I found it a little interesting--I understand there was 
some testimony given perhaps that it was something that 
happened almost in the middle of the night. Well, quite 
frankly, I find it a little discomforting that we are being 
criticized for acting judiciously and quickly. And the reason 
we had to do that was that the CEO, Mr. Terry Winter, of the 
ISO made it clear to us that in fact through that filing, if we 
did not move, the lights would go off.
    Mr. Burton. So what you are saying is if FERC had not 
responded to the ISO's request, what was the probability that 
there would be rolling blackouts starting in December was very 
    Mr. Hebert. The probability was real and great, Mr. 
    Mr. Burton. So something had to be done.
    Mr. Hebert. Absolutely, sir.
    Mr. Burton. Is this why FERC followed up the December 7 
order with the December 15 order to establish the soft price 
    Mr. Hebert. What we were trying to do through the December 
15 order is set a point, the $150 soft cap, at which we would 
get some reporting requirements that would show us, and give us 
the opportunity to learn, whether or not in fact there might 
have been market manipulation. It did give us that opportunity, 
it is why we were able to act expeditiously and issue the 
refunds in January and February.
    Mr. Burton. Yesterday, the head of ISO, Mr. Winter, 
estimated that there would be a 3,000 megawatt shortfall this 
summer. What would happen if, under these circumstances, FERC 
ordered a hard price cap?
    Mr. Hebert. Mr. Chairman, I would love to give you a short 
answer. That is a very complex question and it is a very 
complex answer. I will do my best to make it short.
    Mr. Burton. Will it result, in your opinion, in more 
blackouts and more problems?
    Mr. Hebert. I think it will, not to mention potential 
blackouts in the West, specifically in Washington and in 
    Mr. Burton. So it is going to be a problem not restricted 
to California, it will be the whole Northwest area.
    Mr. Hebert. That is correct.
    Mr. Burton. And you think there would probably be more 
blackouts than otherwise?
    Mr. Hebert. I think that is correct, especially given the 
fact that, as I believe has been discussed in earlier 
testimony, if you look at the entire market, you are only 
talking about us capping about half of that market, a good 
portion of that tied up in bilateral contracts. So you are only 
talking about us capping the spot market, which in the end is 
only going to be about 15 to 20 percent of the market.
    Mr. Burton. You know what I wish you would do for the 
people of California and everybody who is concerned about this 
problem, is explain to them in your own words how supply and 
demand works and what would happen if FERC imposed a hard price 
cap here in California. I mean a lot of people are listening 
across this State and they are hearing all this terminology 
that they really do not understand. They know their prices are 
going up, they know there are blackouts, but I am not sure they 
understand the problem with energy being diverted elsewhere and 
hard price caps causing that energy to be diverted elsewhere, 
thus resulting in possibly more blackouts than they would 
otherwise have. So I think it is important that you explain 
that from your own perspective.
    Mr. Hebert. I think you certainly made it clear in that the 
energy is going to go where the caps are not.
    Mr. Burton. Where the money is.
    Mr. Hebert. Correct.
    Mr. Burton. Energy is going to go where the money is.
    Mr. Hebert. But having said that, that would even be true 
if we could cap the complete marketplace, which we cannot. As I 
told you, we can only cap around 15 to 20 percent of the 
marketplace. So what you do is you create two markets, so you 
understand that you cannot move in a positive direction when 
you do that.
    Now the one thing that I think is not being communicated to 
the good people of California is the fact that when you say you 
are going to have a hard cap, implicit within that remark--what 
that person has said is there is a point at which we are not 
going to pay for the electricity and we are going to turn your 
lights out. There is a point at which we say enough is enough 
and your lights are going out.
    The problem with that, as I see it, and as we are learning 
through this process, in California, the argument is that you 
cannot just have a California price cap, it has to be a 
Northwest price cap. The reason for that is because the West is 
a natural market, and that is absolutely correct, they are 
correct on that in California. The problem with it is that 
whereas California wants a cap, I have got a letter here I will 
be glad to put into the record from 9 Governors of the 11 in 
the West, who say they do not want price controls in their 
    Mr. Burton. Without objection.
    Mr. Hebert. I had a conference yesterday in Boise, ID with 
the 11 State commissions as well as representatives of the 
Governor's office and this tally was not taken by me, it was 
taken by a staff member, so it could be objective, and of the 
11, only 3 favored price caps.
    I guess the real question is do we feel we are better 
suited in Washington, DC, to make decisions for these local 
people. And I think that is a real dilemma. Are we willing to 
say, quite frankly, we are not going to let you decide when to 
turn the switch on or off. We think we are smarter than you in 
Washington, DC, and we are going to decide, there is a price at 
which we are going to turn it off for you.
    I would submit to you I think that is improper, I think it 
sends the wrong signal. Now that is not to say that the 
Commission is not looking at price volatility. That is why we 
were out there yesterday, that is why I was in Denver the day 
before, it is why you have me here today. We have made it clear 
through our refunds in January, through our refunds in 
February, we are going to look at refunds from October to 
December and we are also putting forth a market mitigation plan 
as of May 1 on a going-forward basis. It is just the hard cap 
sends us in the wrong direction.
    Mr. Burton. Thank you.
    Mr. Hebert. Thank you, sir.
    Mr. Burton. Ms. Lofgren, do you have some questions?
    Ms. Lofgren. Thank you, Mr. Chairman.
    I believe that there is more agreement on some of these 
issues than is generally understood. I think that everyone in 
California who has paid attention to this understands that we 
do have a supply and demand problem and that is absolutely 
clear. We had phenomenal economic growth in this State that 
really no one predicted and we had growth in our neighboring 
States that surprised us as well. And so energy demand just 
skyrocketed. That is the upside of a great economy, is the 
shortfall in energy. And for a variety of reasons, supply did 
not meet demand and so we have a problem.
    We have nine power plants under construction right now in 
the State and there are going to be more that will be needed 
and I think there is general agreement about that.
    We also, I think mostly, do believe in supply and demand 
and market forces here in California. This is sort of ground 
zero for the entrepreneurial spirit in California, here in 
Silicon Valley. However, many here in California, including the 
Governor, the California delegation, both Republicans and 
Democrats agree on this as you know from the last meeting we 
had with you in Washington, that we do need to, as part of the 
picture, gain control of this out-of-control market. We do not 
have a functioning market right now and part of the answer--not 
the silver bullet, not the solution to the problem, because 
that is supply and demand, is to gain control of price gouging 
that is going on right now, so that we can move forward.
    And so I was interested in the--obviously I was not at the 
hearing yesterday in Sacramento, but Mr. Winter of the 
California Independent System Operator indicated that the 
wholesale energy prices since January--this is his testimony--
have exceeded the cost necessary for new investment by 400 
percent. And that, in his judgment, this would allow for the 
recovery of an investment in new supply in the period of less 
than 2 years.
    So clearly the price spikes would be an incentive to 
invest, but that has not necessarily occurred. And my sense is 
that the market is so wacky that it has chilled the possibility 
of investment because the State might have to take dramatic, I 
mean very unusual, steps. And so perhaps there might be a way 
to put the rhetoric to one side where we could work out with 
FERC an ability to get control of the price gouging for a 
temporary period so that we can get through this.
    What would your comment be on that kind of approach, Mr. 
    Mr. Hebert. Let me say two things. One, meeting with the 
California delegation that obviously you are a part of, I can 
assure your district you are doing everything you can and I 
appreciate the attention you have paid to this, but I will tell 
you--I am obviously trying not to be rhetorical, that is why I 
am telling you there is a plant that we are looking, that we 
are moving forward with. We are quasi-judicial, we cannot come 
out with that right now, it is something that hopefully we are 
going to have in place before May 1. It is not a hard cap, it 
is something called a mitigation measure and I think it will 
work. But when it comes to the wackiness of the industry and 
the fact that you see these huge prices--now I am not exactly 
sure of the numbers Mr. Winters talked about and I would like 
to see those. But I will tell you this, it does not matter if 
it is electricity, it does not matter if it is widgets--
uncertainty in a market is very unsettling to investors.
    You keep changing the rules on them--you hear these 
discussions about cost-based rates. Well, some of these people 
are not looking to invest in anything that is going to return 
them on a cost-based rate scenario, that is going to be based 
on some 30-year average, not to mention it is hard for us to 
turn that around and do it again. But I will tell you the 
market uncertainty has everything to do that.
    And it is great to hear about these generators that they 
finally permitted, but it will be great when they turn one of 
them on. That will be significant and that is what we have got 
to get done.
    Ms. Lofgren. We are looking forward to that, believe me.
    Mr. Hebert. I know you are. But the other thing, you have 
got path 15----
    Ms. Lofgren. Yes.
    Mr. Hebert [continuing]. Huge transmission problem in the 
State of California. How many studies must be done before 
someone invests another dollar in it and does something so you 
can move electricity in the other direction.
    Ms. Lofgren. You are correct on that----
    Mr. Hebert. And I know that is not your fault, I am not 
blaming you.
    Ms. Lofgren. No, but part of the issue is that we had 
tremendous profit-taking after the sale of generating assets, 
none of which was reinvested into the infrastructure. I think 
maybe--well, it is going to be up to the State of California, 
not up to the California congressional delegation, or probably 
up to you, but some investment in that infrastructure clearly 
does need to be made and I think everyone is aware of that.
    I think my time is about over, but I am encouraged by your 
comment that we might be able to move off of the rhetoric and 
get into a--whatever you want to call it--a stabilization 
effort having to do with prices that will allow that aspect--
not the whole solution, but that aspect to be dealt with.
    Thank you very much, Mr. Chairman.
    Mr. Hebert. My general counsel would like to make one 
followup if that is all right, Mr. Chairman, or would you 
rather move on? We can move on, we can submit later.
    Mr. Burton. Let me just say that we will have a second 
round if you have more questions, Ms. Lofgren.
    You may proceed and make your comment.
    Mr. Madden. Yes, I would like to make one comment.
    When the generators were sold, they were sold at a premium, 
the were sold at substantially above book. And as Mr. Winter 
testified yesterday with respect to what he believed was not 
competitive prices, I think by the time we finished the 
hearing, the numbers had come down substantially, from a $6.7 
billion figure to almost a $1 billion figure. And we can get 
into that.
    Mr. Burton. Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman.
    Mr. Madden's comment is timely. Yesterday we did hear about 
discrepancies between the Cal ISO report and FERC's analysis on 
the issue of overcharges. One of the things I am concerned 
about is at some point or another, this issue dealing with 
Southern California Edison's proposed sale may very well come 
before FERC and we will be asked to provide input for the 
    And what I am trying to get to is a clear understanding of 
the number that took place. Can you elaborate on the flaws, as 
you see them, in the Cal ISO report? And let me just briefly 
describe them, as I understand the discrepancy. The Cal ISO 
report, I think the actual number is $6.2 billion, it uses 
assumptions that we cannot quantify specifically, it 
encompasses the entire market, both bilateral contracts--excuse 
me--bilateral contracts, non-jurisdictional entities and 
jurisdictional entities. And I am having a hard time figuring 
out what is the right number.
    And the reason I ask that question is that Cal ISO's own 
attorneys have provided a letter that we have a copy of that 
says the only amount subject to FERC jurisdiction is $1.3 
billion. So I mean, you can understand my confusion here. I 
asked this question yesterday. Can you elaborate on this?
    Mr. Hebert. Well, Congressman Ose, I think Congresswoman 
Lofgren made a good point about the rhetoric. So much of this, 
especially when you talk about numbers, it is what can we throw 
out there to make the press feel good about what we are doing. 
$6.7 billion sounds a little bit better than $1.3 billion, does 
it not? And I think that is what much of that is about, but to 
walk you through it quickly--and I jotted these numbers down--
we sent out a memo, I think it was sometime last week, through 
the general counsel's office, requesting the information from 
the ISO to break those numbers down. I have not seen that yet, 
but I will tell you $4 billion of that goes through the PX and 
the ISO market, $2.7 of that is bilateral contracts that you 
spoke of, not subject to us, and $3.1 of that is FERC 
jurisdictional, but $1.8 of the $3.1 is beyond our authority.
    Mr. Ose. All right, you have lost me here.
    Mr. Hebert. Sorry.
    Mr. Ose. You have got $4 billion that goes through the ISO 
and the PX, and of that $4 billion, $2.6 billion is non-
    Mr. Hebert. $2.7.
    Mr. Ose. $2.7, all right. So we separate the market out 
that way.
    Mr. Hebert. That is part of what comes under FERC.
    Mr. Ose. All right, go on then, to on with your numbers.
    Mr. Hebert. My general counsel has seen the numbers, so if 
he has got something to add, I am going to let him here.
    Mr. Madden. Mr. Winters, finally yesterday, increased the 
$6.2 million to $6.7 because he included an additional $400 
million for ancillary services. So let me start with that.
    Of the $6.7 the, he took out approximately $2.7 billion 
because they were bilateral contracts. Some of those are 
subject to our jurisdiction, depending on who entered into 
those bilateral contracts, but the whole issue is people going 
forward. And these were contracts that in many cases even the 
CPUC approved. So if you take that out, you then come up with a 
number of $3.1 for FERC jurisdictional from the October to 
February period. Then $1.8 billion of the $3.1 billion is 
before October 2 and we do not have refund authority for that. 
Correct? So then we have a remaining portion of $1.3 
approximately. Now that represents the 5-months, October 
through February. We have refund for just 2 months, January and 
February, which was $124 million.
    So we're about $1 billion off, a little bit more than $1 
billion in terms of our numbers right now. Then you have got to 
look at the ISO has looked at all the hours that the generator 
ran during that period versus our belief that you look at a 
different period, a period where there supply and demand does 
not cross, which is substantially much less. And then we do not 
know what gas numbers or Nox numbers they used. So 
until they supply that information, will we be able to clearly 
define what really is the differentiation between their number 
and ours.
    But I want to point out this $6.2 or $6.7 is clearly now, 
the public should know, is totally out of whack and it is more 
in the $1 billion range and most likely it will come down 
substantially more.
    Mr. Ose. Thank you, Mr. Chairman.
    Mr. Burton. Mr. Honda, I understand you have to be 
someplace at 11, so we will recognize you now.
    Mr. Honda. Mr. Chairman and Mr. Hebert, thank you for 
    We have all heard comments about the discussion about caps. 
We discussed it a little earlier about hard caps and soft caps. 
And I am not so sure even folks in the community understand the 
difference anyway. The bottom line is that the rates have gone 
out of sight and FERC has the responsibility and it is public 
that FERC had said upon your examination of the situation that 
the rates are unjust and unreasonable, I think that is a fair 
    Commissioner Massie had submitted a written testimony as 
far as his solution, his perspective of the situation, that 
there is no marketplace and therefore there is no competition, 
and I tend to agree with him. There are two things happening 
right now and they are parallel. One is groups are looking and 
seeking for a long-term solution which we need to do, and then 
we are looking at a short-term solution, which I am looking to 
FERC to help us with. We have some bills that have been 
submitted asking for relief, temporary relief, that we cap the 
costs, considering cost of production of energy plus a profit 
and that this bill has a sunset date of 2003. And that would 
mean that it is temporary.
    Now your discussions in the past have always been you want 
the marketplace to determine the prices and in your discussion 
just earlier, you talked about hard caps. My question to you is 
when you talk about hard caps and the comments you are making 
right now, it sounds like theoretically you are talking about a 
long-term continuous situation rather than looking at the 
immediate solution.
    I am concerned for the constituents of this State, the 
immediate short-term relief until we get a long-term solution. 
And I would like your response there.
    Mr. Hebert. Congressman Honda, I think that is an excellent 
question, and what I would like to do is explain to you some of 
the misconceptions in regard to what the Commission has done in 
regard to actually what my comments have been.
    You quoted the fact that there have been market power 
issues and a manipulation of the market, or unjust and 
unreasonable rates. And I think the quote that may have been 
shared with you is that we found that. Yes, that is true, but 
it is a little bit--since we are here at a university--like 
quoting first kill all the lawyers without saying what is in 
front of that quote. It does not give you the full explanation 
of what the author was talking about.
    What we said in our order was that we found rates to be 
unjust and unreasonable at certain times and under certain 
conditions. That is not to say that they all were. We have 
moved forward on that. What is so interesting about the price 
cap debate--and I really think this is just someone's artful 
way, I have to give them a lot of credit--of keeping the debate 
away from what it should be and about supply and about demand 
and getting things done, because most people, when they talk 
about these price caps, they look at New York and they look at 
New England, they look at PJM, which has $1,000 price caps. 
Well in January and in February, in January, we set subject to 
refund everything over $273--much less than $1,000. In 
February, we put everything subject to refund over $430--much 
less than $1,000. But I want to assure you, sir, this 
Commission is working to come forward with something on a going 
forward basis of May 1, on price mitigation. We are looking at 
that, it is not that we are not paying attention, we certainly 
are and we are prepared to move forward.
    But when it comes to cost, let me close this gap for you, 
because this is important. So many people want to talk about 
moving away and going back to cost. One of the reasons we moved 
away from cost is what Congresswoman Lofgren brought up and 
that is investment, to get the opportunity, to get the choice. 
Another real reason is quite frankly because we get so bogged 
down. I have got rate cases at the Commission right now--I was 
left with a backlog of 2,000 cases that we are trying to deal 
with, some that go back to 1993. California needs help now, the 
West needs help now. Cost-based scenarios do not get you help 
now. I do not think you can wait 8 years for a remedy.
    Mr. Honda. Thank you, Mr. Chairman, if I may continue on my 
    The next question then is when FERC decided to put a cap, a 
temporary cap a couple of months ago, you indicated that you 
would do it at $150. But it was at stage three and I think that 
consumers want to have a cap on all the stages and not only a 
stage three, because if you want to cap at a stage three, 
whether it is soft or hard, it still increases the rates for 
our consumers. We need to have ways to be able to anticipate 
the cost of our energy when we consume it. And as consumers, we 
do not know what that price is going to be and that is unfair 
in the marketplace and the marketplace is dysfunctional, and 
that is a quote, it is dysfunctional at this time and that is 
why we have to work on a long-term solution, so that the market 
is functional and that there is competition and that will be 
able to drive the prices down. But apparently it is 
dysfunctional and when you start to talk about price caps, it 
is my contention that it should not only be on stage three, but 
it should be all stages, so that you really truly have a lower 
    Mr. Hebert. Do you want me to respond to that, sir?
    Mr. Honda. Well, you said something about in the near 
future you are going to come up with some sort of interim 
solution. Hopefully the interim solution does not relegate 
itself to stage three, but an across-the-board, firm kind of 
pricing that the consumers can anticipate in the future.
    Mr. Hebert. We issued an order on price mitigation and 
actually the comment period closed about 2 weeks ago. We are 
looking at that now and going to move forward.
    Mr. Honda. Thank you, Mr. Chairman.
    Mr. Hebert. Thank you.
    Mr. Burton. Thank you, Mr. Honda.
    [Inaudible comment from the audience.]
    Mr. Burton. We are here to hear from the panelists who we 
have asked to testify and we had not made provision for public 
input; however, if any of you would like to submit to us in 
writing information or concerns that you have, we would be very 
happy to have those.
    Voice. I did, to our Congressman.
    Mr. Burton. Well, I will be very happy to take that and 
that will become part of the record. So any of you that have 
comments or things that you would like, be sure to get those to 
us, and make no mistake about it, we are going to review 
everything that we have. But the problem is, because of time 
constraints, we simply cannot have everybody testify.
    Voice. Just because our questions are entered into the 
record does not mean we are getting answers. We are concerned 
that FERC approved billions of dollars going to PG&E, to the 
parent company, now they have declared bankruptcy, are they 
going to rescind that so PG&E can pay their bills?
    Mr. Burton. Ma'am, I think your question has been heard and 
we will see if we cannot have a response to that in just a 
minute. But if you have other questions, get those to us and we 
will see if we cannot find some format that we can get them 
back to you, but we do not have time to have questions from 
everybody in the audience right now.
    Let me see--Mr. Horn.
    Mr. Horn. I yield 30 seconds.
    [Inaudible comment from the audience.]
    Mr. Burton. Ma'am----
    [Inaudible comment from the audience.]
    Mr. Honda. Mr. Chair, I believe my colleague Mr. Horn had 
conceded 30 seconds to me.
    Mr. Burton. 30 seconds.
    Mr. Honda. Let me just share with the community that I will 
be submitting this in writing on your behalf and any other 
questions that the community may have. And I think that the 
frustration of the community is reflected in the outspokenness 
of some of the folks that had to leave. I share their 
frustration, I think more than they share this frustration, Mr. 
Chair, so on their behalf, I will be submitting these questions 
and I have their names and addresses and you will receive a 
response from the FERC. Thank you, Mr. Chair; thank you, Mr. 
    Mr. Horn. Mr. Chairman, I would like to have you clarify 
for the record, we are talking about hard caps, soft caps, I 
begin to think I am talking with the three bears. So just what, 
in your judgment, as chairman of that very important 
commission, do you feel and what did the Governors you met with 
feel--I think it was 3 out of 11 that had a cap interest--could 
you sort of define for me, will a soft cap always become a hard 
cap or what?
    Mr. Hebert. A soft cap does not always become a hard cap. 
Once it is in place, it is a soft cap, as the $150 was, with a 
reporting requirement. What it did was bids that arose above 
the $150 mark would not set the clearing price, it would come 
back down to $150, therefore, not setting a high market 
clearing price. Whereas a hard cap is a hard cap at which no 
purchases can be made beyond that.
    Mr. Horn. And does the Commission have any view to maybe do 
one or the other on this? Or what will it take to not do it or 
to do it?
    Mr. Hebert. Congressman Horn, my thoughts have been, as the 
Commission has been clear in looking at market mitigation, that 
is the direction we need to move in. That is the direction we 
are moving in, that is why we had the comment period and that 
is why we are trying to come out with something before the May 
1 period. We felt so strongly about that we placed in one of 
our orders, Order 2000, where we are trying to set up regional 
transmission organizations, which every State in the United 
States of America has filed with us, save one--California. They 
are the only one that has not filed.
    We put in that plan, in Order 2000, that in fact the RTOs 
would have additional market monitoring obligations, so that 
would shore us up as well. We are moving in that direction, I 
think the market mitigation is the answer, it will send the 
proper signals to the investment community, it will make sure 
and keep prices, I believe, at a level that would mimic a 
competitive market when things get extremely tight like we were 
talking about in a stage three, when reserves are at 1.5 
percent, when in fact your curves are about to do this, when 
supply and demand do not cross and in fact the lights go out.
    Mr. Horn. When California did not reply and the other 49 
States did, was there any action by the Commission to request 
the Governor or the Commission, the Public Utilities Commission 
here, to respond on that? Or what do you think, why aren't they 
    Mr. Hebert. I would certainly be living within the realm of 
speculation to assert why I think they are not acting, but I 
will tell you we have communicated. I as recently as yesterday, 
not only phoned the Speaker of the House, the Pro Tem as well, 
as well as one of the new Commissioners at California, and they 
said that they could use someone to communicate more with them. 
And I had a gentleman behind me by the name of Shelton Cannon, 
who works closely with me, I gave them the name and number and 
I said let us get this together and let us move forward.
    Mr. Horn. Let me move from this to natural gas. There has 
been interest in the capacity of natural gas to providing a 
certain amount of megawatts and I wonder if the Commission has 
some analysis where the natural gas would be a certain portion 
of providing electricity, and I wonder what is the view as to 
how much an importance natural gas is, and are the States who 
can also regulate pipelines doing what they should be doing, 
has there been sort of a view of some that we will just keep 
moving other things through those pipelines and it will not be 
natural gas? So what is the Commission going to be able to tell 
us on that?
    Mr. Hebert. Well, what we have done, as I had said earlier, 
we are expediting any and all applications that come before us 
for the West and for California. Kern River is a great example 
of that, acting on that in 3 weeks. I would also have to 
commend some other Federal agencies that helped us get that 
    At the same time, the natural gas price, which under most 
scenarios of combined cycle, is about 70 percent of the price 
of the megawatt hour. That being said, the price of natural gas 
has everything to do with what the price of a megawatt is going 
to be. Having said that, you must understand, and I think you 
do, that in the end it does not matter if I get the West 100 
pipelines, if I get California 100 interstate pipes. They have 
got some takeaway problems. In other words, I have got a big 
pipe that brings it to them, and their takeaway capacity is 
much less; therefore, they cannot move it and it inflates their 
prices. Not to mention they did the same thing in the natural 
gas markets that they did in electricity, they played the spot 
market. They did not have a balanced portfolio.
    Mr. Horn. Thank you, Mr. Chairman.
    Mr. Burton. Ms. Lee.
    Ms. Lee. Thank you, Mr. Chairman.
    I think you are quickly dispelling the notion that many 
have had that California's energy problems really are our only 
concern here in California. Modern energy systems, by their 
nature and design, cross State borders. Oregon, Washington and 
Arizona are already directly caught up now in this so-called 
California problem and problems now have emerged in New England 
and New York and elsewhere in the country. So it is clear that 
energy cannot be treated as just another free market commodity.
    Now you mentioned earlier your concerns with regard to 
Washington, DC, and FERC in terms of putting on caps because it 
is a regional problem, but the region actually, as I understand 
it, does not have the jurisdiction over wholesale rates.
    Let me just ask you, Mr. Hebert, am I correct or not; is 
FERC the only entity with that type of power and authorization 
in terms of the wholesale rate price capping?
    Mr. Hebert. We do have the wholesale rate authority, but as 
I suggested to you, with Public Power, BPA, which--
municipalities, which take up about half of the power in the 
West, we do not have authority over. But yes, you are right.
    Ms. Lee. So it is FERC that we need to look to. Otherwise, 
what entity?
    Mr. Hebert. Well, you could certainly look to BPA, you 
could certainly look to municipalities, you could certainly 
look to other Public Power entities where we do not have 
    My general counsel wanted to add something.
    Mr. Madden. When we discussed yesterday the $6.7 billion, 
approximately $1 billion of that was associated with co-ops and 
munis--LA, DWR and SMUD. Yes, the cities can do something about 
that, the munis can do something about that. They, if they 
want, can lower the price to provide better prices to the 
consumer. We do not have jurisdiction over them, but they can 
do it.
    Ms. Lee. In terms of wholesale rates?
    Mr. Madden. In terms of the energy that they sell at the 
wholesale level, yes.
    Ms. Lee. Let me ask you about the finding, going back to 
Congressman Honda's question with regard to the fact that you 
did find--and as you said, at sometimes under some conditions, 
under certain conditions, that generators have exceeded just 
and reasonable wholesale prices--since that finding was made, 
let me just ask you, under--since it was only under certain 
conditions, have you, under certain conditions, assessed 
penalties against the generators that have been found to exceed 
the just and reasonable wholesale prices? Or what is going on 
at this point with regard to the generators?
    Mr. Hebert. We have got some matters subject to rehearing, 
so I want to be careful, but yes, we have. That is in fact--we 
acted in January, we acted in February, we are getting ready to 
act on the time period between October and December where, if 
you will remember right, we did not have the reporting 
requirements that we had on everything above $150, so it has 
taken us a little more time to get the information together. 
But we will get that information together and we will act.
    But there is some misunderstanding that if FERC has not 
acted in the capacity of a cap or something else, that we are 
not doing anything. I can assure you that this Commission is 
looking for and is ready to make certain that there is not 
market manipulation; and if so, we will provide relief.
    Ms. Lee. But again, have you assessed penalties or not? Or 
are you still trying to determine what the level or amount of 
penalties should be, as a result of your finding?
    Mr. Hebert. Penalties in the sense of a refund.
    Ms. Lee. But not against the generators?
    Mr. Hebert. The refunds will be made by them, yes.
    Ms. Lee. OK, when will we know what that amount is, how 
much that is and what that will add in terms of refunding?
    Mr. Hebert. Right now, as I told you, under the January and 
February, we were at $124 million, I think in my testimony, I 
told you about another additional $10 million. So the numbers 
are adding up. And we will act on March, we will also be acting 
on October through December.
    Ms. Lee. OK, finally let me just ask, in terms of 
regulatory practices, given again your findings, how, in terms 
of your regulatory efforts, are you going to ensure just and 
reasonable prices? Are you taking steps now to correct that in 
addition to the assessment of penalties?
    Mr. Hebert. Well, again, the penalties come in the form of 
refunds and yes, that is exactly what those orders are about. I 
mean we--as I have told Congressman Honda and----
    Ms. Lee. But are there any regulatory reforms in place now?
    Mr. Hebert. Well, the reforms that hopefully we will have 
in place by May 1 will be the market mitigation that I have 
spoken about. Again, the RTOs, when we get them up and running, 
hopefully that will be soon, we certainly need a filing from 
the State of California, would have additional market 
mitigation through market monitoring as well.
    Ms. Lee. I think, Mr. Chairman, what is very important is 
that the short-term solution happen immediately, as soon as 
possible, and that consumers do see a refund coming right away, 
because it is going to be a very hard, hot summer this year, I 
think. And while we work on hopefully a national energy policy, 
which is what we need, short-term, I think consumers are going 
to need a refund, especially low-income individuals, people on 
fixed income, senior citizens. They need those refunds in their 
pocket right away so they can just manage to get through the 
next 3 or 4 months.
    Mr. Hebert. I would agree with you and I will tell you that 
President Bush has been very clear as to his commitment, I know 
the committee has as well. We are doing everything we can on 
our part to make sure that those people are protected as well.
    Ms. Lee. It is my understand though that LIHEP was frozen 
in the budget, I do not think we see an increase in LIHEP 
    Mr. Hebert. I cannot tell you what they are doing with an 
increase or not an increase, but I can tell you the commitment 
from the last is brought forward.
    Ms. Lee. Thank you, Mr. Chairman.
    Mr. Ose. As it relates to the LIHEP line item in the 
budget, I would be happy to work with you to ensure that 
California's low income and senior citizens are eligible to 
file under that.
    Ms. Lee. Thank you very much. I look forward to working 
with you on that because as I understand the budget, it is 
frozen at the previous levels and we do need to work to ensure 
that there is an increase for California consumers. Thank you.
    Mr. Burton. We will start a second round. As I understand 
it, we probably have another 45 minutes of your time. Does that 
sound about right to you?
    Mr. Hebert. I think I have got about another 20 or 25, Mr. 
Chairman, but if you need me, I can----
    Mr. Burton. I think if we stick to the 5-minute rounds, we 
can get through, if there are five of us, we can get done in 
about 25 minutes.
    Mr. Hebert. Thank you, sir.
    Mr. Burton. As I understand it, the California ISO now says 
there were $6.7 billion in overcharges and we have not seen 
exactly what they are basing that on, but that is their 
opinion. Of that, you are saying that there is only $1.3 
billion more or less than you can do anything about.
    There are lots of electricity sales that are outside of 
your jurisdiction. Can you give us some examples of that as 
well as that difference we are talking about?
    Mr. Hebert. Well, the sales absolutely that we are looking 
at as far as entities outside of our jurisdiction is what the 
general counsel had mentioned earlier, we have got munis, we 
have got co-ops, we have got BPA, Canada as well which comes 
into the market and actually you have had BPA try to say they 
can do what they can, but as well as you know, they are looking 
at rate increases themselves right now. The Secretary of Energy 
has been very specific that they are going to have to meet 
their revenue obligations.
    Mr. Burton. What percentage of the power here in 
California, do you have jurisdiction over?
    Mr. Hebert. What percentage? Roughly half. But if you are 
talking about capping the market, there would be no way to cap 
those bilaterals, so if you are talking about existing 
bilateral contracts, you take the spot market out of that, you 
are only talking about us capping maybe 20-25 percent at most.
    Mr. Burton. OK, so there is only 20 to 25 percent that you 
could cap. Let us say that there is a tremendous energy 
shortage and we anticipate that across the State, and you cap 
25 percent. What is going to happen then? They are going to 
send it to the other 75 percent where they can get a higher 
rate, right?
    Mr. Hebert. That is correct.
    Mr. Burton. OK, I hope everybody understands that. If you 
can only cap 25 percent of the State market and there is a 
tremendous need, and the other parts of the State, the other 75 
percent, is willing to pay more than the cap that you put on 
the 25 percent, then you can bet your bottom dollar, the people 
who are selling the energy that is necessary to produce more 
energy are going to go to the 75 percent that is not under the 
cap, correct?
    Mr. Hebert. Correct, not to mention out of State.
    Mr. Burton. That is important. I think everybody needs to 
know that, because they are going to go where the money is.
    Now as I understand it, you cannot review sales before 
October 1 of last year. Can you give us a layman's explanation 
as to why that is that you cannot?
    Mr. Hebert. Well, when the utility filings come in, in 
dealing with--I am going to put it in layman's terms--what we 
are dealing with right now, there is a 60-day period, we are 
prohibited from going beyond that 60-day period. That is at the 
point at which it was filed. Was it October 2 exactly? I think 
it was the second.
    Mr. Madden. San Diego Gas & Electric filed a complaint 
August 2, so we, in our order October 2, established the 
earliest possible date under the act, 60 days after a complaint 
was filed.
    Mr. Burton. So you are limited to 60 days.
    Mr. Madden. That is the earliest period.
    Mr. Burton. Now I understand that you have ordered refunds 
for January and February. Are you currently investigating 
transactions for other months?
    Mr. Hebert. Yes, sir, March, and then the period from 
October through December, and then again, we are looking at the 
market mitigation, May 1 going forward.
    Mr. Burton. And when do you expect to issue orders for 
those months that you are currently looking at?
    Mr. Hebert. Whereas I am prohibited from giving you exact 
dates, Mr. Chairman, I will tell you I have instructed my staff 
to move with all deliberate speed and get them out quickly.
    Mr. Burton. One final question and then I will yield to my 
colleagues. Yesterday, we ran into some stonewalls from the 
State as well as your agency on some information that the 
committee requires. We understand that that has to be kept 
confidential, but it will be helpful in our deliberations and 
we will have your cooperation to get that?
    Mr. Hebert. You will have my cooperation, Mr. Chairman. 
Anything that you request, I will be glad to give you under 
cover. I think it is important you see many things.
    Mr. Burton. OK, thank you very much.
    Ms. Lofgren--1 more second. One question further. How 
aggressively do you intend to move to get those refunds from 
January and February? You said as quickly as possible.
    Mr. Hebert. We are in that process right now.
    Mr. Burton. OK, has your ruling been challenged?
    Mr. Hebert. It is on rehearing at this point. So yes.
    Mr. Burton. So what is the next step?
    Mr. Hebert. Well, the rehearing, hopefully we are going to 
deal with that as quickly as possible. They obviously will have 
their right to appeal. Like any other court of appropriate 
jurisdiction, there are appeal rights that go beyond that----
    Mr. Burton. But you are going to move as quickly as you 
possibly can.
    Mr. Hebert. We are going to do everything we can to get it 
out from under us, yes.
    Mr. Burton. Ms. Lofgren.
    Ms. Lofgren. Thank you, Mr. Chairman.
    Just thinking about this, there are some, I think, simple 
things that the people of California want done, and that is for 
our agency, since I think you are the only ones who can do it, 
to aggressively recoup the unjust and unreasonable prices that 
have been assessed against California consumers. And along 
those lines, I am interested--and I understand the current act 
precludes you from looking past October, but clearly there was 
very--in my judgment, very questionable activity that occurred 
prior to October. Just before recess, members of the 
Washington, Oregon and California delegations came together and 
introduced a bill that would change the act and allow you to go 
past the October date that is currently in law. Would you 
support that bill or what would your reaction be to that?
    Mr. Hebert. Congresswoman Lofgren, I have not read the 
legislation; therefore, I would not want to say if I support it 
or not.
    Ms. Lofgren. That is fair enough. Could I ask you to read 
it and consider supporting that?
    Mr. Hebert. I will commit to that and if you would like a 
response on that, I will be glad to give that to you.
    Ms. Lofgren. I would very much appreciate that.
    Second, I think, Congresswoman, we touched on this as well, 
but ISO has indicated to--Cal ISO has indicated in their 
testimony that market manipulation is going on, not just during 
stage three emergencies but also during stage one and two, and 
they are suggesting that FERC needs to look at those, not just 
stage three, but also one and two for market manipulation and 
price gouging. Are you prepared to do that? Can you do that 
under the act?
    Mr. Hebert. Congresswoman Lofgren, this has been one of the 
huge misunderstandings. In the dead of the night when we are 
all asleep and rates are lower, we are looking for market 
mitigation which also includes one, two and three. We are 
always looking for market mitigation.
    Ms. Lofgren. So your answer is you will accept and you 
would order rebates if you found unjust even in those stages. 
That is just a confusion?
    Mr. Hebert. Absolutely. We are continually looking for 
market manipulation and misconduct.
    Ms. Lofgren. That is great to hear.
    Finally, you know, I saw today that President Bush had 
figured out the right words to use so that the Chinese Army 
could be happy about an apology. So it seems to me we could 
figure out the right words to use that will allow FERC to 
control, proactively and prospectively, price gouging. And I 
guess the question is, is the term ``market mitigation'' the 
right word for your proactively controlling prospective price 
gouging, which California needs you to do?
    Mr. Hebert. That is correct. What our intent is, and again, 
we have not ruled on this yet, we sent out for comments--it 
closed out 2 weeks ago, but our intent is to find a process by 
which we can mitigate market conduct based on what a market 
would be doing if it were functional, even during a 
dysfunctional period, taking certain factors into 
consideration. So, yes.
    Ms. Lofgren. All right, finally, you know, we read in the 
paper and we do not know obviously all the details, but it 
appears that some of the energy companies have just made 
extraordinary--I mean extraordinary--profits at the expense of 
California consumers. Duke operating revenue more than doubled 
from 1999 to 2000. Reliant had a 1,685 percent increase in 
operating income. So I am hopeful that we can see some of this 
revenue, as the complaints are made, flowing back to the State 
so that we can have the financial ability to make the 
investments that are required. At the end of my last 
questioning period, I was commenting about the sale of the 
generating assets and, you know, without saying whether the 
price was right or wrong, I mean, there was a tremendous amount 
of money that came into PG&E and they did not invest that money 
in path 15 or anything else, it just went back to the parent 
corporation. So we need to be able to recoup some of the 
gouging, get the money back, take care of the suffering 
consumers in California, but also make some of the investments 
that are going to keep us healthy in the future, including path 
15. I am hopeful that we will be able to get the prospective 
control of prices that will avoid the necessary delay of the 
regulatory and review process for the refunds.
    Mr. Hebert. Let me say a couple of things about that. One, 
the PG&E is on rehearing, so I would have to be very careful 
about making comments. But I will tell you it is my 
understanding that several of those companies have made 
commitments to reinvest capital, do not know to what extent, 
cannot quote to you which companies they are. I know you are 
going to have them later to talk to you.
    Many of those decisions when it comes to reinvesting 
capital and what you do with that investment dollar is made 
with CPUC.
    Ms. Lofgren. I understand that as well as with Public 
Power, but you understand the California consumers feel a bit 
ripped off right now.
    Mr. Hebert. Well, and the CPUC could change some of that, 
    Ms. Lofgren. Thank you, Mr. Chairman.
    Mr. Hebert. Thank you.
    Mr. Burton. Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman.
    I want to followup on something that Congresswoman Lofgren 
said. If it is your point that when a filing is made with FERC 
to remove that 60-day delay by legislation, that makes 
eminently good sense to me, that the analysis ought to start 
from the date of the filing rather than 60 days hence, and I 
appreciate you bring that forward and I would like to visit 
with you about that later.
    Mr. Hebert, on FERC's jurisdiction over bilateral 
contracts, does FERC have the authority to reverse bilateral 
    Mr. Hebert. Yes.
    Mr. Ose. Is it statutory or regulatory rulings that give 
you that authority?
    Mr. Hebert. Well, through the Federal Power Act, we have 
the authority, but I will tell you it is only subject to 
wholesale, which gets us back to where we were talking about 
before, as to the percentage of the marketplace.
    Mr. Ose. The 47/53 break?
    Mr. Hebert. Correct.
    Mr. Ose. Mr. Chairman, I am not sure we did this yesterday, 
but I do want to enter into the record, this letter from Cal 
ISO's counsel that says the only amount of overcharges that is 
the subject of FERC's jurisdiction is $1.3 billion.
    Mr. Burton. Without objection, so ordered.
    Mr. Ose. And then finally, I want to again come back to 
this article in the LA Times this morning about--I do not know 
if you have read this, but there is an article here by Robert 
Lopez and Rich Connell and I see it is not copyrighted, so we 
may well be able to put it in the record, about the context of 
these municipalities--in the context of municipalities selling 
power to the ISO during times of market emergency. This article 
suggests that in particular the Department of Water and Power 
has engaged in some of that activity. It is my understanding 
that they are outside your jurisdiction?
    Mr. Hebert. That is correct.
    Mr. Ose. This speaks right to the heart of one of our 
problems here, Mr. Chairman, and that is FERC has jurisdiction 
over 47 percent or 53--pick your number--and then they have 
jurisdiction over some of the bilateral contracts, but not 
others. And I find it most difficult, as I did in my earlier 
round of questioning, to understand the usefulness of the 
original six point whatever billion number that was created in 
FERC's report. I am trying to get to the hard number, so we can 
talk specifics about how to address it.
    Now I want to make sure I have got this. Pursuant to Mr. 
Winter's testimony yesterday, ISO is saying there are $6.7 
billion in overcharges, of which $2.7 billion is involved in 
bilateral contracts, some of which are FERC jurisdiction, some 
of which are not. OK. Then of the remaining $4 billion, about 
$900 million of that precedes October 2. Am I correct so far?
    Mr. Madden. I think it is $1.8 billion before October 2.
    Mr. Hebert. That is correct.
    Mr. Madden. And the $900 is non-jurisdictional.
    Mr. Ose. OK. So you have got--of that $4 billion, you have 
got $900 million which is non-jurisdictional, which gets you 
down to $3.1 billion and that is for the period from say May 
2000 through February 2001?
    Mr. Madden. Through February 2001.
    Mr. Ose. OK. So now you have got $3.1 billion you are 
looking at. And you are prevented by statute from going back 
prior to October 2, because that is the 60-day--the expiration 
of the 60-day period following the filing. And if you take out 
the numbers or the amounts prior to October 2, which is $1.8 
billion, you end up with a universe of $1.3 billion.
    And if I understood testimony yesterday, some of the 
questions which you have and which you are examining relate to 
how do you quantify the $1.3 billion. In other words, do you 
look at the month ahead contract versus the spot? Because 
yesterday's testimony was you came up on an annualized basis I 
think of $5 billion worth of overcharges attributable to the 
San Diego area only.
    Mr. Madden. The $5 billion, Mr. Chairman, was associated 
with if San Diego had bought a year contract, based on its 
load, from the Duke contract offer. I do not know all the terms 
and conditions, at $55 a megawatt hour, versus what it would 
have to pay on the spot market in December-January, which is 
$345, you would have a differential of $5 billion they would 
have saved, just using that differential.
    The testimony I gave yesterday with respect to the $1.3 
billion is the ISO includes all hours, they say all hours are 
non-competitive, for the most part. We include an hour.
    Mr. Ose. Thank you, Mr. Chairman.
    Mr. Burton. Let me just say that we have about 10 minutes 
maybe, at the most 15; is that right? So if we could stick 
close to the 5-minute rule so that he can leave. And if we have 
additional questions, we will go to Mr. Madden, he can stick 
around for awhile; is that correct, Mr. Madden?
    Mr. Madden. Yes, Mr. Chairman.
    Mr. Burton. Let me see, Mr. Honda.
    Mr. Honda. Thank you, Mr. Chair.
    A couple of quick questions. I heard you say that FERC has 
jurisdiction over 50 percent of the market more or less?
    Mr. Hebert. Roughly, yes.
    Mr. Honda. That is the retail or wholesale?
    Mr. Hebert. Wholesale.
    Mr. Honda. Wholesale.
    Mr. Hebert. We do not have retail jurisdiction.
    Mr. Honda. Statutorily do you have jurisdiction over the 
other percentages that does not appear under your control 
statutorily. If something is going wrong, something is being 
manipulated, do you have any responsibility in the name of 
protecting the consumers to look at the other percentages?
    Mr. Hebert. I do not have the legal authority or ability to 
do it.
    Mr. Honda. Next question, natural gas. It is said that gas 
imported from outside the State rises considerably. Have you 
found that to be unreasonable and unjust and have you found 
that to be part of the increase in cost that we are looking at 
and does FERC have jurisdiction over that?
    Mr. Hebert. I have got a pending issue on that. Yes, we 
have jurisdiction over those issues. I will tell you, as I 
shared earlier, there are concerns that we have got as well 
providing interstate capacity understanding there are 
intrastate constraints, takeaway capacity in the State. So 
hopefully, again, that is something else the CPUC can correct, 
but they are going to have to site some intrastate pipes, deal 
with some compression, to do that.
    Mr. Honda. Just very quickly, does FERC have responsibility 
or jurisdiction over looking at the possible price gouging from 
the increase in the gas prices here in California, coming from 
out of State? Because there have been some articles in the 
paper of possible manipulation of prices in that area too.
    Mr. Hebert. We have jurisdiction over the manipulation or 
over such conduct and it is pending hearing right now, so I 
cannot speak to it.
    Mr. Honda. Will your decisions and your assessment be 
shared with us by the time you have come up with the May report 
or May solution?
    Mr. Hebert. I am prohibited from giving you a time line on 
which--the May 1 I can share with you because it was in the 
order. This, which is subject to pending action, does not have 
a time line in it. I am acting expeditiously, I can assure you 
the Commission will act. I am prohibited from giving you a 
    Mr. Honda. Is there a time line that you may share with us, 
more or less a soft date?
    Mr. Hebert. Protecting myself ethically and legally, and 
protecting the integrity of the Commission, I am prohibited 
from doing so.
    Mr. Honda. But we can expect something sometime in the 
    Mr. Hebert. You have my word I am acting quickly.
    Mr. Honda. Thank you.
    Mr. Burton. Mr. Horn. Are you going to yield to Mr. Ose? 
OK, Mr. Ose, Mr. Horn is yielding to you.
    Mr. Ose. Thank you, Mr. Chairman; thank you, Mr. Horn.
    I want to go to the regional transmission organizations. I 
am trying to make sure I understand the timing of the request 
to all 50 States to submit their plans and the utility--or 
excuse me, the usefulness--I do not want to confuse it--the 
usefulness of the RTO proposals that you are supposed to be 
receiving. So specifically, could you tell me when FERC asked 
the various States to submit their proposals and for what 
purpose are you collecting that information?
    Mr. Hebert. We had two deadlines, the first being December 
15, the second being--I am sorry--October 15 and the second 
being January 15, which is the one that California would have 
been subject to. One bit of correction, which I think I may 
have miscommunicated to you, there are two States, Alaska and 
Hawaii, of which we do not have that jurisdiction over.
    Mr. Ose. Three total?
    Mr. Hebert. Well, Texas, if you include RCOT, correct.
    Mr. Ose. Four total. How many States do you not have a 
regional transmission organization proposal from?
    Mr. Hebert. That we legally have the ability to get it 
from, one.
    Mr. Ose. One, OK. Now the usefulness of the proposal is?
    Mr. Hebert. Understanding that we have natural markets, we 
are trying to set up competitive markets that work, that are 
functional. Good decisions, bad decisions that are made in 
California have good and bad effects in Washington and Oregon 
and Nevada. Understanding that, knowing that, California 
understands that, is committed to that. That is why, in fact, 
they talk about a Northwest price cap. That is why it is 
essential that we work together understanding that something 
like path 15 not only injures California and effects higher 
prices there when they do not repair it and move beyond it, it 
also affects others in the Northwest.
    Mr. Ose. So your point is that because the sources of power 
are distributed across a multitude of States, of which they are 
selling at different times all into California or all out of 
California, we need to have some cooperation, if you will, or a 
meeting place where that sort of discussion can take place.
    Mr. Hebert. Right. When we were strictly looking at it in a 
monopolistic perspective, it was not an interstate commodity. 
When it is an interstate commodity, we have got to look at it 
in an interstate sense.
    Mr. Ose. So we have Oregon's plan, we have Washington's 
plan, we have Idaho's plan, we have Wyoming's, Montana, Nevada, 
Arizona, New Mexico, Colorado. California? No, we do not have 
    Mr. Hebert. No, sir, we do not.
    Mr. Ose. Is that an impediment?
    Mr. Hebert. Yes, sir, it is.
    Mr. Ose. Why?
    Mr. Hebert. Because we cannot move forward with our 
regional transmission organization, understanding that the West 
is one regional market.
    Mr. Ose. How do we help you--I mean, can we do that at 
Congress, can we create that submittal?
    Mr. Hebert. It is a State action through the ISO. Obviously 
any direction that you, through your leadership, would give to 
them, I think they would take wisely.
    Mr. Ose. I yield back to the gentleman from California.
    Mr. Burton. Let me see who is next. Ms. Lee.
    Ms. Lee. Thank you, Mr. Chairman.
    Given the out-of-control prices in the Western region, 
especially here in California, I, like many, support at least 
temporary price controls--price caps actually--on electricity, 
natural gas and heating oil. Let me ask you though about your 
argument that these caps will discourage development since 
temporary price caps--I mean, how do they inhibit future 
investments when plants really would not be completed for 2 to 
3 years, they have a generating lifetime and actual expected 
return on investment for decades? So I am curious about your 
argument with regard to that. How do you see that, in terms of 
wholesale price caps, as impeding development?
    Mr. Hebert. The decades of return based on some cost 
mechanism and variation of that, is something we have moved 
beyond, obviously. So they are not guaranteed anything for 
decades any more. That is yesterday's regulation, not today's.
    The other part of that, as far as stimulating investment, 
we have certainly and a pretty valid conversation, I think, 
about that and what is being done with some of those dollars. 
We cannot force them to invest. What we can do is send proper 
signals, but the other side of that is again, what I continue 
to say, if you set a hard cap in place, you are telling the 
good people of California there is a price at which you are 
willing to turn the lights out. I am not willing to say that, 
or have not been convinced that is in our best interest, not to 
mention when the hard caps were in place and they moved the 
hard cap from $750 to $250 in California, the empirical 
evidence not only suggests but proves that average prices went 
up. And should that not be what this debate is about? Not what 
a single price spike is, but what the average price is.
    Ms. Lee. But even--OK, what after soft cap then or a 
temporary soft cap? What--how does that----
    Mr. Hebert. Again, the Commission has moved in the 
direction of market mitigation so that we may try to mimic the 
market and move forward with it, and I think that is what we 
believe to be in the best interest and hopefully, you will see 
us move on something quickly with the May 1 timeframe in mind.
    Ms. Lee. May 1, OK. Let me just ask you long-term, in terms 
of how you see the whole push now by some to require, say a 20 
percent of the Nation's electricity to come from renewable 
sources by a certain year, say by the year 2020. I mean in 
terms of this crisis now, I think it provides us an opportunity 
to look at alternatives and we have not discussed long-term as 
much as I would like to, because we have got the immediate 
crisis that we have got to deal with. But what is your position 
or what does FERC think with regard to renewable energy 
    Mr. Hebert. I will tell you my persona position. As you, 
the Commission acts as one, we speak through our orders. We 
have made it very clear, in removing some impediments and 
obstacles with PURPA and others, that we think it is very 
important to do that. At the same time, I will tell you that 
California and the West is in a position where they need to add 
supply quickly and the quicker the better. I think it is very 
important to diversify, I think renewables has to be a part of 
that. I think it is important and that is what our orders have 
been about, removing obstacles and impediments, squeezing every 
megawatt out of this system that we can possibly do. We are 
committed to that. I think it is a wonderful idea.
    Ms. Lee. Thank you very much, Mr. Chairman. Glad to hear 
you say that.
    Mr. Burton. I want to thank you very much for your candor 
today. There is one last question I would like to ask. There 
are environmental concerns about diesel-fired generators. We 
did have somebody to talk to me privately and I wanted to ask 
your opinion, even though this may not be in your jurisdiction, 
and that was that they said to get California over the hump 
this summer, that there could be brought into the State 
temporarily on barges and on trucks and so forth diesel-fired 
generators that could create the capacity to get the State over 
the hump without rolling blackouts. Do you have an opinion on 
    Mr. Hebert. My opinion would be that darkness, the lights 
going out, is absolutely the worse thing that could happen. 
Whatever you can do to prevent that, I think is good. I think 
demand side is very important, but at the end of the day, you 
had better have adequate supply. Historically, California has 
not been willing to do much with diesel generation. If you will 
remember right, and I know you do, they brought barges up 
through the Canal Zone and actually into San Francisco Bay when 
they feared a blackout and they turned them around and sent 
them back since they were diesel generators.
    I have also had meetings with producers who were flaring 
natural gas, who informed me that there is about 1,000 
megawatts of production right there that they could put on line 
if they were allowed to do it.
    There are lots of opportunities here. The conversations 
need to stop, someone needs to start putting shovels in the 
ground, someone needs to start hooking up some type of 
generators to provide the electricity so the people will not be 
in danger this summer.
    Mr. Burton. Thank you very much.
    Mr. Hebert. Thank you.
    Mr. Burton. We appreciate you being here. I hope you make 
your plane.
    Mr. Hebert. I will submit this to the reporter, is that is 
all right, Mr. Chairman.
    Mr. Burton. That will be fine, we will accept that without 
object and put it into the record.
    Mr. Hebert. Thank you. And if I may tell the public, the 
one question that the public had asked is on rehearing. We 
cannot speak to it. If Congressman Honda would like for us to 
give him what we can, we will be glad to do that. It is on 
rehearing, and I am going to a hearing right now, as you know. 
I am not trying to escape anything, but thank you for having us 
and shedding light.
    Mr. Burton. Thank you. Thank you, Mr. Madden, as well. I 
think we have concluded with your total panel and we appreciate 
your help.
    The next panel--do you want to take a break? Why do we not 
take a 10-minute break and then we will go to the next panel, 
10 minutes.
    Mr. Burton. If we could get everyone to take their seats, I 
understand that the media is anxious to talk to a number of 
members of the panel and others, but we really need to get 
    Our next panel consists of Ms. Dede Hapner, vice president 
of regulatory relations for Pacific Gas and Electric; Stephen 
Pickett, who is the vice president and general counsel of 
Southern California Edison; Mr. Dean Vanech--is that correct--
president of Delta Power Co.; and Mr. Paul Desrochers--how do 
you pronounce it, like Leo Desrocher? OK, I will not forget 
that one--Mr. Paul E. Desrochers, director of fuel procurement 
for Thermo Ecotek.
    Would you please stand?
    [Witnesses sworn.]
    Mr. Burton. Being a gentleman, we will start with Ms. Dede 
Hapner and let her make an opening statement.


    Ms. Hapner. Thank you very much, Mr. Chairman, and members 
of the committee and guests to the committee. My name is Dede 
Hapner, I am vice president of regulatory relations for Pacific 
Gas & Electric Co., that is the regulated utility. And I 
appreciate the opportunity to speak before you today.
    Clearly, this hearing comes at a very opportune time. You 
have heard both yesterday and today about the prices that we 
have in the West. In March, for example, the average wholesale 
price was approximately $307 per megawatt hour and there is no 
relief in sight.
    At this point, we are even more concerned about the 
megawatt shortages because there is less hydropower in the 
California system and in the entire Northwest than we 
traditionally have, about 60 percent of normal, at least based 
on the last snow pack results.
    In the first several months of this year, the California 
Independent System Operator has declared 52 stage two electric 
power emergencies and 36 stage three electric power 
emergencies. Residents of California had no idea what stages 
one, two and three meant 6 months ago, and now that is as 
common as hearing about the traffic report.
    At best--and I believe you heard from Mr. Winter 
yesterday--we will be short several thousand megawatts this 
summer and that is at best.
    The utilities, including Pacific Gas & Electric Co., first 
raised the issue of shortages and the gap between wholesale 
power costs last summer. We have been working with the State 
officials to try and address these issues, but unfortunately 
the activity that we have seen so far, while it has most 
assuredly meant progress, has still been on a very incremental 
basis and not in a comprehensive form.
    Earlier this year, the State legislature passed and the 
Governor signed AB-1x, which we looked forward to as a way of 
stopping the bleeding with respect to the amount we were paying 
in wholesale power costs. The State authorized the Department 
of Water Resources, which had some experience in the 
electricity market, to enter into contracts and purchase 
electricity on behalf of the customers of California's 
investor-owned utilities. We were pleased because we thought 
that bill required the Department of Water Resources to buy the 
entire net open position of the utilities and that would be the 
amount that we would have to buy on behalf of our customers 
that was not generated by our hydro system, for example, or 
Diablo Canyon or our qualifying facility contracts.
    Unfortunately, that has not proved to be the case. The 
Department of Water Resources has signed many, many contracts, 
but they still have to buy on the daily market and in real time 
and because of the price constraints that they have set for 
themselves, there is still a gap. And so in real time, the 
Independent System Operator, in order to keep the lights on, 
buys power in the very expensive spot market and the utilities 
have been billed for those power costs. So clearly, our net 
open position is not being covered by the law, as it currently 
    You have also heard from President Lynch on the California 
Public Utilities Commission that they have moved very swiftly 
and adopted several orders to ease the situation, including a 
series of rate increases or, as they are termed to avoid the 
implication that the rate freeze is actually over, surcharges.
    Again, that would seem to help the financial situation for 
the utilities. In reality, however, the 1 cent surcharge and 
the 3 cent surcharge that the Public Utilities Commission 
passed through over the last several months will not do 
anything for the billions of dollars of uncollected power costs 
that the utilities have already incurred, and perhaps even more 
importantly, once Pacific Gas & Electric Co. pays the required 
amounts to the Department of Water Resources for the power that 
they are buying on behalf of our customers, pays our qualifying 
facilities as per our contracts, pays for our own generation, 
there frankly just is not any money left. In fact, it is very 
doubtful, and we have testified at the Public Utilities 
Commission, that there is a negative amount, even looking at 
that 4 cents.
    Mr. Burton. Ms. Hapner, we try to stay with 5 minutes.
    Ms. Hapner. I am sorry, I apologize.
    Mr. Burton. If you have just a little bit more, please go 
    Ms. Hapner. I will wrap up.
    Basically, we are now in a situation, as the committee well 
knows, where our utility has sought protection of the 
Bankruptcy Court, in hopes of finding a comprehensive solution. 
What we would like to ask the committee to consider today is 
some short-term steps that will help California through this 
next summer. Particularly, we would like to see the committee 
recommend to the Secretary of Energy or to the FERC that there 
be short-term price caps to help stabilize the situation and 
then anything that the committee can do to move regional 
transmission organizations forward and look at the situation of 
the entire West with respect to renewables would be very much 
    Thank you.
    Mr. Burton. Mr. Pickett.
    [The prepared statement of Ms. Hapner follows:]
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    Mr. Pickett. Thank you, Mr. Chairman, members of the 
committee. I am Steve Pickett, I am vice president and general 
counsel of Southern California Edison and I hope you forgive my 
scratchy voice, I have a cold today unfortunately.
    We are very pleased at Edison that over the last few 
months, both the State and the Federal Government have begun to 
move to solve this crisis. We do have a crisis and it is time 
to roll up our sleeves and start solving the crisis in 
practical ways that can be implemented quickly.
    Let us make no mistake, many of the problems are of 
California's making and many of them are California's to fix. 
And that does not include just the State government, but it 
includes the utilities as well. There is no question but what 
the utilities were slow off the mark in recognizing the impacts 
of the dramatic load growth brought about by the booming 
economy and were undoubtedly too slow in sounding the alarm of 
the impending crisis.
    The State government, for its part, did clearly adopt in 
the deregulation process in California, a very flawed market 
structure. FERC approved it and I think in good faith, the 
State Government and the utilities in California expected FERC 
to be on the job monitoring that market in a more aggressive 
way than it has done, but clearly the market structure is a 
California problem.
    The California utilities were prevented from entering into 
long-term contracts to solve the problem until it was way too 
late for them to do so. And most fundamentally, the State 
government was way, way, way too slow in recognizing the basic 
business fundamental that retail prices have to match wholesale 
costs or the utilities will be driven into bankruptcy.
    In recent weeks and months, we have seen some action in 
California, the California Commission, as Ms. Hapner said, has 
raised rates 10 percent approximately in January, another 30 
percent in March, a very difficult and traumatic decision for 
the State. And I am very pleased to say that last Monday, my 
company, Edison, and representatives of the Governor of 
California entered into a memorandum of understanding that we 
think provides a framework and a comprehensive plan for helping 
us resolve the crisis for us and for our customers, allow our 
company to return to a credit-worthy status that will allow us 
to continue providing quality service to our customers.
    Many, many, many hurdles remain to implementing that MOU, 
but it is a very positive first step and we are pleased that we 
have been able to take it.
    FERC has begun to act as well, Unfortunately I believe not 
nearly as aggressively as they should have done. The San Diego 
complaint that brought the matter first to FERC's attention was 
filed in August of last year and the final rehearing is not out 
on that yet, so that we can get the matter before the court. We 
believe the FERC has taken an unduly narrow view of their 
jurisdiction there. There is a 65-year old statute and a host 
of regulations, the Federal Power Act and a host of regulations 
under it, that are well-established law, that are designed and 
were adopted in the depression era to prevent exactly what is 
happening in California today, and that is the abuse of 
customers, who have essentially no choice in the price of power 
that they have to pay.
    In November, the FERC did find that the wholesale rates 
being charged in California were not just and reasonable. I 
think Commissioner Hebert's reading of that order, as he 
presented it today, was unfortunately unduly narrow. The FERC 
did find that the wholesale rates were not just and reasonable 
and yet they have allowed them to continue to be charged.
    In the face of evidence that the market is dysfunctional, 
evidence by the way that the FERC has never held an evidentiary 
hearing upon, they eliminated the ISO's market caps back in 
November and December, and the predictable happened, the market 
exploded. At a time of low load when prices should be down, 
where there is plenty of supply available, the market exploded.
    Now some have argued that price caps are antithetical to 
efficient, effective, competitive markets and would disincent 
new supply. I am not an economist, I am not here to argue about 
the efficacy of those views today, but I am here to say that we 
do have a crisis. And this is not a time for ideology at any 
regulatory agency, State or Federal. It is a time for 
practicality, it is a time for common sense and it is a time to 
protect the public interest.
    It is the public interest that only the FERC under the 
statute can protect. They have the authority, the only 
authority, over the wholesale markets.
    Two quick points, I see I am out of time, I will wrap up 
quickly. One is that this is not entirely a supply and demand 
problem. There is no question that supply is tight, we do have 
a need for new supply, and in the summer months, the few peak 
hours in California, we have a potential supply problem--no 
    But the blackouts in January and again in March were not a 
function of that supply problem. In March--when the blackouts 
occurred in March, there were 14,000 megawatts of capacity 
idle. Some of that may be due to legitimate problems and 
maintenance, clearly not all of it. That is not a supply 
problem, that is a market function problem, one that has to be 
    And let me just close by suggesting what I believe needs to 
be done quickly and I would urge this committee and the 
Congress to urge the FERC to do; and that is, we need to call a 
time out. We need to say stop, this is crazy. We need to 
temporarily return to a system that we know that works. Maybe 
it is a system that had problems, everybody would acknowledge 
that, but we know that cost-based ratemaking works. It is 
embodied in the law, it is embodied in the FERC's regulations, 
it is the norm. Market-based ratemaking is the exception, it is 
only supposed to exist when there are workably competitive 
markets. We do not have that. We need to temporarily return to 
the regulated, cost-based system which provides a fair return 
to the generators, it imposes an obligation to serve, so we 
will not have 14,000 megawatts off line while people are 
sitting in the dark and if need be, we can look at exceptions 
to that rule for new generation, so that we can clearly incent 
    But let us take a time out here, let us fix this market. I 
happen to believe and my company believes that markets are the 
right way to go. They allocate capital for new generation 
projects more efficiently than the regulated system did, but 
the market has to be set up to work and we cannot sit here with 
a failed market and allow customers to be gouged.
    Thank you.
    Mr. Burton. Thank you, Mr. Pickett.
    Mr. Vanech.
    [The prepared statement of Mr. Pickett follows:]
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    Mr. Vanech. Thank you, Mr. Chairman, committee, I 
appreciate the opportunity to discuss the views of gas-fired QF 
cogenerators in the State.
    Just for some background, since the passage of PURPA in 
1978, California has been a leader in developing QF facilities, 
by far more than any other State. In fact, now it amounts to 
nearly one-third of the supply to the IOUs. In numbers, that 
means about 10,000 megawatts of QFs are on line and about 5,400 
or roughly 60 percent of those QFs are natural gas-fired. Of 
the 5,400 or so megawatts, we understand about 3,000 are 
actually off line right now, and given the system-wide load of 
about 30,000 megawatts, that is obviously significant.
    Going back a bit and almost since the inception of PURPA 
and the time these projects came on line, there has been from 
time to time, more often than not, a contentious relationship 
between the QFs and the regulated utilities. And in my view, 
there is at least three reasons why that is.
    No. 1, when QFs build plants, the utilities lose rate base 
and when they don't have rate base, they earn less profits 
since they make a profit off of their assets.
    No. 2, I think there is a general concern about loss of 
    And third, a fear that QF power is more costly than 
otherwise available power that the utilities can actually 
    QFs have provided significant benefits to the State, 
including an increase in system reliability by scattering 
generation rather than having fewer plants, typically away from 
the load center. There have been ancillary benefits to the 
transmission and distribution network. California's 
manufacturers and institutions have saved hundreds of millions 
of dollars, if not more, in the way of competitively or low-
cost thermal energy that is typically heat wasted in a 
conventional power plant. That steam or other energy is used in 
manufacturing and replaces the cost of production, or lowers 
the cost of production for those manufacturers.
    Also, QFs have used new and clean technologies. Most of 
these plants are less than 15 years old and have adhered to 
more stringent permitting requirements.
    The QFs are often compared to otherwise available sources 
of supply for the utilities. QFs by nature are long-term in 
respect to their agreements, and from time to time, there 
clearly have been imbalances between the cost of QF power and 
the cost of otherwise available power over the short term. And 
in fact, during certain periods and during certain years, QF 
power, as compared to the otherwise available spot market cost 
of power, has in fact been more expensive.
    But there is another side to that equation. We calculate, 
based on our consultants, that in year 2000 alone, Edison saved 
somewhere around $800 million by buying QF power as opposed to 
spot market power. We think that PG&E has probably realized 
similar savings. In fact, the monthly cost, additional cost, of 
the QFs being down now, around 300 megawatts--I will just speak 
to the gas-fired QFs that are shut down--are probably costing 
the State somewhere between $200 and $300 million a month in 
additional cost because that power has to be brought in from 
other sources that are much higher priced than the QF 
    Why the QFs are not operating today--and again, I will 
narrow my discussion on the gas-fired QFs. As has been well 
publicized, the QFs have not been getting paid by the utilities 
and that is widely known. As a result, and particularly acute 
for gas-fired projects, we cannot pay our fuel suppliers and 
they will not sell us fuel any more. These projects are 
typically financed on a stand-alone basis so it is not as 
though there is an enormous balance sheet that can just keep 
funding these losses. These projects have to be able to pay 
their bills.
    In addition, the current and recent formula or the order 
passed by the Public Utility Commission substantially modified 
the way QFs get paid and it is particularly problematic for 
gas-fired projects.
    There are two major changes that were made to the formula. 
One was the efficiency rate used in the formula was lowered 
significantly from around 10,100 to 9,100. That results in 
lower revenues.
    And the second major issue is the Topock Index, which is 
the southern California Gas Index, was substituted with the 
northern California Gas Index, known as Malin. The problem is 
there is about a $5 difference in the cost differential between 
Malin and Topock. This issue is the QF cogenerator, gas-fired 
cogenerator, has to buy gas at Topock, but in the revenue 
formula only gets the benefit of the Malin price. So 
therefore--and just for quick numbers; if today, the Topock gas 
price results in a cost to produce of about $140 per megawatt 
hour, the new revenue formula passed by the Utility Commission 
pays us somewhere around $8 or $9, perhaps a little less. In 
other words, even on margin, there is about a $50 per megawatt 
hour loss on generation. That is why it is impossible for the 
QFs, the gas-fired particularly, to stay in business.
    I will try to finish quickly.
    I just wanted to quickly discuss what we think needs to be 
done because these projects need to come back on line, 
particularly given the acute shortage of power in the State.
    No. 1, until there is liquidity in the market and until the 
investor-owned utilities can pay their bills, we need the right 
to be able to sell outside of our contracts. And that does not 
necessarily mean they terminate, it just means that we have the 
right to be able to sell to other parties in order to get 
liquidity in our projects, to avoid the projects themselves 
going bankrupt.
    The other issue is, and it is perhaps a lessor issue, these 
projects are paid both a fixed and a variable charge, known as 
capacity payments, the fixed charge. The utilities must 
continue to pay the fixed charges even though certain plants 
have been down, because of non-payment. The financing parties 
rely on these capacity payments to repay debt and equity and if 
those are not paid, they get--as you can tell, the projects get 
into trouble.
    The other thing I would just quickly add is there needs to 
be a clear permitting process, and I think it started 
favorably, between the State and the Federal Government. There 
is, as most know, an accelerator or emergency permitting 
program, which is a 21-day or 4 month program, depending on 
when this new capacity comes on line. I would urge the Federal 
Government to have the EPA work closely with the State EPA to 
have a cohesive, single committee so that we are not forced to 
deal with the State and then have to turn around and have a 
different set of rules at the Federal level. And I think that 
is really important to try to get capacity on line.
    That is enough for now.
    Mr. Burton. We will get to questions with you, Mr. Vanech 
in just a minute.
    Mr. Desrochers.
    [The prepared statement of Mr. Vanech follows:]
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    Mr. Desrochers. Good morning. Chairman Burton, 
Representative Ose and committee members, thank you for the 
opportunity to meet before your committee to discuss the 
current energy crisis and its impact on the biomass to energy 
industry in California.
    My name is Paul Desrochers, I am the director of fuel 
procurement for Thermo Ecotek. We own and operate 125 megawatts 
of energy, both in New England and in California, 100 megawatts 
in California.
    The industry in total in the State of California is--we 
have 29 biomass to energy facilities currently operating, 
producing over 600 megawatts of energy, of renewable energy.
    But I think my message today is not only are we producing 
electrons to the State of California, we are also providing 
substantial environmental benefits. Those are primarily air 
emission reductions, reduced greenhouse gases while consuming 
material that is normally open burned in the Central Valley and 
also material that normally would go to municipal landfills. 
And I am not talking about regular household waste, I am 
talking about wood waste that is, you know, tree trimmings from 
your home, grass clippings, that type of material. All that 
material would, if we did not exist, go to the landfill.
    In California alone, we utilize 700 million tons of that 
material a year on an annualized basis. So again, if our 
facilities do not operate, which some of them are not currently 
operating, that environmental benefit goes away also, the State 
pays again. And as Mr. Vanech mentioned, it has to replace that 
energy with higher priced spot energy.
    Not only do we utilize that, in the Central Valley, we 
provide 1,200 post-harvest jobs. That is extremely important in 
our Central Valley because of its unemployment during the non-
crop season. All of our operations are--not the facilities, but 
the collection, processing and gathering operations are all 
done post-harvest, after the harvest of whatever crop that they 
are working on--very important.
    These facilities are under long-term agreements with the 
utilities, both Southern California Edison, but primarily 
Pacific Gas & Electric. And as Mr. Vanech has said, as of April 
1, these facilities have not been paid for at least 3 months 
and in the case of Southern California Edison, 4 months. Thermo 
Ecotek's facilities are currently owed--currently right now, 
$12.1 million for energy delivered since December.
    The energy crisis in California, as we have all heard, 
deepened as PG&E has sought protection under Chapter 11. Just 
prior to PG&E's decision, the State Public Utilities Commission 
ordered the utilities pay our facilities, which were called 
qualified facilities or QFs, for the energy generated after 
April 1, with no provisions for past-due. These facilities have 
been operating for the last 3 months, providing energy to the 
State of California, while the California Department of Water 
Resources are making prompt payments to out-of-state 
generators. That to me is criminal. Here we are in-state 
generation not getting paid, out-of-state generators getting 
paid. Something is wrong with that equation.
    Our facilities have continued to operate and provide energy 
to the State of California, providing the environmental 
benefits that we provide, hopeful that there would be a 
solution in the last 3 months, based on efforts the Governor 
has been working on, California Public Utilities Commission and 
attempts through the legislature. All those have failed. We are 
still not sure the power line acquisition from Southern 
California Edison is going to work.
    Unfortunately, we have waited too long to discontinue our 
operations and we are at the end of our ability to fund our 
fuel purchases and our operating costs. What is most 
unfortunate, as I have said before, is not only does the State 
lose the renewable electrons that we produce, the State is also 
going to lose the environmental benefits that we provide.
    I will list you an example of that. The San Joaquin Valley 
Unified Air Pollution Control District, which is the second 
largest air pollution control district in the State, is about 
to be placed under severe non-attainment for ozone. Our 
facilities reduce 32,000 tons of material that are precursors 
to ozone development, on an annualized basis. That is a 
substantial amount of material, substantial emissions 
    Additionally, our facilities utilize 3 million tons of 
urban wood waste, which we have talked about, the material that 
would go to municipal landfills. We are the only renewable 
energy technology that has to pay for its fuel, because of the 
cost of collection, processing and transportation, we have to 
pay for our fuel. Wind, obviously geothermal does not a fuel 
    We have reduced the amount--just in the last 2 months, we 
have reduced the amount of material that we are currently--we 
normally utilize, by half. So the State has already lost half 
of its benefits, and we are looking at, if we do not receive 
payment, based on the PUC ruling, by April 17, we probably will 
discontinue power generation.
    Mr. Burton. Mr. Desrochers, could you summarize so we can--
    Mr. Desrochers. Yes. Without rapid resolution of our 
current contract payments, we will suspend operations--I just 
said that.
    We do not know what their future brings. The Bankruptcy 
Court will do one of two things, either affirm our contracts or 
reject them. We feel that being--either way will be a positive 
move, but at least there is some forward movement.
    What we would ask is that as you return to Washington, that 
our industry is proposing similar to the wind industry, an 
energy tax credit that will help some long-term viability and 
also we would support, as Congressman Lee has said, renewables 
in the United States and in the State, and we call it a 
renewable portfolio standard, that with a national energy 
policy and with a State energy policy, that at least 20 percent 
of that generation is based on renewable technology, and we 
would support that.
    Thank you.
    [The prepared statement of Mr. Desrochers follows:]
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    Mr. Burton. Thank you, Mr. Desrochers. Let me just start 
with you, Mr. Desrochers, I did not catch that last part, I am 
sorry. Congresswoman Lofgren and I were talking, but I was told 
that the alternative sources of energy that are produced, like 
what you are talking about, accounts for what, about 25 
    Mr. Desrochers. No, in this State here, we are only a 
little less than 10.
    Mr. Burton. A little less than 10 percent, but that is a 
significant amount.
    Mr. Desrochers. I am sorry, I misstated that, less than 2 
    Mr. Burton. Oh, less than 2 percent.
    Mr. Desrochers. 2 percent.
    Mr. Burton. But that still makes a dent.
    Mr. Desrochers. Yes.
    Mr. Burton. Let me start off with questions for California 
Edison and PG&E. Last summer, were your companies engaged in 
negotiations on long-term contracts for electricity?
    Ms. Hapner. Last summer, we had very little authority to go 
out and sign long-term contracts. Ever since the deregulation 
policies at the Commission and at the State legislature passed, 
we have tried to move in that direction. We have requested 
several times the authority to enter into long-term contracts 
to be relieved of the buy-sell provision, etc. and to hedge, so 
that we would not be forced to operate in the volatile spot 
    In 1999, we received very limited authority to make some 
long-term purchases through the Power Exchange, the block 
forward market, and then in August 2000, we received broader 
authority to sign longer term contracts, but without the 
reasonableness protection that we require to protect ourselves 
after the fact.
    Mr. Burton. So you were not negotiating at that time in 
long-term contracts?
    Ms. Hapner. On a very----
    Mr. Burton. We heard yesterday and I think day before when 
we were on our way out here, that you had an opportunity and 
entered into a 5-year contract or contracts at around 5 cents a 
kilowatt hour, in that neighborhood; is that true?
    Ms. Hapner. Yes and no. We did not have the authority to 
    Mr. Burton. Was that offer made?
    Ms. Hapner. I beg your pardon?
    Mr. Burton. Was there an offer made to you for 5 cent per 
kilowatt hour?
    Ms. Hapner. When we investigated those offers, they were 
not what they appeared to be and what were covered in the 
    Mr. Burton. What were they?
    Ms. Hapner. They were considerably higher than 5 cents, 
particularly for peak period.
    Mr. Burton. So there were no 5 or 6 cent per kilowatt 
offers made?
    Ms. Hapner. Certainly not in the last spring and early 
summer timeframe. We did----
    Mr. Burton. Going back to April, May, June of last year.
    Ms. Hapner. No, we did not.
    Mr. Burton. What was the lowest offer you had?
    Ms. Hapner. I do not know for sure, Mr. Chairman----
    Mr. Burton. You do not know?
    Ms. Hapner [continuing]. That is not my area of expertise.
    Mr. Burton. Does anybody know? Do you know?
    Mr. Pickett. No, sir, I do not have the exact number. We 
can get the numbers that were made available to us and present 
them to you, if it is of benefit to the committee. We found, as 
PG&E apparently did, that a number of generators made offers, 
usually through the press, not directly to us, that they were 
willing to sell us power, a figure that was tossed around in 
the early or late spring, early summer of last year was 5 cent 
power. We also found----
    Mr. Burton. Did anybody contact the people who were making 
these assertions in the paper to see if that was a fact?
    Mr. Pickett. Yes, sir.
    Mr. Burton. And what did they say?
    Mr. Pickett. It proved, on investigation, not to be the 
fact. The terms of the contract would have ultimately made them 
substantially more expensive.
    Mr. Burton. OK, what did the terms of the contract take it 
up to?
    Mr. Pickett. Again, I do not have that specific figure. Ms. 
Hapner apparently has some information, but we can go back and 
look at that record and provide it to the committee, if it 
would be helpful.
    Ms. Hapner. I do not have the specific information, Mr. 
Chairman, but I can tell you that those contracts were for a 
considerably longer period of time, up to 10 years, and we did 
not have the authority to sign long-term contracts.
    Mr. Burton. Well, let us just say that there was a 10-year 
proposal made. Do you know how much that was for?
    Ms. Hapner. No, that is some of the information I will have 
to get back to you.
    Mr. Burton. Were the long-term rates that you heard about 
considerably lower than the short-term spot rate?
    Ms. Hapner. Absolutely.
    Mr. Burton. Well, then why was that not pursued?
    Mr. Pickett. In our case, we did pursue it with several 
vendors who were proposing it. We have had I think three 
problems. One, the contracts and the offers did not pan out, 
they either were not there during the critical periods of time, 
the summer peak periods, or they were proving to be 
substantially more expensive than they were advertised.
    Mr. Burton. How much more?
    Mr. Pickett. Again, I do not have that number, but that is 
a figure that we can supply to you.
    Second, we did not have the authority--even if the offer 
had been there, we did not have the authority to sign the 
    Mr. Burton. The authority would have rested with whom?
    Mr. Pickett. With the California Public Utilities 
    Mr. Burton. And what was their position on those, or did 
you pursue that?
    Mr. Pickett. We pursued that vigorously beginning----
    Mr. Burton. So what happened when you pursued it with the 
California regulatory agency?
    Mr. Pickett. Well, if I may, I can back up and explain a 
little of the history, if that would be helpful to you. We 
started in March 1999 trying to get authority to do 
contracting, bilateral contracting, because we began to see 
then that the market was on an upward trend. And in July 1999, 
the PUC rejected categorically our request for authority to do 
bilateral contracts.
    Mr. Burton. Why?
    Mr. Pickett. Because they believed that at that time the 
Power Exchange provided the transparent pricing that would 
allow them to conclude that the prices that we were paying for 
power to serve our customers were reasonable. They wanted to 
see the transparent price and they wanted to be sure that the--
    Mr. Burton. I do not want to belabor this, but did they not 
see the projections that showed that the price of generation 
was going to go up?
    Mr. Pickett. I do not know if they did or did not. We tried 
to explain that what we were doing was hedging against price 
volatility and certainly the possibility that they would go up 
in 1999, and that argument fell on deaf ears.
    Mr. Burton. So they were not going to let you buy it at 
that price?
    Mr. Pickett. No, they--well, when you say at that price, in 
1999, in July 1999, they categorically rejected our request for 
authority to do bilateral contracts.
    Mr. Burton. But the prices, according to the charts we got 
yesterday, started to go up appreciably around May of last 
year, sort of jumping up in quantum leaps.
    Mr. Pickett. Yes, sir.
    Mr. Burton. We were told--and I am out of time, but we were 
told that you could get prices in the 5 cent per kilowatt hour 
range during that timeframe. You are telling me that is not the 
case and you are going to let me know what you could have 
gotten it for. But they would not let you do that even though 
the projections showed that there was going to be some dramatic 
increases in cost.
    Mr. Pickett. Let me say for our part, we were prepared at 
one point to try and take a long-term low-price contract to the 
Commission for authority to sign it if we could get that----
    Mr. Burton. At what point, when was that?
    Mr. Pickett. That was already I believe in June or July. 
Again, I can get the precise information on this for you, but 
the contract we would have taken to the Commission never 
    Ms. Hapner. I would agree with the comments that Mr. 
Pickett made. I would just say for our part, after either 
getting rejected or just having our request sit, we finally 
went out at our own risk, and we still do not have 
reasonableness protection, but we actually went out at our own 
risk and signed a series of contracts, several of them at about 
5.5 cents.
    Mr. Burton. If the Public Utilities Commission had moved 
more expeditiously, would that have eliminated a large part of 
the problem you face?
    Ms. Hapner. Well, hindsight is 20/20, but certainly----
    Mr. Burton. You could see the problem at----
    Ms. Hapner [continuing]. We could have taken advantage of 
the opportunities in the marketplace.
    Mr. Burton. And had you taken advantage, would you be in 
the financial position you are in today? You can put a pencil 
to that.
    Ms. Hapner. Certainly the financial situation that we are 
in today is a function of collecting 5 cents from customers and 
paying upwards of 15 or 20 cents.
    Mr. Burton. You are not answering the question.
    Ms. Hapner. Well, clearly if we had--I do not mean not to 
answer your question--clearly had we been able to buy power in 
the wholesale market that was more closely related to the 
prices that we were collecting from our customers, we would 
have prevented the huge debt that we are in today.
    Mr. Burton. Ms. Lofgren.
    Ms. Lofgren. Thank you, Mr. Chairman.
    Mr. Pickett, I was very interested in your testimony and I 
do not think I have heard anyone be as plainly spoken and 
concise as you in terms of what should happen. And on page 7 of 
your testimony you suggest that the FERC should essentially 
deal with the dysfunctional market by revoking market-based 
rate authority. And I actually have to say I agree with you on 
    I believe that the FERC should have been more aggressive in 
terms of refunds, it should have been more aggressive in terms 
of prospective control of price gouging and the like, but 
clearly that did not occur.
    Our President has indicated an opposition to price caps, 
the Secretary of Energy and Mr. Hebert as well. So I guess my 
question to you is not getting plan A that might be the best 
way to deal with our situation right now, what advice would you 
be able to give for the market manipulation controls that Mr. 
Hebert discussed this morning, that I think are at least 
apparently some intention to prospectively control price. How 
could that be structured best to help California avoid further 
price gouging.
    Mr. Pickett. Let me say that I regard price caps as the 
second best alternative from either perspective. I regard price 
caps, you know, a working, competitive market, even one that 
may be approaching a supply shortage, as providing some of the 
disincentives that Chairman Hebert and others have said. They 
are not a good solution. But when you have a broken market----
    Ms. Lofgren. I agree with you on that as well. I wanted to 
limit my question to the comments that relate to a 
dysfunctional market in an emergency situation.
    Mr. Pickett. I think in the current situation, I cannot 
conceive of a real practical way to make this market work. The 
market structure is so badly flawed that we have to stop, we 
have to take time out and say this is not working. You cannot 
set a just and reasonable rate using a proxy derived from a 
non-functional market, which is what the FERC's last order did. 
That does not work.
    So I would suggest to Chairman Hebert--and if I had the 
drafting pen, I would write a suspension of market-based rate 
authority for the entire Western region. I believe he is right 
when he says you cannot look at a narrow region, you have got 
to look at the whole region. Electricity does not stop at State 
    But you have to not just withdraw the market-based rate 
authority, you have to have a system that both fairly 
compensates the generators--cost-based ratemaking does that, it 
provides them a fair return on their investment and, as the 
general counsel of the FERC indicated, a number of these 
generators paid amounts substantially above book when they 
purchased the generating assets. None of us may like that today 
but it is a fact and those people who paid that money I think 
are entitled to, if they are going to be compelled to operate, 
are entitled to earn a fair return on that money, regulated by 
the FERC.
    That is not a complicated operation, I have practiced in 
this area for 20 years. I cut my lawyer's teeth doing FERC rate 
cases. I know how the system works.
    The Federal Power Act and the regulations are in place. 
Cost-based ratemaking is the norm, it was done for 60 years. 
And I do not find it an acceptable excuse that the FERC says 
well things back up. Give me a break. Everything backs up if 
you do not turn attention to it. They need to turn attention to 
it, focus on what the law and the regulations are and enforce 
    Ms. Lofgren. Let me ask you a question about our future. We 
have nine power plants under construction in California right 
now, I think the first one is set to fire up in June. We have 
13 more that have already received approval. When those 9 are 
up and running and the 13 are up and running, are we going to 
be able to meet our power needs, or what further are we going 
to need to do in terms of--you know, we've got approval rates 
down to 6 months, we are 48th in terms of energy conservation 
in the State--among the States. What else are we going to need 
to do to be healthy energy-wise.
    Mr. Pickett. I smiled at your question because the power 
plant that we hope starts up first is a power plant being built 
by an affiliate of my company and in the MOU we signed on 
Monday, if it is not up and running by mid-August, we are 
subject to a significant penalty. So I indeed hope that power 
plant and all the rest come on line.
    Beyond that, I think we need to assure that there is an 
obligation to serve here. What is missing in this market 
equation today is the obligation to serve that was imposed on 
utilities in return for the regulated rate of return. The 
example are the blackouts. During the blackouts, we had 14,000 
megawatts off line. In a period of low load, there was no 
shortage, none of those generators had an obligation to be on 
line serving. We need to re-establish that in the short term 
until we can create the market mechanism that will incent them 
to be on line as a matter of economics, rather than withhold 
their power to drive prices up.
    Ms. Lofgren. Thank you, Mr. Pickett. I see my time is over, 
so I yield back, Mr. Chairman.
    Mr. Burton. Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman.
    I find I have more questions than we are likely to have 
time for, so I may be sending you written interrogatories for 
you to respond to, to the extent we can get to them we will 
reduce that pile. I want to go back to the original legislation 
    Mr. Burton. Excuse me, Mr. Ose, real quickly, she has got 
one question, could we yield to her and we will start your time 
over here just real quickly.
    Mr. Ose. Sure.
    Ms. Lofgren. You are very kind, Doug.
    Yesterday, the president of the Public Utilities Commission 
apparently testified that they had never refused a request for 
long term contracts and we have heard testimony here today that 
contradicts that. So I am just asking the chairman, not here 
today obviously because Ms. Lynch is not here, but I think we 
ought to do some written inquiry to clarify that contradiction 
in testimony and I thank you for yielding the time.
    Mr. Burton. We will do that, we will send a note to her and 
hopefully you will respond in writing to that as well, so we 
can have both sides of that. All right?
    Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman. I do want to tell my 
friend that it was very clear what Ms. Lynch was saying, but I 
do think it would be interesting to have it in writing.
    I want to go back to AB-1890. As I understood AB-1890, the 
legislation defined a point beyond which the IOUs, the 
investor-owned utilities, would be free to charge retail rates 
based on market rather than a frozen level, it is embedded in 
the legislation to some degree or another. And that threshold 
was basically defined as the point at which the utilities 
declared that they had recovered their stranded costs.
    Ms. Hapner, Mr. Pickett, is my understanding correct?
    Mr. Pickett. I think in the broadest sense, yes, but I 
would like to define a couple of key terms so that we are not 
talking past each other.
    AB-1890 envisioned deregulating the generation market, not 
the utilities' distribution lines or transmission system, which 
would be transmission under the regulation of the FERC, the 
distribution under the regulation of the PUC, on a regulated, 
rate of return basis, as it has always been done. In our case, 
until the recent rate increases, we were charging a system 
average rate of about 10 cents and about 3 cents of it was 
transmission/distribution and the regulated portion of the 
    The generation portion of the business, AB-1890 envisioned 
moving that to a competitive environment and both the PUC's 
prior implementing orders and AB-1890 provided incentives 
designed to get the utilities to sell their generation and in 
fact, until this market melted down, we were in the process, as 
a utility, of moving out of the generation business.
    But I think in direct answer to the central question, if 
the market had not melted down and if the utilities retained 
their generation with a possible exception for some nuclear 
issues, and the PUC had gone through what they referred to as 
the valuation process for our plants that were designed to 
compensate the ratepayers for those plants, post-valuation the 
unregulated side of the utility would have had a generator that 
it could have sold into the market.
    I hope I have not bored you with detail, but the process 
envisioned doing a market valuation process with the generation 
and then allowing the utilities, to the extent they retained 
that generation, to sell it into the open market.
    Mr. Ose. Ms. Hapner, before I get another answer of that 
nature, let me ask the question differently. Did the 
legislation define a date certain at which the utilities would 
be free to price their retail power delivery without CPUC 
    Ms. Hapner. The legislation said that the rate freeze, 
which was part of the legislative package, would end either 
when the utilities had collected their stranded costs or no 
later than December 31, 2001.
    Mr. Ose. December 31, 2001. So December of this year.
    Ms. Hapner. December of this year.
    Mr. Ose. Is that your understanding, Mr. Pickett?
    Mr. Pickett. Yes, that is correct with the possible 
exception of a 3-month stub period that would have taken it to 
the end of March 2002. But clearly there was an end date, one 
or the other, anticipated.
    Mr. Ose. Has PG&E, Southern California Edison or San Diego 
Gas & Electric submitted to the PUC filings that say they have 
recovered their stranded costs?
    Ms. Hapner. Yes, on several occasions--well, first let me 
say that monthly, each utility provides an accounting of the 
stranded costs that have been collected up until that point. 
And we, per CPUC regulation, had alerted the Commission that we 
were very close to recovering our stranded costs and that 
surely when the valuation of our hydro facilities was made, 
that the stranded costs would have been collected. We estimate 
that at the latest, that was last summer.
    Mr. Ose. Summer being July, August, June?
    Ms. Hapner. By August.
    Mr. Ose. Mr. Pickett, is that similar to what Southern 
California Edison did?
    Mr. Pickett. Yes, sir, we also submitted a filing 
indicating that our stranded costs had been collected in the 
early August timeframe.
    Mr. Ose. So at that point, your contention was that under 
the legislation, you were then free to go ahead and use market-
based retail prices.
    Mr. Pickett. For the generation; yes, sir.
    Mr. Ose. For the generation. And how did the PUC respond?
    Mr. Pickett. The PUC has basically declined to end the rate 
freeze and there are a whole series of intervening steps, but 
on March 27, they issued an order that retroactively reversed a 
number of these accounting procedures such that if you accept 
the legality, which we do not, but if you accept the legality 
of what they have done retroactively, it would say that the 
stranded costs have not been collected.
    Mr. Ose. Mr. Chairman, if I could just get Ms. Hapner's 
response. I see my time is clearly out.
    Ms. Hapner. That is absolutely true and in fact, they would 
never be collected by the statutory end date of the rate 
    Mr. Ose. Under the new definition.
    Ms. Hapner. Under the new so-called accounting change. We 
would go back to the beginning, January 1, 1998 and take all of 
the costs that we collected per the legislation and use those 
dollars to pay for the generation costs on behalf of customers.
    Mr. Ose. I have to yield back. We will come back to this 
    Mr. Burton. Ms. Lee.
    Ms. Lee. Thank you, Mr. Chairman.
    OK, to Ms. Hapner, first let me just say of course, PG&E 
filing bankruptcy does not settle very well with me. And the 
irony of this is that many consumers now are going to be 
paying, as they are now, and in the future, paying higher 
utility rates and yet unfortunately bankruptcy laws have been 
changed now that will make it harder even for consumers who 
have to pay these higher rates to file bankruptcy and yet PG&E 
can do this so easily.
    Now we have read in the newspapers that PG&E, before 
declaring bankruptcy, paid $1\1/2\ million, was it, in legal 
fees and distributed more than $50 million to employees and 
provided bonuses to CEOs of over $2 million. Also we understand 
and we have read, and I am asking this because I have just read 
this, that there have been--or at least there is about $30 
billion in the parent company.
    So what I am wondering is how do you reconcile declaring 
bankruptcy with these assets and expenditures. And I know that 
you made billions in 1998 and in 1999, and what happened to 
this money? Why has it not been used to pay off your debt? And 
finally, let me just say that there is no question where this 
money has gone in terms of the escalating costs, to the 
generators, and why have you not gone after them in terms of 
trying to find some relief, rather than filing bankruptcy or 
going to the State for assistance?
    Ms. Hapner. Let me try and handle those one at a time and 
if I miss one, please remind me--I am sure you will.
    With respect to the profits that you mentioned in 1998 and 
1999. Those were very different from the experience that we had 
in 2000. During that timeframe, the dollars that we were 
collecting per the rate freeze were enough to cover the 
wholesale generation costs. Beginning in May 2000, we 
experienced a gap that we have all referred to. The distortions 
in the market, which contributed to exorbitant prices.
    With respect to going after the generators, we have been 
very active with our fellow investor-owned utilities and in 
some cases even the municipal utilities and with the Public 
Utilities Commission in seeking recompense from the Federal 
Energy Regulatory Commission and as Chairman Hebert said, some 
of those cases have been resolved, not to our liking and others 
are up for rehearing.
    Moving to the choice to or the decision to seek protection 
of the Bankruptcy Court, let me first say I am not a bankruptcy 
attorney, so I cannot answer that question in much detail.
    Ms. Lee. Well can you just tell me, do you know whether or 
not you transferred money to the parent company?
    Ms. Hapner. Let me answer that by saying that as vice 
president for the regulated side of the business, I can say 
unequivocally that we have complied with all of the Commission 
rules with respect to how the utility interacts with our 
corporate parent and our other businesses.
    Ms. Lee. So if the rules allowed you to transfer money to 
the parent company, then there is a chance that you could have 
transferred it.
    Ms. Hapner. Others are much more familiar with the cash 
transfers and transactions than I am. All I can say is that we 
have followed those rules very carefully. We have been audited 
on those rules and have had our method of doing business 
blessed by the Commission. They have just begun a new 
proceeding and we look forward to that.
    Ms. Lee. If possible, Ms. Hapner, Mr. Chairman, I would 
like to ask for the details of this to be submitted to the 
committee for the record, if you can do that.
    Ms. Hapner. Absolutely.
    Mr. Burton. Without objection.
    Ms. Lee. Thank you very much, Mr. Chairman.
    Let me ask you about the impact now of the bankruptcy 
filing on consumers and also on employees, those loyal 
employees who have worked for the company for many years, who 
have their retirement now at stake and also those senior 
citizens who, for example, have dividends coming in as a result 
of investments in the stable stock. What are they going to do 
now with regard to their dividends and their investments?
    Ms. Hapner. Basically, we were very clear in our statement 
on Friday, particularly with our employees, and our retirees 
that we take our obligation to serve very, very seriously, we 
do not expect that our business will change very much. Our 
employees have been dealt with very fairly. In fact, the $50 
million that you referred to went to paying non-union, 
management employees--not officers or the CEO, I can attest to 
that personally--for their very good performance in the year 
2000. So we do not expect employees to be laid off.
    With respect to customers, customers are again--taking care 
of customers is our bread and butter business. We do not want 
our customers to suffer. We support the programs that the State 
and Federal Government has in place for protecting small users 
and customers who have limited means.
    Ms. Lee. Mr. Chairman, may I have just 30 more seconds, 
    Mr. Burton. The gentlelady is recognized for 30 seconds.
    Ms. Lee. So are you saying that employees who worked for 
PG&E, say 20 or 25 years will be vested, their retirement is 
secure and when they retire, they will be able to benefit from 
what they thought they would have received as a result of 
working for that long for PG&E?
    Ms. Hapner. Again--and I apologize--I am not an expert in 
terms of the pension programs, but I understand that employees' 
retirements are safe. With respect to the dividend and the 
share holders at large, unfortunately, because of our economic 
situation, we have not been able to declare a dividend for this 
most recent period, but we are hopeful that with the 
reorganization of our debt, that we will get back to a credit-
worthy status as soon as possible.
    Ms. Lee. Thank you very much. Thank you, Mr. Chairman.
    Mr. Ose. If I might just add something, one of the 
jurisdictional subjects that my subcommittee has is the Pension 
Benefit Guaranty Corp., I was telling Congresswoman Lofgren, we 
have looked at the funding at the Guaranty Corp. which would 
handle a failure of PG&E's pension plan, if it ever occurred. 
We looked at the funding, the Guaranty Corp. is very well 
situated and PG&E is on nobody's list from the pension plan 
side of things, as being vulnerable or subject to failure.
    Ms. Lee. Thank you, Mr. Chairman. I think that is very 
important to make clear and to make public so people will 
understand that because there is a sense of panic out there.
    Mr. Ose. We will be watching it as the says go forth. I am 
not speaking to the dividends to stockholders, I am talking 
about pensions.
    Ms. Lee. Retirement pensions, thank you very much.
    Mr. Ose [presiding]. Mr. Horn for 5 minutes.
    Mr. Horn. Thank you, Mr. Chairman.
    Most of you agree, I take it, 1999 was when, as one person 
said, the market was getting a little wacky. Do you all agree 
that is the date on that?
    Mr. Pickett. Speaking for Edison, Congressman, no. March 
1999 was a date I believe I referred to and that was a date 
that we first applied to the California Public Utilities 
Commission for authority to do bilateral contracts. The market 
meltdown became apparent I think most clearly in early May 
    Mr. Horn. OK, do you all agree on that?
    Ms. Hapner. Yes, sir.
    Mr. Horn. In sequence, gentlemen, what about you?
    Mr. Vanech. Unfortunately, I do not have enough data with 
me to answer that question.
    Mr. Horn. Well, was it about that time in the chronology?
    Mr. Vanech. I recall that prices started to escalate about 
a year ago, actually started to escalate noticeably.
    Mr. Horn. OK, that is the year 2000 or are you into the 
year 2001?
    Mr. Vanech. No, in 2000.
    Mr. Horn. 2000.
    Mr. Vanech. That is correct.
    Mr. Horn. OK, and as I listen to you and read your various 
interesting papers, you also think the Federal Energy 
Regulation Commission should have acted sooner; is that 
basically what your position is?
    Mr. Pickett. Speaking for Edison again; yes, sir, very much 
    Mr. Horn. Now those were done--and they would not extend 
it. And apparently the California PUC would not extend it 
either, is that correct?
    Ms. Hapner. Well, the California PUC does not have the 
authority to set the wholesale price, that is the purview of 
the Federal Energy Regulatory Commission. The PUC, along with 
Southern California Edison, PG&E and San Diego Gas & Electric 
went arm in arm to the FERC to extend them.
    Mr. Horn. I think on the Federal side, I would like to know 
what kind of an environment you felt there, because that was 
just about before one administration followed the other and 
when you first went there, that was the Clinton administration 
and what changed? Now if you heard Chairman Hebert this 
morning, they are ready to roll and get things done, but you 
are saying there was just too much of a lag. So I am wondering 
what was going on, was there turmoil within the Commission and 
this kind of thing, because people are leaving and people are 
    Mr. Pickett. Congressman, I do not know and cannot speak to 
what effect the pending change in administration had on the 
thinking of the FERC Commissioners. We simply do not have 
insight into that. I think the history of what FERC had been 
trying to do since the passage of the 1992 Energy Policy Act by 
the Congress, is more instructive. They had been clearly trying 
to develop competitive markets and Edison supported that. We 
believe that a competitive market, a workable, functioning 
competitive market, is a better way to price goods and services 
than a regulated monopoly.
    But the FERC also is the cop on the beat in those markets. 
And when the market began to melt down, frankly the cop on the 
beat was not there, they did not respond. Now Chairman Hebert 
said they are responding now, we have been pleased to see the 
progress, but we still have on rehearing at the Commission the 
decision from the first filing in August, that has not come 
out, that will give us a chance to test the unduly narrow view 
that the FERC has taken of its own jurisdiction and get it to a 
court for a decision. That has not come yet.
    Mr. Horn. Now there is a Department of Energy and again, 
there were Secretaries coming and going. What, if anything, 
could the Department of Energy have done in default based on 
the Commission, was there anything that could happen, maybe 
jawboning if nothing else?
    Mr. Pickett. Well, the Department of Energy was actively 
involved in a fair amount of jawboning in the critical time of 
late December through January where the utilities were running 
out of cash, running out of credit, were unable to buy power 
and the State had not yet stepped in with its emergency 
legislation to give the State agencies the authority to buy 
power. The Secretary of Energy at that point signed a series of 
emergency orders designed to require generators to sell into 
California despite the looming credit-worthiness problem, and 
it is on an emergency basis to keep the lights on. And there 
was a lot of jawboning around that activity.
    Mr. Horn. What is your feeling on that, Ms. Hapner?
    Ms. Hapner. That is my recollection as well. I would say 
that Secretary Richardson signed several of those orders and 
that was carried forward by Secretary Abraham into the spring 
of this year. There came a point when the Secretary did not 
want to renew those orders and I cannot recall exactly when 
that was.
    Mr. Horn. And what did he do? Did he renew them? You 
mentioned that you were not sure----
    Ms. Hapner. I believe Secretary Abraham renewed those 
orders once or twice, I really cannot recall.
    Mr. Horn. So the two of them agreed, the two Secretaries, 
on this, I take it.
    Ms. Hapner. I would not presume to speculate on whether or 
not those Secretaries of Energy agreed. Certainly on that point 
they both had a similar reaction.
    Mr. Horn. Well, did those emergency signatures of theirs, 
did they gain anything from it and you gain anything from it?
    Ms. Hapner. Go ahead.
    Mr. Pickett. I do not think either company gained anything 
from it. The people of the State of California gained from it 
because the continuation of the emergency orders over the 
critical period in January allowed the State legislature to 
implement the necessary legislation to have the State buy the 
power, have a credit-worthy entity behind the power purchases, 
so the lights could stay on, thereby making continuation of the 
emergency orders unnecessary.
    Mr. Horn. Well, if the Federal Commission was not doing 
enough at that point, it sounds like the State Commission was 
not doing enough.
    Mr. Pickett. We are clearly of the view that from May 2000 
when this market started to melt and it was visible to 
everybody, that the governmental response on both sides was an 
unfortunate exercise in finger pointing, and it continued for 
way too long. I think we are starting to see responsible 
reaction by both the State and the Federal Government but we 
already have one of the major utilities here in bankruptcy and 
my company is on the edge of insolvency.
    Mr. Ose. Mr. Horn, we are going to have another round.
    Mr. Horn. I would like the questions I put earlier on this 
to be put to the chairman, because he is not here.
    Mr. Ose. Chairman Hebert.
    Mr. Horn. Right.
    Mr. Ose. Without objection, so ordered.
    I recognize the gentlelady from this area for 5 minutes.
    Ms. Lofgren. Thank you very much.
    I am wondering if I could ask you, Ms. Hapner--and my 
constituents talk to me about this all the time--how much was 
transferred from PG&E to its parent corporation, what is the 
dollar figure?
    Ms. Hapner. Congresswoman, I do not have the exact dollar 
figure of transactions that have occurred over the years, it is 
fairly typical for subsidiaries of a parent corporation to 
shift dollars.
    Ms. Lofgren. Let us go from 1999 to present.
    Ms. Hapner. I do not have the exact amount, I would just 
reiterate that all actions that we took were in compliance with 
the Commission rules. I will get you that exact amount.
    Ms. Lofgren. Can we get the information? I would just 
observe that I understand that there are rules, but did the 
rules make you transfer the money or allow you to transfer the 
    Ms. Hapner. The rules are very explicit in terms of how 
dollars can be used and it is very clear that the utility 
dollars cannot subsidize the activities of other parts of the 
    Ms. Lofgren. Could you have used those funds that you 
recovered from sale of generation assets to improve path 15, 
for example?
    Ms. Hapner. The dollars that we recovered from the sale of 
the generating assets were designed to pay off the uneconomic 
generation costs and the accounting on those is pretty 
    Ms. Lofgren. So you could not have used that for 
infrastructure, is that what your testimony is?
    Ms. Hapner. Dollars that we use for transmission and 
distribution--throughout the entire rate freeze process, we 
have continued to make capital improvements and we request 
dollars for those improvements on the distribution side from 
the Public Utilities Commission and on the transmission side, 
which would be path 15 from the Federal Energy Regulatory 
    Ms. Lofgren. So is your testimony that you were prohibited 
from using the proceeds for transmission infrastructure 
improvements or that you were not prohibited from using that?
    Ms. Hapner. We used those dollars to recover stranded costs 
from generation.
    Ms. Lofgren. The question is what were you allowed to do 
with it, what were your options?
    Ms. Hapner. Well, I suppose that our option was not to pay 
for the generation costs that were incurred, not to buy 
generation on behalf of our customers and to mix dollars that 
were for power procurement and use them for transmission or 
distribution, which was not the intent of AB-1890.
    Mr. Ose. Would the gentlelady yield?
    Ms. Lofgren. If you will give me a couple more seconds 
after I yield.
    Mr. Ose. I will do so.
    I think that is a very interesting question, whether or not 
the legislation underlying her restructuring allowed or 
disallowed certain actions with the proceeds of the 
restructuring. I think we ought to find that out.
    Ms. Lofgren. I think we should.
    If I could ask Mr. Pickett, does Southern California Edison 
have a parent corporation?
    Mr. Pickett. Yes, we do.
    Ms. Lofgren. And were there transfers of funds to the 
parent corporation from you all as well?
    Mr. Pickett. Yes.
    Ms. Lofgren. And do you know what the dollar amount was say 
since 1999?
    Mr. Pickett. I do not know the dollar amount off the top of 
my head. We can get it and supply it to the committee. I can 
say that there are three categories of transfers and one may 
not have occurred in 1999, but the three categories of 
transfers are dividends of earnings to the parent company, 
payments of taxes to the parent company because the companies 
pay tax on a consolidated basis; and third, are in the category 
of special dividends. They were the return of the equity that 
had been invested in the generating plants that we sold. And 
all of that was done because the PUC, as a condition of our 
being allowed to have a holding company, requires the utility 
to maintain a balanced capital structure. And that means that 
there is so much of the utility financed with debt and a 
specified percentage financed with equity. If those dollars had 
been kept in the utility, the equity portion would have 
ballooned and we would have been out of compliance with the 
PUC's rules.
    Ms. Lofgren. Rather than ask either one of you to speculate 
as to dollar amounts, I am hopeful that we can get a written 
report from both companies to the committee.
    Mr. Ose. Without objection, that question will be answered.
    Ms. Lofgren. Finally, Mr. Pickett, your strong testimony 
about the need for FERC to be more vigorous in its activities 
given the dysfunctional market, has I think a lot of agreement 
really, on my part at least. But there is discussion in the 
State now that if FERC does not take the kind of action, the 
strong action that you recommended and many other have, that 
the State of California will necessarily have to take some 
rather extraordinary measures; for example, using its power of 
condemnation to seize private companies and begin directly to 
control this market. What do you think that outcome would mean 
for the State of California?
    Mr. Pickett. I think it would be a very uncertain and 
expensive undertaking. The State, of course, can exercise the 
power of eminent domain but it must pay the fair market value 
for the assets. We are faced with a broken market that has 
created huge apparent value for the assets that might have to 
be paid for them. That could be hugely expensive for the State 
and at least in my perspective, not necessarily the best way to 
incent what we really need, new generation and an efficient 
operating market that will drive prices down. So that sort of 
extraordinary action I hope does not come to pass for that 
reason and I think the State has already taken some very 
extraordinary action. Rates have gone up hugely and that is a 
very painful thing to do for anyone.
    Mr. Ose. Have we met your 2 or 3 seconds?
    Ms. Lofgren. I do not want to take advantage of the 
chairman's--that is sufficient for me and I will----
    Mr. Ose. We will go around again. I do want to add that 
when Chairman Burton returns, we will insert his 5 minutes here 
at the appropriate spot and we will all defer to him 
    I want to go back to the issue of the recharacterization 
that followed the PUC's ruling on stranded costs, which we were 
talking about earlier.
    Both PG&E and Southern California Edison late summer 2000 
filed with PUC documents that said we have recovered our 
stranded costs and under 1890 and PUC rulings, we should now be 
free to price our power, with certain caveats, at market; is 
that an accurate statement?
    Mr. Pickett. Yes, sir.
    Mr. Ose. Ms. Hapner.
    Ms. Hapner. Yes, it is.
    Mr. Ose. PUC turned around--took that under advisement and 
over a period of time responded. How long of a period of time 
before PUC action was taken on that filing?
    Mr. Pickett. The PUC action retroactively changing the 
accounting procedure was in a decision on March 27.
    Mr. Ose. Of this year?
    Mr. Pickett. Of this year. The filings to end the rate 
freeze, August, September, October timeframe, there were a 
series of filings, but basically in the late summer, early fall 
    Mr. Ose. Is that consistent with what PG&E did also?
    Ms. Hapner. Well, the one added piece is that at the order 
of the Commission, we filed an interim value for our remaining 
non-nuclear assets, our hydro facility.
    Mr. Ose. That was the piece that put you over the top, if 
you will?
    Ms. Hapner. And that clearly put us over the top and that 
filing was rejected.
    Mr. Ose. Has Southern California Edison submitted a similar 
filing for any of their non-nuclear assets?
    Mr. Pickett. Yes, sir, there were filings seeking 
authorization to sell our interest in three of our five major 
remaining power plants. We had contracts for sale of two coal-
fired units, one in New Mexico and one in Arizona, excuse me, 
one in Nevada and our interest in the Palo Verde Nuclear 
Station in Arizona, we had sought Commission authority to do 
that. We had also filed a settlement we had reached with the 
consumer advocacy group at the California PUC that would have 
allowed us to retain our hydro generation assets and operate 
them in a quasi-market mechanism under California PUC 
regulation. Those applications had been submitted and we were 
waiting for action. One had been waiting for well over a year 
for action before the market melted down and a hold was put on 
this activity.
    Mr. Ose. You are saying you filed it in May--let me see, 
the market started melting down in spring of 2000, you are 
saying you filed it a year prior to that or a year prior to 
    Mr. Pickett. A year prior to that. The application to sell 
our Mojave Power Plant was filed, if memory serves here, and we 
can certainly get exact dates, that was filed in 1999.
    Mr. Ose. OK, so these filings were made consistent with the 
legislative intent of 1890 that would basically empower the 
utilities to State, subject to PUC affirmation or rejection, 
that they had recovered their stranded costs and under the law, 
they could go forward with retail-based prices.
    Mr. Pickett. No, I am sorry, that is----
    Mr. Ose. I just want to make sure I have got this clear 
because it is important to me.
    Mr. Pickett. In 1999, and up until the time the market 
began to melt down in May, we believed it was going to be 
necessary to sell our power plants, realize the gain, in order 
to pay off our stranded costs.
    Mr. Ose. Right.
    Mr. Pickett. And we had engaged in doing that and we were 
engaged in a program to take the utility, the regulated utility 
out of the generating business under the incentives in AB-1890.
    Mr. Ose. And those requests to sell those generating 
facilities are still pending.
    Mr. Pickett. Well, they are still pending. Pursuant to our 
MOU, they will be withdrawn, but those were the filings that I 
referred to that had been filed back into 1999. As the market 
price went up, and you have to bear in mind here, this is a 
very complicated and arcane accounting mechanism, but we were 
buying power from ourselves.
    Mr. Ose. Right.
    Mr. Pickett. And we were doing it through the Power 
Exchange and we were paying the market-based price for it, not 
set by us, but set by the market. Those market revenues that we 
were being paid for our generation as we tried to sell it, we 
still owned it and were selling the electrons into the market, 
those market revenues were also going to pay off the stranded 
    We reached a point and it depends on any number of 
variables, but we reached a point where we believed that 
without the sales, we had recovered our stranded costs.
    Mr. Ose. I am going to yield to Mr. Horn for a question.
    Mr. Horn. It is not unusual that a corporation gets rid of 
certain things so that they can show the stockholders, look at 
what we have in revenue this quarter, or this half year, or 
whatever. Now I think a lot of charges have flown around by 
both PG&E and Southern Cal Ed that they got rid of a number of 
things that generated power and they used the money to keep the 
stockholders happy, and I would just like to know what the 
policy is there.
    Mr. Pickett. Well, first of all, in our utility business, 
it is very unusual to sell assets. Selling assets that are 
dedicated to the public service requires the approval of the 
PUC to ensure that just that does not happen, that we are not 
churning assets for the momentary benefit of shareholders, but 
that at the same time, the long-run interests of our customers 
are being served. And it is our policy to serve the long-run 
interests of our customers and to do it under the rules set by 
the PUC, that as I mentioned a moment ago, require the balanced 
capital structure, require that we not have excess equity in 
the utility, increasing rates for customers, and as we went 
through deregulation, the utility business shrank, our earnings 
shrank and they shrank because we took the earning assets out 
of the utility.
    Mr. Ose. I recognize Ms. Lee for 5 minutes.
    Ms. Lee. Thank you, Mr. Chairman.
    Let me direct my question to Mr. Vanech, is it?
    Mr. Vanech. Yes.
    Ms. Lee. You indicated in your testimony that the QFs are 
owed huge sums of money and that they cannot pay fuel 
suppliers. Let me just ask you this then. In terms of Delta 
Power's profits, what were they in 1999 and 2000? Do you have 
any idea, just ballpark?
    Mr. Vanech. We have grown rapidly through acquisition. Boy, 
are you asking total corporate? We have 13 plants, 5 of which 
are in California.
    Ms. Lee. OK, give me the California numbers, if you have 
    Mr. Vanech. I am afraid to say. I do not have the numbers 
at my fingertips, but I can certainly provide that to you.
    Ms. Lee. Would you provide that for the record, 1999 and 
    Mr. Vanech. Yes.
    [The information referred to follows:]

    Summary of Net Income for the years ending December 31, 
1999 and December 31, 2000 for Delta Power Company, LLC's 
California affiliates: (i) OLS Energy-Chino, (ii) OLS Energy-
Camarillo, (iii) Carson Cogeneration Company, (iv) Mojave 
Cogeneration Company, and (v) PE Berkeley, Inc.

                      Year                              Net Income
1999...........................................               $2,017,320
2000...........................................             $(1,801,341)

    Ms. Lee. We would just like a ballpark figure----
    Mr. Vanech. Yeah, that would be fine.
    Ms. Lee [continuing]. Of what the profits were. The 
California Independent Systems Operators found that there was a 
potential of over--I believe it was $6 billion in overcharges 
by the generators. That represents approximately 30 percent of 
wholesale energy costs over the last year. How do you respond 
to that? Do you agree with that or is that an inflated number 
from your perspective?
    Mr. Vanech. I understand the question. I can only respond 
from the perspective of qualifying facilities. The contracts 
that we sell to the utility--the contracts under which we sell 
to the utility essentially came out of Federal legislation and 
are in a sense--they are not regulated. The revenues we 
received are a function of the cost that the utility avoids, in 
other words, in not buying that kilowatt hour from another 
producer. So it is supposed to represent incremental cost. 
Clearly the rates have gone up across the board, including 
under our contracts. I mean, we are getting a lot more revenue 
then we were 6 months or a year ago, assuming we are operating. 
The other side to that is we have significantly higher fuel 
costs and some projects make more money, some lose more money 
as fuel prices go up. The key issue is how efficient that 
particular generator is compared to the overall market. I hope 
that makes sense to you.
    With respect to the $6 billion, as we heard earlier--and I 
do not know the breakout specifically, but a significant amount 
of that appears to have come from non-QFs. I do not believe, to 
my knowledge, that the QFs are not being attacked as part of 
this $6 billion overpayment, because the QF contracts, as I 
said, really fall under Federal and State jurisdiction. They 
are based on a formula, as I said earlier, which is supposed to 
represent the utilities avoided cost.
    Ms. Lee. OK. Well many believe that the generators are 
gouging and that is part of the problem, a large part of the 
problem. What do you say to that in terms of QFs role in price 
gouging? Is that an issue or not for you?
    Mr. Vanech. I do not believe--and again, let me speak to 
gas fired projects, because there is a difference between 
renewables and gas fired. Mr. Desrochers may want to comment on 
the renewables. The incremental revenue that we have earned 
because of higher prices has substantially gone to the gas 
suppliers, and we can demonstrate that showing our 
profitability. So even though market prices have gone up 
dramatically, our profitability in some cases has actually gone 
down, in some cases have gone up or in some cases remained 
flat. We have not--these gas-fired QFs--and I can speak to our 
five--have not made any windfall profits as a result of higher 
energy prices. The big reason is because--the way the formula 
works, the utility formula, is that we get paid every month 
based on an assumed deficiency rate and the border gas price 
for that month. We buy gas from our gas suppliers based on that 
exact price that is used in the formula. In other words, there 
is a perfect hedge in a sense between the additional revenue 
and the additional fuel cost. It works when the fuel prices go 
up or down. But it has the effect of maintaining our margin to 
be a fairly constant number.
    Ms. Lee. So you have not inflated your prices; you have not 
gouged and you have not withheld supply?
    Mr. Vanech. Absolutely not. In fact, we have no ability to 
manipulate prices. The prices--and this is another important 
point. The prices we receive are set by the California Public 
Utility Commission each month. We have no control over the 
pricing we receive.
    Ms. Lee. Thank you very much, Mr. Chairman.
    Mr. Burton. Let me--since I had to make a couple of calls, 
let me ask some questions I would have asked. I appreciate Mr. 
Ose taking the chair in my absence.
    If the FERC imposes price caps, do you think there will be 
more or fewer blackouts this summer?
    Mr. Pickett. My judgment is there will be fewer.
    Mr. Burton. Why?
    Mr. Pickett. Because if the price cap is imposed at a level 
that is sufficiently reasonable that it will allow the 
generators to recover their fair costs, they will lose the 
incentive to withhold capacity from the market to drive prices 
ever higher.
    Mr. Burton. Do you agree with that?
    Ms. Hapner. Well, I believe that a price cap should be 
applied regionally. California is very a part of a larger grid, 
in fact, we are a net buyer of electricity. So clearly, we have 
to work and partner with the other Western States. I do think 
that if there is a price cap just in California, then we are 
likely to see some of the effects that you mentioned earlier in 
terms of megawatts following the money. Right now what we are 
seeing is, when there was a price cap in California the 
megawatts left California and then came back in as more 
expensive out-of-market costs. So clearly a cap, particularly a 
short-term cap to get us through this very difficult period, 
has to be a region-wide cap and that should very much help our 
    Mr. Burton. And if it is not a region-wide cap, then do you 
think that it would probably exacerbate the problem?
    Ms. Hapner. I am----
    Mr. Burton. If it is not a region-wide cap, the problem 
could be exacerbated as far as blackouts are concerned?
    Ms. Hapner. I would not speculate on the blackout 
situation, Mr. Chairman. What I would say is that if it was 
just a California cap or an ISO-wide grid cap as we had before, 
then it encourages generators that are not part of the ISO grid 
or regulated by the FERC--including the municipal utilities 
that Mr. Ose mentioned earlier--to certainly drive up the 
prices to stratospheric levels.
    Mr. Burton. And then the energy would go where the money is 
and you probably would have some blackout problems in those 
areas that couldn't break the caps, right?
    [No response.]
    Mr. Burton. I mean, I know it is hypothetical, but if the 
FERC, as they said earlier, said they could only control 25 
percent--put a cap on only 20, 25 or 30 percent of the market, 
that means that the other 70, if the prices went above the cap 
and was forced up, that is where the energy would go to produce 
    Ms. Hapner. Well unfortunately that is----
    Mr. Burton. And in those----
    Ms. Hapner. Excuse me.
    Mr. Burton. And in those areas where the cap was in place 
you could have more severe blackouts, could you not?
    Ms. Hapner. I really cannot say about the blackouts. I do 
think, though, this is exactly the kind of example that 
Congresswoman Lofgren was referring to. In this type of crisis, 
we all have to pitch in, and that includes the municipal 
utilities who are not price constrained.
    Mr. Burton. I understand, but when you start making these 
kinds of decisions you have to look at every eventuality and 
what it is going--if you push in here, what is going to come 
out over here. What do you think the price cap should be?
    Mr. Pickett. Our belief is that the price cap should be set 
at a level that will allow the generators to recover their 
costs, plus a fair return on investment. It could be set--and I 
guess I would want to say that I would be very much opposed, or 
find a distant second best a one-size-fits-all price cap done 
generically, because there are substantial differences from 
generator to generator in terms of cost, the age of their 
plants, their fuel sources and so forth. What they need to be 
set, price caps, on a generator-by-generator basis at a level 
which provides cost recovery and a fair return on investment. 
That is the standard in the law.
    Mr. Burton. This letter from the Governors that was sent to 
Mr. Hebert had nine of the Governors on there from this region 
and they are not in favor of price caps. So a region-wide price 
cap might be a tough nut to crack there. So you may have a 
price cap only for California, and then I think you run into 
the problem we were talking about.
    Let me ask you a couple of other questions. Did you ask the 
PUC in July to give you the authority to enter into what they 
call bilateral forward contracts?
    Mr. Pickett. Our request to the PUC for the bilateral 
forward contracts was made in April. I believe at that time the 
PX was then developing its bilateral forward program. It had 
not been adopted yet. The FERC approved the PX's bilateral 
forward contacting in May 1999, May 26th. On July 14, 1999 the 
PUC finally gave us limited authority to do bilateral--to 
engage in the--excuse me, not bilaterals, in the block forward 
market, but there was a very severe constraint on the amount of 
transactions we could do at that time.
    Mr. Burton. Now up to that time is it true that you were 
only allowed to purchase power through the PX or the spot 
    Mr. Pickett. Yes, sir. Well when you say the spot market, 
that is to say through the ISOs' imbalance market, yes, sir.
    Mr. Burton. Ms. Lynch said that the PUC gave you the 
authority you needed to enter into long-term contracts. She 
said she rushed your proposal through in 2 weeks and got it 
passed on August 3rd, is that true?
    Mr. Pickett. I do not know if she rushed it through, but 
what was--this is now August 2000----
    Mr. Burton. Right.
    Mr. Pickett [continuing]. And what was done then was only 
half the job. They gave us authority to enter into bilateral 
contracts; they gave us no assurance of recovery of the costs 
of those bilateral contracts. The two have to go together. If 
you do not have assurance of recovery you are not a credit 
worthy entity. You cannot get somebody to sign a contract with 
    Mr. Burton. Did you talk to her about that?
    Mr. Pickett. To the extent we could, yes, sir.
    Mr. Burton. What do you mean to the extent you could?
    Mr. Pickett. The PUC has a series of what they refer to as 
ex parte communication rules that prevent open communication 
between the regulated companies and PUC commissioners. We 
certainly did bring our concerns about the nature of the order 
and the limitations on it to the attention of the Commission 
through formal filings. I just cannot say to you that we--did 
we talk to Ms. Lynch about it? I do not know. We may have in 
various times, but it would have been under the constraints of 
the PUC's ex parte rule.
    Mr. Burton. As I understand--this will be the last question 
on this round. As I understand it, the PUC would not preapprove 
long-term contracts and the rates had to pass a reasonable test 
after the fact, is that right?
    Mr. Pickett. That is correct. I can give you the history 
here if you want. I think Ms. Hapner has something to say. 
After we got the authority in August, the PUC set up a 
preapproval procedure. Ms. Lynch has often said well, the 
utilities had the authority in August, they could have gone and 
signed contracts on their own nickel. As I just explained, that 
is not a realistic expectation. They also set up this 
preapproval procedure you have just referred to. We filed our 
contracts under that preapproval procedure in September 2000. 
By the end of October, even though there was a 30-day mandate 
in the PUC order, the PUC had not acted. We were ultimately 
able to sign those contracts only in November 2000, well after 
we were beginning to run out of credit and people were 
beginning to refuse to deal with us.
    Mr. Burton. During that time period, how much did the 
prices go up that month?
    Mr. Pickett. Sir, I do not know, but we could go back and--
    Mr. Burton. It was a big jump though, was it not?
    Mr. Pickett. It was a big jump, yes, sir.
    Mr. Burton. So if you had gotten the approval a little 
quicker you could have gotten a better price?
    Mr. Pickett. Absolutely.
    Mr. Burton. Go ahead.
    Ms. Hapner. Mr. Chairman, rather than take the committee's 
time, I would be happy to provide for the record a history of 
our requests for that authority. With respect to your specific 
question about conversations with the Public Utilities 
Commission and with President Lynch, again taking into account 
the ex parte restrictions that Mr. Pickett mentioned, we had 
several conversations with staff members of the Public 
Utilities Commission at high levels. The only guidance that we 
were provided was a figure of per se reasonableness that is 
actually several cents below what the Department of Water 
Resources paid for the power that they procured very recently.
    Mr. Burton. So it would not work?
    Ms. Hapner. We were told antidotally, but nonetheless, that 
even if we had criteria for reasonableness it would not be 
worth the paper it was printed on.
    Mr. Burton. OK, who is next? Mr. Horn.
    Mr. Horn. Mr. Chairman, I will yield my time to Mr. Ose.
    Mr. Burton. You are going to yield your time to Mr. Ose?
    Mr. Horn. Yes.
    Mr. Burton. OK.
    Mr. Ose. OK, recharacterization of stranded assets. If I 
understand the basic impact of your application, it was to say 
very clearly that the capital base on which rates had been 
structured had been reduced to zero by recovery and that you 
now were willing to go into the open market and compete at the 
retail level; is that correct, Ms. Hapner?
    Ms. Hapner. I would say it a little bit differently, if you 
will permit me, Mr. Ose. AB-1890 said that when the assets were 
valued and/or stranded costs were collected, that those assets 
that were still with the utility family were free from 
regulation and could go out and be merchant plants, if you 
    Mr. Ose. At the wholesale level?
    Ms. Hapner. At whatever the market price was.
    Mr. Ose. Now the impact--I think I understand the impact of 
Edison's and PG&E's filings saying that the stranded cost had 
been reduced to zero. What is the impact on the PUC's 
recharacterization--let me ask the question differently. 
Describe for me the PUC's recent recharacterization that 
effectively said no, you have not recovered your stranded cost. 
Keep it in layman's terms, OK.
    Mr. Pickett. I will try, and if I do not, let me try again. 
It is a very complex and arcane subject. Before the PUC 
recharacterized the accounting, AB-1890 and the implementation 
by the PUC provided three sources of revenue for the utilities 
to recover their stranded costs. AB-1890 and the PUC made it 
clear that the utilities were at risk for recovery of their 
stranded costs. The three sources of revenue were market 
revenues, revenue from the sale of the generating plants and 
headroom. Headroom is that amount of costs that we have in rate 
recovery above our actual cost.
    Mr. Ose. It is the amount of rate over your basic cost?
    Mr. Pickett. That is correct. Those were the three sources 
of revenue for stranded cost recovery. When the market melted 
down and wholesale costs went up headroom disappeared and 
market revenues increased.
    Mr. Ose. I got all of that part. I understand the dynamics 
there. What is the consequence to Edison of PUC's 
recharacterization now?
    Mr. Pickett. The important point to understand, though, 
here is that, in our view, the procurement costs were intended 
to be recoverable.
    Mr. Ose. And when the market went up, you no longer had 
that avenue?
    Mr. Pickett. We may have lost stranded cost recovery but it 
was always intended that we would recover our procurement 
costs. The PUC disagreed with that in the implementation of AB-
1890, and the recharacterization says that the first thing that 
will be recovered by the utility are the procurement costs and 
the rest is beyond.
    Mr. Ose. So you went 3 years with one set of rules, or 4 
years with one set of rules in terms of rate structure and what 
have you, and then March 28th, you had your world turned upside 
down, so to speak, in terms of how those funds--or how that 
rate base was supposed to impact your operations?
    Mr. Pickett. Yes, sir. And with the point that it was--the 
PUC said this was to carry back to the beginning, so it has 
retroactive effect, which we believe is illegal.
    Mr. Ose. And that is the basis of your pending Federal 
lawsuit. Do you not have a lawsuit pending over this particular 
    Mr. Pickett. Not on that issue. The Federal lawsuit deals 
with the recoverability of the procurement costs. I can explain 
that if you would like. It is not related to the 
recharacterization issue.
    Mr. Ose. It predates--your Federal lawsuit predates the 
recharacterization. We may well have a second lawsuit as a 
function of recharacterization?
    Mr. Pickett. Yes, sir. If our memorandum of understanding 
is not implemented, we have reserved the right to pursue our 
remedies in this regard.
    Mr. Ose. Now if you prevail on either the first or the 
second law--no, you do not have a second. You have a first 
lawsuit, the existing lawsuit. Actually you have agreed to set 
that aside in the course of the transmission, so maybe my 
question should be directed to Ms. Hapner.
    Are you a party to this lawsuit? Is PG&E a party to this 
    Ms. Hapner. We also have a Federal filed rate doctrine case 
with the Federal court.
    Mr. Ose. Similar circumstances?
    Ms. Hapner. Well as Mr. Pickett said----
    Mr. Ose. Over procurement costs recovery?
    Ms. Hapner. Yes, that those are legitimate--those costs 
were approved by the Federal Energy Regulatory Commission; 
therefore, we are allowed to pass those costs through to our 
    Mr. Ose. Were they approved by the PUC?
    Ms. Hapner. Our claim and the basis for our case is that 
these are wholesale costs.
    Mr. Ose. So they would be Federal?
    Ms. Hapner. Right.
    Mr. Ose. And the PUC does not have any input or review or 
what-have-you over that particular aspect?
    Ms. Hapner. That is correct. The PUC has challenged that 
    Mr. Ose. OK. I want to shift my focus just a little bit 
now. Yesterday I asked this question at least five times, 
having to do with whether or not there are any standards in 
existence at the PUC to give you direction as to what is 
reasonable or unreasonable in terms of forward contracts you 
may wish to enter into. I was told very directly that the PUC 
has finalized that rule five times. I am asking today, do you 
have any document such as this, which is a PUC printed--
actually this is California Energy Markets, but it looks pretty 
official, so we are going to wave it around a little bit. 
Something of this nature, like we would have in the Federal 
Register for any agency ruling. Do you have anything from the 
PUC that in fact is final regarding what is reasonable relative 
to long-term forward contracts that you may wish to enter into?
    Mr. Pickett. No, sir.
    Mr. Ose. None?
    Mr. Pickett. No, sir.
    Mr. Ose. That is 180 degrees different from what we were 
told yesterday.
    Mr. Pickett. The only caveat I would put on that is that 
the traditional standard for recovery of utility costs is that 
they be reasonable. The PUC has not issued, to my knowledge, 
guidelines that would say what is reasonable for utility 
    Mr. Ose. What is the standard?
    Mr. Pickett. That is our problem. That is why we sought--
when we finally got authority to enter into contracts, we 
wanted them preapproved because there was no standard to say 
what is reasonable, what costs are we going to be allowed to 
recover. You have to have the cost recovery piece in order to 
enter into a viable contract and not just be incinerating 
    Ms. Hapner. I believe that all three investor-owned 
utilities have submitted different criteria suggesting those be 
the basis for preapproval standards, and to my knowledge none 
of those, nor any version of any of those has been approved.
    Mr. Ose. What you are trying to do is eliminate uncertainty 
by asking for the standards.
    Mr. Pickett. Absolutely, yes.
    Mr. Ose. Apparently when the yellow light goes on my 
microphone goes off. That is pretty tricky. I want to go back 
just for a moment, and if my time expires we will come back to 
it. In terms of the recharacterization of the stranded costs on 
a 3 or 4-year after-the-fact basis, what is the consequence to 
the capital structure of the utilities based on what you said 
earlier about utilities having to maintain a certain capital 
structure, the reaction of Wall Street?
    I knew I was going to do this. We will have to come back to 
this, Mr. Chairman. I yield back.
    Mr. Burton. Ms. Lee.
    Ms. Lee. Thank you, Mr. Chairman.
    Let me ask Mr. Desrochers what he thinks the impact of the 
proposed 15 percent cut in renewable energy and energy 
efficient kind of activities would mean in terms of the 
California energy crisis, and also just in terms of renewable 
energy in general. There is a 15 percent proposed cut I believe 
in the President's budget, which is approximately $180 million 
which would be taken away.
    Mr. Desrochers. I am not aware of that. This is a cut in 
the President's budget?
    Ms. Lee. Right.
    Mr. Desrochers. I am not aware----
    Ms. Lee. For renewable energy activities.
    Mr. Desrochers. Yes, I could not give you a guess at what 
the impact on that would be. We are proposing some legislation 
for a tax credit for renewable energy similar to what the wind 
energy industry has currently. So that would be an additional 
legislation. I could not address what that impact would be.
    Ms. Lee. OK. What do you think a reasonable rate in terms 
of percentage for renewable energy should be? I am supporting 
20 percent by 2020. What is your take on that?
    Mr. Desrochers. I would agree that 20 percent would be----
    Ms. Lee. You think 20 percent?
    Mr. Desrochers. Yes. In fact, we proposed legislation about 
4 years ago in California that we have a 5-percent of what we 
call renewable portfolio standard.
    Ms. Lee. What is it now in California? Did you mention that 
    Mr. Desrochers. I said it is 2 percent.
    Ms. Lee. It is 2 percent now?
    Mr. Desrochers. 2 percent, correct.
    Ms. Lee. OK, thank you.
    Let me go now to Ms. Hapner and Mr. Pickett. Let me just 
ask you what you think the distinguishing or most important 
factor was in your decision to file bankruptcy and your 
decision, Mr. Pickett, to move forward with an MOU? I mean, 
what was it that caused you to go in different directions in 
this crisis?
    Mr. Pickett. Well, I cannot speak, of course, to the what I 
am sure were terribly painful judgments at PG&E that led them 
to their decision. For our company, we are not out of the 
woods. We have more bills stacked up on the desk than we have 
money to pay, and it is not a good situation to be in 
obviously. As this crisis has developed, we have struggled 
mightily to maintain our levels of customer service and keep 
our employees working and calm and focused on the job that 
needs to be done. We continue to believe, even as we are 
hanging on the edge by our fingernails here, that a negotiated 
solution, if one can be reached and implemented, is preferable 
to the lengthy process that bankruptcy will involve. It is 
preferable for the State to have its policymakers in control of 
the utilities going forward rather than a Federal judge. It is 
in everyone's interest to get the utility credit-worthy, 
because as several of the panelists have commented, billions of 
dollars of investment are required in California infrastructure 
over the next few years. Path 15 is one example.
    We have not shorted our utility in terms of the investment 
that it needs, but a bankrupt utility cannot put that kind of 
money into the infrastructure. It just simply cannot do it, the 
money is not there. So we believe that a negotiated workout 
that will quickly get the utilities back to a credit-worthy 
status where the critical investment in infrastructure can be 
made, where we can keep our employees on the job and we can 
continue to provide the quality customer service is the way to 
go. Ms. Hapner, of course, will address PG&E, but I have to 
tell you we are not out of the woods and we are hanging on the 
    Ms. Lee. So you have more debts than assets. Clearly 
bankruptcy is a remedy in those circumstances, but you chose to 
try to negotiate your way out of it?
    Mr. Pickett. We have chosen this far--and thus far is the 
critical phrase--to try and negotiate our way out of it. We 
have 14 or 15 lawsuits from QFs now seeking back payment. We do 
not have the money to pay even if they got their judgment. We 
have more bills stacked up on our desk, back bills, than we 
have money to pay. We have got to find a negotiated solution 
and we have to do it quickly because our creditors, the people 
who have invested in this business, our bankers have legitimate 
expectations of being paid and their patience is not infinite.
    Ms. Lee. So, Ms. Hapner, was bankruptcy the easy way out?
    Ms. Hapner. Anyone who thinks that a decision to go to the 
bankruptcy court for protection is the easy way out, 
particularly for a company that's over 100 years old, does not 
understand just how difficult this decision was, Ms. Lee. Let 
me just say the only thing that separates our two utilities--we 
are both facing mounting debts and we both have faced a series 
of very destabilizing actions from the Public Utilities 
Commission. We did not feel that sufficient progress was made 
on a comprehensive solution. I was not part, and I am not part, 
of the utility negotiating team that worked with the State. But 
it is my understanding that those negotiations have been very 
complex and they have been very honest, but they have not moved 
forward as quickly as we would have hoped. In the meantime, it 
was very clear that the State did not assume the full 
procurement obligation that we had hoped they would, meaning 
that every month we are incurring over $300 million more of 
generation debt, which, of course, then is--our inability to 
pay, as Mr. Pickett said, has impacted our ability to pay our 
qualifying facilities. Our ability to make our commercial paper 
debts and thousands--literally thousands of vendors that we 
have quite inadvertently brought into this situation with us. 
So it is the lack of progress, and in the midst of that lack of 
progress the actions by the Public Utilities Commission, 
including the change in accounting that Mr. Ose was pursuing, 
that led us to believe that the quickest and the best way to 
get to resolution was to move to the Federal courts.
    Ms. Lee. Thank you for your candor.
    Thank you, Mr. Chairman.
    Mr. Burton. Thank you, Ms. Lee.
    We are going to do one more round. I know that you are 
probably getting a little tired of sitting there. Do any of you 
have to take a break real quickly or can you sit there for 
another 25 minutes? If you can, then what we will do is, we 
will start our final round and after we conclude this round, if 
we still have questions we will submit them to you. And if you 
will kindly give them to us for the record would be helpful, 
    OK, let me start this final round by saying, Mr. Vanech, 
how many megawatts of power of qualifying facilities are idle 
right now because they are not being paid?
    Mr. Vanech. As I understand it, there are--out of the gas-
fired projects totaling 5,200 megawatts, I understand 3,000 are 
now shut down.
    Mr. Burton. 3,000 megawatts are shut down?
    Mr. Vanech. That is my understanding. I believe this is 
current as of April 2nd. That is the information I got.
    Mr. Burton. Would your company prefer the ability to sell 
electricity in an open market?
    Mr. Vanech. Let me answer that in two ways. With respect to 
the existing QF facilities we have, our preference would be to 
sell under our existing contracts, because our existing 
contracts are long-term agreements and we have lived up to our 
end of the bargain and what we want is our customers to live up 
to their end of the bargain.
    Mr. Burton. But you have not been paid?
    Mr. Vanech. No, we have not been paid; therefore, in turn, 
we cannot pay our fuel suppliers who will not give us gas.
    For new projects--and we, by the way, are trying to get a 
project off the ground for 200 megawatts. The first turbine 
would start delivering energy in last September of this year in 
California. We have to make a decision as to which way we are 
going to go. We have basically three options. We can sell to 
the Department of Water Resources under their procurement plan. 
We can enter into an agreement with a third party such as an El 
Paso or a Shell, one of the large energy companies. Or we can 
try to essentially go it alone and sell into the market. The 
first two are sort of simple because they are going to be long-
term contracts and we essentially are going to lay the risk 
off--the market risk to somebody else.
    The problem is there is really no market now that exists in 
California. The PX, obviously, was discontinued or terminated, 
however you want to characterize it. So there is really no 
transparent market to buy and sell power and trade power in the 
State at this point. I think it would be extremely beneficial--
and I realize that after terminating the PX, I am sure no one 
has the appetite to start it up tomorrow. But I think there 
needs to be a realization that in order to have an effective 
transparent open market, there has got to be a way to trade the 
commodity. So I think longer term some sort of open market 
needs to be reintroduced.
    Mr. Burton. So if you had your druthers it would be an open 
    Mr. Vanech. Yes.
    Mr. Burton. What would be the result if the QFs were freed 
from their contracts with the utilities?
    Mr. Vanech. I believe the QFs for the most part would be 
able to come back on line. The reason we would be able to come 
back on line is, the large energy companies, such as the El 
Pasos of the world, who I mentioned earlier, we believe would 
be willing to pay us a fee to convert natural gas into power, 
and they essentially would sell that power for us. It 
eliminates the current credit issue. Our balance sheets do not 
look very attractive right now since we have huge liabilities 
and in most cases little or no cash. But what they will do is 
essentially deliver gas--they have title to the gas--and we in 
turn deliver them electricity back. In other words, we convert 
the gas to electricity and in exchange they will pay us a fee 
for that service.
    Mr. Burton. So if you could get out of your contracts you 
would jump at that in a heartbeat?
    Mr. Vanech. Absolutely. Different QFs have different views. 
We are not seeking at this point to terminate our contracts.
    Mr. Burton. I understand, but you are not getting paid.
    Mr. Vanech. Exactly. We need the right to suspend these 
contracts, that is correct.
    Mr. Burton. Have you gone to court or anything to try to 
suspend the contracts because of nonpayment?
    Mr. Vanech. We have. We started by actually sending a 
letter to Edison for the four southern California projects 
asking for relief, but we did not get a response. We then, more 
recently, filed a lawsuit in Los Angeles County, on behalf of 
our four projects, asking the court to give us the relief. And 
this past Monday the California Cogen Council, of which we are 
a member filed a petition in front of FERC asking FERC to give 
emergency relief to allow the QFs to sell to third parties. To 
my knowledge, nothing has been done, at least as of this time.
    Mr. Burton. Well, I do not see how anybody in good 
conscious could say you have to go bankrupt when you have an 
opportunity to find another market that will keep you afloat. 
It does not make any sense.
    Mr. Vanech. I agree.
    Mr. Burton. To PG&E and Southern Cal Edison, what is your 
companies' position on allowing the QFs to end their contracts 
with utilities and sell their power on the market since you are 
not paying them?
    Mr. Pickett. Well, beginning this Friday--checks will go 
out this Friday. Under the order of the Public Utilities 
Commission, we will be paying the QFs going forward.
    Mr. Burton. Will you be paying them all that you owe them 
or just a portion?
    Mr. Pickett. We will be paying all of the QFs that are on 
line. These are output contracts. So all of the QFs that are 
delivering in April will be paid beginning--and the checks will 
go out on an advanced basis this Friday.
    Mr. Burton. So that will be for the total amount that is 
    Mr. Pickett. No, no, sir. I am sorry. It is for the going 
forward amount beginning--I have forgotten whether the date is 
March 27th or--it is basically for April forward we will be 
paying the QFs. Hopefully, if we have enough money on an 
ongoing basis--on a current basis, there still is a past debt 
    Mr. Burton. Excuse me, but are the arrearages necessary for 
you folks to be able to continue to move on? I mean, if they 
start paying you in full.
    Mr. Vanech. The answer is, I believe our gas suppliers will 
work with us and start supplying gas again to start back up, 
assuming there is a clear path to us getting paid, and to know 
that we are actually going to get paid. Just saying that, you 
know, at some point in the future we are going to get paid I do 
not think works. I think that most of the QFs have flexibility 
with respect to some sort of suspension, if you will, of this 
amount owed from the utilities. But there needs to be a clear 
path so we can turn around to our fuel suppliers principally 
and say OK, you can be comfortable now because we are going to 
get paid X dollars over a period of time, and this is a credit-
worthy obligation, so we know in fact that there is going to be 
money to get paid. That is what we require.
    Mr. Burton. Do you need the arrearages in order to keep 
those suppliers happy?
    Mr. Vanech. It is a mixed bag. We have three different fuel 
suppliers. I think one will supply gas to us on the basis of 
getting paid currently, assuming we can reasonably demonstrate 
an ability to pay them off over time. The other two I do not 
think are as flexible. So, I think it is company-specific.
    Mr. Burton. So you still need some relief from your 
contracts in order to keep things going, is that what you are 
    Mr. Vanech. We either need relief from our contracts, i.e., 
the ability to suspend or not sell under the contracts, or to 
the extent we sell under the contracts we need two things. We 
need credit-worthiness behind the payment so that we know we 
can get paid.
    The second problem is, as I said in my opening statement, 
the current formula that was approved by the Public Utilities 
Commission, I think about 2 weeks ago, does not work for the 
gas-fired plants. The revenue--again, taking an average 
qualifying facility, the revenue of $80 a megawatt hour does 
not even come close to covering the fuel cost of about $140 a 
megawatt hour at today's gas prices. So it is totally 
uneconomic for the gas-fired plants to run today until the 
Public Utilities Commission, or some other body, changes the 
formula to be consistent with the Federal and State law. Right 
now that formula is inconsistent with Federal and State law and 
that is one of the arguments or causes we are going to FERC to 
seek relief on, that this formula does not work and is just 
    Mr. Burton. Let me get on to another subject here. 
Yesterday Ms. Lynch testified that both of your companies did 
enter into some long-term contracts last summer after the 
Public Utilities Commission issued its August 3rd order. You 
have testified to that effect today. Will each of you provide 
us with documentation of all the forward contracts you entered 
into during that period? That is after the PUC gave you 
authority to do it in July 2000.
    Mr. Pickett. Yes, sir, we are pleased to do that. We 
entered into five contracts for 350 megawatts. When you say 
documentation, we would just like to be clear on what it is you 
want. We can give you the contract itself or whatever else we 
    Mr. Burton. We would like to have a copy of the contract, 
if we could. The Public Utilities Commission said yesterday 
that we had to get permission from you to get this information. 
They would not give it to us. So we would like to have the 
contracts. Can we get them for you as well?
    Mr. Pickett. Let me say there may be confidentiality 
provisions in those contracts. If we cannot provide them for 
that reason, we would provide them pursuant to a subpoena from 
the Commission.
    Mr. Burton. Well we will send you a subpoena if it is 
required. So you just tell us what is necessary. We do not plan 
to divulge this information publicly, but it is something that 
we need to take a look at to see what, if anything, we can do 
to be of assistance at the Federal level.
    Mr. Pickett. I understand. For our part, we would be 
pleased to provide whatever material we have, subject only to 
the confidentiality provisions that may have been entered into 
with the other party to the contract. But I would think if this 
committee subpoenas them they can have them.
    Mr. Burton. Would you prefer for us to subpoena them?
    Mr. Pickett. Well let us check the confidentiality 
provisions. I just do not know----
    Mr. Burton. We want to make sure we have got all of the 
facts. That is all I am saying.
    Mr. Pickett. One way or the other you will have the facts.
    Mr. Burton. OK, good. Ms. Lofgren.
    Ms. Lofgren. This has been a long day, so I will be quick. 
Mr. Pickett, you have been active in your legal career around 
energy issues your whole career, if I heard you correctly, and 
know a lot about FERC and the law. I am wondering if in that 
capacity as a witness you could comment on this question. The 
chairman mentioned that there had been a letter sent by nine 
Governors to FERC objecting to rate caps, and he was kind 
enough to share a copy of the letter with me. We also know, 
however, that the Governors of Washington, Oregon and 
California on March 9th asked FERC to impose price caps, and I 
do not believe they have received an answer to that. Now 
putting aside the politics of the situation, and that the 
founders in their wisdom made North Dakota have two Senators 
and California two Senators as well. Would the law allow for 
the feds to impose regional price caps for the Western region 
despite the fact the Governors of some of these small States do 
not like it, even though the Governors of Washington, Oregon 
and California have asked for it?
    Mr. Pickett. I am not sure how much I really know the law, 
but I have practiced in the energy area for 20 years, sometimes 
to my regret. I have done a number of FERC rate cases and 
proceedings before the FERC of other natures. My understanding 
of the Federal Power Act, the whole reason for it is to be sure 
that regional differences and inter-regional competitive 
pressures do not impact the public interest. I believe that the 
FERC--if it had the record before it, which it can surely make, 
it has the rules to make the record so that it can take 
action--can impose a region-wide price cap either on individual 
generators--the regulation as it is contemplated is on the 
seller--or it can do it region wide, either way. I believe it 
could do it.
    Ms. Lofgren. All right, if I can just quickly followup. I 
am sure that there are more users of electricity in California 
than these nine States put together. If nothing is done--if the 
FERC--what did they say, market--what was the phrase they used 
this morning? Mitigation plan proves to be puny and not very 
helpful and we end up with this price control situation that is 
completely out of hand, do you believe that the States of 
Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, North 
Dakota, Utah and Wyoming will not also be caught up in the 
rapid price escalation and crazy market that has developed here 
in the West?
    Mr. Pickett. I believe they already are with the possible 
exception of North Dakota.
    Ms. Lofgren. It is under water right now.
    Mr. Pickett. Well most of the Western States are 
interconnected in a grid, but are not connected to the Eastern 
half of the United States on a line that runs roughly East of 
the Rocky Mountains. There is very limited interconnection 
there. I think North Dakota is on the Eastern side of that. But 
with that exception, I think that the Western States, like it 
or not, are going to rise together or fall together here. The 
market impacts and certainly spreads to nearby States in 
California and--or spread to the Northwest and are certainly 
likely to spread elsewhere if the situation is not corrected. 
Now having said that, I should say that a number of these 
States have not deregulated their markets and the effect of 
that is very, very important when you talk about caps and the 
percentages and so forth. A State that is not deregulated and 
has utilities operating as a vertically integrated monopoly is 
providing most, if not all of their power, from rate-based 
regulated generation. They are not in the market, or if they 
are in the market, it is for a very, very tiny percentage of 
their power. Sure, they may be willing to pay a huge amount for 
that little tiny increment. In California, we are paying that 
huge amount for the whole thing and that is what is crazy. We 
have got to stop that. That can be stopped.
    Ms. Lofgren. And is that why, in your judgment--I will not 
ask you to speculate what the Governors were thinking, but why 
it would be in the interest of the State of Washington and 
Oregon to join with California on a request for cost-based 
price caps to FERC?
    Mr. Pickett. In part--and I have to hedge the answer 
because the regulatory situation--the extent of deregulation in 
each State is different, and the supply and demand situation in 
each State is different. As a general matter supply is 
tightening up. As I said earlier, it is not all a supply and 
demand problem, but clearly in the summer, in the peak months--
in southern California the peak months are in the summer and 
there is a supply shortage. In the Northwest the situation is 
reversed. It is a winter shortage, or it is a winter-time 
peaking and therefore a shortage problem. Supply is tightening 
up there as well. So you have to be careful and look at the 
inter-regional factors, but in general the answer is yes.
    Ms. Lofgren. Thank you.
    Mr. Burton. Thank you, Ms. Lofgren.
    Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman.
    On the issue of the recharacterization and its impact on 
your financials, I am going to ask you to respond to that in 
writing because I do want to ask these fellows a couple of 
    I want to make sure I understand as it relates to the QFs 
the impacts in the valley. In Sacramento and its surrounding 
area, we are a severe non-attainment region regularly and San 
Joaquin is on the verge of being characterized or classified 
similarly. So in effect, a vast majority of the central valley 
will then be on a non-attainment basis. My understanding of the 
QFs is that they provide power that has a far lower level of 
emission into that geographic area than say a more traditional 
type of power generating infrastructure, is that correct?
    Mr. Desrochers. Yes, that is correct. And not only that, 
the material that we utilize normally is open-field burned, 
which is still permitted in the Central Valley. We take that 
material and use it for fuel in a controlled combustion 
atmosphere and reduce the pollutants by 96 percent of what 
would have happened if it was burned in the open fields.
    Mr. Ose. So it is very environmentally friendly?
    Mr. Desrochers. Yes.
    Mr. Ose. Is that the same with you, Mr.--is it Vanech?
    Mr. Vanech. Vanech. Yes it is directly resultant from the 
age of the plant typically. But since the QFs tend to be 10 or 
12 years old and have to comply with the best available 
technology, most of them have selected catalytic reduction on 
the back end, which means the Nox emissions are 
generally in single parts per million. All that means is that 
they are very clean plants, simply put.
    Mr. Ose. Now the decision recently by the PUC to reduce the 
compensable level for the IER from 11,000 plus to 9000 plus in 
effect says--if I understand correctly--that you are only going 
to be compensated for using enough--in terms of your 
recoverable costs or your rate, you are only going to be 
compensated for the costs that would get you up to an IER of 
9140 BTU, whereas it might take you 11,000 to get to the 
appropriate level so that your facilities run?
    Mr. Vanech. That is exactly correct.
    Mr. Ose. OK.
    Mr. Vanech. In fact, the rate is actually supposed to 
represent an incremental energy rate. Just by comparison, the 
average energy rate, which is far below the increment, for 
Edison over a 20-year period we calculated it about 9,900 or 
10,000. So not only is that 9,100 way below an incremental 
energy rate, it is actually below the average rate.
    Mr. Ose. Now you have facilities in the Central Valley. Mr. 
Vanech, do you have facilities in the Central Valley? You said 
you have five in California, four in Los Angeles?
    Mr. Vanech. And one is at UC-Berkeley serving the State.
    Mr. Ose. OK. LA has got air quality problems regularly. The 
question I have is that to the extent that the QFs, who were 
originally developed under PURPA, as I recall--to the extent 
that the QFs cannot recover cost, they are going to shut down 
or they are going to reduce operations.
    Mr. Vanech. Absolutely.
    Mr. Ose. So my question is, because--I mean, I have to tell 
you between the health and safety of young people--I should say 
the health of young people, the health of older folks in the 
valley, our ability to have clean air, it would seem to me that 
the arbitrary decision to reduce the IER from 11,000 to 9,000 
is a direct attack on our environmental quality, because it 
makes it less economical or less possible for you folks to 
operate. I mean if you just connect the dots.
    Mr. Vanech. Yes.
    Mr. Desrochers. Yeah, you have come to the right 
conclusion, that is correct.
    Mr. Ose. The thinking behind the decision by the PUC is 
found--what is the fundamental logic?
    Mr. Vanech. I will speculate that it is based on political 
pressure to lower the rates. I mean, it clearly contradicts 
Federal and State laws, PURPA laws. I can only imagine that it 
is politically motivated in a desperate attempt to lower rates.
    Mr. Ose. Is there anything we can do at FERC to reverse 
    Mr. Vanech. We have filed a petition, effective as of 
Monday, to ask for relief at FERC, yes.
    Mr. Ose. And the basis on which you are doing it relates to 
PURPA or to the fact that maybe your electrons travel 
    Mr. Vanech. Strictly as it relates to the rules of PURPA, 
because the formula now violates Federal and State law.
    Mr. Ose. How many folks work at your plant, Paul?
    Mr. Desrochers. Statewide we have 100 folks and then we 
have indirect employees of right around 400.
    Mr. Ose. Mr. Vanech.
    Mr. Vanech. We have about 65, including management and 
    Mr. Ose. You testified earlier that the natural gas that 
you get is provided to you by third parties.
    Mr. Vanech. Yes, that is correct.
    Mr. Ose. And it is on a spot price basis?
    Mr. Vanech. It is.
    Mr. Ose. And you return the electricity based on a factor 
above and beyond the cost of natural gas. In other words, you 
take the natural gas and you produce the electricity and you 
sell it back to the guy?
    Mr. Vanech. Exactly.
    Mr. Ose. OK. My time has expired, Mr. Chairman.
    Mr. Burton. We will go to Ms. Lee and then we will come 
right back to Mr. Horn who can yield to Mr. Ose if he so 
chooses--what a nice fellow you are. Ms. Lee.
    Ms. Lee. Thank you, Mr. Chairman. For the record, let me 
just indicate that it was brought to my attention that on March 
22, 2001, Dr. Alan Lloyd who is the chair of the California Air 
Resources Board, he actually testified in front of the 
Subcommittee on Energy and Air Quality of the House Committee 
on Energy and Commerce. His quote was it can be said with 
certainty that environmental laws are not to blame. I just want 
to make sure that is in the record.
    Let me just mention this, and then I would just like each 
of you to respond very briefly. Some say that the only way out 
of this crisis is actually through re-regulation. Price gouging 
was not as evident when utilities were regulated and utility 
bills were much lower. So I guess I want to ask each of you, 
which regulatory or which nonregulatory environment worked best 
for the consumers, for the utility companies and for the 
generators? Ms. Hapner and each of you. I would like to hear 
your take on that, because many people are saying that it was 
better before, and there is evidence that at least consumer 
costs were much lower. We did not see the evidence of price 
gouging, even though it may have been occurring.
    Ms. Hapner. I agree that this has definitely turned into a 
deregulation versus regulation debate. We still think that a 
correctly structured market could work. It is certainly working 
in other States. I think in retrospect, all of us who were part 
of this process--and I worked on the restructuring--on 
proposals for the last 7 or 8 years. All of us involved made a 
series of compromises in order to get the kind of legislation 
that would be unanimously passed, which it was. In retrospect--
and certainly it is always easy to do this in retrospect--the 
way that the market was structured was designed to fail. 
Obviously we did not do that intentionally.
    It is very easy to be critical right now of one or all of 
the parts of the electric restructuring that we took on in 
California. Admittedly, we are California, we are an easy 
target for others. But knowing what we know now about how to 
establish the market, knowing what we know now about the impact 
of supply and demand and the record growth that we faced, we 
clearly could have done a much better job of restructuring this 
    Mr. Pickett. I share all of those comments and would now 
look to the future and say we need to do two things, in my 
judgment. As I said in my opening comments, the first thing we 
have to do is take the time out and fix this thing so that we 
can fix it while customers are not being gouged. We just have 
to stop this. The market does not work. But beyond that, I 
think it can be fixed. There are electricity markets around the 
country that work.
    We believe that generation is probably best provided in a 
competitive market that is workably competitive, that provides 
the kind of price restraints that competitive markets provide 
and provides the kind of rigor that best allocates capital to 
the most efficient projects that wind up benefiting customers.
    But we are faced with a real crisis here and we cannot just 
wish away that crisis and rely on the ideology of getting to 
the workably competitive market to carry us through the next 2 
    Ms. Lee. Mr. Vanech.
    Mr. Vanech. It is my strong view that a correctly 
functioning deregulated market is the best situation for 
everyone. PJM, Texas, you can look to those markets, they 
really work pretty well and people have actually saved money.
    The other big issue I think is utilities need the ability 
to create a balanced portfolio of energy purchases. What that 
means is, it should not be all long term and it certainly 
shouldn't be all short term, as evidenced by California. It is 
like any other investor putting a portfolio together, not 
everybody buys high tech stocks presumably and not everybody 
buys only bonds. There has got to be risk and reward and an 
understanding by the regulators that long-term contracts from 
time to time may be more expensive than short-term 
alternatives, but on the other hand, they are also going to be 
less expensive at certain times. So I think there needs to be a 
balanced portfolio approach.
    I think the other thing I would add is there needs to be a 
clear way for developers to come in and actually get things 
done. That means both from a regulatory perspective and from an 
environmental perspective there needs to be a clear path to get 
projects built. Nothing will scare a developer away who is 
putting millions and millions of dollars at risk before we ever 
know we have a project if we cannot see--knowing if we follow 
the rules and go down the correct path, that--you know, we do 
what we are supposed to do, that we can get a project put 
together. That is what needs to be done. There needs to be 
confidence in the market for people to commit significant 
amounts of capital. Again, if you go back to Texas and go back 
to PJM, just to take those two markets, significant amounts of 
new capacity have been added over the last 2 years and continue 
to be added because people feel that if they put their money in 
the market there is no guarantee of return certainly, but at 
least there is an assurance that there will be a fair process 
in the market.
    Ms. Lee. Mr. Chairman, can we have 30 seconds to hear Mr. 
Desrochers' response.
    Mr. Burton. [Nods.]
    Ms. Lee. Thank you very much.
    Mr. Desrochers. I would echo the statements and the 
comments that the other panel members stated. I would just add 
one more statement, in that I do believe that we need a 
comprehensive National and State energy policy that would 
include a focus on renewable energy. That is all.
    Ms. Lee. Thank you very much.
    Mr. Burton. Mr. Horn.
    Mr. Horn. I am going to ask one question and then turn it 
over to Mr. Ose. I am fascinated by the two gentlemen's 
testimony, and I wonder, since every group in America always 
has an office in Washington, DC, and the QFs that do all of 
these good deeds, is there a national group in Washington 
speaking for you?
    Mr. Vanech. I think there used to be and it merged with a 
group known as EPSA, that you may be aware of, Electric Power 
Supply Association, and that group tends to represent 
generators. I am not aware of a specific QF industry group.
    Mr. Horn. How many units are there in the Nation similar to 
yours? Are we talking 10,000, 5000?
    Mr. Vanech. If I had to guess, I would say--boy, that is a 
tough question. I would just hazard a guess and say maybe 1,000 
to 2,000. I might be on the high side.
    Mr. Horn. It is very interesting that you can be the 
balance wheel here and solve some of these problems.
    I now yield the rest of my time to the gentleman from 
California, Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman.
    I have just a couple of simple, straightforward questions 
and they are based on a concern that our colleagues in other 
States not have to experience in their States what we are 
experiencing in ours. My question is, if other States are 
looking at a deregulation--quote, deregulation proposal, would 
you recommend that those States allow utilities, IOUs, QFs, 
whatever, the ability to enter into long-term contracts without 
undue after-the-fact review? In other words, my question is, 
should those other States give their power companies the 
option--not the mandate, but the option of entering into long-
term forward contract deliveries? The second question is 
whether you would suggest to those other States allowing 
generators direct access to the marketplace? In other words, 
the ability to sell not only here but there. Ms. Hapner.
    Ms. Hapner. I think if I was advising another State on how 
to go forward or in the alternative how to do things 
differently, I would first of all not require that the 
regulated utilities buy and sell from only one market.
    Mr. Ose. I need----
    Ms. Hapner. I am getting to----
    Mr. Ose. I do not have a lot of time here. I have four 
people I want to ask this question.
    Ms. Hapner. OK. Yes, they should be able to contract in the 
market with clear standards ahead of time, so that down the 
road they shouldn't be second guessed for their decision.
    Mr. Ose. If there are other suggestions that any of you 
have beyond the two questions I have, we would be happy to take 
those in writing.
    Ms. Hapner. Great, I will do that.
    Mr. Ose. Now you would support--if other States are 
considering restructuring, your advice would be to allow the 
utilities in their States to engage in long-term forward 
contracts without undue reviews or second guessing or however 
you want to describe it?
    Ms. Hapner. Without undue review after the fact. I think it 
is quite appropriate before the fact to lay out criteria.
    Mr. Ose. OK. Mr. Pickett, would you agree with that?
    Mr. Pickett. Yes, sir.
    Mr. Ose. OK. Mr. Vanech.
    Mr. Vanech. Yes, fully. In addition, I might sort of 
propose that the committee consider resurrecting the original 
intent of PURPA. One thing PURPA did is it got a lot of new 
plants off the ground, and the reason it did is because 
utilities were able to enter into long-term contracts. I will 
keep it quick. Basically the generator knew they could recover 
their capital.
    Mr. Ose. As to the PURPA question, I would be happy to take 
your other suggestions in writing.
    Mr. Vanech. The answer is yes then.
    Mr. Ose. Paul.
    Mr. Desrochers. Yes. The answer is yes.
    Mr. Ose. OK. On direct access, is that a tool other States 
ought to allow their generators--their intrastate generators to 
    Ms. Hapner. I apologize, Mr. Ose, but I am not sure I 
understand what you mean by direct access.
    Mr. Ose. OK, let me just cite an example. Let us say that 
Mr. Desrochers' plant has the opportunity to contract in a new 
market environment with any number of people rather than being 
forced to sell to a single point of purchasing. Is that 
something that would help this?
    Ms. Hapner. I think that all the markets work better if 
they are unfettered. I do think though that where contracts 
already exist between two parties, they need to be respected.
    Mr. Ose. Bilateral contracts?
    Ms. Hapner. Yes.
    Mr. Ose. OK. Mr. Pickett.
    Mr. Pickett. Fundamentally I think that direct access, by 
which I take it to mean generators selling directly to other 
retail customers, is not a useful tool in the long run because 
the market is not one in which choices--the product is 
fungible. There are not a lot of choices that can be made.
    Mr. Ose. What about wholesale?
    Mr. Pickett. At wholesale there should be an open market. I 
think to allow unfettered direct access allows the big users to 
cream skim and the small customers and the residential 
customers wind up bearing the burden.
    Mr. Ose. But you would support wholesale direct access?
    Mr. Pickett. Wholesale, yes, sir.
    Mr. Ose. OK. Mr. Vanech.
    Mr. Vanech. Yes, anything to enhance liquidity will 
increase the supply and should actually make prices better--
    Mr. Ose. Do you think the solution--I mean, you suggest 
supply is--I am going to ask you a question in writing--and you 
can respond to it--on the supply and demand issue.
    Mr. Desrochers. Yes, I would agree with wholesale direct 
    Mr. Ose. Mr. Chairman, I want to come back to something 
Congresswoman Lee said, and I heartily agree with her. I have 
said this time and time again. This is not a question of 
California's environmental standards being too tough, and I 
will tell you why. The technology that is available today to 
convert natural gas to electricity, as an example, is 50 
percent more efficient at that conversion with emission levels 
25 to 50 percent below technology that was developed as 
recently as 8 or 10 years ago. We can bring on line plants that 
take that same amount of gas and instead of creating 10,000 
megawatts, create 15,000 megawatts with 25 to 50 percent fewer 
emissions. The consequence of that is, if we would expedite 
siting licensing and allow the supply to come on line, we would 
have a temporary uptick, as you would expect, in emissions, but 
as those new plants come on line the old plants would fall from 
a base position in the load to a standby or peak load and that 
curve would come down on the emissions. So I agree with 
Congresswoman Lee. I have been beating my brains out trying to 
get that message out and I just wanted to reinforce it.
    Ms. Lofgren. Would the gentleman yield for just one 
    Mr. Ose. Subject to the chairman's discretion.
    Ms. Lofgren. Just in support of your statement and 
Congresswoman Lee's, although no one is thrilled about it, 
practically every large user of electricity in this valley that 
I know of has backup generators that are diesel. When those 
diesel generators get powered up this summer, as they 
inevitably will, the air quality will be severely impacted. So 
everybody really wants these cleaner plants to be approved and 
built as quickly as possible.
    Mr. Burton. I want to thank you for your diligence and your 
patience and your ability to sit there that long.
    I would just like to say that the last series of questions 
that Mr. Ose put to you, every one of you were in favor of free 
market principles and that flies in the face of the price caps 
you were talking about. So I presume you want the price caps 
removed as quickly as possible once this crisis is over, is 
that correct?
    Ms. Hapner. That is correct.
    Mr. Pickett. Yes, as long as we take the time to get it 
right next time.
    Mr. Burton. OK. Do you all agree with that?
    Mr. Vanech. Yes.
    Mr. Desrochers. Yes.
    Mr. Burton. I want to thank you very much. I want to thank 
my colleagues and our colleagues who are not members of the 
committee for spending your time with us today. You were very 
helpful. Thank you very much. We stand adjourned.
    [Whereupon, the committee was adjourned at 2:15 p.m.]

                     AND WHERE DO WE GO FROM HERE?


                        THURSDAY, APRIL 12, 2001

                          House of Representatives,
                            Committee on Government Reform,
                                                     San Diego, CA.
    The committee met, pursuant to notice, at 10 a.m., in the 
County Board of Supervisors, 1600 Pacific Highway, room 310, 
San Diego, CA, Hon. Dan Burton (chairman of the committee) 
    Present: Representatives Burton, Horn, Ose, Hunter, Filner, 
and Davis.
    Staff present: Caroline Katzen, professional staff member; 
Robert A. Briggs, chief clerk; and Elizabeth Mundinger, 
minority professional staff member.
    Mr. Burton. If I can get everybody to take a seat. Can you 
hear me all right? Is this mic on? If everybody could take 
seats, we could close the doors.
    Good morning. A quorum being present, the committee will 
come to order. I ask unanimous consent that all Members' and 
witnesses' written opening statements be included in the 
record, and without objection, so ordered.
    I ask unanimous consent that all articles, exhibits, and 
extraneous or tabular material referred to be included in the 
record, and without objection, so ordered.
    I ask unanimous consent that Members of Congress who are 
not members of the committee be allowed to participate in 
today's hearing, and without objection, so ordered.
    I ask unanimous consent that all questions submitted be in 
writing to the witnesses, and their answers be included in the 
hearing record. I ask unanimous consent that questioning in 
this matter proceed under clause 2(J)(2) of House rule 11 and 
committee rule 14, in which the chairman and ranking minority 
member allocate time to members of the committee as they deem 
appropriate for extended questioning, not to exceed 60 minutes 
equally divided between the majority and the minority. And 
without objection, so ordered.
    I want to welcome the members of the committee who are here 
with us today: Congressman Ose, who is from up North, around 
Sacramento; and Congressman Horn who are both subcommittee 
chairmen on our committee. Congressman Horn, is from the Long 
Beach area. We also from this region have Congressman Duncan 
Hunter, Congressman Filner, and Congresswoman Davis. And we 
appreciate you being here and participating in the hearing 
    I want to welcome everyone to our third day of hearings on 
the energy crisis here in California. I want to say a couple of 
things about why we are here. We came here because we want to 
play a constructive role in the crisis. We did not come to 
point fingers at anybody. We came to listen and learn. We want 
to see if there are ways the Federal Government and the State 
government can work together to get past this crisis. But first 
we need to understand the problems.
    This summer, Congress is going to have a serious debate 
about our country's energy policy. It is a debate that is long 
overdue. Energy policy has been neglected for far too long. On 
the Government Reform Committee we have been holding hearings 
to prepare for this debate. We study our oil and gasoline 
markets. It is very clear that we need to have more domestic 
production to reduce our reliance on OPEC.
    It is clear that we need to have more refinery capacity to 
avoid the kind of disruptions that we had in the Midwest last 
summer. We have studied the problems in the natural gas 
markets. America has abundant supplies of natural gas, but 
prices are skyrocketing because those reserves are off-limits.
    Today we have the technology that makes it environmentally 
safe to drill for natural gas. As demand keeps growing, we must 
increase our supplies. This week we are focusing on 
electricity. If you want to learn about the problems in our 
electricity markets, then you have to come to California.
    We have tried to look at this problem from every angle. We 
have heard from State regulators. We have heard from the 
Federal regulators. We have heard from the major utilities. And 
today we will hear from the generators.
    As we have gone through this process, one thing has become 
very clear to me. When you boil it all down, the root problem 
here is supply and demand. One of our witnesses in Sacramento 
was an independent energy analyst. He told us that over the 
last 5 years, California's economy has grown by about 32 
percent. But at the same time, energy generation in the State 
actually went down--it fell. A major new power plant has not 
been completed in this State in the last 12 years. The head of 
the ISO told us that he expects to have a 3,000 megawatt 
shortage during peak periods this summer, and that is very 
    Everyone agrees that more generating capacity is needed. 
But that is going to take time. The question is: How do we 
manage the situation in the meantime? Some people say price 
caps are the answer. My concern is that price caps for 
California may cause power to be diverted to other States where 
sellers can get better prices. Three out of our four energy 
experts who testified in Sacramento said that if FERC reimposed 
price caps it would lead to more blackouts this summer. Out of 
11 Governors of the Western States, 8 are opposed to price caps 
on the Western grid. What is more, the Washington chairman of 
the FERC testified yesterday that they only have jurisdiction 
over about 25 percent of the electricity sales in California. 
If they impose rate caps on the 25 percent, the electricity 
will flow to the other 75 percent where prices are not capped. 
So I do not think that price caps are a panacea.
    We have also had a running debate about long-term 
contracts. The press has reported that the Public Utilities 
Commission last summer blocked the major utilities from 
entering into long-term contracts that would have saved 
billions of dollars. On Tuesday we heard from the president of 
the Public Utilities Commission, Loretta Lynch. She insisted 
that the PUC did everything necessary to allow the utilities to 
enter into long-term contracts. She went so far as to say that 
they published final guidelines that gave the utilities 
everything they needed.
    Then yesterday we questioned officials from Cal Edison and 
PG&E. It was like night and day. They told us that there was no 
way that they could enter into those contracts under the PUC's 
rules. Mr. Pickett, from Cal Edison, said it would have been 
like incinerating or burning money. They said that to this day 
the PUC has not published the guidelines that are needed. Now, 
this is very disturbing. The general counsel from FERC talked 
about long-term contracts on Tuesday. He said that if San Diego 
Gas & Electric had entered into a long-term contract a year 
ago, they would have saved roughly $5 billion last year. SDG&E 
will be testifying today.
    Today we are going to focus on the power generators. We 
have representatives from Reliant and Williams testifying 
today. As prices have skyrocketed, the generators have been 
accused of profiteering and price gouging. Today they will have 
a chance to defend themselves, and talk about why this market 
is not working like it should. Williams and their partner, AES, 
have been accused of manipulating the market last year. The 
Federal Electric Regulatory Commission said they intentionally 
prolonged the shutdowns of two of their units where they were 
obliged by contract to provide electricity at a lower rate. As 
a result, electricity had to be purchased from two other AES 
units at 10 times the cost. FERC has ordered them to repay $10 
million. We are going to have a lot of questions about that 
case today.
    On our first panel we have several distinguished 
businessmen from the San Diego area. As we all know, San Diego 
ratepayers have been hit harder than anyone across the country 
this year. We want to hear from them, how that has affected 
their competitiveness. We also have added one new witness, Mr. 
Gregory Conlon. He was the president of the Public Utilities 
Commission under Governor Wilson. At our first hearing, the 
current president, Loretta Lynch, had a number of criticisms of 
her predecessors, and Mr. Conlon is here to respond. I believe 
we have added one other person, Mr. Bill Horn, to the first 
panel. He is the chairman of the San Diego County Board of 
    Before we get to our first panel, I better allow my 
colleagues to say something. So why do I not start with you, 
Mr. Filner. Do you have an opening comment you would like to 

                    THE STATE OF CALIFORNIA

    Mr. Filner. I thank the chairman for the courtesy of 
appearing with him on the committee. I thank you for coming to 
San Diego, which is ground zero, really, in this energy crisis. 
I am glad to have Mr. Horn, who is the chairman of our Board of 
Supervisors. You are sitting in his chair, Mr. Chairman.
    Mr. Burton. It is a very comfortable chair.
    Mr. Filner. And unfortunately, in San Diego we just had 
another deadly shooting yesterday, so we are very sensitive 
about these issues here in San Diego.
    As I said, you are at ground zero of our crisis. Last 
summer San Diego was the first area, in fact, the only area in 
California, to have complete deregulation of both our retail 
and our wholesale prices. What occurred there, Mr. Chairman, 
was a disaster, and disaster quickly. Within the first month of 
deregulation, bills had doubled for businesses and for 
individuals. Within 2 months they had tripled. And there was no 
end in sight, and no explanation. Can you imagine, Mr. 
Chairman, a small business person who was paying $800, faced 
with a bill of $2,500? Can you imagine a person on fixed income 
paying $50 or $60 a month, all of a sudden up to nearly $200 a 
month? There is no way people can survive in this situation. 
There was no way that we could continue.
    A revolution broke out here, Mr. Chairman. This is a very 
conservative county. And yet very conservative school boards 
and city councils tore up their utility bills. There were 
rallies. There were demonstrations. And, in fact, the State put 
a temporary cap or a deferred cap on our retail prices which 
said we will stem the bleeding, but you will have to pay in the 
    Now, why did that occur? The demand was not any more than 
the summer before. The temperatures were not any hotter. It was 
clear, Mr. Chairman, that this was, at root, when it started 
here in San Diego, not a supply and demand problem, but a 
manipulation of the market by a group of people who had control 
over the energy coming into our area and into our State.
    Prices had no relation to cost, no relation to supply and 
demand. And I will tell you, Mr. Chairman, that when we asked 
the Federal Energy Regulatory Commission to investigate the 
sudden rise in prices in San Diego, they did investigate. And 
what did they find? That prices were unjust and unreasonable! 
In fact, under the Federal Power Act, that means they were 
illegal. FERC found the prices that California was paying to be 
illegal. And yet they did nothing--they did absolutely nothing. 
And what they did, by their inaction, was to say to the energy 
cartel, who we will have members here today before us, ``Go rob 
the State blind.'' That is what they said to this energy 
cartel. And boy, did they rob the State blind.
    You know what we are paying, Mr. Chairman, for energy; we 
are paying over $2 million an hour, maybe $3 million. Up to $50 
million, up to $80 million a day, almost $2 billion a month. 
This energy cartel has taken almost $20 billion out of our 
State in the last 10 months--$20 billion was robbed from our 
economy. Schools cannot educate because they are paying their 
electricity bills. Libraries cannot buy books because they are 
paying their electricity bills. The guy yesterday in a senior 
center in my district, a half block from my office, who went on 
a rage, had been evicted from his apartment because he refused 
to pay an increase in rent, and that increase in rent, Mr. 
Chairman, was caused by a raise in electricity prices.
    This is disastrous, what is occurring. And I will tell you 
we have tight supplies, and the Governor of California is doing 
everything he can to increase the generation of electicity. We 
have to conserve more, and the Governor is doing everything he 
can to encourage that. But the problem is the price structure. 
The wholesale prices are criminal. They have been found to be 
illegal, and we are still paying them. And it is because of the 
criminal prices that this is occurring.
    Mr. Chairman, we have 45,000 megawatts capacity in 
California. The demand right now is 30,000 megawatts, because 
it is not the summer. And yet we had blackouts. Why? Because 
certain suppliers were not getting paid, and they just said we 
cannot supply. This is not a supply problem, it is a 
manipulation of the market.
    And the folks that will appear before us later today have 
had incredible increases in profits in the last year. They have 
increased dramatically their ratings in the Fortune 500. They 
are taking the money, and they are killing off the economy of 
California. This threatens the West, it threatens the entire 
United States.
    I have a bill which is supported by my colleague, Mr. 
Hunter and Ms. Davis, which says let us establish cost-based 
rates on wholesale prices, and more important, Mr. Chairman, 
let us refund the overcharges to California consumers and 
utilities. If that bill passed tomorrow, California would be 
made whole. We still would have to try to deal with some 
issues, but we would be made whole tomorrow. So I urge us to 
look very carefully at this legislation.
    Mr. Burton. Let me just say to the audience that we 
appreciate your being here. At some of our hearings we have had 
some disruptions, and I try to tell the audience that we would 
like for them to be here. We appreciate their attendance. But 
if there are disruptions, then we have instructed the police--
the Capitol Hill police and the local police and sheriff to 
remove those people from the room.
    So we want you to stay. We want you to get as much 
information as possible. But it is very important that there be 
control of the hearing.
    With that, I would like for the Members to try to stick to 
the 5-minute rule as close as possible. So we will now 
recognize Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman. For brevity sake, I will 
submit my statement to the record.
    I do want to welcome our friends from San Diego, Mr. 
Hunter, Mr. Filner, and Ms. Davis. I was most appreciative of 
Ms. Lofgren and Ms. Lee and Mr. Honda joining us in San Jose. I 
regret that we did not have any of our friends from the other 
side of the aisle in Sacramento. I have found the testimony 
very compelling, and to the extent that our colleagues have 
joined us for just today's hearing, have the opportunity to 
review that, I am hopeful that it will help them as much as it 
is helped me. So thank you, Mr. Chairman.
    Mr. Burton. Very good. Ms. Davis.


    Ms. Davis. Thank you, Mr. Chairman. I appreciate your being 
here, and I appreciate the folks here, all of you here today. 
And I would like to share with the audience one of the 
concerns, of course, that we did hear about at the hearing on 
Tuesday night. And I regret that one of the great resources 
here in San Diego, the San Diego's Utility Consumers Action 
Network is not part of the panel or the testimony today, 
because I know they have been providing a vital resource to all 
of us, and I wanted to just acknowledge that for the record.
    I do appreciate the fact that you are all here because you 
recognize that this is not just a California crisis; in fact, 
this is a crisis today that threatens our national economy. And 
it is important that the Federal Government take more forceful 
action to address the crisis. And so far it is clear that we 
feel that has not happened, and in fact, that the action has 
been sorely lacking.
    I believe, and I know my colleagues believe, that the 
Federal Energy Regulatory Commission has failed to step up to 
the plate. And in determining that California is paying unjust 
and unreasonable prices for energy, it has, nevertheless, 
stepped away from its obligation to truly look at that, to 
truly investigate, and to determine why that is the case. It 
has failed to impose, as well, the cost-based rate 
stabilization that we think would bring about fair and 
reasonable prices.
    I know that at last week's hearing Commissioner Linda 
Breathitt demonstrated a new willingness to consider some 
regional price stabilization, and I applaud her for her change 
of attitude. And I hope that FERC today--that the general 
counsel will dispense with a number of their philosophical 
statements on the beauties of this free market, and offer some 
useful information on FERC's legal authority to act where the 
free markets do not yet exist.
    Again, I want to thank Congressman Hunter and Congressman 
Filner for their energy on this issue, for your leadership. We 
have met as a California delegation, and I know that we feel 
very focused, and we certainly want things to change. As a San 
Diegan, as someone here, and associate myself with Congressman 
Filner's remarks, as well as, I am certain, Congressman 
Hunter's. Because what we experienced in San Diego early on was 
almost a feeling of the death of a city.
    And what we predicted in many cases has certainly come 
true. We acted responsibly here. In many cases, San Diegans 
actually kept the lights on for the State because of our 
conservation. And at the same time, we know we have to do our 
part. But, Mr. Chairman, we believe that there is a greater 
part to do on the part of our government, and we hope that this 
hearing is helpful to everybody in looking at those issues. 
Thank you.
    Mr. Burton. Thank you, Congresswoman Davis. Mr. Horn.
    Mr. Horn. Thank you, Mr. Chairman, but I am going to waive 
my 5 minutes or whatever. Let us get down to the question and 
    Mr. Burton. We appreciate, as always, your brevity.
    Mr. Hunter.


    Mr. Hunter. Thank you, Mr. Chairman. And I thank Steve for 
giving me his time. Very kind of him. [Laughter.]
    And do not remove anybody for laughing at that.
    Mr. Chairman, thank you, as an old friend, and all my 
colleagues, for being here. And Mrs. Davis, Mr. Filner, for 
your work on this issue.
    Mr. Chairman, this is a problem that really has a couple of 
sides to it--one, pricing; the other, supply of energy. And we 
did have FERC in front of us here a while back in a hearing 
that Mr. Barton chaired. And I pointed out, and Mr. Filner also 
did, that the prices at one point on the exchange actually 
increased. This was verified by the head of the exchange who 
was here. They went up 9,000 percent in a matter of minutes. 
Now, that is not a free market operating; that is the lack of a 
free market. And that was the equivalent--and that was paid and 
reflected in these bills across the State. That reflected the 
equivalent of a $200 gallon of gasoline.
    And there is a statutory duty that is attached to FERC that 
says that they have the duty, and courts have subsequently said 
the duty, not the option, to reform unreasonable rates. I think 
a $200 gallon of gasoline is unreasonable. And they have now, 
somewhat belatedly and many months later, come in with orders 
for some fairly small refunds. But certainly you had a price 
gouging. When you have a 9,000 percent increase, that is price 
gouging, and that has nothing to do with free enterprise.
    The other aspect of this that is very interesting is this, 
typically, if you have a bakery on your side of the street and 
you are charging $5 a loaf, the way the free enterprise system 
operates is that other people build bakeries on the other side 
of the street, they charge $1 a loaf, and the consumer wins. So 
when prices go up, typically supply goes up, because other 
people get in the business.
    Because of a lot of very powerful political forces in 
California--some of them the environmental forces--we, as you 
have said, have not built a generating plant in some 12 years. 
So when prices went up and we have--basically we are in what I 
would call nothing short of paralysis in terms of moving 
quickly to build generational plants. So when prices went up in 
the summertime last summer, a number of people said wait until 
winter gets here, when we are not running our air conditioners. 
That means the demand will go down from about 45,000 megawatts, 
to about 33,000, it will go down almost 30 percent. And prices 
will go down.
    When the winter got here and we went down, in fact, in 
demand by 30 percent, the generators turned to us and said you 
know, we have had some problems at the plant. Looks like supply 
just went down 30 percent, too. Supplies are still tight. Now, 
that is not free enterprise, that is John D. Rockefeller owning 
all of the kerosene in the United States and telling us the 
times are tough and we are going to have to see a shortened 
    On the other side of the equation is the supply problem. 
And that is a problem in which you had two unusual 
participants. One was the energy industry which took advantage 
of an opportunity to, on this exchange, this futures market 
that we created basically in California, to get the highest 
possible price for their product.
    But aiding and abetting them was the environmental lobby. 
And if you were sitting in a board room, I would say, in an 
energy company, and you were asking one of your analysts if 
anybody was going to come in and compete with you in 
California, thereby driving the price down, your analyst would 
say do not worry about it. If these other competitors who 
compete with us in other States try to build something in 
California, when the Sierra Club gets finished with them it 
will be 20 years before they build a power plant. So you had an 
unusual situation in which the supply was constricted. And it 
was constricted by some partners who on most occasions do not 
come together for any common cause.
    And so what we have right now is, we are about 2 months out 
from summer. We know that our air conditioners are going to be 
turned on in the summertime. We know that industry is going to 
need lots of power. And we have to do something that government 
is not very good at doing, and that is building something fast. 
We can do it in California. We did it when we had the 
earthquake. We did not wait for massive studies and reports and 
the Endangered Species Act and all of the other regulations and 
laws to work themselves out over 2 and 3-year time periods 
before we acted to rebuild infrastructure that was damaged by 
the earthquake. We jumped right in.
    And what we need to do today is to build supply. That means 
we have got to build power plants in California, and in the 
interim, we can move in some of these high tech power plants 
that we have, that we built in fact in San Diego County, that 
Solar builds, a Caterpillar subdivision. They built a great 13 
megawatt generator that produces electricity very efficiently. 
And we sell it around the world. We sell it almost every place 
except in our own State, which it is very, very difficult to 
get this stuff sited.
    So I would just ask you, Mr. Chairman, in closing, to look 
at a couple of things. One is a bill that I have that is 
directed toward summertime. And it says if you have a generator 
in the State of California, you can turn it on. Now, that seems 
to be elementary. But you cannot turn it on right now. You will 
have all types of agencies, environmental and otherwise, 
closing you down. So we have to have the right to turn on 
whatever we have got, whether it runs on diesel, natural gas, 
or whatever.
    I have got another bill that says that the President and 
the Governor can waive siting requirements--that is, the 
bureaucracy that puts off siting of power plants for years and 
years--and move quickly to build power plants.
    And the last one that I mentioned, the price problem, it 
gives the Secretary of Energy the right and the same power as 
FERC to reform unreasonable rates. And I think there is a 
difference between price caps or price fixing or price setting, 
and allowing energy to increase by 9,000 percent in 60 minutes. 
Thank you, Mr. Chairman.
    Mr. Burton. Thank you, Mr. Hunter, for that very 
comprehensive statement. And that first bill I think is--I have 
not seen the other two, but that first one seems reasonable to 
me, and I would like to be a co-sponsor of that one. And I will 
look at the other two.
    We will now go to our first panel. Mr. Sam Hardage, who is 
the president of Woodfin Suite Hotels; Mr. Bill Horn, who is 
the chairman of the San Diego County Board of Supervisors; Mr. 
Douglas Barnhart, who is president of Douglas E. Barnhart, 
Inc.; Mr. Richard Thomas, the vice president of Alpine Stained 
Glass; Mr. Mark Seetin--I think he had to cancel.
    Is Mr. Mark Seetin here? Oh, you are there. Thank you for 
being here. Mr. Mark Seetin. He is the vice president of 
governmental affairs for New York Mercantile Exchange. And Mr. 
P. Gregory Conlon, who is the former PUC president under 
Governor Wilson. Would you all please stand, please. Raise your 
right hands.
    [Witnesses sworn.]
    Mr. Burton. You will each be recognized for 5 minutes. And 
because we have a long schedule, I hope you will stick as close 
to that as possible. And we will start with you, Mr. Hardage.


    Mr. Hardage. Thank you, Chairman Burton and members of the 
committee. My name is Sam Hardage, and I am chairman and CEO of 
Woodfin Suite Hotels, a national hotel company with 18 
properties in 11 States. Here in California we operate 
properties in San Diego, Emeryville, Sunnyvale, Newark, 
Cypress, Brea, and Fullerton.
    It is my pleasure to speak to you today concerning the 
impact the current electricity crisis is having on my company, 
and the travel and tourism industry in California. The 
committee is doing the people of California a great service by 
highlighting the impact of this crisis on various sectors of 
the State economy. Only through a thorough examination of how 
this crisis can and will affect jobs and income can the 
magnitude of this crisis be understood.
    For all of my life, and I suspect the lives of most 
Americans, we have not even given a second thought to the 
simple event of turning on a light switch. We have always had 
adequate power to make our lives better. Indeed, the poorest of 
our citizens enjoy daily power and convenience that only kings 
and queens of a few centuries ago could command. In fact, 
cheap, abundant power has enabled Americans to participate in 
the most awesome growth of wealth in the history of the world.
    Without reliable, abundant power, none of the industrial 
revolution would have been possible. Our citizens would be 
impoverished, and our lives infinitely worse. And yet, here in 
California, we seem to be trying to drive our citizens backward 
in time to an era of shortages and scarcity. Californians need 
to examine our priorities and decide what kind of future we 
really want as we begin the 21st century. The insane 
environment that we find ourselves in today will continue to 
reduce the availability of power, increase the level of misery 
for all Californians, decrease the number of jobs available for 
our citizens and our children, and make a mockery of the 
sacrifices that so many have made to build our mighty State.
    I am optimistic that this dark view can be prevented, since 
the situation that we find ourselves in is entirely man-made. 
Our leaders in California need to stop blaming everyone else 
for the current situation, and take responsibility for their 
own actions. Providers of electricity, natural gas, and other 
sources of energy should be encouraged and welcomed into 
California with open arms, not driven away by shrill, mean 
voices threatening seizure, taxes, and more onerous regulation. 
I am hopeful that these hearings will provide the impetus for a 
return to sanity in California.
    I am deeply concerned that the human cost in California 
will be enormous unless we correct the present situation. We 
are in the hotel business, which is one of the largest 
employers in the State of California. Our industry is gravely 
threatened by the specter of rolling blackouts and unreliable 
energy supplies. The effect on our State's business environment 
will be devastating, starting this summer. We have already seen 
many businesses sharply modify their travel plans, greatly 
reducing the number of room nights spent in California.
    In March alone industry income dropped 3.9 percent in the 
San Francisco Bay area. Imagine yourself making a family 
decision about where to vacation this summer. Most tourists 
would rather not run the risk of being stuck in a hotel 
elevator, sitting in their hotel room in the dark, or otherwise 
having vacation plans interrupted by blackouts. Vacationers 
seeking warm weather without these risks may choose other 
vacation destinations, ranging from Florida to Hawaii.
    California government officials have made clear that 
rolling blackouts will most likely occur in the early summer 
season. The fact that these threats persist can only have a 
chilling effect on families who are now planning their summer 
vacation. Fewer tourists means not only more empty hotel rooms, 
but also downward pressure on prices for those rooms we are 
able to sell.
    The impact of this ongoing uncertainty will not be confined 
just to the tourism industry. Executives with major employers 
in California have indicated that they will curtail expansion 
in the State until the power crisis is over. With 82 percent of 
our company's business coming from the corporate traveler, 
fewer business expansions will have a direct impact on our 
company's occupancy rates and revenue streams.
    Other States have been quick to exploit the uncertainty 
here in California, and have launched public campaigns to lure 
businesses out of State. One State recently sent flashlights to 
Silicon Valley executives as a reminder that their State may 
not have California's sun and palm trees, but their lights do 
stay on.
    I am concerned that the sum of these consequences for our 
company could force us into a new round of cost-cutting 
sometime this year. With real estate costs, taxes, and other 
overhead costs fixed, skyrocketing utility bills would force us 
and other hoteliers to look to our labor force to bring cost 
into line, to prevent us from going into the red.
    Those who own and operate hotels will not be the only ones 
to suffer as this crisis wears on. Unfortunately, the greatest 
loss will come to our treasured employees, who will be hit 
hardest by layoffs and job reductions due to the slowdown in 
the industry. Couple that with the increase in the personal 
misery felt as our employees also suffer at home with the 
specter of rolling blackouts. That is a recipe for a long, hot 
summer indeed.
    The current situations has forced our hotels to impose a $4 
per night surcharge on all of our guests. As an operator of All 
Suite Hotels, we attract a high number of extended stay guests. 
A typical corporate guest with a week-long stay now sees their 
bill rise by $28, purely for electrical costs. Over the past 
year our California hotels have experienced a 313 percent 
increase in our electric bills, and a 200 percent increase in 
our natural gas bills. The Loeas Coronado Bay Resort here in 
San Diego has experienced a 357 percent increase in its 
electricity cost, despite a 4-percent drop in consumption.
    California has experienced extraordinary growth during the 
past few decades, precisely because it is such an attractive 
place to live, work, and play. While some parts of the country 
wrestle with the problem of out-migration, California has had 
no such problems. California is home to thousands of leading 
companies. The presence of these companies has helped drive 
California incomes up, and made the American dream possible for 
millions of Californians. But that future, which once appeared 
so bright, has been dimmed by threat of unreliable power 
supplies and skyrocketing cost. California and the people of 
California deserve better.
    Mr. Burton. Thank you very much, Mr. Hardage. Our next 
witness will be Mr. Horn. Mr. Horn, you are recognized for 5 
    [The prepared statement of Mr. Hardage follows:]
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    Mr. Bill Horn. Thank you, sir. I normally only give people 
who testify 3 minutes, as Duncan Hunter can understand.
    I want to thank you, Congressman Burton and members of the 
committee, and Congressmen, for being here. I am chairman of 
the San Diego County Board of Supervisors, and I am sure you 
are aware, as you are here, of the many stories that have gone 
on with the electric crisis in California and throughout the 
West. While I would like to reiterate many of these stories, I 
am sure you have heard them over and over again. I would like 
to focus on what we in San Diego have been experiencing.
    The effects of this new market system that allowed for 
profiteering and market manipulation hit us hard last year. We 
were the first. During the summer of 2000 residents saw their 
bills jump over three times what they had been paying in the 
previous year. As the hot weather began, and the increase in 
demand, wholesale price for electricity climbed high, and 
generators profited tidily from this. The county of San Diego 
currently is $25 million over budget because of this electric 
crisis. Those are services that would have gone to our 
taxpayers, that have gone off to pay for the electric bills.
    You may have heard of the numerous rallies, some of which I 
organized, and town meetings that were brought before SDG&E, 
and displaying the bills, and how the bills were hurting us. 
The rally that took place, that we organized and took place on 
San Diego Gas & Electric where residents burned their bills in 
protest, currently pointing out, as we go through this rolling 
blackouts which we just incurred a few weeks ago, that blackout 
occurred when southern California had plenty of power to keep 
the lights on. The problem is, the ISO ordered SDG&E to produce 
the blackouts so that we could suffer like the rest of the 
State did. And because of those blackouts, if SDG&E had not 
cooperated with those, they would have been financially 
penalized. And because of that, a number of our businesses 
experienced shutdown. We had employees who went home in the 
    I am going to talk for a moment, and I brought you a tape, 
and this tape is for your committee. This is a biotechnology 
conference which I put on here in the county of San Diego.
    Mr. Burton. And we will have it there for the record.
    Mr. Bill Horn. We have over 500 firms involved in medical 
research in San Diego. Of those firms, 250 are currently 
involved in FDA approved drugs. These rolling blackouts 
produced loss of experiments that had taken up to 3 years in 
two firms. Because they had no prior warning of the fact that 
the blackouts were coming and they could not put on secondary 
power, their labs went down. And when they went down, they lost 
3 years worth of medical experiment on FDA approved drugs that 
were in the pipeline just because of the blackouts. They have 
to have warnings. I have met with SDG&E to see if we cannot, 
from now on, include those in the areas that get the prior 
    We have learned that firms in San Diego and California 
cannot survive with the high energy costs in California, and 
will likely be looking to move out of the State unless we can 
come back with reliable supplies and a reliable market. One 
such company is Idec Pharmaceuticals, which outlined the risk 
of continued energy crisis on the health of their company. They 
anticipated higher manufacturing costs, in part due to the high 
energy costs. This firm, that is anticipating approval this 
year of a new cancer drug, now has to explain to its customers 
why the price tag of these drugs has risen, and could even 
become unaffordable. It does not take into account the fact 
that blackouts for any significant period of time could harm 
the ability to manufacture the clinical and commercial 
requirements of this product. These firms will look elsewhere 
to do business if we do not solve this problem.
    Many businesses now include in the power crisis as part of 
their annual reports to alert their shareholders of the 
significant impacts that are damaging earnings. Shareholders 
will not stand by and watch their money go to generators. They 
will pull out, and you will see an economic downfall never 
before seen in California. As a businessman and someone who has 
always been an advocate of the free market, I now find that 
this crisis has put me in a position that I believe that we 
need to place temporary wholesale caps on electric prices, not 
only in California, but in the Western market. This must occur 
to restore stability and reliability for residents, industries, 
and customers in these States. I would suggest that at the 
Federal level, also, you consider extending temporary emergency 
emission credits to distributive generating facilities who come 
online during a Stage 3 alert. We have a number of those 
facilities in San Diego County that could come online. The 
reason they do not is they will be penalized if they use up 
their air credits. And so something we could do at the Federal 
level is, during this emergency, until we can get the supply 
back, extend to them those credits.
    What we have not seen here in San Diego is a concern for 
the wellbeing coming from Sacramento. I just returned from 
Washington, DC, where I met with congressional leaders, 
Senators, and the White House, including Spencer Abraham, the 
Secretary of Energy. And I was surprised to learn that our 
Governor has been conspicuously absent from D.C. And I am 
concerned for the wellbeing of the residents and the economy of 
San Diego and all of California.
    If we cannot find solutions quickly, we will surely lose 
our businesses, industry. And I know that San Diego cannot 
afford it, and I am sure the State cannot afford it. As 
chairman of the San Diego County Board of Supervisors, I urge 
you to examine all the possible solutions to this crisis at all 
levels. This is not just a California energy crisis anymore, 
but it extends throughout the United States. All eyes are 
watching to see what will happen here, and are fearful that if 
California cannot resolve this crisis, then deregulation will 
surely fail.
    I want to thank you for coming to San Diego and for 
listening to our testimony, and God bless you for a speedy 
resolution of this crisis.
    Mr. Burton. Well, thank you, Mr. Horn. We appreciate your 
    Mr. Barnhart.
    Mr. Barnhart. Thank you for letting me be here today to 
participate in this field hearing on today's energy crisis in 
    The construction industry is feeling the effects of the 
energy shortage, like many other industries. I am Doug 
Barnhart, chief executive officer of the Douglas E. Barnhart 
Co., based here in San Diego. We are a construction management, 
general contracting firm, active in public and private 
construction in San Diego and elsewhere. In fact, if you came 
through Terminal 2 at the airport you might have seen our 
handiwork, or when your plane was flying into San Diego, you 
might have seen the sales enclosure at the convention center or 
the new ballpark.
    I am a member of the Associated General Contractors of 
America. The 33,000 companies who are members of AGC are 
beginning to evaluate the impact of the energy crisis on the 
industry, and how the construction industry can play a role in 
alleviating the energy shortage.
    The construction industry is a lagging economic indicator. 
While we have yet to see a dramatic drop in construction 
spending, we can definitely see the beginning of a construction 
slowdown based on the energy problems in the State. If the 
California energy crisis precipitates a national energy crisis, 
we will probably experience a national economic downturn that 
will impact all industries. That is why it is important that 
the crisis be dealt with rationally, methodically, and 
    AGC believes that the solution to our energy crisis comes 
from both energy conservation and energy production. 
Construction can ease production and transmission shortages 
through development of new facilities, and through the 
retrofitting of existing facilities. Furthermore, the promotion 
and production of energy efficient structures can promote 
energy conservation. California is the world's sixth largest 
economy. We have become synonymous with the technology boom. It 
is ironic that the same energy that powered our rise to become 
the world's technology leader is now threatening our tech-heavy 
economy. Once the haven of high tech, concern over rising 
energy prices and unstable power supply is opening doors to 
other States interested in stealing our employers. The State of 
Michigan has distributed glow-in-the-dark mouse pads; North 
Carolina has sent high tech companies batteries.
    The following are examples of construction delays. Cisco 
Systems has placed two tech centers on hold, and is looking 
into alternative sites outside California's borders. A southern 
California refrigeration plant was recently canceled. In 
addition, the diversion of State budget surplus causes strong 
concern that funds set aside for infrastructure funding will be 
diverted to fund State electrical purchases. If this happens, 
schools, roads, bridges, and other essential infrastructure 
projects could be delayed or canceled.
    The San Diego Economic Development Commission, of which the 
Barnhart Corp. is a member, conducted a survey of their 
membership; 33 companies responded, which collectively employed 
24,667 workers. Here is what they said. Average monthly energy 
costs prior to June 2000, $57,000 a month; current monthly 
energy cost, $134,150 a month. Average bills have increased 
since June 2000 135 percent; 42 percent of those companies 
invested in capital equipment to promote conservation; 82 
percent had made operational changes to conserve energy; 67 
percent said administration/business operations would be 
negatively affected by blackouts; 33 percent, there would be 
significant amounts of lost inventory, wasted inventory by 
power outages.
    The Barnhart Corp. mirrors the results of this survey. In 
the first quarter of 2000 our energy costs totaled $20,000; 
third quarter, they had exceeded $120,000 with the corporation 
absorbing the majority of the increase. I have even run into 
problems where owners now are refusing to take facilities, 
avoiding paying the energy costs during the summers and 
delaying taking them until the fall.
    Tom Collier, an AGC contractor, closed his heavy equipment 
rental company because of high fuel and utility costs. This put 
14 individuals out of work. Tom closed his business because he 
fears the construction market will be drastically affected by 
the energy crisis.
    Hazard Construction, long a mainstay in San Diego, reports 
that during February 2001, employees were sent home in the 
middle of resurfacing projects, causing tens of thousands of 
dollars in losses due to blackouts.
    Last month woman-owned AGC contractor I E Pacific 
experienced an unannounced rolling blackout at 1 p.m. They were 
in the process of posting accounts payable, lost all entries. 
The office staff of nine people were sent home for the day. 
Since the staff is salaried, they received no productive effort 
for wages paid, solely due to the blackout.
    Construction contractors often must submit time-sensitive 
bids for projects. Every minute of the day is critical in 
developing the best value for the owners. We are very concerned 
what will happen if a blackout occurs on bid days. There would 
be no power, no faxes, E-mails, phones. This communication 
technology is essential in order to meet given deadlines. How 
is a general contractor to coordinate a bid with its 
subcontractors and provide responsible bids? What happens if a 
blackout does not affect all bidding contractors equally? These 
are just a few of the examples.
    This problem is part a political problem. Government cannot 
control retail prices despite volatile swings in wholesale 
prices, as was the situation outside of San Diego. Any business 
owner will tell you this is an impossible situation. While it 
may be proper for government to step in and help pay for power 
in life and death situations, it should not be involved in 
keeping everyone from paying their fair share. A power subsidy 
has a detrimental impact because, by artificially holding down 
prices, it supresses the incentive to conserve power, and will 
only delay the construction of new facilities.
    We worry about the impact of the energy crisis. We can fix 
this if we are permitted to use our God-given talents to 
provide new production and transmission facilities. We have a 
commitment to the community and the economy that is not shared 
by certain groups who have used well-intentioned laws as a 
means to impede much-needed construction projects. This is a 
critical issue for the industry, my country, my State, my 
    I hope that these hearings give you a better understanding 
of what has caused the problems, and that you can develop a 
strategy that ensures that the problems are not repeated in 
other States or nationally. I hope you can design a balanced 
response that can solve the problems here and elsewhere. I hope 
you understand that
my company and the rest of the construction industry stands 
ready to do our part to alleviate this crisis. Thank you very 
    Mr. Burton. Thank you, Mr. Barnhart.
    Mr. Thomas.
    [The prepared statement of Mr. Barnhart follows:]
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    Mr. Thomas. My name is Richard Thomas, and I am the vice 
president of Alpine Stained Glass and Door located here in San 
Diego. I am the founder of Alpine Glass, and been in business 
over 25 years. Our company is quite diverse in the 
architectural and stained glass industries throughout San Diego 
and throughout much of the Nation.
    We also distribute a lot of stained glass and related 
products to the hobby and craft industry, and that is basically 
through the Internet and worldwide sales quite often. Our main 
warehouse markets bulk glass and related products to glass 
studios, furniture and cabinet manufacturers, as well as craft 
stores throughout the Nation.
    California's power crisis is affecting the wellbeing of my 
business in numerous ways, both directly, and even more 
importantly occasionally indirectly. I have highlighted six 
major obstacles that are currently facing us. No. 1 is our 
procurement of inventory. Our major glass manufacturer just 
outside of Seattle, WA, Spectrum Glass, was shut down on their 
power in December 2000 when the electricity they receive--they 
are an all-electric type of furnaces--was shut back and they 
were not able to produce a lot of the glass we needed. This 
created a situation of them not running the full line; 
consequently, their glass production was diminished, and it 
forced us to purchase glass manufactured in China. The glass 
was not of a quality we use in our upper-end doors and panels 
and entryways. This not only disrupted our schedule, the extra 
labor to accommodate this was absorbed by the company. Most of 
our jobs are contract.
    The increases and fluctuations in power prices have created 
surcharges added to our freight bills. These surcharges are not 
normally a condition of freight contracts. This leads to 
erroneous cost projections for us, as well as inaccurate quotes 
to our customers. It degrades our reliability, and customer 
relations are slowly declining. Because of that, we have to 
keep adjusting for it. The method and amount of applying these 
charges varies widely from either the manufacturers or from the 
freight companies. What is good today may not be good tomorrow.
    The power crisis has greatly increased our overhead costs 
for our utility and power bills. It has been up as high as 400 
percent. All sheet glass and most of our material products have 
increased by a minimum of 10 percent since the first of this 
year, 2001. This is due to elevated manufacturing, not just 
normal inflation.
    Alpine Glass has an extensive program of classes for 
training new students in the art of stained glass, as well as 
many seminars and multi-day workshops directed at professional 
artists and the advanced hobbyists. Professional glass artists 
and instructors are brought here from around the Nation to 
present these workshops. The increase in utility rates has 
prompted a decrease in students that are able to participate in 
these classes and directly purchase materials.
    At this time--and this was as of about a week ago--we are 
showing almost a 40 percent decrease in attendance, which is 
actually leading to a deletion of these classes, or at best a 
postponement to a later date. In 25 years we have never had 
this problem, and I was shocked. Many of the attendees and many 
of our customers are on fixed incomes and cannot afford the 
high utility prices plus the hobby at the same time.
    This tends to run into the area of or is especially true of 
any of the jobs that require the electric glass kilns. We sell 
them. They are a common item. You see them also in pottery 
areas. Twenty percent of our customers are retired, and use 
stained glass as a hobby, or even better yet, as a second 
income. Producing a stained glass panel or object that is not 
only beautiful, but quite practical, fills a very important 
need for their self-esteem. Our cost of running our electric 
kilns to slump and fuse glass has forced us to increase our 
prices on some of our finished products, as well as rental fees 
for student or customer use.
    The increased cost of products beyond normal inflation, 
without any predictability, is forcing us to increase prices to 
our customers, or to absorb the cost from declining company 
profits. This scenario becomes quite apparent in some of our 
larger entryway and window projects that are often quoted many 
months ahead, as in the case of large institutions, hospitals, 
churches, or residences. They also have a budget to follow. And 
if our quotations become too far out of line, they will seek 
these services elsewhere in this Nation or out of country.
    The situation and unpredictability defeats the reliability 
of our printed catalog. And they have always been on an annual 
basis. Furthermore, added to this increased product cost is the 
cost of labor, where our own employees are now having to 
sustain substantial increases in their basic cost of living 
expenses. The persistent and unpredictable timing of rolling 
blackouts has caused a great amount of anxiety and apprehension 
when we use our high temperature kilns, as I mentioned earlier, 
for classes or to produce products we have for sale.
    Large investments of labor, not including product, can be 
ruined by just the power being turned off at any time. The 
cooling process in these kilns is at a controlled rate, meaning 
we cannot just cool it off in a very short period of time. It 
can run from 4 hours to 72 hours, or, as many of the 
professional glass artists, not only here but around the 
country have, they quite often can take anywhere from 5 to 7 
day cycles. They will end up with 2 weeks of work in a project. 
If the cooling rate is interrupted at any phase of it, it is 
gone. It does not take long, with 2 weeks of work, to lose your 
faith real quick.
    A little bit on climate control. Our ability to conduct 
business with our customers and clientele is directly linked to 
the availability of power. Light and temperature is extremely 
important to our company. Our customers and clients need to 
view colors with light. Does not work in the dark. When they 
come in, we have many, many wood doors, entryways, lampshades. 
We need light. Room temperature, when you have clients coming 
in, if they are not comfortable it is a sales fact. 
Uncomfortable customers do not buy. Never have.
    Mr. Burton. Mr. Thomas, could you summarize as quickly as 
    Mr. Thomas. Sure. I am right at the end right now.
    Mr. Burton. Thank you, sir.
    Mr. Thomas. Personnel reduction. We will have to eliminate 
jobs if it continues. There is not much other choice. We have 
done the same as all other companies in reducing it. We are 
using separate switches on lights, and as long as they do not 
compromise safety.
    In conclusion, the power crisis has given us a jolt. But if 
we use our ingenuity and development of new operating 
procedures, we can endure this, unless the generating companies 
withhold their power and the ISOs continue rolling blackouts. 
We must take a much closer look at how we utilize our day-to-
day electrical consumption. And I am a firm believer in this. A 
$10 energy-saving light bulb or a $3 switch is much less 
expensive than any interruption of power. I feel it is 
imperative for business to set the example and create a 
stabilizing effect. We should pride ourselves in how much we 
are able to save. It only makes good business sense. Thank you, 
Mr. Chairman.
    Mr. Burton. Thank you, Mr. Thomas.
    Mr. Seetin.
    [The prepared statement of Mr. Thomas follows:]
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    Mr. Seetin. Thank you, Mr. Chairman and members of the 
committee. My name is Mark Seetin. I am vice president for 
government affairs for the New York Mercantile Exchange. NYMEX, 
based in New York City, is the world's largest physical 
commodities futures exchange, specializing in energy and 
metals. On any given day we trade three to five times world oil 
production, seven times North American natural gas production 
in a regulated marketplace. We are a regulated public 
    Mr. Ose. Mr. Seetin, would you pull that mic closer to you. 
I can barely hear you up here.
    Mr. Seetin. I am sorry, sir.
    We are a regulated public marketplace under the auspices of 
the Commodity Futures Trading Commission. As such, NYMEX does 
not have a stake in the outcome of this particular situation in 
California. Our interest has always been in competitive 
markets, and offering our services, which are not mandated, but 
voluntary. We provide competition under the auspices of the 
    And I must say also that, just to make it clear to people, 
under Section 5 of the Commodity Exchange Act, fraud and 
manipulation are felony offenses. And we, as a marketplace, are 
bound by our oversight of those markets, to detect and prevent 
that. We also have no interest in whether commodity prices are 
high or low, only that they are fairly arrived at through 
competitive means, and reported.
    California is in a real crisis. You have heard the 
symptoms, the results of this situation. I am going to talk a 
little bit about some of the causes and what can be done, 
hopefully, to help it. Our analysts agree that probably, among 
all the predictions on blackouts, that probably they are going 
to be on the high side. And we have heard some say as high as 
55 days of rolling blackouts. From our market access and our 
looking at it, that is what we see.
    But I want to say first of all that what California did was 
not deregulation. If you believe that California deregulated 
its industry, you will probably believe that Hannibal Lecter is 
a gifted surgeon. [Laughter.]
    Does this sound like deregulation? You take three monopoly 
utilities, you create a taxpayer-funded, centralized monopoly 
power exchange through which the utilities are mandated to buy 
and sell all of their electricity and then you tack, inside of 
that, a cockamamie pricing system that, instead of matching 
buyers and sellers, like most of the rest of the world does--
including Third World countries--you have one price clears all. 
So that no matter what the number of bids in this 1-hour block 
of lower prices, if it takes the highest price bid to fill that 
need, boom, you have got it. Our guys would go to jail if they 
did that. [Laughter.]
    Well, maybe some should, I do not know, it is not my 
judgment. I am not done yet, though.
    Because, you know, next you get the government that 
decides, OK, for this efficient marketplace the electricity 
bought and sold through this PX is going to be done in the next 
day, the day ahead. While the electricity market outside the PX 
had been evolving in a traditional energy path that we are 
familiar with of longer-term contracts, direct contracts, 
forwards, future swaps that move out into the future, this one 
mandated a 24-hour-ahead marketplace that was where the trading 
was going to take place.
    Can you imagine GM being forced to buy their parts and 
equipment just a day ahead? I mean, that is as much sense as it 
made for electricity. Everybody knows what their needs are 
within a certain percentage. The electricity market was heading 
in the way of the traditional energy markets, that that spot 
market, that up-close market was a very small percentage.
    The benefit of that, of course, is you have the price 
certainty of the longer-term pricing that direct contracts and 
forwards and futures give. But in addition to that, it is only 
a small percentage, so that if you do have a price spike, which 
happens periodically in commodity markets, it affects a much 
smaller part of the marketplace instead of the 30 or 40 percent 
that is in California. Well, I am not done yet.
    Next, for good measure, the government, through the CPUC, 
steadfastly denied, because retail prices were still regulated, 
that the utilities could increase their rates, even despite the 
fact that these guys were paying 20 cents in the wholesale 
market and selling in at 5.5. I mean, they had the economic 
equivalent of the Ebola virus. They were hemorrhaging all over 
the place with cash.
    They were then, in desperation, denied the ability to lock 
in prices through contracts last summer, inexplicably. Reports 
were in the press, apparently, that they had offers of 5 cent 
contracts, but they were not allowed to do that by the actions 
of the Commission. And it still gets a little bit better, 
because when the CPUC did take action last June--I think it was 
June 8th--they moved to allow the utilities to use other 
outside exchanges to procure their electricity.
    Remarkably, within 5 days, on June 13th, when the State 
budget was adopted, there was a specific provision in the 
budget that created a study which prevented them from 
implementing that CPUC action. So, in essence, they were frozen 
out again.
    Well, it did happen that finally the crisis got so bad that 
by August there was a ruling that allowed them to use a small, 
limited number of forward contracts. But guess where--out of 
the monopoly PX. Once again, if you call that deregulation, you 
know, it sounds to me like California put Dr. Jack Kevorkian in 
the recovery rooms. I mean, I do not know what they had in 
mind, but, you know, it certainly was not recovery from this 
standpoint. [Laughter.]
    Every time a decision came up, it seems like--and I have 
been working here for a long time, so if I sound a little 
frustrated, I guess I have to confess I am--but every time the 
policymakers made a decision here regarding this marketplace, 
it always seemed like Yogi Berra said, ``When you come to a 
fork in the road, take it.'' Well, in California when they came 
to a fork in the road, they stepped on it. Their foot looks 
like a pincushion at a quilting bee.
    Where are we now? Well, only a couple of the players now 
have entered a new chapter. Of course, it is Chapter 11. That 
is the PX and PG&E. [Laughter.]
    The utilities had their credit cards shredded last January, 
and now the State has stepped in, and the DWR is the sole buyer 
and seller of electricity in the marketplace. And that was 3 
months and about $5 billion ago.
    So where are we now? Still the critical problem has not 
been solved. And what is it? The State needs to immediately do 
a couple of things. First of all, they have got to implement 
direct access. This is the anathema that has been denied. You 
know, individuals outside are certainly not qualified to go and 
buy electricity, the businesses that are here, apparently, in 
the view of a lot of people. We think those people are the few 
that have the credit rating left in the State to be able to buy 
    Direct access means bilateral contracts. Let at least the 
70 percent of the State that commercial and industrial 
businesses represent the chance to step out from under the 
State purchasing DWR and find and procure their own 
electricity. Under the law that was passed in January, that is 
illegal. In California, the only legal buyer and seller is the 
State. I mean, we trained the Russian oil company, Rosneft 
Product, at the request of the State Department in 1993. This 
was under the old Brezhnev regime. Rosneft Product had more 
freedom than these guys have. I mean, at least they traded in 
    You have to let the commercial and businesses out of there 
for two reasons: Because the State simply has not been able to 
take care of all the electricity purchasing on the long term 
that it needs, and it should not be expected to do that, 
either. The businesses need to do that. A benefit of that 
direct access movement will be to change the spot market that 
we are still in, because people are still having to buy, the 
energy is still being bought, largely in the spot market, and 
it is costing a lot of money. As I said, it is about $5 
    You know, people have been angry about the State government 
not talking about how much they are paying for electricity. 
But, you know what, you can figure it out fairly closely. As 
somebody said here, it takes about 30,000 megawatts a day to 
power the State. And you know that the utilities have about 
12,000 of that or so. There is another 3000 megawatts that are 
the QFs. So if you put 10 cents or whatever the new price cap 
is on that 12,000, and you add about 14 cents, which is the 
agreement supposedly for the QFs, that leaves you about 15,000 
megawatts to have to be purchased in the market by the DWR. So 
if every 10 days they are coming in and getting $500 million, 
that means $50 million a day, which is what the press reports 
say. If you take the 10 or 11 cents times the 12,000, the 14 
cents times the 3, you wind up with about $33\1/2\ million that 
is being paid for the remaining 15,000 megawatts. A little 
math, a little division shows that that is about 22\1/2\ cents, 
roughly. Now, that is about probably what they are paying. Now, 
you know, I could be off by a few cents. But if you take a look 
at what the spot markets are--and you can look up on the 
Internet, a site called Interfacts, which prints out a lot of 
those sites--this is pretty well within it.
    What the ominous part of that is, is that is still 22\1/2\ 
cents. And people are going crazy right now about their 
electricity rates being raised to 11 cents. The stunning part 
of this is, if I am even off by half, the rates have to come up 
a whale of a lot more to hit that market. So the bottom line 
    Mr. Burton. Mr. Seetin, can you sum up?
    Mr. Seetin. What I am trying to say is, first of all, get 
direct access. Allow those commercial businesses to go out and 
take care of themselves. They can do that. That will help get 
the State off of this treadmill of the spot market.
    Second of all, the other thing is transmission access. The 
ISO had a good proposal in January to allocate transmission 
capacity. That goes hand-in-hand with transmission access, so 
that buyers and sellers of electricity can lock in the 
transportation and the commodity price. There is nothing that 
will build this foundation faster, that is crumbling right now, 
than those two. Without building that foundation with direct 
access and transmission access, this building cannot be 
    Thank you, Mr. Chairman.
    Mr. Burton. Thank you. We did not get your opening 
statement, Mr. Seetin. Did we get that?
    Mr. Seetin. Yes.
    Mr. Burton. We do have that?
    Mr. Seetin. Yes.
    Mr. Burton. OK. I have not had a chance to look at that. 
Did that opening statement cover everything that you said?
    Mr. Seetin. Yes, sir.
    Mr. Burton. OK. I think that was a very important----
    Mr. Seetin. I did not have Kevorkian in there.
    Mr. Burton. I would like to know who writes your metaphors, 
though, because--they are in the opening statement? They are 
    Mr. Seetin. No.
    Mr. Burton. Your metaphors were not in the opening 
statement, but I need a good comedy writer, so if you would 
give me your phone number, I will get a hold of you sometime in 
the future. [Laughter.]
    Our next witness is Mr. Conlon, former head of the PUC.
    [The prepared statement of Mr. Seetin follows:]
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    Mr. Conlon. I think he just gave me a new name here. But I 
assume, Mr. Seetin, that other than the comments you meant--
that you stated, that everything is fine.
    I want to try to do two things today in my 5 minutes, is to 
give you the reasons for why we went through the restructuring 
and the deregulation of the generation. And I would like----
    Mr. Burton. Can you pull your microphone a little closer. 
Those mics are not picking up as well as----
    Mr. Conlon. And how I think we got where we are today, you 
know, without attributing it to the restructuring and the 
    I think you need to put in perspective where we started. Is 
this mic coming on now?
    Unidentified. We can barely hear you.
    Mr. Conlon. Is this better? Is this better? OK? All right?
    OK, I want to give you a perspective on why we started and 
why we did what we did. I think you have got to go back to 1993 
and think a minute, for those of you who were involved in the 
business community at that time. This State was in a recession 
that was almost as bad as the depression. We had unemployment 
over 10 percent. We had lost over 500,000 jobs, almost 800,000 
jobs in the State of California. We had very close to a 
depression going. I mean, compared to where we are today, you 
know, I think our recession back then was a lot more serious.
    And without in any way demeaning what we are up against 
today--because we do have problems but I just think that with 
the situation we had at that time, we had large industrial 
customers and co-generators coming to us and said we are no 
longer building in California. There were two specific projects 
that I am aware of that were $250 million each that were built 
outside of California, and they attributed it solely to our 
high rates. We had the highest or the second highest rates in 
the United States, and in their view, we had the worst 
regulation in the United States.
    So the five commissioners, at that time, were committed to 
do something to help the situation. Because all the high energy 
users in the State blamed us rather than the recession for 
their problem. So I think that is the environment we started 
    We went through hearings for 3 years. We had two different 
proposals on how to restructure the industry and how to fix the 
high rates and the poor regulation. So it was probably the most 
thoroughly examined hearings. We had over 50 to 100 days of 
hearings all day long, and I think that it was the most 
thoroughly examined proposals of what to do.
    And I think you have to also remember at that time we had 
30 percent excess capacity in the State. Our natural gas rates 
were the lowest in the United States because of deregulation 10 
years earlier. So we were sitting with low gas rates and excess 
capacity. No one was going to build new power plants in 
California because of those two facts.
    We even tried to order 3,000 to 4,000 megawatts of 
renewables back in 1995 and 1996, and everybody went 
hysterical. They went to FERC and got an order that said we 
could not build those plants because there was no need, and the 
prices were too high. They were 5\1/2\ and 6 cents. And I think 
here in San Diego it was 5\1/2\ cents, and you were paying 3\1/
2\ cents. So the utilities in the State were against building 
any additions. Everyone was against it. So we threw up our 
hands and said hey, if nobody wants to build these plants, we 
are not going to build them. We have got 30 percent excess 
capacity, we have a 2-percent growth rate. That gives us 15 
years of excess capacity. That is where we were when we went 
through this process, so that everybody understands that we 
were not doing this as an academic exercise.
    So what did we do? We ordered--the major concern that we 
had was that if we tried to deregulate the market--which is 
what we concluded was the right answer, because it would happen 
faster and it would get more investment than if we tried to 
continue the traditional regulation. So we ordered the 
utilities to divest 10 percent of their--or 10,000 megawatts in 
a 45,000 megawatt market of their generation. And they agreed 
to do it.
    So when they sold those plants, that created a situation 
where no player in the State had a large control of the market. 
And our main concern was market power. In spite of the market 
power you are concerned about today, if you only had two 
generators, the market power would be much more significant. We 
saw that in the UK, and we said that was not what we wanted to 
    So we created a situation where we had five or six 
competitors, rather than just two. We created the independent 
system operator, so that he could be the traffic cop, the 
airport director. And then we created the power exchange. And 
we created the power exchange only during the transitional 
period, about 4 years, to protect the small consumer. Because 
our view was if we start out with bilateral contracts, which is 
what Mr. Seetin is advocating, all the low-cost generation 
would be sold to the large customers, and the high-cost 
generation would be left to the small customers. So our belief 
was to have all the utility assets sold into the power exchange 
during the transition period, until they divested their assets 
and a market was established. And that is why we had the 
requirement that they sell into the market.
    And we allowed all customers, large and small, for direct 
access. The legislators came along and put a rate freeze on, 
which virtually was very difficult for the marketers and 
suppliers to sell into the market, if they had a rate freeze 
and a power exchange. So the only people that really elected 
direct access were the large industrial users. They have 
today--about one-third of them have elected direct access, and 
about half of their volumes now are bought directly. And they 
wanted the opportunity to make their own mistakes. They did not 
want the Commission to set the rates, they wanted to go out and 
buy their own power. And some of them did. And some of them 
won, some of them lost. But that was the basic structure we 
    And I think what happened after that I believe is 
attributed to three acts of God and some delay in some 
government action. And we are facing the worst drought in 25 
years in the Northwest. We are dependent on the Northwest for 
at least four nuclear plants worth of generation. We have been 
without that generation for over 15 months. And now they are--
the drought this year is even worse than last year. So we are 
suffering where we are not going to get any hydro to speak of 
from the Pacific Northwest, and we have lost 2,000 megawatts in 
    So the 6,000 megawatts we have lost to reduced hydro is 
virtually the problem this summer. Because if we had those 
6,000 megawatts, we would not have any blackouts. So let me 
make it clear that the hydro situation in the Pacific Northwest 
and California is one of the prime drivers for this crisis. And 
along with the fact that the price of natural gas is 
skyrocketing. It has gone up fivefold. I am not sure what these 
gentlemen were talking about when they said high prices, but 
the natural gas prices came through with at least a 200 percent 
increase in California, and all customers are paying it. So I 
think, when they say energy bills, they ought to be careful 
that they are looking at natural gas versus electricity. 
Because only in San Diego do the electric prices go up. 
Everywhere else in this State they have been frozen.
    Mr. Burton. Mr. Conlon, could you sum up?
    Mr. Conlon. All right. And I just want to say that the 
energy commission has been blessed with 17,000 megawatts of new 
projects, and they have taken an average 18 months to approve 
those, as compared to other States, which do it in 3 months. 
And I think if the nine projects they have already approved, 
were approved 9 months earlier or 15 months earlier, we would 
also have additional supply. And they have got 15 more projects 
there that they need to approve.
    We need to get these new projects out and approved, 17,000 
megawatts in a 45,000 megawatt market would completely solve 
the problem. I mean, you are having one-third new capacity. 
They need to approve those plants as fast as possible. I do not 
know how you could help, but if you can, I will rest on that 
    Mr. Burton. Thank you, Mr. Conlon.
    We will now go to the 5-minute rounds for the Members. And 
I will start off here.
    First of all, to the business people that testified, Mr. 
Barnhart and Mr. Hardage, have the high electricity prices 
threatened the viability of your companies?
    Mr. Hardage. Mr. Chairman, the high energy prices will 
affect not only our company, but the electric company. 
    The high energy prices will definitely affect not only my 
company, but every hotel company. Because of not only the 
direct effects of 300--so far we have had over 300 percent 
increase in our electric power cost. And other hoteliers have 
had the same problem.
    The problem is that the indirect causes will have a greater 
effect, and that means that fewer businesses will be expanding 
or growing in California because of the uncertainty, fewer 
tourists will be coming to California. And when you combine a 
high fixed cost, and most hotels have debt and they have real 
estate taxes, they have operating costs, and you can only cut 
costs so much. So I would say that probably at the margin, that 
you would begin to see the less-competitive hotel companies and 
hotel sectors begin to suffer the most. And if this goes on for 
a long period of time without solving it, without solving the 
problem, without getting more supply--and the only solution is 
more supply, there is no other solution. So unless we get more 
supply, I would say that business, and certainly the hotel 
business in California, is in great danger.
    Mr. Burton. Mr. Barnhart.
    Mr. Barnhart. Well, there is actually three answers. The 
first answer is the first price increases--because construction 
operates primarily on fixed price contracts, the first price 
increases, the companies took the hits right out of their 
bottom line, because they didn't have any choice.
    The second round will be passed on to the owners. Because, 
as you are bidding new projects, you are going to price it 
right in on the cost for power.
    The third round is similar to Sam's answer. What we figure, 
it is just a matter of time until somebody figures out, well, 
if we cannot supply all the power needs for the existing 
facilities, why do we need any new facilities. And then we are 
in a total--you know, we are in a total shutdown. And we will 
see owners delaying their projects, and we will see private 
owners moving outside the State. So, long-term, it is a 
    Mr. Burton. Mr. Seetin, I got a great deal out of your 
statement, so pull that mic close because I do not want to miss 
what you have to say here. Can you once again go into the flaws 
that were--in the way that the California market was 
structured, and also why you think the crisis has lasted so 
long. And if you could, make it as quick as possible.
    Mr. Seetin. Sure.
    Mr. Burton. Not too long.
    Mr. Seetin. Again, I will try to be very brief. First of 
all, they created a mandatory power exchange. We said, you 
know, we do not mind if you take the taxpayer money, and it is 
not bad to create this exchange. It is unnecessary, because 
every other market, such as natural gas, those institutions 
competed with each other and came in without forcing the 
taxpayers to pay an additional piece.
    However, if they would have not made that mandatory, others 
would have, and that would have stopped from happening what 
actually did happen, and that is that cockamamie pricing system 
where they take the highest price for every hour that fills the 
demand. Because somebody else would have said, hey, guys, there 
is a better way to do this. It is called matching buyers and 
sellers, which every traditional marketplace would have done.
    When they then further stopped these people from using 
long-term and direct contracts, you have got that marketplace 
now forced into 24 hours. They cannot get those instruments. 
They could not get forwards if they wanted, because much of 
that market is short-term.
    Which, by the way, when you want to talk about a link, 
natural gas is directly linked to that. About 60 percent of the 
electricity generated in the State comes from natural gas 
sources. When you force electricity into the day-ahead market, 
what have you done? You have done the same thing to natural 
gas. That is why it does not do any good to have a long-term 
contract with natural gas. You are going to make more of that 
the volatile spot marketplace.
    Mr. Burton. Well, let me followup on that. How do you 
think--and I think you covered this a little bit. But how do 
you think California could solve the current electricity 
prices. I see here from your notes that you are talking about 
direct access, which you just mentioned, and long-term 
    Mr. Seetin. Right. The first thing you have got to fix--the 
thing that has been completely overlooked, everybody talks 
about the symptoms. Nobody looks at the cause. The root cause 
is a screwed-up marketplace underneath. You have got to fix 
that first. You have got to fix it with direct access. That 
will lead to other types of contracts--direct contracts, 
forward contracts, swaps, and future--that is going to bring 
financial soundness to that economy. It will bring in people to 
build power plants financed without the taxpayer's dollar, and 
it will stabilize the market. It is going to get away from that 
spot market because it is going to move everything into the 
future, where it naturally would go.
    Second with that, you have got to have transmission access. 
You have got to have the ability for those buyers and sellers 
to lock in their space on that transmission line. And I am not 
talking about completely, because there is also the need to 
take care of the citizens, the hospitals, the schools, and that 
type of thing. I am talking just about for the commercial and 
industrial sector.
    Mr. Burton. So that is the recommendation you would make to 
the PUC?
    Mr. Seetin. Yeah, absolutely.
    Mr. Burton. Mr. Filner.
    Mr. Filner. Thank you, Mr. Chairman, and thank you, panel, 
for your testimony.
    I do want to make several points for the record, and for 
the visiting committee and the chairman. Mr. Horn's appearance 
here as chairman of the Board of Supervisors to me makes the 
point, although you did not make it in your prepared testimony, 
Mr. Chairman, that the approach--that the legislation that we 
have taken in Congress, supported by myself, Mr. Hunter, Ms. 
Davis, is supported by the Board of Supervisors, supported by 
virtually every city council in our county. And I will tell 
this committee and this chairman that most of those are 
controlled by the Republican party, although all those offices 
are non-partisan, they are Republican registered. And so this 
is a bipartisan response to the crisis. It is a bipartisan 
response to say that we ought to set cost-based rates to get us 
over this disaster, and that we should refund the over charges.
    I think that is a fair statement, Mr. Horn, is it not?
    Mr. Horn. That is correct.
    Mr. Filner. Thank you, sir. This is a bipartisan approach, 
and nobody should think that it is only some Democrats 
screaming about this.
    Second, we have heard many statements about it is 
environmental regulations and whacko environmentalists that 
have caused this problem. I think Mr. Conlon stated it very 
succinctly. The market that everybody here is praying to 
decided that there was no reason to build capacity over the 
last decade. That is, utilities themselves and the private 
sector decided that they ought not to build. As Mr. Conlon 
said, there was a forecast of 15 years of excess capacity. We 
have people, public-minded citizens in San Diego, who are going 
to build us capacity following all environmental regulations, 
and they will produce energy at a profit, and provide San 
Diegans with reasonably priced electricity. It is not 
environmental regulations. That is a myth that people are using 
to take advantage of this thing to get rid of all environmental 
laws that we have had in this Nation for some time.
    I have heard from the business people at the table here 
very eloquently an expression of the situation you are in. It 
is disaster. And people who have less resources than your 
companies have gone out of business. Scores of our constituents 
are out of business, who could not cover this. But I did not 
hear any recommendations for what we ought to do, except you 
said that--I think Mr. Barnhart and others have said people 
ought to be paying fair retail rates. Well, Mr. Barnhart, you 
saw what happened when the retail rates were deregulated in San 
Diego. They tripled within 60 days.
    You are all assuming there is a market at work here. There 
is no market. There is a control by a few companies. And what 
makes you all think that if we increase supply--which I agree 
with--that you are going to get a reduced cost? All of the 
assessments that have been made have shown that the wholesale 
price you are paying has no relationship to the time of day, to 
the demand, to the cost of anything. So what makes you think 
that the same few companies will not charge increased prices 
when the supply increases?
    When we conserved here in San Diego and decreased the 
demand, prices went up. There was no relationship, because 
there is control of the market. And all of you folks who are 
complaining about the costs of your doing business, you are 
absolutely correct. But you are paying criminal rates. You are 
paying wholesale prices that have been found, by the Federal 
Energy Regulatory Commission, to be illegal. ``It is the price, 
stupid,'' if I may coin a phrase.
    It is not environmental regulations that are forcing you 
out of business, it is not that we are not paying adequate 
retail prices. It is not the lack of supply. There is no 
market. And you are paying a price that is demanded from you by 
a few people. Why do you not support the legislation that says 
have a refund for all the overcharges over the last 10 months? 
Mr. Horn and his board have supported that. And as I hear your 
recommendations or lack thereof, I hear nothing about renewable 
sources of energy, which I think is the key to the future in 
terms of our supply. I hear only let us build some more power 
plants, and the Governor is trying to do that.
    What about public control of this situation? I did not hear 
anything about that. Where there is public ownership--as in 
L.A. or Sacramento, there seems to be some control of the 
pricing. They are not paying the prices that you are, that are 
forcing you guys out of business. So I sympathize with your 
position. And again, my constituents are paying a higher price 
than that.
    But it seems to me your ideology is somehow refusing to let 
you face the reality that it is the prices that are controlled 
by a monopoly or by a cartel that are found to be criminal. We 
should demand the refund of those prices. And I tell you, Mr. 
Seetin, the structure that you have so eloquently described as 
flawed, which is--you are perfectly right--was set up by, you 
know, the previous administration, and had the goal as Mr. 
Conlon said, of increasing competition. It failed. But it was 
the cartel that took advantage of every one of those things 
that you pointed out to hurt the consumers of California. They 
took advantage of all that. They forced all the purchases into 
the spot market. They did not have to. They forced it in there. 
And all of the things that you described were caused----
    Mr. Ose [presiding]. The gentleman's time has expired.
    Mr. Filner [continuing]. By a few companies who have ripped 
us off for $20 billion.
    Mr. Seetin. May I respond to that?
    Mr. Ose. Unfortunately----
    Mr. Filner. That was a question at the end, so----
    Mr. Ose [continuing]. Unfortunately, I am not sure which 
was a question and which was not. Perhaps on our second round 
we will have questions.
    I am going to recognize Mr. Horn for 5 minutes.
    Mr. Horn. Thank you, Mr. Chairman. This thing just seems 
to--well, we will just forget the little furry thing, whatever 
that is.
    Mr. Conlon, were you in the Wilson administration?
    Mr. Conlon. Yes.
    Mr. Horn. What was your position?
    Mr. Conlon. I was on the Commission for 6 years, 1993 to 
1998. And I was president for 2 years, 1996 and 1997.
    Mr. Horn. I think we all know that where the recession 
started was in March 1988, because of the end of the cold war.
    Mr. Conlon. Yes.
    Mr. Horn. And people were being let go, in certainly Los 
Angeles County, 400,000 people were out of work.
    Mr. Conlon. Yes. Absolutely.
    Mr. Horn. So I am interested in the role of Governor 
Wilson, because he was assaulted by the President of the 
current group in terms of it was all, it seemed to be, on his 
plate, not now, and do not bother us with it. So I would be 
curious what the Wilson administration did do in this period.
    Mr. Conlon. Well, you know, they had an economy that was 
very sick, and the high energy users blamed the Commission and 
its regulation and the high rates, rather than the recession, 
itself. So I think the burden was on the CPUC to take 
initiative to try and lower the rates, and to try and open the 
market. And, you know, I think that the result of that was to 
do exactly what we did.
    Now, I really think that the retail level for the small 
customers was deferred until the end of this year because of 
the rate freeze. I mean, I think the smaller customers really 
did not have the opportunity to lock in a rate. I mean, San 
Diego was offered a rate of 5\1/2\ cents or 6 cents last 
summer, and they had a debacle with the Commission, the current 
Commission, not to get that approved. But be that as it may, 
there was no energy suppliers that came into the San Diego area 
and offered individual customers 5\1/2\ or 6 cents, so they 
could have locked in the rate. Each of these gentlemen here 
could have locked in a 5\1/2\ or 6 rate if there was a marketer 
in the area willing to do that. And I pleaded with some of the 
marketers to come in. And they said hey, things are just too 
unstable now for us to even come in. Because, until the rate 
freeze was over, they were not going to do anything.
    And I said, well, why are you not in San Diego?
    And they said, well, we are going to stay in the wholesale 
market until the entire State comes off of freeze. So I think 
that was--the idea, though, was that competition would do a 
better job. I mean, we are in California. This is not the 
Republic of California. We got Silicon Valley, which is the 
heart of the free enterprise system. I mean, that is what has 
driven this State for the last 5 years out of the recession, 
into a prosperous economy.
    So for us to turn to government regulation to make an 
allocation of resources was so inconsistent with the free 
enterprise system and the Silicon Valley prosperity. I mean, 7 
percent of the growth was due to Silicon Valley and the 
computers and high tech.
    So I think that Governor Wilson and the Commission were 
convinced that competition, in an area where you have multiple 
providers of generation, was the only answer. And that is why 
we went down that street. And I think if it had not been for 
the hydro problems and the run-up in natural gas because they 
had to use so much natural gas, and it was a cold winter this 
year, both in the Midwest and the East, that natural gas prices 
have driven these prices--if you look at the price composition, 
and I have got an article here out of the Fortnightly Magazine 
for February 15th, 75 to 80 percent of the prices throughout 
the summer were driven by natural gas and NOx 
credits. And there was about 20 to 25 percent of those prices 
was due to other causes. And you can call it price gouging or 
whatever you want. But only 20 to 25 percent of the cost for 
those high prices was attributable to other than natural gas 
and Nox credits. And Nox credits were a 
large part of last summer's high prices. I hope I answered your 
    Mr. Horn. Mr. Seetin, you probably had a view of both the 
Public Utilities Commission 10 years ago, 15 years ago, and 
now. What advice would you give us in terms of how they 
conducted themselves?
    Mr. Seetin. Well, at this stage, I think we are in a 
situation where you have got to go forward. But as I said in my 
testimony, I think even when the crisis became apparent a year 
ago, things could have been done that would have mitigated it 
quite a bit, we believe. At any time they could have opened up 
the market to other exchanges, they could have allowed those 
people to use direct access, which would have had a very quick 
effect in that regard. It would not have brought on more 
supply, because that takes some time.
    But the bottom line is, for example, they did not have a 
choice of whether or not to use the PX. That 24-hour-a-day, 
that day-ahead market was mandatory. They did not choose not to 
go in that thing. They certainly would have over the last year. 
It was put in by regulatory fiat and maintained by regulatory 
fiat. And, you know, that is where the responsibility--I am 
getting on dangerous ground here. But the policymakers that 
implement those institutions do bear responsibility, when 
things are going bad, to adjust that.
    Mr. Horn. The current group there that is running the 
Public Utilities Commission just points all their fingers at 
Washington. Is that a realistic thing to be done, or is that 
just demagoguery?
    Mr. Seetin. When Washington, DC, gets the authority to 
rewrite California statutes that prohibit direct access and 
that oversee the power lines----
    Mr. Burton. [presiding]. Mr. Seetin, I am sorry, we are 
going to have to come back on a second round.
    Mr. Seetin. OK.
    Mr. Burton. Gentleman's time has expired.
    I am going to recognize Ms. Davis for 5 minutes.
    Mr. Horn. Thank you, Mr. Chairman.
    Ms. Davis. Thank you, Mr. Chairman. And I appreciate all of 
you being here and sharing your stories with us. Obviously we 
met with many businesses that had dire predictions of the 
outcomes for them and for their customers, and I appreciate 
    I wonder if we could go to the issue of the long-term 
contracts. Because I am hearing different things, and I hope 
that you can clarify for me. You mentioned Mr. Seetin, and I 
know others have said that the real problem here was the lack 
of direct forward contracts. But it is also my understanding, 
and I wonder if Mr. Conlon could respond, that in fact the 
California PUC worked with companies to try and develop long-
term contracts. And part of the requirement was that there be a 
reasonable clause as part of that. That is what most States 
have, or a lot of States have a reasonableness clause, so that 
you set it at one time, but that continue. Could you enlighten 
us a little bit about that, and did in fact companies not want 
to enter into long-term contracts that you tried to bring them 
into because of that?
    Mr. Conlon. You know, this question really should be 
addressed to President Lynch, when she was here Wednesday. 
Because I am off the Commission and I am not--all I can speak 
is as an observer and as when I was a Commissioner. There is a 
great lack of faith and trust between the utilities and the 
Commission. And this debacle that you are talking about is 
manifested clearly, as you can see.
    Because on one hand, the Commission says the utilities can 
go out and buy any kind of bilateral contracts they wish, but 
it is subject to review and refund after the fact. And the 
utilities say hey, if we go out and buy a contract and commit 
to $10 million and the Commission comes along 2 years later and 
disallows $2 million of it, I mean, how could we go out and 
contract in good faith with a creditor for $10 million?
    So it is a lack of trust. The Commission does not trust the 
utility for reasonable prices; the utility does not trust the 
Commission, because in hindsight they could disallow the cost. 
So they need standards--and I think the Commission is working 
on that now--that are specific enough that the utilities can go 
out and buy contracts with the assurance that they were not 
going to get hammered after the fact. I mean, that is the 
problem. And your colleagues were here on Wednesday when they 
talked to President Lynch, so you can get from them what she 
said. I do not know exactly. I think she said they authorized 
the contracts, which they probably did. But the subject of 
refund and disallowance is the hook that the utilities have 
trouble accepting.
    Ms. Davis. Did you----
    Mr. Ose. If the gentlelady would yield, I would be happy to 
share with you after--when we break, the information that Ms. 
Lynch and the utilities provided us Tuesday and Wednesday.
    Ms. Davis. OK. Thank you. But I really was wondering, did 
you know--was there a look at other States and the way that 
they pulled that together, so that they were able to agree to 
    Mr. Conlon. Well, the only other State that I think would 
be a good analogy would probably be Pennsylvania. And I think 
they relied on bilateral contracts almost entirely. Mr. Seetin, 
is that your understanding? Yeah. So I think they have a 
different situation. It was a spot market that Mr. Seetin was 
criticizing, that we felt was imperative to protect the small 
consumers from what we called cream skimming.
    And, you know, this was only during the transition, which 
was 4 years. The PX today, the power exchange he was 
criticizing, went bankrupt 2 months ago. So it is no longer in 
the market. So there is no spot market today. And as a result, 
the new generators have no idea what the current price or the 
forward price of electricity is to build new power plants, 
which was one of the other reasons for having that. If you have 
a clear, deep, liquid price, then new investors can come into 
the State knowing what they are going to get paid when they 
invest their money.
    Now, you know, we had a debate at the Commission with NYMEX 
on one side and two economists on the other, and this was a 
debate that went on for about 8 hours. So this was thoroughly 
hashed out. And everyone agreed to have this separate power 
exchange that bought into the whole process. And there was 
virtually no one dissented. So right or wrong, good or bad, 
there was complete consensus that the power exchange and the 
ISO were absolutely essential. And the power exchange is now 
gone. It is bankrupt. So NYMEX has 100 percent of the market, 
or anybody else. So if it is going to work, where is it?
    Mr. Seetin. Could I also add that the Harvard economists 
won that argument. That is why we are here today. We do not 
have 100 percent of any market. I want to make that clear. 
There is no mandate. So I just want to make it very clear, 
though, and we filed a lot of testimony, that the argument did 
go on like that, but we lost.
    Ms. Davis. OK. Thank you. One more just followup question, 
if I could go back to you again, Mr. Conlon, for a second.
    Mr. Conlon. Certainly. That is why I am here.
    Ms. Davis. As we are talking about the competitive market 
and when the PUC had the ability to lift caps here in San 
Diego, when San Diego Gas & Electric indicated that they had no 
longer the market share that would have disallowed them from 
doing that, did you think at that time that there was a 
competitive market here in San Diego that would have responded 
in the way that we would hope the markets would have responded?
    Mr. Ose. Before you answer, Mr. Conlon, you are going to 
have to hold your thought. The gentle lady's time has expired, 
and we recognize Mr. Hunter for 5 minutes.
    Mr. Hunter. Thank you, Mr. Chairman. Gentlemen, I think we 
have had a chance to understand a lot of the problem from your 
perspective, and probably watching the panel, you have been 
able to understand a lot of the problem from our perspective. 
And you have seen us agree, Republicans and Democrats, at least 
some of us, on the idea that 9,000 percent increases in a 
matter of minutes do not reflect a free market, they reflect a 
market that is certainly not an operation of free enterprise.
    On the other hand, you have seen us also--at least myself--
criticize the paralysis that we have in California, 
particularly, which--with the application of a lot of laws, 
including environmental laws. And you have seen a staunch 
defense of those laws by Mr. Filner. That is not slowing 
anything down. And he referenced Mr. Conlon to say, well, we 
did this because of our economic predictions. That is why no 
power plants came in.
    But, Mr. Conlon, you also stated that plants that try to 
get permitted take about 18 months in California versus about 3 
months in other States; is that not true?
    Mr. Conlon. That is correct.
    Mr. Hunter. And are a number of those considerations not 
environmental considerations that lead to that 18-month delay 
in permitting?
    Mr. Conlon. Well, the EIR and all the environmental 
constraints is what the Commission addresses. And they try and 
accomplish it in a year, but it usually takes 6 months to get 
the data adequate, if you will, before they implement their 1-
year rule.
    Mr. Hunter. And Mr. Conlon, and let me--because we have got 
a limited amount of time.
    Mr. Conlon. OK.
    Mr. Hunter. You are precisely right. And let me just give 
you a laundry list, in this effort that I am undertaking to try 
to get some generational capability at Miramar, our Marine 
Corps air station here. Walking down through this list the 
other day of what we have to comply with: the Endangered 
Species Act; the Clean Air Act; the NEPA process, which 
involves a number of public hearings, all duly noticed, and 
then our response to those hearings. The fact that we have 
    In California you can only put so much stuff in the air. 
And any Federal landlord--in this case the Marines--are worried 
that the amount of stuff that is put in the air, pollution that 
is put in the air by a generational capability that would 
supply the citizens of San Diego County will be charged against 
them under the law, to their air operations for the U.S. 
military, and could foreclose their air operations.
    And so the bottom line was, after you walk through the 
environmental requirements in terms of meetings, studies, 
plans, permits, hearings, what are we looking at? And the 
answer: years. So certainly there is--one problem with this 
whole situation is it does not come neatly packaged. And 
certainly, for people that believe in free enterprise, who say 
no cost caps, they do not understand that there is, to some 
degree, the aspect of--electric supply has some of the aspects 
of public infrastructure. You have only a limited amount of 
lines that this stuff can pass through. You have a lot of 
difficulty in terms of siting locations. All those things that 
deny the one aspect of real free enterprise, which is easily 
qualifiable competition.
    So, Mr. Conlon, when the economy did turn around and our 
usage started to go up dramatically, the problem was we could 
not easily qualify new plants that could come online and 
increase the supply; is that not true?
    Mr. Conlon. Right. We had $10 billion of free private 
capital ready to be built in California without any government 
assurances, without any government incentives. This was all 
free enterprise investment. And they cannot get it through the 
energy commission on a timely basis.
    So, I mean, that $10 billion, you could go back to 
regulation and let the State build the power plants and take 
the $10 billion away from the schools and the libraries and all 
these streets and everything else that California needs, also. 
So I think it is--you have got to define the role. And I think 
when you have got $10 billion of private moneys waiting to be 
built, let it be built.
    Mr. Hunter. Let us get down to business. One thing we could 
do right now that I think everybody is for, is if you have got 
a generator or if you can locate a generator--in fact, Solar 
tells us their power peaking plants that they built at the 
plant, you do not build them onsite, can be sited and started 
up within 1 week. Those are the easily transferrable units. 
Within 1 week. Meaning that if we had permitting taken care of 
in California, and in San Diego particularly, you could roll 
these components out on flatbed trucks, put them down on a 
cement slab and hook them up and have those babies going in a 
week, meaning we could save ourselves from summer.
    So, Mr. Chairman, I have got H.R. 1075, which says if you 
have got a generator in California, you can turn it on without 
any punishment with respect to air attainment. And I would like 
to give that to Bill Horn, to our county supervisors, and to 
you. Thank you for your co-sponsorship. And Bill, if you guys 
could support us on this thing, I think this would give us a 
shot, at least, at saving ourselves from summer. Thank you very 
    Mr. Bill Horn. If I might, Congressman, I agree that if we 
could get some emergency air credits to these folks, we would 
not have any blackouts in San Diego. In fact, we did not get to 
get into that, but I do not think there is any reason for the 
blackouts in San Diego.
    Mr. Burton. Thank you, Mr. Hunter.
    Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman. Mr. Horn, the Governor 
has entered into a memorandum of understanding with one of the 
utilities to I believe acquire their transmission facilities. 
If the transmission facilities for San Diego Gas & Electric 
were acquired by the State, what is the amount of lost property 
tax revenue that the county would suffer?
    Mr. Bill Horn. I am sorry, I do not have the number for 
you. The franchise fee, I believe, it is about $3 million, but 
I am not certain as to that exact number. I disagree with the 
Governor. I do not believe he should buy the transmission lines 
to free up capital for the utilities. I personally believe that 
there is enough capacity, at least in southern California, for 
us not to have any rolling blackouts. When we have plants, and 
the two plants both, Encino and Duke----
    Mr. Ose. Mr. Horn, let me cut you off, because I noticed my 
time is evaporating here.
    Mr. Bill Horn. Sure.
    Mr. Ose. I just want to be clear. $3 million in lost----
    Mr. Bill Horn. I am saying approximately. I do not know the 
    Mr. Ose. OK. Approximately $3 million in lost franchise fee 
equates to what in terms of law enforcement, library service 
hours? Quantify that. I mean, you have quantified it. Tell me 
the impact.
    Mr. Bill Horn. Well, obviously our budget in the county of 
San Diego is $3 billion. So I suppose we could absorb the $3 
million. But at the same time, we now have a $25 million over 
cost overrun just in power alone. That is why you do not get 
all the lights in the chamber here. We are trying to conserve.
    But at the same time, the $3 million does have a direct 
impact. I do not believe the Governor should be rescuing the 
utilities. They should have let them go bankrupt.
    Mr. Ose. All right. Thank you. Thank you for your comment.
    Mr. Seetin, I find your remarks on market structure--pardon 
the pun--highly illuminating. The concept that you have put 
forward about direct access strikes right at the heart of 
providing liquidity to the market, so that there is certainty 
on both ends of the transaction. If we had the proposal that 
you have made here for direct access--and I presume implicit in 
that proposal is the ability to contract--in addition to your 
proposal on the ability to acquire transmission capacity, how 
long would it take us to get out of this problem, this crisis 
that we have in California?
    Mr. Seetin. Well, it is hard to say. Depends on how quickly 
the law could be changed and enact this. We think it would be 
very fast, No. 1, because California is the world's sixth 
largest economy. There are, we think, a lot of people that 
would come in quickly to offer those instruments.
    Mr. Ose. Let me back up. It is my understanding that the 
direct access prohibition is regulatory, not statutory.
    Mr. Seetin. No, it is statutory. The CPUC has not enacted 
the law that was passed, AB 1X, in January. They have not taken 
the action. But it is in the statute. The CPUC has not put the 
date in yet.
    Mr. Ose. OK, 1890 did not prohibit access, but 1X does?
    Mr. Seetin. AB 1X does specifically.
    Mr. Ose. Did 1890 prohibit long-term forward contracting by 
the utilities?
    Mr. Seetin. I do not think so. I am not sure, but I do not 
think so.
    Mr. Ose. Does AB 1X?
    Mr. Seetin. Well, it is----
    Mr. Ose. By its nature, it does?
    Mr. Seetin. Yeah. It is insignificant. Because it basically 
creates a single buying agency. That is the DWR. It does not 
    Mr. Ose. In effect, it does prohibit long-term forward 
    Mr. Seetin. Yes.
    Mr. Ose. Now, if I look across the panel today, I see a 
market participant, Mr. Hardage; market participant, county of 
San Diego; a market participant, Mr. Barnhart; a market 
participant, Mr. Thomas. I see a market operator, Mr. Seetin. 
Is that accurate?
    Mr. Seetin. Yes, we operate the market. We do not have the 
physical commodities.
    Mr. Ose. I understand. You do not take a pro or con 
    Mr. Seetin. Right.
    Mr. Ose. And Mr. Conlon, I see a market--with someone with 
experience as a market regulator.
    Mr. Chairman, I have to say in Sacramento and in San Jose 
we did not have the opportunity to talk to a market operator. 
And I would commend his testimony to the committee and the rest 
of the Members of Congress, regardless of their State, as to 
the impact of I think your phrase was artificial standards and 
their impact.
    I want to go back to one other thing we covered. I cannot 
remember if it was yesterday or Tuesday. The issue of a 
regional transmission organization. As I understand the market 
for power in the Western United States, the Rockies actually 
acts as the divider. In other words, West of the Rockies 
basically is a whole market, and East of the Rockies is a 
separate market.
    Of those States West of the Rockies, some have put forward 
regional transmission organization plans and some have not. 
Which States have not? Is there some reason for them to hold 
out? And what is the consequence of having all the States 
participate or some of the States only?
    Mr. Seetin. I am glad this is not a quiz, because I would 
probably flunk that question. But I will tell you in general 
terms, those that are more resistant to the RTOs, the regional 
groups, are those that feel they have lower cost power and may 
be disadvantaged by being part of a larger group. I think that 
is fast going by the wayside, because they are seeing now that 
politically you cannot stop that border. Just markets cannot be 
held in. God knows, California learned that.
    Mr. Ose. The testimony we had yesterday was that the 50 
States, and I believe 49 have put forward their RTO plans. The 
one being absent is California. Do you have any information 
about that?
    Mr. Seetin. That would square with my basic knowledge.
    Mr. Ose. That the markets are screwed up? All right. My 
time is about to expire. Mr. Chairman, I yield back.
    Mr. Burton. We are going to go to a second round. I do not 
think all the Members are going to take their full time. Some 
will. But I did want to ask one question I think is very 
important. Mr.--I cannot----
    Mr. Seetin. Seetin.
    Mr. Burton. Seetin. Excuse me. My Lasik surgery is not 
working right now.
    Mr. Seetin. Just think of looking at a tin roofing and see 
    Mr. Burton. There is a number of Congressmen and business 
people that believe that price caps are important, rate caps. I 
would like to have your perspective on that.
    Mr. Seetin. Well, we, you know, as a marketplace----
    Mr. Burton. And let me add one caveat to that. Eight of the 
Governors of the Western States have sent a letter to the 
Federal regulators saying that they are against price caps. The 
only three that did not sign it, I believe, were Oregon, 
Washington, and California. With that as a backdrop, will price 
caps work, or do you have to have everybody involved?
    Mr. Seetin. Well, obviously the more that are involved in 
that, of course, you spread the pain. Because, in fact, we do 
not believe that the history of those things has anything of 
success. They have failed every time.
    Now, let me say personally I was a fan of price caps, 
because I grew up on a farm in Minnesota and we raised cattle. 
And when the administration, back in 1972, put a price cap on 
the price of beef, our cattle were selling for 58 cents. They 
put a price cap of 70 on and, boom, the market went right to 
70, and we were happy for that price cap.
    So I can just tell you that is traditionally how markets 
respond. In that particular market you are focusing on, it 
might deal with it, but then you have got all of the side 
markets that all of a sudden are influenced by that. So, as 
those off-peak markets may be influenced by that price cap, all 
of a sudden your net cost of energy goes way up and your supply 
is inhibited. Because, again, how can you say we want supply, 
but you can only get this much for it?
    Mr. Hunter. Mr. Chairman, would you yield on that briefly?
    Mr. Burton. I will be happy to yield to my colleague.
    Mr. Hunter. Thank you for yielding, because I think you 
have come to an important point here. The law right now has a 
species of price caps, in that the law says that FERC shall 
reform unjust and unreasonable rates, which seems to be an 
anti-gouging provision. But it is not necessarily a price cap 
or does not have a formula for figuring out how much you pay 
for electricity. But a 9,000 percent increase in a matter of 
minutes is not a matter of a long-term market adjusting itself, 
and it is not something that is going to, I think, motivate 
producers to get into the market. I think everybody is going to 
view it for what it is, which is a very short-term taking 
advantage of an opportunity that appears on the board.
    So do you see any distinction between those two things? 
One, an anti-gouging statute, if you will; and No. 2, price 
    Mr. Seetin. First of all, let me make it clear that I do 
not believe that fraud or market manipulation ought to be 
allowed, and I agree with your contention that a price spike 
like that is an indication that something is very wrong, 
something is sick. That is very atypical for a truly 
competitive market, and you need to find out what that is.
    We do not like price caps. But if price caps are the ransom 
in this, they are not going to do any good if you do not fix 
the underlying market. Again, I am getting back to that. If you 
do not fix the underlying market with direct access and 
transmission access, price caps will do no good. So if you pay 
the ransom of price caps, get the baby.
    Mr. Burton. Let me just reclaim my time and ask a followup 
question. And that is, according to the Federal regulators who 
testified in Sacramento, they indicated that there was only 
about 25 percent of the market that they could put a price cap 
on. Which means that you have another 75 percent of the market 
that would be not under the price cap. Now, if that is the 
case, and you had a supplier who was inhibited by the price 
cap, what would they do?
    Mr. Seetin. I think you have intuitively figured out one of 
the big problems in those things, and that is it.
    Mr. Burton. They would go to the 75 percent where they 
could make more money.
    Mr. Seetin. Well, just like if California decides to do it 
differentially, you know, you have 40 percent of your power 
coming in. What are those guys going to do if the power--if the 
cap is here and it is not----
    Mr. Burton. Well, I think that is the point I am trying to 
make, is if all the Western States in the grid are not together 
on this, or if all of California is not under the price cap 
along with them, then if there is a price increase, they are 
going to go where they can sell the electricity, and those that 
are under the price cap are going to suffer with blackouts. 
Now, did California not have price caps in December? I think 
they did. And I wanted to followup and just ask how did those 
price caps work, and why did they not work, if they did not?
    Mr. Conlon. Well, the ISO had various degrees of price caps 
during last year. It went from I think $750 down to $500 down 
to $250. And then FERC came in in January and set a cap--a soft 
cap at $150 in January, and $420 in February. And they said 
yesterday to you that they were going to go back and do October 
through December, and then they were also going to do March and 
April, so that they will retroactively set a price based on the 
price of natural gas and the price of Nox credits 
for each month. And FERC I think is doing that, or did it for 
January and February. The ISO did it. When it went to $250, I 
think the price many hours went to $250, even though it was not 
the peak.
    Mr. Burton. Well, will price caps increase the likelihood 
of blackouts this summer, or reduce the likelihood?
    Mr. Conlon. I do not think anybody knows for sure, but I 
just think that the main participants who are not under FERC's 
jurisdiction are the municipals. You are talking about LADWP, 
Sacramento, Palo Alto.
    Mr. Burton. Well, thank you, Mr. Conlon. You want to 
respond to that real quickly?
    Mr. Seetin. Well, if they do work, this would be the first 
time, I would think. The problem with those, you know, you are 
in a situation where you are worried about supply, and you are 
doing something that runs counter to that in the marketplace. 
That is the problem with price caps.
    Mr. Burton. Mr. Filner.
    Mr. Filner. Thank you, Mr. Chairman. You have opened an 
extremely important issue, and there is obviously different 
perspectives on that. And I think that is the debate that has 
to take place in a rational way without labeling.
    But, I have a different perspective. I would point out that 
the panel does not have a cross-section of folks who we can ask 
that question to and get the kind of answers that at least 
might contribute to this debate.
    You raised two important issues. One, if a price cap was 
not regionwide, obviously there would be differences in 
approach by different States. My legislation, and almost every 
legislation that calls for--not caps, Mr. Chairman, cost-base 
rates. And there is a real important distinction there that I 
want to add.
    Cost-base rates are all regionwide applied in our 
legislation. So, and if I am not mistaken--although I would 
like this clarified later for the record--some of those 
Governors who you point to in the letter have in fact earlier 
come out in support of what the Western--far Western States 
supported. But California, Oregon, and Washington, all of whose 
Governors have called for cost-based rates, probably have a 
population and economy more than double or triple all the other 
ones combined. So if you had a weighted vote here, I think you 
would agree that the cost-base rates would win.
    Now, on your issue about the jurisdiction of FERC, I will 
accept your number, 25 percent, for the sake of argument. But 
let us remember that 25 percent is what is determining the 
prices. It is that marginal control when supplies get tight 
that allows this cartel to set the prices.
    And most of that other energy, as was pointed out by Mr. 
Conlon, and I think Mr. Seetin, is from municipals and Federal 
hydroelectric. These--by contract, by law, by practice--all 
have consumer-friendly rates. If you control the 25 percent 
that FERC has the ability to, you control the market here. That 
is why the prices are so high. The people who control that 25 
percent control the prices. So if we brought them under 
control, you would have a reduction in prices and a 
stabilization in the market.
    And I will tell the people who are ideologically opposed to 
this, you just keep yelling price controls, price controls 
never work. You know we have had cost-based rates for 100 years 
or since Edison. Utilities provided reasonably priced and 
reliable electricity. They made money. They were the most Blue 
Chip stocks you can buy if you were looking for that. And so I 
do not know who did not make money or what did not work there. 
But it is that cartel that is now setting the prices. If you 
eliminate all the structure--which I agree with Mr. Seetin, it 
was just a completely flawed structure--you are not going to 
have competition.
    There is not a competitive market here. Those folks have 
destroyed basically any research and development of renewables. 
They have through the political process, gotten all kinds of 
incentives for themselves to make the money. I do not know why 
you think there is going to be competition.
    You say let the markets work. There is no market. Mr. 
Hunter keeps pointing that out. And Mr. Hunter had an exchange 
with Mr. Hebert, who was then a commissioner and now the 
chairman of the FERC, who said in response to complaints that 
people on fixed incomes were making life and death decisions, 
that the markets must work, even if granny dies.
    And even the Republicans on the committee had a reaction to 
that, including Mr. Hunter, who said look, Mr. Hebert, and I am 
going to quote, as well as I remember, Mr. Hunter. He said, 
``Look, Mr. Hebert, there is no more free enterprise person 
than me. There are no more free entrepreneurs than my 
constituents. But if you want to philosophize, Mr. Hebert, get 
on the philosophy unit. We have an emergency. We need a trauma 
unit at work.'' I think Mr. Hunter will remember those words.
    Virtually all the public officials in San Diego County, 
Republican, Democrat, school board, city council, board of 
supervisors, Congress people, have looked death in the eye when 
we had full deregulation. And there was panic here in San 
Diego. The market was at work. And people went out of business, 
people suffered. We were the only ones, Mr. Chairman, who had 
full deregulation of retail prices. Everyone else in the State 
and the region had been shielded up until now. Now the prices 
are going to hit them. And I will tell all the elected 
officials in those areas, whether it is Washington, Oregon, 
Montana, New Mexico, and increasingly every Western State, as 
these obscene prices, criminal prices spread, and I think these 
guys are going to charge whatever they can until cost-based 
rates come--and they will eventually come, believe me--they are 
going to get everything they can. And there is no market at 
work that you are all praying to and praying for.
    Mr. Seetin. Could I respond just briefly. I just want to 
tell you that those markets do work everywhere but California, 
apparently. Because that is why we are around. People do not 
have to use us. And certainly, if we were not providing a 
service, I would not be here talking to you right now. So I 
just want to emphasize I strongly disagree with the fact that 
those markets do not work. They work everywhere else.
    Mr. Filner. Well, that is not accurate--we have not had the 
experience long enough for a, ``deregulated market'' for you to 
make that statement.
    Mr. Bill Horn. If I might, Mr. Filner, you mentioned 
municipal utilities, and specifically L.A. Water & Power. I 
would point out that L.A. Water & Power sold excess energy 
which they got from Federal hydropower at less than 1 cent a 
kilowatt, into the market, and wiped out $85 million worth of 
bonds, at San Diego County ratepayers' expense, in 6 weeks. So 
I would like to----
    Mr. Filner. I have no trouble blaming with L.A. too. But 
take off the same, Mr. Horn, on Enron and Williams and Southern 
    Mr. Bill Horn. I will. I would be happy to.
    Mr. Filner. OK.
    Mr. Burton. Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman. I want to go back to Mr. 
Horn's comment here a minute ago. You are saying L.A. Water & 
Power had Federal power wheeled into its market area, under 
contract, and I think it is either Hoover or Glenn Canyon, that 
they are paying a penny a kilowatt----
    Mr. Bill Horn. Less than a penny.
    Mr. Ose. Less than a penny. All right, we are going to say 
a penny, for simplicity sake. A penny a kilowatt for the power. 
And then turned around and sold that power to the ISO.
    Mr. Bill Horn. Back into the ISO.
    Mr. Ose. This was the substance of the L.A. Times article 
    Mr. Bill Horn. 23 cents a kilowatt hour they got for that 
    Mr. Ose. It seems to me, if I recall correctly, there are 
provisions in the Internal Revenue Code that you cannot use 
public bonding capacity and convert it to private purpose. And 
I am curious whether or not using L.A. municipal water and 
power facilities in this way is consistent with the law. And 
that may be above yours and my pay grade here. But I think that 
is a question we need to ask, Mr. Chairman.
    Mr. Bill Horn. I think the other question I would like to 
point out is San Diego County, because it is a Federal dam. My 
ratepayers and my taxpayers paid for that power that they are 
getting. Now, they are fortunate----
    Mr. Ose. That is exactly my point.
    Mr. Bill Horn [continuing]. They are fortunate to have a 
municipal, and I would like to get one here in San Diego, but 
the law has precluded that until we get that changed. But at 
the same time, I think they should have sold that excess power 
into the grid or to San Diego at at least the cost of 
generating it and moving it to L.A., and then moving it to us. 
Not gouging us.
    Mr. Ose. All right, I want to go back to Mr. Seetin.
    Ms. Davis. Could you yield, Mr. Chairman, for just a 
followup on that, Mr. Ose, if you do not mind?
    Mr. Ose. Sure. You yielded to me. I would be happy to 
    Ms. Davis. Thank you. It is my understanding that they were 
compelled to sell into the ISO at the going rate, that they 
could not--is that correct? I mean, if someone could just----
    Mr. Bill Horn. No. We mentioned price caps a minute ago, 
and I keep wanting to weigh in on these things. I am a free 
enterprise person and I really do not like the price caps. But 
we have got an unregulated monopoly at the moment. We took a 
regulated monopoly and made it unregulated.
    I would get rid of the ISO, frankly. Allow these 
distributive utilities to purchase the power from the 
generators, and then we could at least get close to a free 
market. Because at the moment you have a controlled market. It 
is the last person in, they get the highest price, and 
everybody below that gets that same price. That is what has 
literally robbed San Diego County's ratepayers of their money.
    We have a transfer of wealth going on here. And I think 
somebody mentioned the fact that we need a trauma unit. Duncan 
Hunter. We need a trauma unit here. We are being gouged from 
both ends, and we do not see any relief coming from Sacramento. 
Every time they make an adjustment--I would not bail these 
utilities out. Allow them at least to have a free market, and 
then we can hold them accountable. We cannot hold them 
accountable this way. We have an ISO who every 10 minutes can 
change the ball game. And I just think it is absolutely 
    Mr. Ose. I want to reclaim my time. All right, I want to go 
back to Mr. Seetin. In your statement you talk about the entire 
market, that being--you know, you have to have the ability to 
move power here and there to meet demand and supply. If one 
State is not participating in a regional transmission 
organization and all the States surrounding it are, in this 
example--and I cannot tell you if this is the case or not, so 
it is hypothetical. If California has not submitted its RTO 
plan and every other State has, what kind of difficulties does 
that create?
    Mr. Seetin. Well, it again creates two separate markets, 
theoretically. And that is what our experience has been. That 
every time you segment a market like that--and it really hurts 
the efficiency. Because, again, your products are not 
transferrable as easily. And from the marketplace standpoint, 
we have always urged that the control areas should be as broad 
as possible to maintain reliability and take care of the 
necessary things, of course.
    Mr. Ose. I want to go back to one other thing. The PUC 
recently changed the manner in which the qualifying facilities 
are compensated for the power that they generate. In other 
words, they put a cap on the cost that they could factor into 
their retail rates, lowering the IER rating from 11,000 plus to 
9,000, thereby making Biomass and other qualifying facility-
generated power less remunerative.
    The point I want to make here is that those are sources of 
power that are very favorable for us environmentally in terms 
of the air emissions that they put into the basis. In 
particular, in Sacramento and in San Joaquin Counties, we are a 
non-attainment area. And the consequence of a reduction in 
compensation to the qualifying facilities is that we will have 
to buy more power from other sources, which will contribute to 
our non-attainment. So, in fact, the PUC's order makes it more 
difficult for us to comply with air quality standards, and it 
is absolutely unnecessary, if we would just give the qualifying 
facilities the ability to directly access the market.
    And I want to finally, Mr. Chairman--I think Mr. Filner is 
right. This is not a function of our environmental constraints, 
and I will tell you why. If you look at the major generators, 
whether they be the guys we like or the guys we do not like, 
they have facilities that largely are 10 or 15 years old. They 
have technology that is 10 or 15 years old. New technology 
converts gas to electricity at up to 50 percent greater 
efficiency than that old technology at 25 to 50 percent less in 
emissions. What we need to do is find a way to get that new 
technology online so we have reduced demand for gas, we can 
lower the price accordingly.
    Thank you, Mr. Chairman.
    Mr. Burton. Ms. Davis.
    Ms. Davis. Thank you. And thank you, Mr. Ose, because I 
appreciate your comments about the environmental 
considerations. I think there are a number of statements made 
by very responsible people, but that, in itself, is not the 
issue. But we do need to address that, and we do need to find 
those alternative sources of energy.
    I wonder if we could go back just to Mr. Conlon for a 
second, because I know I was cutoff. There has been a lot of 
talk about competitive markets. And probably it is a little 
like so many other things, we cannot always describe it, but we 
know it when we see it. And I am wondering in San Diego, 
because part of the charge of the PUC was to lift the caps when 
the competitive markets were in place, could you share with us 
what indications you had or you believed that the Commission 
had that there were competitive markets that would work in San 
    Mr. Conlon. Well, I think the requirement was to lift the 
cap when the utility recovered all its stranded assets, not 
when the market was competitive. So, you know, the presumption 
was that the markets were going to continue to be competitive, 
because we had a 30 percent excess capacity. And I think a 
competitive market is where 20 or 30 percent of the players do 
not operate every day.
    Otherwise, when you know you are not going to operate 
because there is 130 percent of the people in the market and 
there is only 100 percent, then prices are going to go down to 
meet the most inefficient player that is going to operate that 
day. So the guy that gets the 100 percent, his price sets the 
price. And the other 30 percent go home. They do not work at 
all. So that is when you get competitive markets, when these 
people go home instead of operating.
    Ms. Davis. Would you say that today in the marketplace, 
then, that some of the companies that are operating have a 
market share that could be considered in the neighborhood of 15 
to 20 percent?
    Mr. Conlon. No. I am saying that we intentionally made sure 
that no one had more than 20 percent, because----
    Ms. Davis. No, I understand that. I am sorry, if I could 
just interrupt for a second.
    Mr. Conlon. OK. I am sorry.
    Ms. Davis. I am wondering today--and we have the companies 
that are going to be joining us in a little while, whether you 
have the knowledge or impression, in some cases, that they 
actually do have the market share that we were working hard to 
insure that companies did not have?
    Mr. Conlon. Well, the problem is, with the supply where it 
is, especially when you get into Stage 2 or Stage 3, that 
everybody has market power because you need every ounce of 
generation you can get. So that is why the market is not 
competitive, because there is not enough capacity available. If 
there was 110, 120, or 130 percent capacity available, then I 
think they would have no choice but to lower their rates. 
Because again, they would not be in the 100 percent that 
    Ms. Davis. Thank you.
    Mr. Filner. I just want to point out, if the gentlelady 
would yield. I just want to thank the chairman. Ms. Davis and 
I, and Mr. Hunter, are not members of this committee, and it is 
by the courtesy of the chairman that we can join you today. And 
I just want to thank the chairman for giving us full expression 
of our questions, and allowing us to participate. I think it is 
very helpful to the whole debate. I thank the Chair.
    Mr. Burton. Well, I think Mr. Filner and Ms. Davis and 
everybody, all of us understand this is not a partisan issue. 
We have got to figure out, along with the Federal and the State 
regulators, some way to solve this problem.
    Mr. Horn.
    Mr. Horn. Thank you, Mr. Chairman. I would like Mr. Conlon 
and Mr. Seetin to answer this. Agencies, over time, always have 
some sort of corporate culture, even if they are in government, 
not in the private sector. And I would be curious as to how you 
would analyze the relationships 15 years ago between the State 
utilities commission, that you headed, and the Federal 
situation, where right now everybody is pointing their fingers 
at each other. And I would be curious how you would think the 
Wilson, for want of a better thing--although other Governors 
had put their people in there--Wilson commissioners versus the 
Davis commissioners. What is the difference between the two, 
and where is it that we are being shorted by our own 
    Mr. Conlon. Well, all I can say is what public statements 
that the present commissioners have made. And I think, by and 
large, they do not believe that there should be competition in 
the generation market, they do not believe that there should be 
deregulation of any form. I think at least two of the 
commissioners have been very vocal on that point.
    And I think that all five of the commissioners under 
Governor Wilson were supportive of competition where there were 
adequate competitors. And with 30 percent excess capacity, I 
mean, we never dreamed of a supply problem. I mean, these 
events that have occurred, the drought, the worst in 25 years, 
we had the hottest summer in 100 years last year. It was the 
hottest summer in 100 years in the State of California.
    And I think those two events, together, has caused this 
problem, not the fact that we had deregulation or a regulated. 
If we had a regulated market, if we had not changed anything, 
we would have had a serious problem in the entire State, and we 
would have had 30 percent rate increases under a regulated 
basis. Because the price of natural gas skyrocketed fivefold. 
And whether you are regulated or unregulated, if you are going 
to use natural gas, you are going to pay that price. It is an 
unregulated price done by the Federal Government 15 years ago.
    So regulated markets today, we would have just as much rate 
increase as we are having today in an unregulated market. 
Because natural gas is driving it, and we have got the shortage 
of capacity. And, you know, until we get that 17,000 megawatts 
online, this is a serious problem. These short-term contracts 
the Governor did are just the right idea.
    President Bush mentioned using aircraft carriers to drive--
in the summer to drive power in the cities. And I think San 
Diego, with I assume two or three aircraft carriers, should 
certainly consider that in the short term. I read that in the 
press someplace. I am a compulsive reader.
    Mr. Horn. Mr. Seetin, what would you like to comment on 
that question?
    Mr. Seetin. That is one you do not touch with a 10 foot 
pole. But I would just say this, that I think that clearly, if 
the market needs had been responded to, we would not be having 
this hearing here today. And I just think, from our standpoint 
and the market's standpoint, they continually missed the mark. 
That is all I can say.
    Mr. Horn. I yield the rest of my time to Mr. Ose. Did he 
hear me?
    Mr. Burton. I think Mr. Ose has temporarily flown the coop. 
You are going to yield it to Mr. Hunter?
    Mr. Horn. Mr. Hunter.
    Mr. Burton. Mr. Hunter, he yields his time.
    Mr. Hunter. Well, thank you, Mr. Chairman. I want to thank 
you again for having the hearing.
    Gentlemen, we have got about 60 days until summer reaches 
us, and we are vastly understocked in terms of generational 
capability in San Diego and elsewhere. My colleagues--not to 
beat a dead horse, but my colleagues have said they do not 
think there is any environmental consideration here. That is 
kind of a myth and a red herring. So I wanted to offer to Ms. 
Davis, my good friend in the House, and Mr. Filner, co-
sponsorship on my bill that says we will allow any business or 
individual in the State of California, or in any State 
experiencing a power emergency, which is defined as supply 
being within 10 percent of demand, to operate any type of power 
generator available to insure their economic stability. Now, 
gentlemen, do you all agree that would be a good thing for us 
to pass, now, on the Federal level?
    Mr. Hardage. Absolutely. Absolutely.
    Mr. Hunter. Mr. Horn.
    Mr. Bill Horn. I totally agree. We have enough capacity, if 
we could bring those generators up.
    Mr. Hunter. Mr. Barnhart.
    Mr. Barnhart. Yes, sir.
    Mr. Hunter. Mr. Thomas.
    Mr. Thomas. I totally agree.
    Mr. Hunter. Mr. Seetin.
    Mr. Seetin. We are only the marketplace and neutral to 
    Mr. Hunter. OK. Mr. Conlon.
    Mr. Conlon. Well, you know, you have to define that very 
carefully, because the environmental concerns are still there. 
But you could certainly get it done in 90 days instead of 18 
months. I mean, I think it is a matter of time.
    Mr. Hunter. OK. Let me then offer, Susan, could you get on 
my--since Mr. Filner asked me in the last hearing if I would 
co-sponsor his legislation, which I did, could you sign up to 
this and say we are going to let anybody turn on a generator 
who has one in the State of California during an emergency?
    Ms. Davis. Mr. Hunter, I appreciate your asking me that, 
and I will take it under advisement.
    Mr. Hunter. OK. Mr. Filner.
    Mr. Filner. Dr. Filner. I am glad we have 100 percent from 
the Republicans on this. But let me tell you, Duncan, I do not 
have any idea what your peaker plant proposed entails.
    Mr. Hunter. Well, then, why not sign it and turn them on?
    Mr. Filner. They are not the problem. This is not the 
problem. And we are going to have new problems if we go down 
your route. We have the ability to provide the energy that we 
need to our county and to our State that is prohibited--it is 
prohibited from being used now.
    Mr. Hunter. OK, Mr. Chairman, let me take my time back and 
follow on.
    Mr. Filner. It is not the environmental thing that----
    Mr. Hunter. If Mr. Filner's answer is not preceded with a 
``yes,'' I do not want to hear the rest of it.
    Mr. Burton. Let me interrupt just 1 second.
    Mr. Hunter. OK.
    Mr. Burton. Please. I feel like Johnny Carson on a bad 
night. Let me just say that Mr. Horn's time has now expired, 
and now it is your time for 5 minutes.
    Mr. Hunter. I thank the chairman. And now that we have 
established that, and my point is that we--this is a crisis and 
we do need to have a bipartisan response to this crisis. And I 
have told my friends who are the free marketeers that the 9,000 
percent price spike is not free enterprise.
    And I have also told my friends who have very strong 
environmental considerations, when you are going under for the 
third time and you want to reach for that lifesaver, and that 
lifesaver is the ability to turn on a diesel generator in your 
own plant to keep your life savings from going out in the next 
2 weeks, you should be allowed to do it. Right now in 
California you cannot do it.
    We have been told by Solar, which makes great generators, 
and Mr. Ose spoke about it, extremely efficient, makes them in 
San Diego with the great expertise of San Diegans, and we have 
been told by them that they can bring their peaker plants out 
and could actually set those babies up within a week, assuming 
that we could get into the production schedule, because 
everybody else and the rest of the world, except California, is 
buying them.
    Mr. Barnhart, you are a contractor, a heavy-duty contractor 
who does lots of big infrastructure projects. How fast could 
you build 10,000 square feet of cement slab, if you were given 
a contract to do that? What kind of time are we talking about?
    Mr. Barnhart. Just put down 10,000 square feet of concrete 
    Mr. Hunter. If you had to do it on an emergency basis?
    Mr. Barnhart. We would probably have it down within 48 
    Mr. Hunter. You could do it in 48 hours. Solar could move 
these peaker plants in and install them within a week. We are 
60 days away from disaster. And in the State of California, in 
the county of San Diego, we are unable to help ourselves 
because of regulations and laws that we have to meet and comply 
    And so once again, Mr. Chairman, to our head of the board 
of supervisors, I would hope that the board of supervisors, 
which has met, incidently, with the Coalition for Electricity 
Independence, which is our group of business people in San 
Diego County who want to have the ability to save themselves by 
turning on a generator this summer, I would hope that the 
county of San Diego and the State of California--and I am still 
hopeful on this--would be willing to waive all regulations to 
let us save ourselves from this impending disaster. So, Mr. 
Chairman, I would hope that we could get co-sponsorship of 1075 
or support of 1075 from the county board of supervisors.
    And, Mr. Barnhart, one last question for you. You could 
build a 10,000 square foot slab in 48 hours. How long would it 
take you to knock out--assuming you were permitted--to knock 
out a 1-mile pipeline, a gas pipeline, 16 inch pipeline? You 
have done that before?
    Mr. Barnhart. I have not done that specifically before. 
That might take longer, I would suspect.
    Mr. Hunter. Longer than 48 hours. OK. Well, we hope that 
you will work with us, and Sam and other folks who are 
interested in continuing to employ people in San Diego County, 
to get this--try to get some respite in before the summer 
    Mr. Hardage. Thank you, Congressman Hunter. We, in the 
hotel business, in order to keep the lights on, as a matter of 
fact met in executive committee yesterday to discuss the 
purchasing and installation of individual co-generating plants 
in all of our hotels here in California, because we do not know 
what we are going to do when the lights go out in California. 
And your bill would make it infinitely easier. Contrary to what 
Congressman Filner says, there are definitely very strong 
environmental hurdles to solving the problem. And your bill 
would literally help turn the lights back on. And thank you 
very much for introducing that.
    Mr. Bill Horn. And I might say, on behalf of the board of 
supervisors, I would be happy to carry that and get your 
endorsement for you, Congressman Hunter. I would like to point 
out--my staff just brought me this--this is dated today, April 
12th. Dynergy's plans for the 18 combustion turbines they have 
in San Diego County, they are refusing to turn on and to sell 
that power to SDG&E because they do not believe they are going 
to get paid from the ISO. And this is a transmission I just got 
from SDG&E. So there is 250 megawatts we will not have 
available if they refuse to sell them. And I am telling you, 
the ISO is the problem.
    Mr. Filner. And that is not an environmental restriction; 
    Mr. Bill Horn. They say they are not going to get paid, so 
they are going to refuse to give you the power.
    Mr. Filner. That is purely a price problem.
    Mr. Burton. Mr. Hunter, do you yield back your time?
    Mr. Hunter. Yes. In fact, I would be happy to yield the 
balance of my time to Mr. Ose, who stepped out at a--if he has 
any more questions to ask.
    Mr. Ose. Well, I thank the gentleman from this area. And if 
I could reserve it, I would. And not wishing to spend the 
committee's time fruitlessly, I would yield it back to the 
chairman for further use.
    Mr. Burton. Well, I want to thank you for yielding back to 
me. We will dispense with this very fine panel we just had. 
Thank you very much for your testimony. You all were very 
eloquent. We really appreciate it.
    We will take a 10-minute break, because I think you cannot 
think if you cannot--if your seat goes to sleep. So we will 
take a 10-minute break and we will come back with the second 
panel. Thank you.
    Mr. Burton. The next panel consists of Mr. Kevin P. Madden. 
He is the general counsel for the Federal Energy Regulatory 
Commission. Mr. Madden has been with us before and has been 
helpful. Mr. Fred John, senior vice president for external 
affairs for Sempra Energy. Mr. Steve Malcolm, president of 
Williams Energy Services. And Mr. John Stout, senior VP for 
asset commercialization for Reliant Energy. Would you please 
stand, gentlemen.
    [Witnesses sworn.]
    Mr. Burton. Let us start with Mr. Madden. Do you have an 
opening statement?


    Mr. Madden. A very brief one. Mr. Chairman, thank you for 
the opportunity to appear here today to address the electricity 
matters and markets in California and surrounding States. I 
applaud this committee for the time and effort it has spent 
over the past 3 days gathering the unvarnished facts about the 
reasons why the electricity markets in California and 
throughout much of the West are in a state of stress.
    It is my belief that these markets will continue to 
experience various serious problems throughout this coming 
summer. Wholesale prices have increased substantially. 
Consumers are being implored to conserve as much as possible. 
Generation has not been built for the past decade. Restrictions 
have been placed on long-term commitments. And utilities 
continue to face severe financial problems.
    While some have accused FERC of being indifferent or even 
hostile to the concerns of California, I think our actions 
prove otherwise. I will not dwell on those actions, as I have 
already addressed them in my opening statement to the committee 
on Tuesday. I believe we need to work together, not point 
fingers at one another. We need this to solve the electricity 
crisis that exists now. We need supply, we need the market 
certainty, and we need to move forward. Thank you.
    Mr. Burton. Thank you, Mr. Madden.
    We will now hear from Mr. Fred John, senior vice president 
for external affairs for Sempra Energy.
    Mr. John. Thank you, Mr. Chairman. Sempra Energy is the 
parent company of both SDG&E and Southern----
    Mr. Burton. Would you pull that mic a little bit closer, if 
you can.
    Mr. John. Sempra Energy is the parent company of both San 
Diego Gas & Electric Co. and Southern California Gas Co. My 
comments today will focus on both electric and natural gas 
issues as they relate to the State of California's present 
    You already heard from Mr. Seetin and former CPUC 
commissioner Greg Conlon on an overview of what has evolved in 
California over the past 6 to 7 years that got us to the point 
where we are today. And I would be happy to respond to some of 
those points that they made in the Q&A, but I am not going to 
reiterate all of those.
    You have also heard from segments of the commercial and 
industrial market here in San Diego on the negative impact that 
high energy prices and poor power reliability have on them as 
customers, and also on the general economy in California. My 
comments are focused on what we think is the real crux of the 
problem, though, and that is skyrocketing wholesale electric 
prices. This was addressed earlier by Congressman Filner, 
Congresswoman Davis, and Congressman Hunter. But I want to 
amplify on these points.
    One of the assumptions we made here in California, when the 
deregulation process started back in 1998, was that FERC would 
act as an effective policeman of the wholesale electric and 
natural gas market. Unfortunately, our hopes have been--we have 
been somewhat disappointed. I am not going to point fingers at 
FERC, and I know Mr. Madden made comments about it earlier. But 
we do believe that the Federal legislation is very clear. It is 
mandatory. It is not discretionary. Wholesale sellers of 
electricity and wholesale transporters of natural gas must be 
required to charge prices that are just and reasonable.
    However, prices that are 500 percent higher tha historical 
norm clearly do not pass the just and reasonable test. Even 
FERC has agreed that the prices in the wholesale market do not 
pass that test. Yet for 10 months FERC has refused to require 
wholesale sellers of electricity to charge just and reasonable 
rates prospectively, or to refund dollars to consumers that 
exceed the just and reasonable standard.
    We do recognize that in early March FERC did issue two 
orders with respect to potential refunds, and we are hopeful 
that they will follow through on that. But even the sums that 
are set forth in those orders are a small percentage of what 
the total alleged overcharges are, at least according to the 
California ISO.
    We are also disappointed on the natural gas side, because 
we filed a petition in December 2000 with FERC requesting a 
temporary reimposition of the maximum rates on natural gas 
transportation in the secondary market. FERC has not yet acted 
on the petition, and transportation rates in California exceed 
those of every other State by ranges of $5 to $50 per million 
    I know there have been a lot of comments this morning about 
whether natural gas prices have driven up electric prices. I 
think you should also look at the flip side. Have the high 
electric prices caused natural gas transportation rates in 
California to have increased, and increased dramatically?
    Our belief is that if FERC is not going to take further 
actions--and I still say there is an ``if'' there based on 
recent comments at least by Commissioner Breathitt--that 
Congress and the President need to step in. Commissioner 
Massey, himself, in testimony on March 20th before the House 
Energy and Air Quality Subcommittee said, ``Power that cost 
California $7 billion in 1999 increased to more than $27 
billion last year. Costs in 2000 may exceed $70 billion.''
    Customers--and believe me, we have been going through this 
here in San Diego since May. Customers are saying to us we are 
mad as hell, and we are not going to take it anymore. But it is 
not just an impact on the customers. Because of these wholesale 
price increases, and up to this point the refusal, until 
recently, of the California commission to pass through any of 
these costs, at least one of the major utilities in this State 
has gone bankrupt. And with all due respect to the statement 
that Supervisor Horn made earlier, I do not think it is 
responsible to say that a major utility, who is the backbone of 
the infrastructure in this State, should be allowed to go 
bankrupt. The State of California has also been required to 
purchase power on behalf of the investor-owned utilities, and 
they have already built up a bill of $4 billion, and that is on 
top of the $14 billion of under-collections that the utilities 
have absorbed.
    Although the Commission in California has recently allowed 
retail rates to increase for PG&E and Edison, none of these 
dollars are targeted at their under-collections. The revenues 
are going to basically help the State repay its general fund.
    Our view is, all of this could have been avoided back in 
the summer of 2000 if two things happened. One, if FERC had 
taken action on the wholesale side, and if the State of 
California had taken action on the retail side to increase 
rates, but to do it in a way where it was conservation-
oriented, and higher use cause ratepayers to pay more money.
    We respect the fact that Congress has held several 
hearings, including two field hearings: The one you have held, 
and previous hearings out in California. And we really respect 
that. But there does come a time for hearings to stop and 
action to be taken. And we think that time is now.
    We also recognize that Congress is trying to do a lot of 
good things to help consumers, not only in California, but 
throughout the country. For example, a Federal tax cut bill. 
Well, what good is a Federal tax cut bill if the consumer has 
to use all of its payments to pay its electric and gas bill, 
and then it is still underwater? What good is a Federal 
education reform bill if parents do not have enough money to 
take care of the basic necessities of life for their children, 
or if schools are having to spend their money on electricity 
instead of on teachers and equipment? What good is a Federal 
healthcare reform bill if people have to make a choice between 
freezing in the winter or suffocating in the summer because 
they cannot afford to pay their gas and electric bills? It is 
time to act.
    Mr. Burton. Thank you, Mr. John. I think you made a very 
strong point there.
    Mr. Steve Malcolm, the president of Williams Energy 
    [The prepared statement of Mr. John follows:]
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    Mr. Malcolm. Mr. Chairman, I want to thank you again for 
the opportunity to offer Williams' views on the urgent actions 
that are necessary to minimize the stress that Californians 
will face this summer because of energy concerns.
    First, a little background on Williams. Williams is a 
publicly traded, diversified energy company that is active in 
most parts of the domestic energy industry through various 
operating subsidiaries.
    We are the second largest natural gas pipeline company in 
the United States, transporting about 17 percent of the 
Nation's peak day consumption through five wholly owned 
pipeline transportation and storage systems. This network does 
include our Kern River pipeline which just received expedited 
approval to add a substantial amount of new capacity to 
California for this summer.
    Many people outside our industry are just now becoming 
aware that we also have a large and rapidly growing energy 
marketing and trading group.
    In the electricity area, we market about 15,000 megawatts 
of installed and planned generating capacity around the 
country, and intend to grow that portfolio to about 40,000 
megawatts over the next 5 years.
    Here in California, we dispatch roughly 4,000 megawatts 
from three plants in the Los Angeles area. And as you all know, 
that represents about 10 percent of California's peak day 
demand. And we sell the majority of our megawatts through 
forward contracts.
    Key elements of the Williams message are unchanged and are 
consistent with what we have been saying in California and in 
Washington since early last summer. In the few minutes I have 
today, while I want to update you on the most recent actions by 
the company, I will focus primarily on the most urgent and 
immediate actions we think are necessary based on today's 
    I want to emphasize, our focus is and has been on 
developing solutions to the real problems. In fact, Williams 
has worked closely with State and Federal Government officials 
to develop solutions toward that end. Despite the decision by 
PG&E last week, Williams has refrained from taking action to 
force utilities into bankruptcy. We were at the forefront of 
the initial movement to postpone due dates for payments in 
January. Since then, Williams has continued to sell power to 
the ISO voluntarily, despite the mounting unpaid bills. 
Williams has used its own credit and liquidity to buy power 
outside the State, and then resell it to the ISO at the ISO's 
request during the period when many out-of-state generators 
refused to sell to the ISOs. Williams signed one of the first 
long-term contracts with the Department of Water Resources 
earlier this year, and most recently, as I mentioned earlier, 
we worked diligently and urgently to get approvals necessary to 
expand the capacity of our Kern River pipeline to bring more 
natural gas to the State by this summer.
    Looking first at some much needed near-term actions, it is 
absolutely critical that we remove every obstacle to utilizing 
all existing generation, and to adding new generating capacity 
this summer. First, the dampening of new development caused by 
regulatory uncertainty and the financial instability of major 
purchasers in the market must be removed. Credit-worthy counter 
parties with the flexibility to take advantage of risk 
management tools must participate in the wholesale market to 
obtain supplies for end use customers.
    Last summer we actively encouraged California regulatory 
agencies to follow the utilities to add long-term--to allow the 
utilities to add long-term contracts to their power portfolios. 
Fortunately, the Department of Water Resources has recently had 
some success in this area, and including an arrangement with 
Williams. But there are important issues that remain 
unaddressed, not the least of which is a solution of the 
problem of past due payments.
    Second, the permitting and approval process for new 
generation needs to be streamlined and improved. The good news 
is that we have seen some progress, but clearly the processes 
leading to project approval still need more attention.
    We have been monitoring with particular interest an 
application at Huntington Beach that would take an existing 
site and add 450 megawatts by revitalizing old, out-of-
commission units. The developer has estimated that it will take 
3 months of 20-hour days to get that power online. But the 
construction has yet to commence, as the developer tries to 
work his way through a long list of obstacles.
    Third, and certainly a tough choice, is that a significant 
amount of power can be available only if certain environmental 
regulations are suspended. Power plants that have specific 
limits on the number of hours that they can run may already be 
over the limit because of strains on the system last year and 
in the first quarter of 2001. Rules must be clarified to allow 
those plants to run and make that power available, and not just 
under Stage 3 conditions.
    Further, these changes must be made in a way that does not 
put greater pressure on prices, nor mortgage the future of 
those facilities.
    And finally, we must have a significant demand side 
response. Painful as it is, the fact of the matter is that 
consumers must be exposed to price signals before they will 
reduce consumption in a meaningful way, just as suppliers and 
potential suppliers must receive appropriate price signals to 
encourage development.
    Looking now at some of the longer-term solutions, to avoid 
us having to be back here again next year, again accurate price 
signals are the most effective means of attracting the 
investment in new generation and new transmission that is 
essential. We must take actions to facilitate the integrated 
planning operation and upgrading of the electric transmission 
grid. The answers in this area must be developed on a regional, 
not a State basis.
    And I would just conclude by saying we certainly appreciate 
the opportunity to share our views, and look forward to being a 
constructive part of finding a solution. Thank you.
    Mr. Burton. Thank you, Mr. Malcolm.
    We will now hear from Mr. John Stout, senior vice president 
for asset commercialization for Reliant Energy.
    [The prepared statement of Mr. Malcolm follows:]
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    Mr. Stout. Thank you very much, Chairman Burton. First of 
all, let me say I am an engineer by profession and I like to 
deal with the cold, hard facts. And so I have chosen to use 
some slide presentations to help illustrate some of the facts 
that we developed to try and explain what took place this year.
    Originally in the package that has been handed out to you, 
you had several slides dealing with the supply demand 
situation. I am going to skip those and go straight to the 
heart of a couple of important issues.
    This is a slide that represents how much generation we 
produced from our facilities over the last 5 years. Now, we 
only owned these the last 3 years. Before that they were owned 
by Southern California Edison. What I would like to point out 
is that in year 2000 we produced two-and-a-half times as much 
energy from these facilities as they historically averaged in 
the past.
    Couple of points about that. No. 1, in respect to a comment 
made by Congressman Hunter about the extensive outages we are 
having now, a lot of that has to do with these extra hours that 
we ran on these units. We do not have a single power plant that 
is less than 20 years old, and we have a couple of them that 
are nearly as old as I am. They were built in 1953. So we have 
a very old fleet. And it is kind of like taking a 20 or 30-
year-old automobile and putting about 50,000 miles in 1 year on 
that car. At the end of that year you are going to have a lot 
of maintenance and a lot of repairs that you have to do. And 
this slide tends to illustrate that.
    The other point I would like to make--go back to that 
slide. I think you skipped ahead. Is that I need to ask the 
question: Does this really look like the strategy of a business 
who is trying to withhold energy from the market? We produced 
two-and-a-half times as much as the historical average. I would 
argue that is totally inconsistent with someone who is trying 
to withhold. If you would, skip the next two slides. One more.
    Congressman Filner pointed out a comment a minute ago in 
his opening statement about a $20 billion outflow from 
California. That is a reflection of the increase in market 
prices in California, which went from $5 billion in 1998 to $7 
billion in 1999 to $27 billion in year 2000. And what I would 
like to illustrate to you is that when you look at how much 
money an independent generator such as Reliant had to spend on 
natural gas for fuel, our cost actually went up 50 percent more 
than that.
    Our costs are up 738 percent from what we spent for fuel in 
the year 1998. Now, the gentleman from the hotel industry 
commented that their fuel bills have gone up, too. Theirs have 
only gone up 350 percent, he said. Ours have gone up more than 
double that. That is not a market manipulation, that is just a 
cost of doing business.
    And in response to another comment made by Congressman 
Filner about how well the old regulated system worked, I would 
point out that even if you had the old regulated system and you 
had this sort of increase in the amount of usage of gas-fired 
generation and those sort of gas price increases, even the 
regulated utility would see similar increases in their cost of 
producing energy.
    Because of these increases, fuel now takes two-thirds of 
every dollar of revenue that we take in. Two years ago it was 
45 percent; now it is 65 percent. Not a whole lot that I can do 
about that. That money comes in, goes right back out to the 
fuel suppliers.
    I would like to point out, though, that in trying to be 
part of the solution to this problem, Reliant has offered--has 
made this offer to every one of the IOUs, to DWR, even to the 
Governor's office that we will provide energy for 2 cents a 
kilowatt hour for the next 5 years. All you have to do is bring 
the fuel to us. We will cook it, make electricity out of it. We 
are not trying to gouge California consumers, we are trying to 
be part of the solution. And 2 cents is a very reasonable price 
for converting that gas into electricity. But it highlights the 
fact that the cost of that gas is a critical element of the 
high cost of power in California right now. That offer is still 
on the table. So far no one has taken us up on it.
    Now, I would like to get into something that I hope you 
find quite interesting. It has to do with the fact that there 
are some people who have been raising their bid prices in this 
market. And I would like to show you a little bit of the detail 
that explains exactly who they are. If you would flip to the 
next slide, please.
    This slide shows what the PX day-ahead market supply bids 
looked like on June 29, 2000. This is what suppliers such as 
Reliant bid in. The PX adds them all up and produces a big 
curve like this. We do not set the price in the market, though. 
You actually have to have people who are buying power also put 
a bid in as to what they are willing to pay. And if you will 
flip to the next slide, you will see what was bid in.
    These were the bids from the buyers in the market. And the 
point where those two curves cross, which is about $175 a 
megawatt hour, reflects the clearing price in the market for 
that hour. Now, I picked June 29th, because that is the very 
date that the CPUC Chairman Loretta Lynch highlighted her 
report to the Governor as a day that illustrated market 
manipulation, withholding. Her argument is that the price at 5 
p.m. had jumped to $750 a megawatt hour. And her contention was 
that perhaps this is evidence of suppliers withholding from the 
    Now, if that was the case, and I were to show you the bid 
curves that were submitted by suppliers at 5 p.m., you would 
see that red line that stretches up to the right-hand side of 
the sheet, you would see that shift to the left. That means 
less supply was being offered into the market. Let me show you 
now what actually happened. Next slide, please.
    The supply curve did not shift to the left, it shifted to 
the right. Suppliers offered more supply into the market at 
even lower prices. So why did the market clear at $750 a 
megawatt hour? Next slide, please.
    Because the buyers in the market raised their bid prices. 
You can see from this that the supply cleared at $750 a 
megawatt hour. And if you will flip to the next slide, this 
shows you the whole bid curve for those 2 hours. It is pretty 
clear who raised their bid prices in this market. Next slide, 
    This is a slide those of you in Washington have seen 
before. Excuse me?
    Mr. Burton. Who raised their bid prices?
    Mr. Stout. It is the buyers. But I do not have information 
as to which specific buyers it was. That is considered 
    Those of you in Washington have seen this slide, I think. 
It was passed around as evidence of the sort of problem in the 
market. Shows much, much higher prices on a day. In fact, this 
was a Sunday. I went back, researched exactly which day this 
was. And if you will flip to the next slide, that is what the 
bid curves looked like on that day. Once again, the exact same 
pattern of buyers bidding the price up, which is consistent 
with any auction where you have a scarce resource.
    I actually have with me a binder with every single day this 
summer. Pick any day you would like to look at, I will be happy 
to show it to you, because you will see exactly the same 
pattern of buyer bid behavior.
    And let me close by explaining why this takes place. Next 
slide, please. Because this is a competitive auction, but the 
competition, because you had a shortage of supply, was existing 
between buyers, not as much between suppliers. Buyers were 
working against one another to try and get scarce resources. 
And what made it especially worse were the rules that were in 
place in California that require the utilities to bid all of 
their own generation into the market, because what they had to 
do then was bid back into the market to get that generation for 
their own use. It was equivalent to having to put your house on 
the auction block every day, and having to outbid every other 
home buyer that came along just so you could stay in your own 
    The quote you see here is from a CPUC audit of PG&E, trying 
to investigate what happened last summer. And it pretty well 
explains the situation. And with that, I conclude my opening 
    Mr. Burton. Thank you very much. We will now go to 5 minute 
rounds of the questions.
    Mr. Madden, in your March 14th order regarding the AES, 
Southland, and Williams, you essentially concluded that they 
intentionally shut down two plants where they were going to 
receive about $63 per megawatt hour. As a result, the power had 
to be purchased from other AES units right next-door at more 
than 10 times the price. Is that a fair characterization?
    Mr. Madden. Yes.
    Mr. Burton. If they did that, is that illegal?
    Mr. Madden. They violated--in the March 14th order, which 
is a show cause order where we essentially tell AES/Williams to 
prove otherwise, if they do not prove otherwise, it is a 
violation of 205 of the Federal Power Act and the tariffs at 
the Commission.
    Mr. Burton. Under your order, AES and Williams were given 
20 days to contest that finding. That time period should run 
out I guess on Tuesday. Have they done so?
    Mr. Madden. They have submitted additional filings with the 
staff, the enforcement staff, and have had discussions with 
    Mr. Burton. In your order, you stated the information 
suggests that Williams took action to extend the outage at 
Alamedas, and to make Huntington Beach Two unavailable for 
pretextual reasons. What does that mean?
    Mr. Madden. What I believe, that what they meant behind the 
order is that they did not necessarily have to have that outage 
at that plant.
    Mr. Burton. What led you to believe that the outages at the 
two plants were not directly related to the necessary and 
timely maintenance of the units?
    Mr. Madden. Mr. Chairman, there is confidential information 
in the record which demonstrates otherwise, we believe.
    Mr. Burton. Well, we would like to have that confidential 
information, and I think I have talked to the director, the 
president--what is his title? Mr. Hebert. I cannot remember----
    Mr. Madden. The Chairman?
    Mr. Burton. Yeah, the chairman. The chairman. And he said 
that they would give that to us. The confidential information 
we will keep confidential. And if a subpoena is required, you 
let me know and I will issue a subpoena.
    Mr. Madden. Yes, Mr. Chairman.
    Mr. Burton. OK. Now, to Williams, why were the Huntington 
Beach Two and Alamedas Four units shut down in April and May 
    Mr. Malcolm. First, I would like to start by saying we take 
these allegations very seriously. We believe very strongly in 
doing the right thing, treating people fairly, maintaining a 
very high level of integrity. Integrity----
    Mr. Burton. Why were----
    Mr. Malcolm. Excuse me?
    Mr. Burton [continuing]. Why were they shut down?
    Mr. Malcolm. Well, they were shut down because of needed 
maintenance. There was a tube leak, there was a water cooling 
tunnel that needed work. There was a boiler that needed repair 
work done on it.
    Mr. Burton. Can you document all that?
    Mr. Malcolm. Yes, we can.
    Mr. Burton. Well, we want to have those documents. And if I 
need to, I will subpoena them. Because if they were--if that is 
a real reason for the shutdown, then that makes some sense. But 
we want documentation to that effect, to make sure that is what 
    Is $63 a megawatt hour a good estimate of your variable 
    Mr. Malcolm. I am really not sure.
    Mr. Burton. $63. Well, that was the price quoted in what?
    Mr. Madden. Mr. Chairman, that was the price quoted in our 
March 14th order, at $63 a megawatt hour.
    Mr. Burton. OK.
    Mr. Madden. Versus the 750 bid price, or close to it, 
    Mr. Burton. But that was a good estimate on the plants that 
were up and running, that they shut down?
    Mr. Madden. I have not heard anything to the contrary.
    Mr. Burton. To Williams, could you give us an estimate of 
your fixed cost per megawatt hour at those two plants?
    Mr. Malcolm. No, sir, I do not have that detail.
    Mr. Burton. Well, we want that, too.
    Mr. Malcolm. All right.
    Mr. Burton. Setting aside the question of whether you 
intentionally shut down these units, explain to us how it is 
that you were charging a price that was 10 times your cost.
    Mr. Malcolm. I think the circumstances at the time were 
that we had to take those facilities down. Those were RMR units 
that had to be taken down. And we simply bid into the market, 
and the market allowed us to capture the higher rate.
    Mr. Burton. Did you ever charge prices of more than $750?
    Mr. Malcolm. I do not know.
    Mr. Burton. Well, according to our information, that your 
prices got as high as $1,500 per megawatt hour at some times. 
And you do not know about that?
    Mr. Malcolm. No, sir, I do not have those facts in front of 
    Mr. Burton. How much profit did you make in the year 2000?
    Mr. Malcolm. Which business unit?
    Mr. Burton. We are talking about the energy unit.
    Mr. Malcolm. The energy unit made about $1.7 billion.
    Mr. Burton. $1.7 billion?
    Mr. Malcolm. $1.7 billion in operating profit in 2000.
    Mr. Burton. Reliant, how much profit did you make in the 
year 2000?
    Mr. Stout. And you are asking for the business units, or 
are you asking about California?
    Mr. Burton. California.
    Mr. Malcolm. My answer did not----
    Mr. Burton. Well, you can give us California and then give 
us the total as well.
    Mr. Stout. I would respectfully request that you let us 
file that with you under confidentiality.
    Mr. Burton. Will you require a subpoena?
    Mr. Stout. No, sir.
    Mr. Burton. OK. Well, then, we would have that information.
    Mr. Malcolm. I would be happy to answer the question as you 
have now asked it. Our energy unit made about $1.7 billion, and 
I am speaking now about our energy services group, which is 
responsible for the unregulated and lightly regulated 
businesses. Marketing and trading is a part of that. And with 
respect to California's spot market activities, the percentage 
was about 5 percent of the $1.7 billion.
    Mr. Burton. Well, does that $1.7 billion include other 
States besides California?
    Mr. Malcolm. I have not expressed myself very well. The 
$1.7 billion relates to all the earnings of our energy services 
group, which includes products, pipelines, gathering 
facilities, refineries.
    Mr. Burton. That is inside and outside of California?
    Mr. Malcolm. Inside and outside of California.
    Mr. Burton. Do you have a breakdown that could give us the 
figures for California alone?
    Mr. Malcolm. I do not have them on the tip of my tongue.
    Mr. Burton. Can you get that for us as well?
    Mr. Malcolm. Yes.
    Mr. Burton. OK, we would like to have that.
    Mr. Filner.
    Mr. Filner. Thank you, Mr. Chairman. Those are very good 
questions, similar to what I was going to ask, so they must 
have been good. Thank you. [Laughter.]
    Now I have some not-so-good ones. First of all, Mr. John, 
thank you for your statement and your words. I want to take 
advantage of you here and do some case work that my other 
Congressmen will appreciate. Do you have staff with you?
    Mr. John. Yes, some.
    Mr. Filner. I mean, there is a constituent of mine named 
Jaime Salazar--if you would raise your hand, Jaime--who got a 
bill that was 500 times what it was the previous month, in 
which he had been out of town. He has tried to protest this, he 
has tried to call SDG&E, but has gotten no response.
    He has pictures of the fact that his meter is behind a 
fence that is locked, and his rottweilers are there. He would 
know if the meter was read. Apparently the meter was not read, 
and yet he is getting bills of incredible amount, and they are 
threatening to turn off his electricity. Could you please make 
sure that Mr. Salazar's questions are taken care of.
    Mr. John. We will have somebody work with him this 
    Mr. Filner. Thank you very much.
    Mr. Madden, for the record I have to say you are coming to 
California and to San Diego, which is the center of an 
incredible disaster, as you heard in the first panel. The 
economy of California, and maybe the Nation, is teetering. And 
you do not have anything to say. And just for the record, I 
found that very unsatisfactory. FERC is supposed to guard the 
interest of the consumer. Not only did you take no action back 
in December, when there was evidence of manipulation of the 
market--and in my opinion you caused most of the crisis that 
has been with us since--but you have nothing to say to us when 
you come here.
    Mr. Madden. Congressman Filner, I have been with this 
committee for the past 3 days. I have----
    Mr. Filner. I have not.
    Mr. Madden. Well, I wanted to cut my opening statement 
short simply to move on and get the questions answered.
    Mr. Filner. People in San Diego are in this audience. They 
are looking for some help. And we have nothing to say.
    Mr. Malcolm and Mr. Stout, I am surprised that I guess Mr. 
Malcolm was ready to give some answers to the chairman. Mr. 
Stout claimed confidentiality. I am not sure why you have a 
different approach there. You were not very confidential in all 
these charts you got for us. Why can you not tell us the 
profits you made?
    Mr. Stout. Well, what I will do is give you an indication 
that I think means something to the----
    Mr. Filner. Can you tell me why you cannot tell us how much 
money did you make off California last year?
    Mr. Stout. The answer that I would like to give to that 
question is one that I think is in a context that means 
something in terms of what people pay for electricity. What I 
will tell you is that our net income in California this last 
year was less than 2 cents per kilowatt hour.
    Mr. Filner. And multiply that by millions of kilowatt 
hours. How much money is that?
    Mr. Stout. Well, that is the part that we would like to 
retain confidentiality on.
    Mr. Filner. Well, that is why we have so many problems with 
you all. You are whining about your costs and about all kinds 
of things, but then you will not tell us stuff we want to know 
about. Because everything is relative. I mean, do either of 
you, for example, have affiliates, subsidiaries that you buy 
your natural gas from?
    Mr. Stout. Yes, we do.
    Mr. Filner. Mr. Malcolm.
    Mr. Malcolm. Yes, we do.
    Mr. Filner. Mr. Stout.
    Mr. Stout. Yes, we do.
    Mr. Filner. So your increase in cost of natural gas, which 
you so proudly were telling us about, you are paying to 
yourself and they are making the money; right?
    Mr. Stout. Actually, our affiliates have to go out to the 
market and buy it. We are not producers.
    Mr. Filner. But you are buying from yourself. I mean, you 
are just playing games with these numbers.
    Mr. Stout. If I may answer the question.
    Mr. Filner. Your filings with SEC that you have to make 
public--I am not sure what is different then that you cannot 
tell us here--show incredible increases in profit over the last 
couple of years. You particularly have moved up on the Fortune 
500, you know. You have gone from, I do not know, 117 to 55. So 
you are not doing too bad, with all this whining about the 
costs; right? Is that correct?
    Mr. Stout. Well, if I could, I would like to go back to 
your question about the gas purchases. It is absolutely true 
that we have an affiliate, but the affiliate is not a producer. 
They do have to purchase from the open market. We simply use 
that affiliate because of their gas brokering skills. So it is 
just an expediency measure, so that we have----
    Mr. Filner. And who are they buying from? I mean, do they 
have any relationship to the producers?
    Mr. Stout. Let me finish your first question, then I will 
come back to that last one.
    You also asked a question about our SEC filings. The 
filings that we have made at the SEC that a lot of people have 
quoted as saying we have had a 600 percent increase in profit, 
that is a fundamentally flawed analysis. And the reason is, is 
because the numbers they are quoting are not profit numbers, 
those are numbers called operating income. That is before you 
take out things like interest, depreciation, and taxes. So that 
is not the bottom line.
    Second, the size of our company, when compared with 1999 
earnings, we more than doubled the number of megawatts that we 
have in the market. Our company has grown significantly since 
    And finally, 1999 was a year that was exceptionally poor 
return for a generating company in California. In fact, our 
income dropped about 80 percent between 1998 and 1999. Simply 
stated, 1999 was an exceptionally good hydro year, and that 
depressed the earnings. So anytime you draw an analysis 
comparing 1999 to year 2000, you get extraordinary increases.
    Mr. Ose. Mr. Stout----
    Mr. Stout. Yes, sir.
    Mr. Ose [continuing]. The red light has come on. The 
gentleman's time has expired. I am going to recognize Mr. Horn 
for 5 minutes.
    Mr. Filner. I will be back.
    Mr. Horn. Mr. Madden, you have been with us in a number of 
these hearings. And after the chairman left to go back to 
Washington, a number of things were said by the president of 
the California Public Utilities Commission.
    OK, can you hear it now? Somehow, somewhere?
    Mr. Madden. I can hear you now.
    Mr. Horn. You were there during some of the testimony of 
President Lynch, the head of the California public utilities. 
And I just----
    Mr. Madden. I was there for all of it.
    Mr. Horn. Yeah. And I just wonder if you would like to make 
a few statements for the records as to whether she said was 
accurate or not. Because there was a lot of finger pointing at 
your agency, etc.
    Mr. Madden. Congressman Horn, if you do not mind, since I 
believe we should stop the finger pointing and the rhetoric 
between and among the various participants, whether State 
commissions, Federal, the players, I would prefer not.
    Other than to say I think this committee has learned a lot 
of things in terms of the policies of the CPUC, as well as the 
FERC. And with respect to long-term contracts, there were major 
restrictions put on the IOUs in terms of buying long or buying 
in short-term packages, and there was also questions in terms 
of how they determine what the reasonableness is, or they would 
then second-guess the purchases by the IOUs.
    Mr. Horn. Thank you. I will give you, Mr. Ose, the rest of 
my time.
    Mr. Ose. Thank the gentleman.
    Mr. John, you are with Sempra, if I understand correctly.
    Mr. John. Yes, sir.
    Mr. Ose. The question I have has to do with the Governor's 
proposal to buy the transmission grid. I know he has a 
memorandum of understanding with Edison to buy theirs. Are you 
engaged in discussions with the Governor's office or the 
Governor's representatives to acquire San Diego Gas & 
    Mr. John. Yes, we are in discussions with the Governor's 
    Mr. Ose. I mean, I keep coming back to try and to figure 
out how to increase supply or reduce demand. And I am trying to 
understand how buying transmission grid facilities increases 
supply or reduces demand. Could you sort of elucidate or 
illuminate this, if you will?
    Mr. John. Well, that is a good point. There are two issues 
here. One is the point you are making about supply and demand. 
And on the supply side, I know the State has taken a lot of 
criticism for not building a sufficient number of power plants 
over the past 10 to 12 years.
    On the other hand, I think the record does show that over 
the past year or so a lot of those projects have been approved. 
The concern is that not enough new power will be online by 
2000, and certainly not by the summer of 2001, likely not the 
summer of 2002. Maybe 2003, but more likely 2004. The only 
remedy we see over the short term, to avoid--and I do not mean 
avoid--to mitigate outages is increased conservation.
    And that is one of the reasons we said to the PUC last year 
that we recognize the difficulty the customers down here were 
having with the high rates, but that some action had to be 
taken to start increasing rates on a stair-step approach in 
order to get customers to conserve. And there was some 
conservation in San Diego last year.
    Mr. Ose. So going back to my question, how does the----
    Mr. John. OK. The sale of the transmission assets is a 
separate issue. That is to deal with removing or mitigating, at 
least, the huge balancing account under-collections that have 
built up, which, absent offsetting those balancing account 
under-collections, will be passed on to the consumer.
    Mr. Ose. Your point is that the function of the transaction 
is to basically recapitalize the balance sheets of the 
    Mr. John. That is correct.
    Mr. Ose. It has nothing to do with increasing supply or 
increasing demand or conservation.
    Mr. John. And I do not think the Governor has ever said 
that it did.
    Mr. Ose. OK. I appreciate that clarification.
    I am going to recognize Mrs. Davis for 5 minutes.
    Ms. Davis. Thank you. I appreciate--if I can just fix my 
microphone. Great. Thank you.
    Mr. Ose. We are going to--let us restart the clock on Susan 
here. There you go.
    Ms. Davis. Thank you, Mr. Chairman. I was reaching out so 
much that I got my mic.
    I appreciate your all being here as well. And I wanted to 
just go first, if I may, to Mr. Madden with FERC. And what you 
may have been--I believe you were at the hearing that we had at 
Washington when the California delegation met with Mr. Hebert. 
And at that particular hearing I asked him what authority he 
lacks--the Commission lacks to do their job. And I wonder if 
you could respond to that.
    And if you also could, tell us about the authority that you 
feel you perhaps need to better define for everyone how to 
figure out what is a fair and reasonable rate. How do you 
determine what levels of profit are OK? Are there some levels 
of profit that you think are not OK? And also, do you believe 
that you have the full power to subpoena people and establish 
whether or not there was manipulation in the market, and 
whether or not those--whether you have looked at those 
documents and tapes?
    We know that in one of the reports where you suggested that 
the rates were not just or reasonable, that you also 
recognized, and in fact, you had it investigated what was going 
on in the market. So that would be helpful, just to get a sense 
of that, if you could. The other--and then I have some other 
questions, as well.
    Mr. Madden. There are a lot of questions just there. Let me 
see if I can start out. The Commission has a great deal of 
authority under the Federal Power Act, to remedy the type of 
actions that exist today. Now, in terms of refund authority, 
our authority is the earliest of 60 days after a complaint is 
filed, such as the one that San Diego filed in August, or the 
date the--60 days after the Commission order is noticed in the 
public register--Federal Register, rather.
    In this particular case, we took the earliest one, SDG&E's 
filing of August 2nd, and established the refund date of 
October 2. So in terms of the remedies and the refunds--and so 
our refund authority does not go back beyond or before October 
    In terms of the remedies under the Federal Power Act, I 
think, as they exist today we have the full authority. There 
may be one thing in the future, depending on whether or not 
RTOs get up and running--and we hope they are--and that is 
transmission siting does not occur, transmission is not built, 
that is something that Congress should look at in terms of 
giving the FERC authority, if a State or an RTO does not act 
within a certain period of time.
    In terms of subpoena power, the Commission has the subpoena 
power built in under the Federal Power Act in I believe 309 and 
307 of the act specifically. And, in fact, in the Williams/AES 
proceeding, they delegated to me the full range of subpoena 
power so I can, in that particular case, request any particular 
documents and they have to be brought to me.
    One thing that is missing in this Williams case, and which 
was in the notice, is that, although the timeframe talked about 
the April-May period, the Commission directed me to look into 
the remaining part of 2000 and into 2001. And I can assure you 
I will be vigilant in looking into those dates and those 
    In terms of manipulation, there are a number of informal 
investigations that staff is doing to look at questions of 
outages, look at questions of withholding, look at bidding 
patterns. Although, you know, there have been, at the same 
time, some more public documents, we, at the staff level, 
conduct the type of informal primarily investigations as we did 
in the Williams case. I believe that should cover it.
    Ms. Davis. Are those all included in public documents that 
we have been able to acquire?
    Mr. Madden. The preliminary investigations are confidential 
until they are brought to the Commission, and the Commission 
has to decide what it will release. Because in many instances 
the entities that we review, audit, and monitor ask for 
confidential treatment. And many ask why confidential 
treatment. Well, there is a lot of things out there, that if it 
were released to the public, may affect them from a competitive 
    At the same time, my view is that in order to get the type 
of interaction and the information we need from the various 
entities, it is best, at various stages, to give them 
confidential treatment.
    Ms. Davis. Thank you. If I could go on. I know I only have 
5 minutes. OK. All right. If I could just turn to Mr. Malcolm 
and Mr. Stout for a second.
    Could you please share with us what percent of market share 
you believe your company has in gas-fired generation in 
    Mr. Stout. Well, for Reliant, it depends on how you want to 
measure the market. If you measure California, I believe our 
market share is around eight--I am sorry. If you measure the 
ISO grid, our share is about 8 percent. If you measure all of 
California, which picks up the munis and things like that, that 
market share drops to I believe around 5 percent, maybe 4 
percent. And if you pick up the whole Western interconnection, 
which that is really the market, not just California, it drops 
down to probably less than 2 percent.
    Mr. Burton. Mr. Stout, I appreciate the brevity. Your time 
has expired. I am going to go to Mr. Hunter. Mr. Hunter for 5 
    Mr. Hunter. First, let me--since Mr. Hebert has been 
mentioned several times, and Mr. Madden, you are here 
representing the Commission. Mr. Hebert and I, as Mr. Filner 
depicted, have crossed swords on several occasions on this 
issue in terms of price, and what is unjust and unreasonable.
    But he does have a right to be quoted accurately. And 
actually, he did not say that if the high price of energy hurt 
granny, let granny die. He said that he believed in speaking 
the truth, and if the truth hurt granny, let granny die. And he 
further added that he had talked that over with his grandmother 
several times, and she did not agree with that statement. But I 
just wanted to make sure he is quoted correctly. And obviously 
he has in the record here, because he testified right where you 
are at.
    Mr. Ose. Record stands corrected.
    Mr. Hunter. Mr. Stout, you pointed out that Reliant has 
actually increased the amount of energy that they now provide 
to California. They have not shrunk their energy output in 
California; right?
    Mr. Stout. That is correct.
    Mr. Hunter. Last summer we were using in excess of 45,000 
megawatts. And as you probably are aware, if you watched the 
discussion among State leaders, it was to the effect, wait till 
winter gets here and all the air conditioners are turned off, 
and we historically drop usage by about 30 percent. So supplies 
are very tight right now at 45,000 megawatts. When they go down 
to about 33,000 megawatts, then the price will come down.
    Winter arrived. We went down to about 33,000 megawatts, and 
we were told by the energy suppliers doggone it, supplies are 
still tight. Now, my question to you is: Were there any natural 
disasters that destroyed some of the generating plants, or was 
there some other reason for the supply of this product, energy, 
to go down by 30 percent when prices were rising?
    Because typically, when prices are up and you are making 
lots of money and there was a lot of opportunity, you might not 
see new generational capability coming online right away 
because it takes a long time to get this stuff permitted. But 
certainly it is highly unusual that, in the face of rising 
prices, supplies were constricted. What do you think happened 
    Mr. Stout. The answer to that is there were actually two 
disasters that took place. One was natural, one was manmade. 
The natural disaster was the fact that the Northwest region's 
hydro battery was being drained. If you look in the----
    Mr. Hunter. Say again. The hydro----
    Mr. Stout. Hydro battery. And I use that word loosely.
    Mr. Hunter. Yeah.
    Mr. Stout. It is not really a battery. But there is a 
certain amount of energy that is stored in the hydro systems in 
the Pacific Northwest. If you look at the amount of hydro you 
had in 1999, it was above average. If you look at the amount 
that you had in year 2000, by the numbers I have seen, it was 
about 25 percent below what it was in 1999, but only slightly 
below average.
    The bad news is the forecast for this year looks like it is 
going to be about 60 percent of average, which is even worse. 
Now, that impacted the problem, because the people that 
generate power with hydro up in the Pacific Northwest, a lot of 
those people, I believe, were coming to California to buy 
energy, trying to save what little charge they had left in 
their hydro batteries because they will not get another chance 
to recharge that battery until next winter.
    There was also a manmade disaster.
    Mr. Hunter. Just on that point, how much of our usage is 
    Mr. Stout. I could not quote a specific percentage without 
checking my records, but I would be happy to get that 
    Mr. Hunter. So you think some of it was hydro being reduced 
as a function of the drought?
    Mr. Stout. Less hydro being generated. But also hydro being 
saved so more gas-fired generation in California was being 
utilized. There was also----
    Mr. Hunter. You say hydro being saved?
    Mr. Stout. Correct.
    Mr. Hunter. What does that mean?
    Mr. Stout. The folks that have hydro are trying to make 
sure they have enough energy to get them through this coming 
summer. The hydro battery is not fully charged. As I indicated 
a second ago, it may only be at 60 percent charge going into 
this year. And if they use up too much of it now, they will run 
out big time later in the summer.
    Mr. Hunter. OK. Well, just an aside, I was up campaigning 
in Washington last summer. And the talk--and again, I do not 
want to just--you deal in facts, and we need to deal in facts. 
But the talk was that several of the hydro producers were 
pulling their stuff offline because they were anticipating 
higher profits.
    So whereas I do not have any specifics on the hydro 
reduction that you have talked about--apparently you do not 
have too many specifics, either--there is at least the 
possibility that they were anticipating and looking forward to 
reaping some of the same higher prices that some of the gas-
fired guys were receiving on the spot market.
    Mr. Stout. Well, there is two sides to that story. The 
first is----
    Mr. Hunter. Do you think there is any truth to that at all?
    Mr. Stout. It is very possible there may be. I do not have 
factual basis.
    Mr. Hunter. OK, well, I tell you what, let us leave hydro, 
because we have got a lot of stuff we have got to talk about. 
Let us leave hydro.
    You said part of this is hydro. Do you think there was any 
reduction among the gas-fired users that was a function of a 
strategy that said if we got high prices when supply is 
constrained, let us keep the supplies constrained. Do you think 
there is any of that?
    Mr. Stout. I cannot speak for every producer, but certainly 
that was not the case for Reliant.
    Mr. Hunter. OK. But you think that may have happened with 
    Mr. Stout. I have no idea. I am not saying it did.
    Mr. Hunter. Mr. Malcolm, when you produce those records of 
documentation for the----
    Mr. Ose. Mr. Hunter, the gentleman's time has expired.
    Mr. Hunter. Can I just finish my sentence, and I will be 
done with that question.
    Mr. Ose. Finish your question. We will hold the thought on 
the answer.
    Mr. Hunter. OK. When you produce those documents for 
Chairman Burton, could you make sure you include any internal 
memos with respect to the direction of shutting down your 
    Mr. Stout. Be happy to.
    Mr. Hunter. Thank you, sir.
    Mr. Ose. Recognize myself for 5 minutes. One of the 
questions I have, and I want to be very clear about this, is if 
I understand, Mr. John, your company is subject to both FERC 
and PUC oversight.
    Mr. John. No. San Diego Gas & Electric Co. and Southern 
California Gas Co. are both regulated by the CPUC. They are not 
regulated by the FERC.
    Mr. Ose. OK. Mr. Malcolm, how about you? Are you subject to 
the PUC regulation?
    Mr. Malcolm. I do not think so; no.
    Mr. Ose. Mr. Stout.
    Mr. Stout. I do not believe so.
    Mr. Ose. Are you subject to FERC?
    Mr. Stout. Yes, sir.
    Mr. Ose. Mr. Malcolm.
    Mr. Malcolm. Most assuredly.
    Mr. Ose. OK. Mr. John, you have generating facilities here 
in the State for electricity?
    Mr. John. San Diego Gas & Electric divested their 
generating facilities as part of the electric restructuring 
process. We do own a 20 percent interest in a nuclear facility 
up the coast.
    Mr. Ose. But you have no generating facilities besides 
    Mr. John. That is correct.
    Mr. Ose. OK. So you buy your power on the market?
    Mr. John. Yes.
    Mr. Ose. You have to go in and buy it.
    Mr. John. And I know there was a lot of discussion this 
morning about last year. And we were obligated for a 
significant portion of the year 2000 to buy our power through 
the PX.
    Mr. Ose. OK. Mr. Malcolm, I want to make sure I understand 
your business motto. And Mr. Stout, you also. As I understand, 
Williams--or in Mr. Stout's case, Reliant--you in effect take 
the place of the credit-worthy buyer, provide the seller of the 
natural gas or the electricity the assurance of being paid. And 
then, as the market works, you will deliver power to the high 
bidder, so to speak. Is that accurate?
    Mr. Malcolm. Generally speaking, yes.
    Mr. Ose. Mr. Stout.
    Mr. Stout. Yes, sir.
    Mr. Ose. OK. Mr. Malcolm, do you have any generating 
facilities that you own?
    Mr. Malcolm. We have generation facilities in Pennsylvania 
and in Four Corners.
    Mr. Ose. OK. So you are down here South--or actually East. 
Not South from----
    Mr. Malcolm. We control a portfolio today of about 15,000 
megawatts by virtue of what we call tolling agreements, where 
we partner with someone, like AES in the case of California. We 
partner with them. They own and operate the facility. We 
provide the natural gas to and market the power from those 
    Mr. Ose. They have agreed to sell you the generation at 
some price on a long-term contract?
    Mr. Malcolm. We effectively pay a tolling fee for them to 
generate the power for us.
    Mr. Ose. Mr. Stout, do you own your generating facilities?
    Mr. Stout. Yes, sir, we own facilities in California, about 
4,000 megawatts. Another 4,000 in what we call the Midatlantic 
States. Generation in Florida, the Midwest. There are quite a 
number of facilities in our portfolio.
    Mr. Ose. One of the things that just continues to challenge 
my understanding is if the PUC does not allow you to forward 
contract beyond 24 hours, how do you run your facilities? Mr. 
    Mr. Malcolm. Well, that does represent some concern and 
some difficulty. But we are working in the spot market. And 
there have thus far been buyers for that power.
    Mr. Ose. Well, let me turn the question around on the input 
side. In terms of the inputs that you buy to run your plant, do 
you buy those on a 24, day-ahead market?
    Mr. Malcolm. We contract for natural gas supplies in a 
variety of ways in order to be----
    Mr. Ose. You transit, basically?
    Mr. Malcolm. Yes. Yes. In order to meet our needs. There is 
a base load, and there is certainly also a piece that we 
utilize on a peak day.
    Mr. Ose. So what percentage of your total load do you leave 
vulnerable to the spot market?
    Mr. Malcolm. I am sorry, I do not have that number.
    Mr. Ose. Could you get that for us?
    Mr. Malcolm. Sure could.
    Mr. Ose. And my point--and I am going to ask you, Mr. 
Stout, the same question. My point is I want to understand--you 
know, business takes their vulnerability down to some 
percentage on a spot market basis. Whereas, the structure we 
have in the State of California basically has it at 100 
    Now, Mr. Stout, in terms of your generating facilities on 
the input side, in order to control your costs, provide a cost 
effective product at the far end, do you forward contract for 
the raw material, if you will, to run your facilities?
    Mr. Stout. That is a good question. The answer is, if I 
have a forward sale, then I forward contract for the input 
supply. If I do not have a forward sale, I have to buy it on 
the spot market. Because otherwise I would be taking a 
speculative position in the market.
    Mr. Ose. All right. So you tie your exposure to your 
    Mr. Stout. That is correct.
    Mr. Ose. OK. Now, as I look at--I see my time is about up, 
but we are going to come back to this if we have time. In the 
Wall Street Journal, every single day a report on the price of 
natural gas that you can buy forward. And it goes out 3 or 4 
years in some cases. And I go back historically and I look 
last--they also have the high-low for the past year. And the 
high-low for the past year indicates natural gas at $2.07 low 
versus $5 plus for a high. Now, seems to me that most 
businesses would contract a year ahead, if you will--time? 
Rules are rules. No, rules are rules.
    Mr. Hunter. I yield to Mr. Ose.
    Mr. Ose. All right. My question is: If the opportunity that 
existed last spring to buy natural gas at $2 was available, why 
were the intrastate generating facilities, that are subject to 
the PUC, not allowed to buy that, just to take the uncertainty 
off the table?
    Mr. Stout. I guess I am a little confused by your question 
when you said the intrastate utilities subject to the PUC. Are 
you referring to the IOUs?
    Mr. Ose. Yes. I am separating you out on this.
    Mr. Stout. OK.
    Mr. Ose. I am just trying to get some sense of what 
happened. I mean, it seems like you would take a whole 
uncertainty out of the entire transaction.
    Mr. Stout. I would have to defer that question to someone 
from one of those utilities.
    Mr. Ose. But Mr. John last year you had facilities that 
were generating capacity.
    Mr. John. No, sir.
    Mr. Ose. You had sold them by then?
    Mr. John. Yes, sir.
    Mr. Ose. All right.
    Mr. John. We sold those in--my recollection was in 1998.
    Mr. Ose. It seems like an excellent way to----
    Mr. John. When prices of gas were very low and prices of 
electricity were very low.
    Mr. Ose. But being able to buy a year ahead certainly seems 
like an excellent way, when you know what your base load is 
going to be.
    Mr. John. Yeah. But, I mean, on the gas side, though, 
because we also own Southern California Gas Co., the real spike 
in the gas price started in the fall--at least into California, 
started in the fall, my recollection is, of 2000. And it went 
nuts in December 2000, where a delivered price into California 
was $50 per million BTU, compared to a historical price maybe 
of $2.50 or $3.
    Even today, although it is not $50 per million BTU, it is 
close to $15 per million BTU. And that is primarily the 
transportation rate, not the wellhead cost of the gas. It is 
the transportation cost in the secondary market from Texas and 
Oklahoma, to California.
    Mr. Ose. I am going to have to ring the bell on myself 
    Mr. Madden. Mr. Chairman, I did not want to ring the bell, 
but let me help the record a little. San Diego Gas & Electric 
is jurisdictional to us, to the extent it is sales for resale 
and wholesale transmission.
    Mr. Burton. That is correct. I was sitting back there 
listening. I guess I will take my time now.
    You said at the wellhead the price is still fairly low?
    Mr. John. Well, again, low--it is higher than historical.
    Mr. Burton. What is it at the wellhead?
    Mr. John. Probably today around $4 to $5 per million BTU.
    Mr. Burton. Why are the transportation costs so high?
    Mr. John. Because the cap was removed in the secondary 
market on an experimental basis by the FERC. And several 
companies--I think even we--supported it at that time. But it 
was on an experimental basis. And I think that there is a 
limited capacity coming into California right now on interstate 
pipeline capacity, and people are taking advantage of it.
    Mr. Burton. So what you are saying is that they need more 
pipeline capacity and probably more exploration?
    Mr. John. I do not know about the exploration so much, but 
we certainly do need additional pipeline capacity coming into 
the State. And I think the gentleman from Williams talked about 
one of their projects.
    What we are trying to convince the Federal regulators of is 
to make sure that we are meshing the new interstate pipeline 
capacity with the intrastate capacity, so when the new 
interstate capacity comes in, we are able to use it for 
electric generation. Because that is where the real demand is 
    Mr. Malcolm. If I might add, there is no question that 
there is more pipeline capacity needed, and there is more 
wellhead deliverability needed.
    Mr. Burton. So you need more exploration as well?
    Mr. Malcolm. Yeah, there is a perception on a peak day that 
there is not enough supply, and therefore we do need additional 
    Mr. Burton. As I understand it, there are areas of 
California where there is reservoirs of natural gas that could 
be tapped if they could get by, I guess, the environmental 
requirements for exploration. Is that correct?
    Mr. John. Our company is not a producer, so I cannot 
    Mr. Malcolm. I am not aware of what the reserves are in 
    Mr. Burton. I would be happy to yield. Turn on your mic.
    Mr. Hunter. I understand there are untapped gas resources 
in California. But on that point, Mr. John, you folks have now 
constructed a 30 inch pipeline going into Mexico.
    Mr. John. We have a pipe that serves the Rosasito Power 
Plant. We also are planning to build--one of our affiliates is 
planning to build a pipeline in northern Mexico.
    Mr. Hunter. Well, now, so my question is--I understand 
that. If we are short on gas and that gas shortage is--and the 
inability of our present pipeline system to move that gas is a 
main driver. And, you know, Mr. Malcolm says that--or Mr. 
Stout, that they would sell all the electricity we wanted for 2 
cents above the gas price per kilowatt hour, that is kind of 
astounding. And if you are moving gas--if you are preparing to 
move gas to Mexico, does that not compound the price problem we 
are going to have here in the United States?
    Mr. John. I am not sure I am following you, Congressman.
    Mr. Hunter. Well, you got a 30-inch pipeline going down to 
the border. We got a shortage of natural gas in California 
which has driven prices to 500 percent of what they were. Why 
are we going to be moving gas down to Mexico when this low 
supply and high demand in California is driving our electricity 
costs 500 percent? Why are we moving more of it out of State?
    Mr. John. Because several of the plants in northern Mexico, 
when they are built, will be able to provide electricity to 
southern California.
    Mr. Hunter. Well, do you not have--but right now you are 
moving natural gas right now into Mexico, are you not?
    Mr. John. Yes.
    Mr. Hunter. How much are you moving?
    Mr. John. I think it is probably around--this is subject to 
check, but probably 40 to 50 million cubic feet a day.
    Mr. Hunter. Well, now, I was told, when you guys told us 
earlier, that you were moving electricity back, so there was 
kind of a quid pro quo, gas to Mexico, electricity to the 
United States. There is almost no electricity coming back into 
the United States.
    Mr. John. I think there is a limited amount right now. But 
the point I was making is the new pipeline that we are 
proposing to build in northern Mexico is for brand new energy 
efficient power plants, and a significant amount of that power 
will come into the United States.
    Mr. Burton. Let me reclaim my time, Mr. Hunter.
    Mr. Hunter. Thank you, Mr. Burton.
    Mr. Burton. How many cubic feet of gas are you sending down 
there a day?
    Mr. John. Right now?
    Mr. Burton. Yeah.
    Mr. John. My recollection is it is around 40 to 50 million 
cubic feet a day.
    Mr. Burton. Why is it going down there if there is no power 
plant to use it?
    Mr. John. There is a power plant. And we are going to----
    Mr. Burton. And where does that electricity go?
    Mr. John. There is an existing power plant at Rosasito.
    Mr. Burton. Where does the electricity go from that power 
    Mr. John. Most of it is to serve northern Mexico.
    Mr. Burton. So what we are doing is we are supplying this 
amount of gas to Mexico to power their utility?
    Mr. John. Yes. And that agreement was struck several years 
ago before we had this crisis. And we--you know, we believe in 
honoring agreements.
    Mr. Burton. What about gas exploration here in California? 
I was told there is some reservoirs of gas here in California. 
Can anybody tell me why that is not being tapped? I mean, it 
seems to me that you would not have to have an intrastate 
problem with pipeline if you could get more gas within the 
State, and the pipes could be utilized right here.
    Mr. John. Again, we are not a producer, so I cannot comment 
on that.
    Mr. Burton. Well, we probably ought to look into that. What 
is this here? Yeah. Why are we building electric plants in 
    Mr. John. Because the Government of Mexico seems to be more 
willing to have power plants built there than they seem to be 
historically in the State of California.
    Mr. Burton. Oh, my God. The government of Mexico has less 
stringent requirements for building a power plant, so you are 
building them in Mexico?
    Mr. John. Well, I do not think they are less stringent.
    Mr. Burton. Well, then why are they being built there?
    Mr. John. I think it is an expedited permit process.
    Mr. Burton. So you can get through the bureaucracy faster?
    Mr. John. So far; yes.
    Mr. Burton. Now, if you could get through the bureaucracy 
faster in Sacramento and in California, you could build them 
    Mr. John. And I think they are working on that. I mean, I 
think the----
    Mr. Burton. Well, how many plants are you building down in 
    Mr. John. We, personally?
    Mr. Burton. Well, yeah. I mean, I would just like to know 
how many plants are being----
    Mr. John. We, personally, we are looking at one plant right 
now in Mexico. Other suppliers are in the process of building 
plants in Mexico. Not our company.
    Mr. Burton. And those could be built in California?
    Mr. John. Perhaps. I cannot speak for other suppliers. I am 
just telling you, we are building the natural gas pipeline 
system to serve those power plants.
    Mr. Burton. And is all the electricity that is going to be 
produced going to be utilized here in California?
    Mr. John. Not all of it. I think some of it will.
    Mr. Burton. How much?
    Mr. John. I do not know the figure.
    Mr. Burton. Well, wait a minute. It is your plant.
    Mr. John. One of the plants that are being proposed----
    Mr. Burton. Well, let us just talk about your plant. Your 
plant that you are building in Mexico, that is using American 
or Californian gas, is that plant going to be used----
    Mr. John. It is going to be a merchant power plant, and it 
depends who wants to take power from the power plant.
    Mr. Burton. So you are going to sell to Mexico as well as 
to the United States and to California?
    Mr. John. Possibly; yes.
    Mr. Burton. I see. With the power shortage here in 
California, when that plant comes online, if you still have 
that problem, you will still be bifurcating the power, giving 
part to Mexico and part here; right?
    Mr. John. Well, hopefully by the time our plant is online, 
which is probably going to be in the 2004 timeframe, enough 
additional supply would have come online in California that 
there will be enough reserve capacity, we will not have to 
worry about that.
    Mr. Burton. Mr. Filner.
    Mr. Filner. Thank you, Mr. Chairman. Welcome to California. 
    I want to talk a little bit or try to get some 
understanding of what has been called market power. Regardless 
of all the stuff that you can or cannot tell us, the facts of 
the matter, are that California paid about $7 billion for 
electricity in 1999, and it is projected we could pay as much 
as $70 billion this year. That is some tenfold increase that 
has no relationship to anything you have told us about the cost 
of natural gas or regulation or anything. I mean, that has gone 
into your pockets and the other members of the cartel.
    But how does that occur? Mr. Malcolm, in your statement you 
said you transport 17 percent of the Nation's consumption of 
natural gas.
    Mr. Malcolm. Yes, sir.
    Mr. Filner. What percentage coming into California do you 
    Mr. Malcolm. The pipeline that we have coming into 
California is Kern River. And I think the capacity that Kern 
River controls versus all of the pipeline capacity coming to 
the State is fairly small. And I think, importantly, Williams 
does not control the capacity. Its customers, its end use 
    Mr. Filner. You transport 17 percent of the Nation's 
natural gas?
    Mr. Malcolm. We do, throughout the country.
    Mr. Filner. That is a pretty high percentage. And you have 
4,000 megawatts, you said, basically of the gas-fired capacity 
in California?
    Mr. Malcolm. Yes, sir.
    Mr. Filner. I mean, you were asked the question, both of 
you, about percentage of the market, and you gave us some 8 
percents, 4 percents, 2 percents. I have been told by people in 
the industry and the economists that the best way to measure 
market power is the number of megawatts that really determines 
the price. That is, there is a baseline use of, I do not know, 
20,000 megawatts. And when you start getting demand above that, 
that is where control of the market comes in.
    So that is where the 17,000 gas-fired megawatts come in. So 
if you have 4,000--each of you actually has about 4,000, as I 
understand it--it looks to me, of the ability to control the 
market in terms of prices, you have 25 percent of the market. 
Now, is that a good or bad way to look at it?
    Mr. Stout. Well, if I can respond to that. One of the 
things that we do in order to try and manage risk, is we try to 
sell off forward as much of that 4,000 megawatts as we can, so 
that we have some price certainty in our financial forecast. 
While I answered the question based on the number of megawatts 
that we had, when you take a look at how much we sold forward, 
who now someone else owns and controls, our market share is cut 
by more than half. So it is considerably less than that.
    Mr. Filner. Well, who has that stuff?
    Mr. Stout. There are at least 20 or 30 different market 
participants who have each bought portions of our generation 
portfolio, who now market that in the Western interconnection.
    To get back, though, to another comment you made, 
Congressman Filner, about the $70 billion forecast, that is a 
very questionable forecast. I think that----
    Mr. Filner. What is your forecast?
    Mr. Stout. Well, my forecast I have not done. But I can 
tell you, from asking questions----
    Mr. Filner. We are paying $2 billion a month now, right 
now. So, just make that one. That is $25 billion. Is that 
closer to what you think?
    Mr. Stout. That may be. That is--if you look at what you 
    Mr. Filner. All right. So compare that with $7 billion, 
    Mr. Stout. If I may finish the answer. If you look at what 
you paid in year 2000, you paid $27 billion, it is very 
possible that the prices could be very similar to what they 
were because of the increase in natural gas prices. Counter-
affecting that, though there have been a number of forward 
contracts that have been entered into, which the Governor has 
publicly announced, which should help to mitigate some of that 
price exposure. I do not believe that that $70 billion estimate 
takes into account all those forward contracts that the 
Governor has put in place.
    Mr. Filner. But it is an incredible increase, and somebody 
is making that money. And that cannot be accounted for by 
anything else except profit. I mean, that is where it is going. 
This is America. You are allowed to make a profit. But let us 
understand what is going on here.
    Mr. Stout. If I may respond to that, sir----
    Mr. Filner. I want to ask Mr. Madden. Your name fell down, 
so I forgot your name. These folks who sell into the California 
market at a wholesale price, did they have to get authority to 
do that from FERC?
    Mr. Madden. Are you talking, now, gas or electricity?
    Mr. Filner. Electricity.
    Mr. Madden. They have market-based rates and they have----
    Mr. Filner. Is that based on an approval from FERC?
    Mr. Madden. They received approval from the FERC.
    Mr. Filner. All right, now, correct me if I am wrong, any 
of the three of you. When they asked for that authority, one of 
your criteria is market power. They said in those filings, as I 
read them, that there was something like 60,000 megawatts of 
capacity in California. And therefore, their few thousand was a 
real low percentage of that, and therefore they had no market 
power. Do those figures sound like what they had filed to you?
    Mr. Madden. I do not recall, Congressman.
    Mr. Filner. Do either of you recall what you estimated as 
the California capacity was?
    Mr. Stout. I do not recall.
    Mr. Malcolm. I do not recall.
    Mr. Filner. You guys got to prepare like I do here. All 
right, read your filings. You said around 60,000 was available, 
which is, of course, way above what the actual capacity is. So 
therefore, your estimates of market power were way below what 
the actual fact is. And if you take a true estimate that 
economists have told me--that is, the percentage of the market 
that really determines the price--it is inescapable to me that 
you have market power. Notwithstanding what you said about 
forward contracts, etc.
    And it seems to me, Mr. Madden, that your approval of their 
market-based rates was based on a certain estimate of market 
power, and I think we can prove that it is much greater. Would 
that not lead you to reconsider their authority to sell at 
market-based rates?
    Mr. Madden. We have the authority to look at our market-
based rates that we have issued under Section 206 of the act.
    Mr. Filner. So you can do that right today?
    Mr. Madden. We have the authority to initiate an 
    Mr. Filner. All right. And we would formally request that 
at some point; OK?
    Mr. Madden. In the November order we looked into the 
particular rates being charged, and those were subsequently 
addressed in the December 15th order by the Commission. We are 
looking at the rates now.
    Mr. Filner. And in the December 15th order, as I said, you 
found all kinds of problems and have not acted on any of them. 
And I will ask you guys, do those figures about market power 
sound reasonable or not to you?
    Mr. Stout. Well, let me respond to your 60,000 megawatt 
number. When you examine market power, you do not draw a 
boundary at the State border. You examine the market that you 
are competing against. I compete against generators in Arizona, 
Nevada, and all around the Western interconnection. It is very 
possible that in trying to define the range of market 
competition, that it included more than just California. And so 
you may, in fact, have had more megawatts in that market power 
analysis than----
    Mr. Filner. So, but your 4,000--the 4,000 figure is also 
only California, so you may have more megawatts elsewhere; 
right? Too, right?
    Mr. Stout. That is correct.
    Mr. Filner. So if you will give me all those figures, I 
will tell you what your market share is. And I bet you you have 
market power.
    Mr. Stout. Well, we respectfully disagree with your 
conclusion with regard to market power, but we will be happy to 
furnish you with the details of other generating units. I can 
quickly summarize, if you would like.
    We actually brought on a generating unit this last year. No 
one mentions that. But it was this 500 megawatt unit. We own 
half of it, Sempra Energy owns the other half. It is located 
just outside Las Vegas, but it is not connected to the Nevada 
power system, or at least it was not last summer. It was 
actually connected to the California grid, and was contributing 
to help keep the problems in California as minimal as possible, 
as well as keep the price down.
    We are also bringing on another 500 megawatt project this 
summer in the Western interconnection.
    Mr. Filner. I appreciate your attempts to keep our prices 
down. I have not seen that in anything that you have told us 
    Mr. Stout. Well, you just indicated that the more 
competition you have, the more effective the market works, and 
I agree with you on that. Bringing on more generation increases 
the competition in the market.
    Mr. Filner. Well, hold it.
    Mr. Hunter. I just want him to be allowed to answer the 
question. The second 500 megawatts?
    Mr. Stout. Arizona.
    Mr. Burton. Who is next? Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman. I want to go back to Mr. 
Seetin's remarks this morning. He indicated very clearly today 
that he thought the market structure in California was 
seriously flawed. And interestingly enough, when he was asked 
to testify before the legislature in 1996, he made the same 
observation. And in fact, much to everybody's chagrin, his 
prognostications appear to have come to fruition.
    The question that I am trying to deal with is, as we go 
from here forward, how do we solve this problem. And we can sit 
up here and argue about everything.
    But I just want to make sure I understand. I heard you very 
clearly say we need additional gas transmission lines into the 
State. Is that accurate?
    Mr. Malcolm. Yes.
    Mr. Ose. OK. I believe I heard you say that the market 
structure that exists in--I think Pennsylvania was the citation 
you made, where the long-term forward contracting was allowed, 
and direct access was allowed, is a far more preferable model 
than the current one we have in this State; is that accurate?
    Mr. Malcolm. That is not part of my filing.
    Mr. Ose. Mr. Stout.
    Mr. Stout. Well, the comment was made. And let me clarify 
what really goes on in PJM. They have a spot market in PJM, as 
well. The difference is that the spot market only accounts for 
15 percent of the energy supply. The rest of it is either 
utility-owned generation, which is about 50 percent. The 
remainder, I think that is about 35 percent or so, is forward 
contracting. So what they have is PJM is a portfolio of supply. 
That is what you did not have in California. So when you had--
and, in fact, you can have thousand dollar megawatt hour prices 
in PJM, but that only applies to a portion of the energy.
    California, if you had thousand dollar prices, under the 
market design which you had this last summer, you had that 
applied to 45,000 megawatts.
    Mr. Ose. So your point, then, was that the construction of 
the now-defunct PX--but I guess now the ISO is doing it. The 
construction by which the market-clearing price that you showed 
up there, where the lines crossed as opposed to where the bid 
was, is flawed because it pays the----
    Mr. Stout. No, absolutely not.
    Mr. Ose [continuing]. Because it pays the top guy's price 
to everybody in the market.
    Mr. Stout. No. Let me be perfectly clear on that. The 
problem was not in the market-clearing price concept. The 
problem was in the fact that California had to buy everything 
from that one market, rather than having a portfolio of markets 
to buy their energy from. The PJM clears at a clearing price in 
their spot market, just like California did.
    Mr. Ose. OK. Then it is the constriction that allows the 
different tranches of demand, the base versus the peak, to all 
be priced at one price, instead of a variety of prices?
    Mr. Stout. That is right on target.
    Mr. Ose. OK. Now, the other question that I have, and this 
is news to me, and I appreciate Mr. Hunter and Mr. Burton and 
Mr. Filner and Ms. Davis bringing it to our attention. Did I 
understand correctly that we are shipping natural gas to Mexico 
right now?
    Mr. John. Yes. And so are other pipeline companies in Texas 
for power plants.
    Mr. Ose. We are shipping natural gas out of California into 
    Mr. John. Uh-huh.
    Mr. Ose. For what purpose?
    Mr. John. To generate electricity in northern Mexico.
    Mr. Ose. For whom?
    Mr. John. I do not know the exact figures, but I know some 
of the power comes back into California, some of it is actually 
used in northern Mexico. This is part of the North American 
Energy Policy that President Bush has been espousing.
    Mr. Ose. Well, I appreciate you bringing that up. I think I 
have found something that I can drop a note to President Bush 
about. And I am sure that he can speak with President Fox about 
it. But I am just amazed. I mean, how many--Mr. Hunter, if you 
will, how many--some of your constituents have been cutoff, if 
I understand correctly, from access to natural gas.
    Mr. John. And so have some--and so has this power plant in 
Mexico, but it has been done on a pro rata curtailment basis.
    Mr. Burton. Would the gentleman yield to me just a second?
    Mr. Ose. I would yield; yes.
    Mr. Burton. I would like to know what rate per cubic foot, 
or however you charge for the gas, what rate are you getting in 
Mexico? Are you getting more there or same amount of money?
    Mr. John. Same. I mean, it is basically a tariff rate that 
is approved by the California Public Utilities Commission.
    Mr. Burton. It is a rate that is approved by the Public 
Utilities Commission here in California?
    Mr. John. Right.
    Mr. Burton. That you sell to Mexico?
    Mr. John. Uh-huh.
    Mr. Burton. So you are getting the same amount of money?
    Mr. John. Uh-huh.
    Mr. Burton. But you have less what? Restrictions?
    Mr. John. The restrictions I was referring to, Congressman, 
is the restrictions on construction of new power plants.
    Mr. Burton. OK. Thank you for yielding.
    Mr. Ose. Did the PUC approve the transfer of this natural 
gas to Mexico?
    Mr. John. Yes.
    Mr. Ose. Did FERC?
    Mr. Madden. The export-import of gas is approved by the 
Department of Energy. The siting of the facility is the Federal 
Energy Regulatory Commission. The CPUC, because of the Hinshaw 
status of this facility, approved the tariff. We did not do 
    Mr. Ose. I can flat guarantee you, Mr. Chairman, we are 
going to look into this. And I yield back.
    Mr. Burton. If the gentleman would yield his time.
    Mr. Ose. I yield my time.
    Mr. Burton. I think that Mexico has substantial gas 
reserves. In fact, they have a lot of oil reserves, too, down 
there. Is the reason that they are importing gas from us 
because they do not have the pipeline capacity down there?
    Mr. John. That is correct. I mean, there are very few--to 
the best of my knowledge, there are very few natural gas 
reserves in northern Mexico. Most of the reserves are in the 
southern part of the country.
    Mr. Burton. Well, but that is--but we are sending our gas 
down there while Americans are suffering, at a time when they 
really need the generation; right?
    Mr. John. But I think you have to take a longer-term look 
at this issue. I do not think it makes----
    Mr. Burton. Well, you tell that to somebody whose lights go 
out. I was having dinner the other night, and the lights went 
out in the middle of dinner.
    Mr. John. And all I am saying to you, Congressman, is when 
we have to curtail in southern California, we also curtail in 
northern Mexico. So they are feeling the same pain. It is not--
they are not getting favoritism.
    Mr. Burton. Well, that is very nice, except we do not 
represent Mexico, we represent America.
    Who is next?
    Ms. Davis. Thank you. Thank you. While we are on natural 
gas--and I appreciate, Mr. John, what you are sharing with us, 
because sometimes it is hard to get information like that 
directly. I am aware that there was a Rand Corp. report in I 
guess December or January that said that California was being 
charged something in the neighborhood of about 60 times the 
rate of other States, other places in the country. Is that 
correct, that we were paying----
    Mr. John. I think what they were referring to, 
Congresswoman, is in the month of December 2000 the price of 
gas to California was about $50 per million BTU. And you would 
compare that to probably somewhere around $5 or $6 per million 
BTU in other parts of the country. So that we were paying 
basically, at that point in time, about 10 times more than 
other States.
    Ms. Davis. And why was that?
    Mr. John. Because of the cost of transportation between the 
Southwest and the California border.
    Ms. Davis. And then, so if there was natural gas, what 
about in Mexico, then? What were they being charged at that 
    Mr. John. I do not know that.
    Ms. Davis. But is it possible that we were being charged a 
lot more here in San Diego than in Mexico?
    Mr. John. The transportation rate that we were charging to 
the power plant in Mexicali, as I said, was a PUC approved 
rate, not a FERC approved rate.
    Ms. Davis. So the ones that were higher in southern 
California were FERC approved rates?
    Mr. John. They were rates in the secondary market. The 
maximum rates that FERC approves are tariffed rates in the 
primary market. But as I said earlier, FERC allowed, on an 
experimental basis, the caps to be lifted in the secondary 
    Mr. Madden. Congressman, if I may, the prices did hit $50, 
even $60 at Topock, CA, for about 2 or 3 days in California. If 
you look at the San Juan basin at that time, it was about $10 
to $15. Other areas of the country with constraint points, like 
New York City, had about $50.
    In terms of the gas itself, the Federal Energy Regulatory 
Commission has very little jurisdiction over the amount of gas 
because of the decontrol. Essentially it is with respect to gas 
that is in interstate, intrastate, or in LDC ships, or it is an 
affiliated. And even then it is restricted. If it comes in from 
Canada, we do not have the authority, and if it is their own 
production, we do not have the authority.
    We are looking into that matter right now. And he raised 
the case in terms of the transmission. We do have jurisdiction 
over the transmission. No one can charge more than the J&R rate 
on the pipeline. The pipeline cannot get that.
    Mr. John is talking about the secondary market, where we 
relaxed the price and allowed people to--people, not the 
pipeline shippers, and they include everyone, including Mr. 
John's company, everyone to charge the value of the 
    We have done an analysis of it, and it has shown that in 
the secondary market--and we required it to go on the board--in 
the secondary market, very few volumes went into the secondary 
market, and the prices were at or above the J&R rate that is 
approved in the primary market. So there is transparency there.
    At the same time, we are looking into whether or not 
certain entities manipulated the gas prices, because they were 
a market power, to raise the prices at those points in 
    Ms. Davis. When will that information be available to the 
    Mr. Madden. We, in the first instance, have set a matter 
for hearing last week, and we ordered the judge to report back 
to us in 60 days on that matter.
    Ms. Davis. Thank you. If I may, Mr. Chairman, just for a 
moment, to go back to the market control that we were talking 
about. And I think, Mr. Stout, you had answered the question 
about the percentage that you control. I do not--Mr. Malcolm, 
did--what percentage?
    Mr. Malcolm. Less than 10 percent on a peak day.
    Ms. Davis. Less than 10 percent. Because when the ISO 
reviewed the records and did a profile, it is my understanding 
that there were about five companies that they looked at, and 
those five companies controlled about 98 percent of the market. 
Was Williams part of that, do you think, in that survey? Would 
they be----
    Mr. Malcolm. I do not think so. I can assure you it would 
be my view that Williams is not part of any five-company group 
that controls 98 percent of the capacity.
    Mr. Stout. I would agree wholeheartedly. There is no way 
the five generators, who I think together have about 16,000 
megawatts, that, by no stretch of the imagination, is 98 
percent of the market.
    Ms. Davis. Well, we might go back and look at that.
    Mr. Filner. Would you yield?
    Ms. Davis. Yield? Sure.
    Mr. Filner. It was not 98 percent of the market, it was 98 
percent of all the bids that five companies submitted, and you 
two are amongst those five, showed control of the market. The 
bids reflected market power, is what the ISO has alleged.
    Mr. Stout. Well, I would very much appreciate you sharing 
that particular document with me. I am not aware of that 
    Mr. Malcolm. Nor am I.
    Mr. Filner. If that were true, Mr. Madden, if ISO has 
alleged it correctly, would their authority for market-based 
rates be revoked?
    Mr. Madden. I think the facts upon which you are relying 
are not based in anything that I am aware of. Because if you--
their share in total--you have to look at what PG&E has, you 
have to look at what So Cal Edison has, you have to look at 
what San Diego has.
    Mr. Filner. You understand ISO knows this better than I do.
    Mr. Madden. Well, if you look at those alone, they are 
about 60 percent of the market. And then you have to look at 
all the other sellers in----
    Mr. Filner. The issue was not what percent of the market. 
What the issue was, as I understand it, the bidding pattern and 
the ability to get the price that they bid reflected market 
power. And that is their statement, not mine. And if that is 
true, now I am just asking you if it was true, would their 
authority to sell at market-based rates be revoked?
    Mr. Madden. We would have a number of equitable remedies to 
do with respect to that, including revocation of market-based 
    Mr. Filner. Thank you.
    Mr. Burton. Mr. Horn.
    Mr. Horn. I yield my time to Mr. Ose.
    Mr. Burton. Mr. Ose.
    Mr. Ose. Thank you, Mr. Horn. I want to go back to the 
Pennsylvania--PJM, Pennsylvania-Jersey Market situation. I just 
want to make sure I understand that. Mr. Stout, based on your 
comments, I am inclined to believe that people in the energy 
business in that marketplace calculate their base, hedge their 
exposures for a vast, vast percentage of the entire load that 
they have to provide. Am I correct?
    Mr. Stout. On average, that is correct. On specific company 
basis, that may not be correct.
    Mr. Ose. OK. From your experience relative to the average 
company basis, do they hedge 95 percent on long-term?
    Mr. Stout. The actual percentage is 85 percent, as 
published in the PJM annual report last year.
    Mr. Ose. OK. Now, when you look in the Wall Street Journal 
on a daily basis, there is a chart in there that says ``PJM,'' 
``Four Corners,'' ``California-Oregon Border,'' etc. And it 
shows prices for firm and non-firm, peak and off-peak power, 
electricity. I think the actual compilation of data is either 3 
or 4 days, the day immediately past, and the preceding 2 or 3 
    And it always seems to me, when I look in or at that chart, 
that the price at COB is far higher than say at Mead or Four 
Corners or PJM. And I have never--why is that? Is that a recent 
    Mr. Stout. I would have to say that is more of a recent 
development. And the primary reason is, if you look at what 
fuel is on the margin in PJM this time of year, it is not 
natural gas, it is typically coal. They are down low enough in 
load that they are able to minimize their use of natural gas as 
the marginal fuel.
    But the problem you have in the West right now is, because 
of the low hydro battery I mentioned earlier, gas is on the 
margin. Gas prices are up, and the cost of generating with 
natural gas is causing those higher prices there.
    Mr. Ose. Would you agree with that, Mr. Malcolm?
    Mr. Malcolm. Yes.
    Mr. Ose. Is there a premium that is attached in the market 
to power being sold into California? In other words, is there a 
risk premium that is attached to that power?
    Mr. Malcolm. There is certainly a credit premium----
    Mr. Ose. OK, a credit premium.
    Mr. Malcolm [continuing]. Assigned to sales coming to 
California. And for good reason.
    Mr. Stout. But there is also an opposite effect. And I 
guess I would comment that if I looked at prices in California 
for power for next summer, compared them with prices around 
California, California is actually lower. The reason that 
occurs is because California has put in place, through their 
ISO, some rules that allow them to confiscate exported power 
whenever California runs short.
    That puts anyone who is in California, who is selling power 
in the market, at risk for firm contracts that they enter into 
with anyone in Nevada or Arizona. And as a result, you have to 
add an additional risk premium when you sell power to someone 
outside of California, because of the risk that California will 
confiscate that power.
    Mr. Ose. Because of the interruptible nature?
    Mr. Stout. It is not interruptible. We are doing firm 
contracts, but their rules say that if they need the power in 
California, they can interrupt it and keep the power in 
    Mr. Burton. Would the gentleman yield real briefly?
    Mr. Ose. It is Mr. Horn's, but I would be happy to.
    Mr. Burton. Mr. Horn, would you--OK. We will get you some 
more time, if you would yield to me a little bit.
    Mr. Horn. That will be fine.
    Mr. Burton. You are talking about the electricity; right?
    Mr. Stout. That is right.
    Mr. Burton. What about gas? Can they confiscate gas, too?
    Mr. Stout. I am not aware of anything in that regard.
    Mr. Burton. I was just wondering about the gas that is 
going to Mexico.
    Mr. Stout. Well, this is in the California ISO rules.
    Mr. Burton. That is a power generating source. I mean----
    Mr. Madden. Mr. Chairman, they cannot confiscate interstate 
gas supplies.
    Mr. Burton. What is the difference between that and the 
electricity he was talking about?
    Mr. Madden. Well, I assume what he is talking about, there 
is a tariff provision in the ISO that says in emergency 
conditions they will require power that is sold into other 
areas come back to California.
    Mr. Burton. Well, I understand that. But you cannot 
generate power without gas down here, and it is going to 
Mexico, so what is the difference? You cutoff generation.
    Mr. Madden. The difference is that there is a tariff, and 
the tariff on file is--all I can think of, there is no 
confiscation of interstate natural gas supplies.
    Mr. Burton. Well, we ought to look into that. If it applies 
to electricity, why would it not apply to gas which produces 
the electricity?
    Mr. Ose. I want to examine this particular issue. And I 
appreciate the information on the PJM market. Are there 
turbines or generating capacity in California that is offline 
for lack of natural gas, to anybody's knowledge?
    Mr. John. Not to my knowledge.
    Mr. Stout. Not to mine.
    Mr. Malcolm. Not to mine.
    Mr. John. And that is why I think this issue with Mexico is 
a red herring.
    Mr. Ose. Well, I think it is a fair question. I mean, I 
think your point is a fair point to make.
    Mr. Madden. Mr. Chairman, there is about 7.1 BCF of 
interstate gas supplies, gas supplies coming into the 
California market every day. Every single day. There are 
constraint points in various parts of southern California where 
they cannot take away the gas supplies that come into 
    Mr. Ose. OK.
    Mr. Madden. So, and that is something that I believe the 
CEC now is looking with the other utilities in terms of 
identifying what infrastructure in the State needs to be added 
in order to take more gas supplies away from the pipelines.
    Mr. Ose. We are still going to look at it. But I think your 
point is fairly made. So I appreciate that.
    Mr. John. And the only thing I would add to what Mr. Madden 
just said is, one of the filings we recently made to the FERC 
was to take a regional approach, looking at all the new 
interstate pipeline capacity coming into California, and make 
sure it meshes with the intrastate capacity. And I know they 
are looking at that.
    Mr. Stout. Congressman, if I could add a very important 
point to that. It is very easy to take the attitude, let us 
protect our natural resources. Let us keep it in California. 
Let us not let it go to Mexico. But let me remind you, 
California is also critically dependent on power coming from 
    Mr. Burton. If the gentleman would yield real quickly, let 
me just say that Canada does not have a power problem, do they, 
right now?
    Mr. Stout. Not that I am aware of.
    Mr. Burton. Well, that is the difference. You are talking 
about eggs and apples.
    Mr. Hunter.
    Mr. Hunter. Thank you, Mr. Burton. Mr. John, let us go back 
to this issue. I am glad I brought it up with respect to 
    You testified about a 500 percent increase in the cost of 
natural gas, and the fact that is the driver on electricity. In 
fact, Mr. Malcolm said that you had a standing offer, anybody 
wants to buy electricity from us, 2 cents a kilowatt hour, 
which is extremely low, plus the price of natural gas.
    Then we said well, why is natural gas so expensive?
    And one of you said well, at the wellhead it is still 
relatively inexpensive. But because of the constraints on our 
pipelines coming into California, it has gone up 400 or 500 
    Mr. John. From the Southwest.
    Mr. Hunter. Then we said but some of it is going out to 
    And you then said, in answer to a question, we got plenty. 
And what is sent to Mexico does not bother our supply at all. 
And no plant is short because of the amount going to Mexico.
    Mr. John. That was in response to a question from 
Congressman Ose.
    Mr. Hunter. OK, now, reconcile--well, taken holistically, 
now, reconcile those statements you made. There is no problem 
with supply, and so we should not worry about Mexico. And yet 
the problem with supply in California has driven the price up 
500 percent.
    Mr. John. But it is not the supply, Congressman. It is the 
cost of the transportation.
    Mr. Hunter. Well, now, wait a second. But one of you 
testified it was not the physical cost of transportation, it 
was the fact that there was a shortage of transportation, and 
there is apparently a competition for the transportation; that 
is, for portions of the gas line. Right?
    Mr. John. On the interstate side. In the case of the gas 
that is going to Mexico, it is going through the existing 
distribution systems in California, and there has----
    Mr. Hunter. Well, but if you were not sending that gas to 
    Mr. John. Yes.
    Mr. Hunter [continuing]. Then you would not have to be--
everything that goes to Mexico passes through California from 
another State; right? We are not generating much natural gas 
ourselves; right?
    Mr. John. The gas supply that is coming in from--that is 
serving Mexico?
    Mr. Hunter. Do we generate much natural gas from wells in 
    Mr. John. We produce a fair amount, but not as much as you 
are getting from the Southwest.
    Mr. Hunter. OK. If you have got a supply of gas coming to 
California in the intake lines, we will call them, and you said 
because of a constriction in these intake lines we have--prices 
have gone up much more than they are at the wellhead, so that 
is a line problem you have got. Some of that capacity is being 
taken by the gas that comes into California, and then flows out 
in this 30-inch line into Mexico; right? Right?
    Mr. John. Go ahead.
    Mr. Hunter. Then why are you saying there is no 
relationship between the capacity in those lines? If you did 
not have the gas going into Mexico, presumably that volume of 
gas would not be a factor in the constriction of the lines 
coming into California, because you would not be trans-shipping 
it; is that right?
    Mr. John. I am still not following you.
    Mr. Hunter. OK. You got a pipeline coming into California 
bringing gas from other States; OK?
    Mr. John. I understand that.
    Mr. Hunter. Part of that gas is going through California 
and going into Mexico. OK? You stated, or one of the panelists 
stated that one reason the price of gas is going up is not 
because of what it costs at the wellhead, it is because of the 
constriction or the lack of availability of capacity in the 
lines coming into California.
    If part of that capacity is taken, with natural gas that 
comes from other States, goes through California and goes out 
to Mexico, why would you not alleviate part of that problem and 
the attendant price increases if you did not have that volume 
of gas basically flowing through? If we were not also flowing 
through our neighbor's gas?
    Mr. John. But there are other pipelines that serve 
California, other than from the Southwest.
    Mr. Hunter. I understand that.
    Mr. John. There are pipelines from Canada, there are 
pipelines from the Rocky Mountain region.
    Mr. Hunter. We understand all that.
    Mr. John. So you cannot assume that all of the gas that is 
going into Mexico is coming from the Southwest.
    Mr. Hunter. No. But you can assume that it is relevant. 
Because, as you know, as we all know now, the, you know, 5 
percent shortage on supply can mean a doubling of price.
    You other gentlemen have any insights on this?
    Mr. Stout. I guess my comment would be there is a direct 
relationship between supply, demand, balance, and price. The 
more demand you put on a pipeline, the more likely it is that 
the cost of using that pipeline will rise. And I think that is 
the point you are alluding to.
    Mr. Hunter. Yeah.
    Mr. John. I know that is. All I am trying to say is, do not 
assume that all of the gas that is coming into Mexico----
    Mr. Hunter. We have not.
    Mr. John [continuing]. Is going from the Southwest.
    Mr. Hunter. No, we have not. But it may be relevant.
    Mr. John. Maybe.
    Mr. Malcolm. I think some of the points, some of the 
pipelines that bring gas into California are constrained. 
Others are not. And therefore, there may be some excess gas 
that could go to Mexico.
    Mr. Hunter. OK. Second question. If you have got a 500 
percent increase in natural gas prices, does that make diesel 
more attractive? And do we have diesel generational capability 
we could turn on either in California, or in other States that 
moves electricity into California, if diesel remained 
relatively stable? Is diesel a good deal right now in terms of 
cost? Not air quality, but cost.
    Mr. Stout. Unfortunately I do not have any diesel 
generation, so I have not done that particular analysis. But 
there is a breakpoint where it will become economically 
efficient to do that. I just do not know exactly where that 
breakpoint is.
    Mr. Malcolm. I think for the most part it would be economic 
    Mr. Hunter. You think it would be economically feasible 
    Mr. Malcolm. Yes. Yes.
    Mr. Hunter. So if we had some relaxation on air standards, 
if we are in an emergency situation in the summertime, moving 
some diesel-fired electricity would be economically feasible?
    Mr. Malcolm. I think it would be. No question that every 
little bit would help.
    Mr. Hunter. Just a last question. Do you have more 
generational capability you could turn on right now, but for 
regulations, procedures, laws? If you were having to--if you 
wanted to save California in 60 days from what is going to 
happen in the summer, and you were told to get every piece of 
generational capability online, is there anything you would do 
that you are not doing now?
    Mr. Malcolm. We may be plagued with Nox 
restrictions at some point this summer, that could reduce the 
amount of megawatts that we have available.
    Mr. Hunter. That is when you have to stop because you put 
too much stuff in the air?
    Mr. Malcolm. That is right. That is right.
    Mr. Hunter. OK. Mr. Stout.
    Mr. Stout. That is absolutely correct for me as well.
    Mr. Hunter. OK. OK, thank you, Mr. Chairman.
    Mr. Burton. Thank you. I guess it comes back to me. I think 
we have covered that.
    Mr. Malcolm. Mr. Chairman, could I have 15 seconds----
    Mr. Burton. Sure.
    Mr. Malcolm [continuing]. On the show cause order, which we 
sort of went through very quickly at the beginning.
    Mr. Burton. Sure. Sure.
    Mr. Malcolm. I would just want to say that we feel very 
strongly that a full and fair investigation will yield the 
conclusion that we did no wrongdoing, that we did not break any 
rules. And to the extent that information is provided to the 
committee, we want to have the opportunity to present our side 
of that story. The show cause order is very one-sided and very 
    Mr. Burton. We will be very happy to. First thing we need 
is, we need to get the information we have requested from you 
and FERC. We get all that information, and we will have our 
legal staff and everybody take a look at it. And then if you 
would like to come to Washington and appear and make a case, we 
will be happy to talk to you. We are not in the decisionmaking 
process in that area. We are looking at legislative remedies to 
help with the problem. But if you want to do that, we could 
probably talk to FERC and you and, from a congressional level, 
take a hard look at it.
    Mr. Malcolm. Thank you.
    Mr. Burton. To Reliant and Williams, what is the difference 
between the profits made by the independent generators compared 
with the municipal and Federal power sellers such as the Los 
Angeles Department of Water and Power and Bonneville Power 
Administration? Did you understand the question?
    Mr. Malcolm. You asked what the difference is?
    Mr. Burton. What is the difference between the profits made 
by the independent generators compared with the municipal and 
Federal power sellers such as the Los Angeles Department of 
Water and Power and Bonneville Power Administration?
    Mr. Stout. Mr. Chairman, I would love to know the answer to 
that question, myself. But, honestly, there is no way for me to 
have access to their profit numbers.
    Mr. Burton. So we would have to get information from you 
and them?
    Mr. Stout. That is correct.
    Mr. Burton. And then compare them. Did you hear that? OK, 
we need to get that. We will request your information and we 
will get that. I am way past that already. Do not worry about 
it. I am probably up to about 1,100.
    To Reliant, Williams, or Sempra, the utilities--I was not 
suggesting I was going to have to subpoena these things. I 
think they are going to volunteer those information, are you 
    Mr. Malcolm. That is correct.
    Mr. Burton. Thank you. But if necessary, we will do what we 
have to do.
    The utilities, in order to receive the benefit of the Cal 
ISO price cap, often scheduled their power purchase in the spot 
market instead of the PX. How did this affect the price of 
electricity last year? You want me to repeat that?
    Mr. Stout. Well, I guess my comment on that is that they 
were almost forced to buy all of theirs in the spot market. So 
that question sounds a little strange to me.
    Mr. John. That is my understanding. If that is the 
question, the utilities were required to buy out of the PX, and 
the PX was basically the spot market at that time.
    Mr. Malcolm. And so, since they were not able to take 
advantage of the forward market, long-term sales, then it had 
the impact of increasing the cost of power.
    Mr. Burton. We will submit these questions to you a little 
more succinctly in writing. And if you could respond to those, 
we would appreciate that.
    Why did generators continue to make large profits as the 
price caps were lowered last summer? Any one of you.
    Mr. Stout. Well, I am not sure that the statement is 
accurate. I do not personally know----
    Mr. Burton. Did you not make large profits last summer.
    Mr. Stout. We made profits last summer. I do not know the 
relationship between the profits that were being made versus 
the price cap. I have never gone back and looked at that.
    Mr. Burton. Well, as the price caps were going down----
    Mr. Stout. Part of the problem--part of the reason that 
generators in California probably made more money when price 
caps were lowered is because people outside of California were 
less likely to sell into California, which increased the volume 
that generators in California sold. Our profits are directly 
related to the amount we sell. So as volume goes up, the order 
of profits should go up as well.
    Mr. Burton. So you are saying your profits were outside the 
    Mr. Stout. No. What I am saying is, people from outside the 
State, when given a choice between selling into a price capped 
market, like California, and other markets which were not price 
capped, probably chose to keep their power and sell it 
somewhere else.
    Mr. Burton. I can understand that. That makes sense. But 
your profit margin continued to rise, did it not?
    Mr. Stout. Once again, I do not know that is an accurate 
statement, because I do not know how our profit margins 
compared month by month as the price cap changed. I have never 
looked at that.
    Mr. Burton. Can we get that information?
    Mr. Stout. I am not sure if we have that, but I will take a 
look and see.
    Mr. Burton. Well, it should be a simple accounting--you 
should have records, I would think, showing your profit margin 
month by month during those times.
    Mr. Stout. Well, I agree to go back and check and see what 
we can put together for you on that.
    Mr. Burton. Would you do that? Would you do that as well?
    Mr. Malcolm. Yes, sir.
    Mr. Burton. Thank you, sir.
    Why has FERC only focused on Stage 3 days when considering 
    Mr. Madden. The Commission, in its order, believed that the 
Stage 3 was the appropriate time when supply and demand would 
be out of imbalance, and that it was the time that the FERC 
should intervene in terms of looking at the prices.
    Mr. Burton. But if you focus solely on the Stage 3 
emergency deals, FERC had eliminated more than 81 percent, and 
according to these records, 57,151 of the transactions above 
the $150 were--which were, what, in January? In January.
    Mr. Madden. Mr. Chairman, I believe that came from 
Commissioner Massey's dissent. But let me say the Commission 
staff looked at the 70,000 transactions that were filed in 
January, and determined to look at a proxy as to what price is 
necessary to mimic the market and sell in at a variable price.
    What we did, essentially, was to look at the price of gas, 
the Nox, and the Nox rate. And the price 
of gas for January was 12-50 on the spot. Your Nox 
costs were 22-50, I believe. And we gave 2 pounds for the 
average CT unit, which would use that, plus the variable cost 
of $2. And we used a CT unit of 18,000 heat rate unit. And that 
was based upon the generating facilities that the three IOUs 
    Mr. Burton. Did you get all that? OK.
    Mr. Filner.
    Mr. Filner. Thank you, Mr. Chairman.
    Mr. Madden, the ISO, I think in filings to you, estimated 
or alleged or said that there was a $6\1/2\ billion overcharge 
by the wholesalers into the market. And you have issued several 
findings which found a couple hundred million or $60 million at 
one point, some other figure less. And why is there such a 
great difference between your findings of overcharges and 
    Mr. Madden. Well, Congressman Filner, I am glad you raised 
that. Because if you were here for the past 2 days of the 
testifying and the hearing, we now hear that the ISO believes 
that the $6.7 number that it gave was inappropriate, and that 
the real number, at most, is $1.3 billion.
    Mr. Filner. When did they say this?
    Mr. Madden. They have a filing that came into the 
committee. They now recognize for the first time that figure 
represents $2.7 billion associated with bilateral contracts, 
many contracts of which the CPUC reviewed from entities. It 
also included approximately $900 million associated with non-
jurisdictional entities such as L.A. Water and Power.
    Mr. Filner. So they are down to $1.3 billion or whatever?
    Mr. Madden. They have come down now to $1.3 billion, at 
most. And we have asked them for further data, which we asked 
them last week and they did not provide it to us, as to--they 
account for all the hours in all the days, for the most part. 
Nor have they told us what the gas prices are and what the 
Nox credits are.
    More importantly, if you look at it, the $1.3 includes also 
October through December. We have not looked at that period yet 
at all.
    Mr. Filner. All right.
    Mr. Madden. And on rehearing, we do have----
    Mr. Filner. If we pass my legislation, you will have the 
authority to look before October, back to June.
    In your findings, when you looked at the overcharges, you 
only counted during the period of Stage 3 alerts, as I remember 
    Mr. Madden. That is what the committee order said.
    Mr. Filner. That seems like a strange thing, because it is 
at that moment that you would find that there is real 
competition, I mean, when there is so little left. Why did you 
not look at other times when price spikes occurred for 
unaccountable reasons all through the----
    Mr. Madden. The Commission, in its order, believed that the 
Stage 3 was appropriate. What we now have to do--it is on 
rehearing. We discussed the rehearings in April 8th, or this 
Monday, rather. And one of the issues that you have raised in 
terms of why not look at a different stage----
    Mr. Filner. What price did you come up with, then?
    Mr. Madden [continuing]. And a different stage is on 
rehearing. And I cannot address that because it is a contested 
    Mr. Filner. OK.
    Mr. Burton. Was it because you had a manpower problem that 
you did not go beyond Stage 3?
    Mr. Madden. Oh, no. No. No, Mr. Chairman.
    Mr. Burton. It was not that reason?
    Mr. Madden. No. We developed on a methodology, and then 
applied that methodology to the transactions.
    Mr. Filner. Just one final comment, Mr. Chairman. And, Mr. 
Stout, I appreciate all the charts and who was bidding and 
when. It reminded me of--I have to quote my friend, Mr. Hunter, 
again. He has the best quotes. He said what that bidding 
represents, really, is if you came into a hospital for a life-
and-death operation that was scheduled at a certain time, and 5 
minutes before the operation--I am getting this right; right, 
    Mr. Hunter. Yes.
    Mr. Filner. The administrator of the hospital came in and 
asked: ``what were you willing to pay for the oxygen?'' That 
is, you control a commodity at the moment you need it. It has 
nothing to do with anything but control at a time that is 
necessary. And you could charge anything you please at that 
    I think that is what those bids represent, more than 
anything. Not that somebody was ready to pay a good price. They 
needed the electricity at that moment. You controlled it.
    Mr. Stout. If I might respond to that. We still have an 
offer on the table for forward contracts at 2 cents a kilowatt 
hour. That is a competitive bid. It is out there.
    Mr. Filner. I will have to look at that. Of course, you 
guys also control the cost of the natural gas. I mean, the 
reconciliation that you asked for earlier, Mr. Hunter, how can 
you reconcile this and that. Because there is a cartel that 
controls the transportation. I mean, I think the cartel is even 
smaller than that controls the energy production. So they could 
charge whatever they please for the natural gas stuff. So we 
are just moving the cartel from one place to another.
    One final question, if I may. You have heard stories about 
people going out of business in this area. You have heard 
stories, schools that cannot educate because they are paying 
these costs, libraries that cannot buy books because they are 
paying these costs. I have got YMCAs that have closed down 
because they cannot handle the energy cost.
    However you want to look at it, you guys are doing well. I 
mean, I look at the Fortune 500, I look at your profit 
statements. Do you feel any responsibility for a situation in 
which you are making literally hundreds of millions of dollars, 
and people are bankrupt, people cannot get educated, people 
cannot get into their YMCA, people on fixed income making life-
and-death decisions? Do you have any responsibility for that?
    Mr. Stout. Well, if you are using the word responsibility 
in a negative connotation, the answer is no, because the 
profits that we make in this market are rolled back into this 
market in terms of solutions. We are investing millions of 
dollars in equipment at our power plants that will reduce 
emissions from those power plants. We are investing hundreds of 
millions of dollars in new supply that will bring power to 
California, that will help to supply the electricity for those 
hospitals that Mr. Hunter is worried about, and for the elderly 
citizens who need to have that power in order to have their 
refrigerator running.
    Mr. Filner. Yeah, but meanwhile you have killed off their 
business and you have killed off their families, so it is not 
going to help them too much.
    Mr. Stout. Well, it is certainly not our intent to see that 
sort of result occur. We hope that the policymakers in 
California can address that concern in a way that precludes 
those customers from being harmed. But by the same token, the 
solution to this market is supply. You have got to get the 
supply and demand back in balance. And rather than blame 
suppliers for the problem, we are here to be part of the 
solution, and we want to have the opportunity to provide that 
    Mr. Filner. We have just today one of your fellow 
producers, Dynegy, told SDG&E that they would close down their 
operated plants because of a payment problem, a dispute over 
the payment. There is not a shortage of capacity, it is a 
question of who controls the ability to give it out. You have 
Duke Energy in my district had its biggest generator closed 
down during our Stage 3 alerts.
    You keep yelling supply. I will show you example after 
example the supply is there, and because you guys chose not to 
use that supply, it put us into an incredibly difficult 
situation. And you can yell supply all you want, but it is your 
control that is the problem.
    Mr. Burton. Mr. Horn. Well, you want to go--let me take 2 
minutes, real quickly, and then we will yield to Mr. Horn.
    Mr. Horn. Chairman, you go ahead.
    Mr. Burton. Thank you. We are not here to beat up on you 
fellows, although it may appear as though we are being a little 
aggressive. And we understand that if you have outstanding 
debts to you, you have got to answer to your stockholders and 
that sort of thing. And so if they are not paying, it goes down 
the line.
    But this is an extremely difficult situation, and we really 
need to get as much information and answers as possible, so 
that if there is a legislative remedy that we can assist 
California with in Washington, or if we can make some overtures 
to the EPA to relax some standards so we can get some other 
forms of generation online to help ease the problem, then we 
want to do that. But we really need information for us to make 
some kind of informed decision, and a lot of us are neophytes 
as far as understanding all the intricacies of the electricity-
producing area.
    Let me ask FERC this. Why has the floating soft cap changed 
every month? In December it was $150, in January it was $273, 
in February it was the Commission that said it would determine 
a new screening price for each month until the $150 soft cap 
expired at the end of April. Can you explain that?
    Mr. Madden. Mr. Chairman, the ISO came in with a filing I 
believe sometime in 1999, which we approved, to establish a 
cap. First it was $750, then it was $500, then $250. Up until 
December 8th there was a hard cap, $250. At which point the ISO 
made a filing, emergency filing that was discussed yesterday, 
and to change that $250 cap to a $250 soft cap in order to 
attract more energy.
    The Commission, in its December 15th order, then said 
starting January 1, from an initial screening standpoint, we 
will establish a $150 breakpoint, upon which we will look at 
all those transactions. And those are the 70,000 transactions I 
talked about that the Commission staff looked at to establish 
the price. And the $273, as I discussed, is based upon an 
18,000 heat rate unit.
    You multiply the 18,000 times the 12-50 gas, and you come 
up with the $273 if you include the Nox prices. And 
that changes each month, depending what the value of the spot 
    Mr. Burton. I understand. OK. Why did FERC decide to only 
seek refunds on electricity sold in excess of $430 per megawatt 
hour during the Stage 3 alerts in February?
    Mr. Madden. We used the same methodology as we applied in 
January, so you had higher gas prices on average for February, 
Nox went up substantially from $22 to----
    Mr. Burton. So the soft cap went up to $430 because of the 
    Mr. Madden. That is right. The methodology. You just input 
    Mr. Burton. OK. I got it.
    Mr. Hunter, go ahead.
    Mr. Hunter. Thank you, Mr. Chairman. I think it has been a 
good, informative session.
    I think one of the most instructive statements for us, as 
Californians and San Diegans, was the fact that SDG&E is going 
to Mexico to build a plant that will transport American--that 
will receive American transported gas into Mexico, and then 
presumably export some of the created energy or electricity 
back into California, because doing all of that is easier than 
building the plant in California in the first place. Is that 
the essence of what you said, Mr. John?
    Mr. John. What I said, and you are close to it, is for a 
lot of suppliers these days it is easier to build power plants 
outside of California than it is within the State.
    Mr. Hunter. OK. I think there is a lesson for all of us 
here, and I want to go back to the solution that we need to 
come to, because again we are 60 days away from what could be a 
disastrous summer.
    But we are also looking at a situation where literally 
thousands of prospective high wage employers who would come and 
locate in our community, are going to ask in the boardroom to 
their energy analyst, what is the picture for electricity in 
San Diego County, CA?
    And what they are going to get, at best, probably is, it is 
uncertain. And that term uncertain will mean that whoever is 
competing with us for that location of that prized employer for 
our citizens will probably win, and that company will go 
elsewhere. Besides driving a number--in my estimation, a number 
of American or Californian companies are going to be probably 
moving out of State if things do not get better quickly.
    So it is clear that we could build generational capability 
in California. We are not talking high tech. You make 
electricity by running--by flowing natural gas through a 
generator. And most of the big new generators that we make now, 
like the LM-6000, you bring in and you bolt down on a concrete 
pad. That is not too complex. And you run pipelines. We have 
been running pipelines for a long time.
    And yet, because of our own laws, regulations, bureaucracy, 
it takes literally years, roughly half the time it took us to 
win World War II, to get a permit for a power plant in 
    My question to all of you gentlemen is--and this is kind of 
a San Diego question--do you have right now in your inventory, 
Mr. Malcolm and Mr. Stout, do you folks have any 15 to 30 to 
50-megawatt generators that you can move in quickly and 
operate, presuming they are permitted? Do you maintain that 
kind of inventory?
    Mr. Malcolm. Just recently we had ongoing discussions with 
parties in California to site new generation, and unfortunately 
were unable to get the kinds of commitments that we needed in 
terms of siting, in terms of permitting, that would have 
allowed us to have new generation on stream by the end of July.
    Mr. Hunter. But you actually could move--have new 
generation on stream by the end of July if you had permitting 
and if you had financial backing for those plants?
    Mr. Malcolm. That is correct. We scrambled throughout the 
country and throughout the world trying to find generation 
units that we could bring in, and had located some, and very 
clearly were trying to bring additional units in for the 
summer. Were unable to do so.
    Mr. Hunter. Would you work with San Diego if we could--if 
we can----
    Mr. Malcolm. Most assuredly.
    Mr. Hunter [continuing]. If we would be willing to work 
with you on this project?
    Mr. Malcolm. Sure.
    Mr. Hunter. Mr. Stout.
    Mr. Stout. We had a couple of units earlier this year. In 
fact, we had nearly 100 megawatts of gas-serving capacity we 
were trying to locate in California. We approached Southern 
California Edison. We already had a site. Unfortunately they 
said their transmission grid was not sufficient to support it. 
So we were unable to place those. Now it is a little too late.
    Mr. Burton. We will be back to you in a minute.
    Ms. Davis.
    Ms. Davis. Thank you. Just to followup for 1 second, the 
transmission grid was not supportive. But is there anything in 
the legislation--there was legislation passed last fall--that 
precludes you from doing that? Are there any obstacles in that 
area for you to locate capacity?
    Mr. Stout. I am not familiar with which legislation you are 
referring to that was passed last fall. Could you clarify that 
for me?
    Ms. Davis. Well, there was legislation that made it easier, 
streamlined some of the processes. And I am just wondering 
whether--was that helpful? I think, Mr. Madden, you signaled 
earlier that--or perhaps Mr. John, that it is easier now. Are 
there additional obstacles that are precluding you from doing 
something that you would like to do?
    Mr. Stout. I think the most significant obstacle at this 
point is what I call political and regulatory uncertainty in 
California. We do not know what this market is going to look 
like. There are threats of confiscation of power plants. It 
would be very difficult, I think, for us to go to our boardroom 
or go to our bankers and request that they loan us hundreds of 
millions of dollars to invest in California until we have a 
clear strategic plan on how this market is going to evolve from 
this point forward.
    Ms. Davis. One of the things we hear a lot about is 
municipal power. But I think, you know, you need to understand 
that one of the reasons that cities are talking about municipal 
power is because they feel so ripped off. And so it is a shared 
responsibility that we all have, I think, to do something about 
    What is your sense of cities developing their own ability 
to regulate their own power?
    Mr. Madden. Congresswoman, are you talking about the 
transmission facilities or generation, now?
    Ms. Davis. Well, I think here in San Diego they are talking 
about transmission.
    Mr. Madden. Well, if we are talking about the----
    Ms. Davis. I am sorry. Generation.
    Mr. Madden. Oh, generation.
    Ms. Davis. Right.
    Mr. Madden. In terms of San Diego itself becoming a muni, 
for example?
    Ms. Davis. Yes.
    Mr. Madden. I think that it should be under consideration 
in terms of where San Diegans think you will get the most bang 
for their buck and their value in terms of developing their own 
    Mr. John. From our standpoint, we have been working with 
the county and the city. If they want to build their own 
generation, that is fine with us. And we are also working with 
independent generators, to try and hook them up to our system 
as best we can. We have been working with Congressman Hunter's 
office on issues like that. Especially with respect to the 
military. We would love to see some new generation built on 
some of the military bases, if it could get done.
    Ms. Davis. OK. Well, one final question, if I could go back 
for a moment. We talked about--and I am sure I appreciate you 
all have really hung in here, and we appreciate that very much. 
And my colleagues, as well, have certainly hung in here. I 
appreciate that.
    The issue of the forward contracts came up early on. And I 
spoke to Mr. Conlon about that. He suggested that in fact there 
was real mistrust going on quite some time ago, and that 
contributed to the lack of forward thinking, perhaps, we might 
suggest. Is one of the problems that--and maybe, Mr. John, you 
can answer this. What do you think it would have taken for 
those forward contracts to be developed in concert with the PUC 
    Mr. John. OK.
    Ms. Davis. It is my understanding that there was a need for 
a reasonableness clause that was rejected. And correct me if I 
am wrong on that. What was wrong, what was missing, and how can 
we improve that? How can we move forward from here?
    Mr. John. OK, the issue was that once the Commission 
started to give us some leeway to deal in the bilateral market, 
we went to them and said, that is fine. But what we need from 
you are some up-front reasonableness review criteria, so that 
if we enter into contracts, we are not going to get a hindsight 
review a couple of years later and you are going to tell us you 
paid too much for the power.
    And to this day we do not have those standards. If we had--
and in some cases we actually brought proposals to the 
Commission that were negotiated with some of the generators and 
suppliers, and we tried to say is this OK or is it not? And we 
could not get a response. So I am not sure it is as much 
mistrust as it is frustration, because the regulators have not 
been able to keep pace with the market.
    Mr. Madden. Congresswoman, if I may, California was unlike 
many, many other States when they subsequently deregulated the 
market. And I think Chairman Ose mentioned Pennsylvania. The 
utilities were not required to divest, as they were in 
California, all of their portfolio. And when they were, or they 
had to give up something, they entered into long-term 
    You do not have 85, 90 percent of your needs being sold 
into and bought out of the spot market. It does not make sense. 
You should have a mixed portfolio of spot, short, mid, and 
long. That is the best way. And you should also have financial 
and risk instruments. And a lot of State regulatory agencies 
recognize the importance of that.
    One part of our order, in the December 15th order, we told 
the State--we told the utilities, as well--that with respect to 
the generation you have left, the State can do what it wants 
with respect to the cost, but we want you out of the spot 
market, and we wanted approximately 95 percent of that 
remaining generation to be done forward, so that the realtime 
market would only consist of 5 percent. And so that even if it 
was volatile at certain points, it would be masked because of 
the certainty associated with the contract prices you got on 
the forward market.
    Ms. Davis. I guess my frustration is, with your expertise 
and the expertise of the FERC, seeing that, and I am assuming 
you saw that from the beginning in California, it seems as if 
there was a point at which you could have intervened, 
acknowledging that the likelihood of a fair and reasonable 
market would not occur.
    Mr. Madden. Well, Mr. Chairman----
    Ms. Davis. Could you have done that earlier?
    Mr. Madden. I assumed--and I was not in the position I was 
earlier, so I assume, though, the Commission could have 
rejected the ISO's filings. But the history of it indicates 
there was great deference because California was the first one 
to unbundle, and they worked at it very hard.
    Hindsight is 20/20. But even as late as--or as of 2000 they 
should have changed their position. They should have allowed 
the utilities to have a higher level portfolio, and not subject 
them to prudence reviews if the market does not work out.
    Ms. Davis. Thank you, Mr.----
    Mr. Burton. The gentlelady's time has expired.
    Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman. I do want to share with 
Congresswoman Davis that Southern California Edison, PG&E, and 
now Sempra have all said that they do not have a standard by 
which they could have a safe harbor on long-term contracts. And 
that is a critical issue here. The testimony we received in 
Sacramento on Tuesday and on Wednesday was that Southern 
California Edison and PG&E and I believe Sempra, also----
    Mr. John. SDG&E.
    Mr. Ose [continuing]. San Diego Gas was into PUC late last 
summer and early last fall asking for those standards to be 
finalized, and they have yet to receive finalized standards. It 
is a huge problem, because it creates such uncertainty. And I 
appreciate you asking that question.
    As far as Mr. Stout and Mr. Malcolm, in terms of either 
Williams or Reliant, are either of your companies contracted 
with the State of California, through the Governor's office, on 
any of these contracts that we cannot seem to get any 
information about?
    Mr. Malcolm. Yes, we have entered into a 10-year, fixed 
price, 1,400 megawatt contract.
    Mr. Ose. How about you, Mr. Stout?
    Mr. Stout. Reliant had a short--I think it was around a 30-
day contract. That has since expired. We do not have any long-
term contract.
    Mr. Ose. The reason I ask that question is that ultimately 
the question of transaction relating to the transmission lines, 
as I understand it, falls under the jurisdiction of the FERC.
    Mr. Madden. That is correct.
    Mr. Ose. And we may well need to understand the financial 
implications of these long-term contracts that the Governor's 
office has arranged, but for which we cannot get any 
information. Would you be willing to, under seal, provide us 
with a copy of your contract so that we can at least have some 
information as it relates to that?
    Mr. Malcolm. I am sure something can be arranged.
    Mr. Ose. I appreciate your offer, because--and I will say 
that the others that we have asked that have also consented to 
provide us that information, and I am appreciative of it.
    One final point, Mr. Chairman. Mr. John's company has 
technology that is relatively old. But, well, excuse me. Your 
generating capacity before you sold it was relatively dated?
    Mr. John. Yes.
    Mr. Ose. Mr. Malcolm's company and Mr. Stout's company are 
forced, just by economics, to produce the power at the lowest 
possible price, and thereby generating the returns that their 
capital partners and the like will want. And the interesting 
thing about that is that in non-attainment areas like the 
Sacramento Valley and the San Joaquin Valley and elsewhere 
across the country, they can bring to the market power. In 
other words, they can convert natural gas to electricity at up 
to 50 percent more efficiently using new technology than old, 
at a 25 to 50 percent reduction in emissions. Whether it be 
nitrous oxide or sulfur dioxide or what have you. And the issue 
that we need to figure out is how to help increase supply in 
such a manner that it is positive for the environment. These 
are things that we can do.
    Now, Duncan cited the issue of regulatory burden being one 
of the factors pushing the construction of these plants into 
Mexico. I am curious whether we can work with FERC on such a 
manner where some improvement of conversion or some decrease in 
emission, the Federal Government can give the opt-out for a 
company to move ahead in a regulatory environment. I think this 
is absolutely a huge opportunity for us. And I hope that as we 
contemplate the information we have received over the past 3-
days hearing from all the witnesses, that we are able to take 
that and put it into legislation that will make something 
happen, and relieve the supply crisis that we have here. Thank 
you, Mr. Chairman.
    Mr. Hunter. Doug, would you yield for 1 second on that?
    Mr. Burton. We are going to you next. But we certainly will 
try, and that is the whole purpose of all this.
    Mr. Hunter.
    Mr. Hunter. Yeah, thank you, Mr. Chairman. Doug, I think 
you have pointed out a path that would be a very wise path for 
us to follow. Because what we have now is a situation, it is 
like buying a car, and you are told you buy the technology. If 
you want to buy the earliest technology you possibly can have, 
in the year 2000 the newest car you can have is a 1990. And the 
reason you cannot have a 1995 or a 1996 or a 1999 or a 2000 
model is because it takes you so long to get that online, so 
when you get something online, almost by definition, somewhat 
analogous to our military systems, it would take us a long time 
to develop. You do not have the state-of-the-art.
    And so, Doug, it would seem to me your point or your 
recommendation that, in exchange for eliminating this 18-month 
permitting time, if you promise and you commit to the 
regulatory agency that you are going to use the highest 
technology available--in fact, you may even get that down to 
where you specify models and types of equipment--and the 
bureaucracy can look at that and say that is going to put 50 
percent less emissions into the field, into the air. Is it in 
our interest, as a government, to delay the new stuff, and 
thereby guarantee we are going to have the old model continuing 
to operate for the next 5 years? Or is it in our interest to go 
to a 1-month permitting time, and thereby get the new model 
into the field, help the environment at the same time we are 
getting new stuff online? Now, does that make sense to you 
    Mr. Madden. Well, it makes sense to me to get the dirtier 
plants off, and get the more efficient steam, CT plants in. And 
that is what we mentioned in our March 14th order.
    You have got to send the right price signals for that to be 
accomplished. And, you know, the regulatory prohibitions, in 
terms of the timing, I think really need to be changed 
dramatically, and they have to come down. It does not make 
sense when everyone wants a site outside of California. It does 
not make sense.
    Mr. John. The only thing I would add is, we have talked a 
lot today about generation, appropriately. We have talked about 
gas transmission. But the same issue applies to electric 
transmission. And you have to have electricity transmission 
either upgraded or built in order to hook into some of these 
generation facilities. And it is harder to build transmission, 
especially in California, than it is generation.
    Mr. Hunter. Is that right?
    Mr. John. Yes.
    Mr. Hunter. Mr. John, just one point on that. I am trying 
to go back to getting through the summer again. You folks have 
substations around San Diego County, obviously.
    Mr. John. Yes.
    Mr. Hunter. It looks to me like a substation, if you are 
going to try to have some distributive generation capability, 
the best place to have that is at a substation, because you 
obviously have got your fuel there and you have got your line 
there; right? Is there a lot of capacity at the substations to 
put in an extra 50 megawatts, 10 megawatts, 20 megawatts?
    Mr. John. I do not know the actual amount, but I do know 
that the people over at SDG&E have been working with certain 
developers on--but I do not have the specifics. I can get that 
for you.
    Mr. Hunter. OK. Thank you. And I want to thank everybody 
here, Mr. Chairman, for their testimony. And, Mr. John, thanks 
to you folks for working with Bob Simmons, who is the president 
of the Coalition for Electricity Independence. I think that it 
is a bunch of businesses trying to get the answer here and get 
stuff online. Thank you, Mr. Chairman.
    Mr. Burton. I think Mr. Filner has one last question.
    Mr. Filner. Mr. Malcolm, Mr. Stout, you have put yourselves 
in this position and I thank you. I mean, you had to take a lot 
from us, and we appreciate your being here and answering our 
    Mr. John, we heard an offer for 2 cents plus the price of 
natural gas. There must be something wrong with that offer.
    Mr. John. And last year we heard 5 cents. Again, 
everybody--it has either been made in the newspapers or in 
congressional hearings. And the problem is, when we then sit 
down and try and have discussions with the generators, it is 
almost like a bait-and-switch. You know, all I can tell you is 
in previous discussions we have had with certain generators, 
they have said one thing in public; and then when we sat down 
to negotiate, new bells and whistles get added and the 2 cents 
becomes 10 cents or 12 cents.
    Mr. Burton. Let me just say that if some kind of an 
overture is made on the 2 cent issue and it does materialize, 
give me a call and we will have everybody come to Washington 
and talk about it. And we will just ask you to come out. And, I 
mean, if this offer that was made today is a valid offer, and 
you take him up on it, and it does not work out, our committee 
has oversight over the entire Federal Government, which has 
ancillary responsibility for what is going on here through 
Federal agencies. We will be happy to have people come out 
there and we will discuss it in an open forum.
    Let me just say we have some more questions for the record, 
but I do not want to keep you people here overnight. So if you 
do not mind, we would like to submit some questions to you for 
the record, and if you can have your staffs or you answer those 
questions and get them back to us, along with the other 
information which we have asked for, we sure would appreciate 
it. And if you get that information back to us that we ask for 
in a timely way, then I think that will probably conclude what 
we have to do out here in California.
    And with that, if there is no more questions, thank you for 
being here. We appreciate it. We stand adjourned. Thank you.
    [Whereupon, the committee was adjourned at 3:09 p.m.]
    [Additional information submitted for the hearing record