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



 
          FERC: REGULATORS IN DEREGULATED ELECTRICITY MARKETS

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON ENERGY POLICY, NATURAL
                    RESOURCES AND REGULATORY AFFAIRS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             AUGUST 2, 2001

                               __________

                           Serial No. 107-88

                               __________

       Printed for the use of the Committee on Government Reform


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




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81-342                          WASHINGTON : 2002
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                     COMMITTEE ON GOVERNMENT REFORM

                     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
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, 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
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
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
TODD RUSSELL PLATTS, Pennsylvania    JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida                 WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   DIANE E. WATSON, California
ADAM H. PUTNAM, Florida              ------ ------
C.L. ``BUTCH'' OTTER, Idaho                      ------
EDWARD L. SCHROCK, Virginia          BERNARD SANDERS, Vermont 
JOHN J. DUNCAN, Jr., Tennessee           (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
JOHN J. DUNCAN, Jr., Tennessee       ROD R. BLAGOJEVICH, Illinois
------ ------

                               Ex Officio

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





                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on August 2, 2001...................................     1
Statement of:
    Madden, Kevin, General Counsel, Federal Energy Regulatory 
      Commission; Shelton Cannon, Deputy Director, Office of 
      Markets, Tariffs, and Rates, Federal Energy Regulatory 
      Commission; James E. Wells, Jr., Director, Natural 
      Resources and Environment, General Accounting Office; Terry 
      M. Winter, president and CEO, California Independent System 
      Operator; Phillip Harris, president and CEO, PJM 
      Interconnection, LLC; and William W. Hogan, professor, John 
      F. Kennedy School of Government, Harvard University........    16
Letters, statements, etc., submitted for the record by:
    Harris, Phillip, president and CEO, PJM Interconnection, LLC, 
      prepared statement of......................................    81
    Hogan, William W., professor, John F. Kennedy School of 
      Government, Harvard University, prepared statement of......    93
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio, prepared statement of...................     7
    Madden, Kevin, General Counsel, Federal Energy Regulatory 
      Commission, prepared statement of..........................    18
    Ose, Hon. Doug, a Representative in Congress from the State 
      of California, prepared statement of.......................     3
    Otter, Hon. C.L. ``Butch'', a Representative in Congress from 
      the State of Idaho, prepared statement of..................     9
    Tierney, Hon. John F., a Representative in Congress from the 
      State of Massachusetts, prepared statement of..............    14
    Wells, James E., Jr., Director, Natural Resources and 
      Environment, General Accounting Office, prepared statement 
      of.........................................................    57
    Winter, Terry M., president and CEO, California Independent 
      System Operator, prepared statement of.....................    65

 
          FERC: REGULATORS IN DEREGULATED ELECTRICITY MARKETS

                              ----------                              


                        THURSDAY, AUGUST 2, 2001

                  House of Representatives,
  Subcommittee on Energy Policy, Natural Resources 
                            and Regulatory Affairs,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:45 p.m., in 
room 2154, Rayburn House Office Building, Hon. Doug Ose 
(chairman of the subcommittee) presiding.
    Present: Representatives Ose, Otter, Duncan, Tierney, 
Towns, Kucinich, and Waxman (ex officio).
    Staff present: Dan Skopec, staff director; Barbara Kahlow, 
deputy staff director; Connie Lausten, professional staff 
member; Regina McAllister, clerk; Michelle Ash and Elizabeth 
Mundinger, minority counsels; Ellen Rayner, minority chief 
clerk; and Earley Green, minority assistant clerk.
    Mr. Ose. The committee will come to order. I want to thank 
everybody for showing up today. Today's hearing is to discuss 
the prospective efforts of the Federal Energy Regulatory 
Commission--that I'm going to now refer to as FERC from 
hereafter--as they relate to energy markets and the effective 
functioning of them. We have a choice to make today. There are 
two paths that we could easily follow. Path A--sort of like 
Path 15. Path A is to engage in finger pointing and the like, 
and that is pretty pointless, however, I'm confident that some 
wish to pursue that path. Path B is to explore how to prevent a 
repeat of this debacle we've worked our way through over the 
past year. I am intent that today's hearing will pursue the 
second path.
    FERC has been asked to do many things lately. Up until a 
year ago, this agency operated in the obscure back waters of 
the regulatory world. Over the past 12 months, though, 
circumstances have significantly changed. Today's challenge is 
that energy has become a commodity that is traded across 
electronic markets, traded across national borders and traded 
among market participants who, in some cases, have no 
generating capacity. If FERC is to meet its statutory 
obligations to ensure just and reasonable prices, then Congress 
must periodically examine the tools that are available to FERC 
to meet its responsibilities.
    Now that FERC's role has evolved into one of market 
monitoring, as opposed to regulatory control, does the agency 
have the necessary tools to perform that function? As FERC 
tries to monitor the energy market, does it have the necessary 
staff to do its job? From a statutory standpoint, does current 
law constrain FERC in ways that are no longer useful? For 
instance, what was the original purpose of a 60-day lag between 
the time a pricing complaint was filed and the time when FERC 
could actually examine that complaint?
    Given the possibility that egregious pricing behavior might 
occur, why were the remedies available to FERC restricted to 
ordering only the amount of an overcharge to be refunded as 
opposed to assessing fines or penalties?
    I have introduced legislation, H.R. 1941, to address these 
two particular problems, and I look forward to the witnesses' 
comments on this piece of legislation. Members on both sides of 
the aisle and all of you in attendance are quite familiar with 
the facts in the energy crisis. The question remains, are we 
going to try and fix the problems, or are we going to engage in 
political sniping? I'm challenging every single member of this 
subcommittee to focus on the question that I just posed. Are we 
going to try and fix it or are we going to snipe?
    The residents of my State of California need the Congress 
to examine this matter and provide direct concrete input as to 
how to avoid a repeat of this debacle elsewhere in the country. 
I look forward to the testimony of our witnesses today. I will 
submit the balance of my statement to the record. I recognize 
the gentleman from Cleveland for an opening statement.
    [The prepared statement of Hon. Doug Ose follows:]
    [GRAPHIC] [TIFF OMITTED] 81342.001
    
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    [GRAPHIC] [TIFF OMITTED] 81342.003
    
    Mr. Kucinich. I thank the Chair, and I'm sure the Chair is 
aware that yesterday I had the opportunity to support 
California legislators who were looking for assistance in 
various amendments to the bill. So I have a great deal of 
sensitivity to the issues that were raised in the State of 
California. I've watched the troubles of deregulated energy 
markets brewing for several years now. I'm convinced that 
partially deregulated electricity market will do more harm to 
consumers than good.
    California, while unique in some ways, is not the exception 
to the rule. Rising wholesale electricity costs can be found 
everywhere electricity has been deregulated. The most 
ridiculous free market argument is that California only 
partially deregulated and complete deregulation would have 
prevented the crisis. They are correct that complete 
deregulation would have prevented the bankruptcy, but only 
because of all of the excessive prices would have been passed 
on to the consumer.
    Consumers would have shouldered the brunt of the failed 
market, and many more families and small businesses would be in 
bankruptcy. I have some serious concern with FERC's recent 
actions. For example, it took FERC a year to offer any real 
relief to California by applying the breaks to a dysfunctional 
market with their June 19th order. Yet FERC, in the same 
action, decided to illegally expand its jurisdiction to include 
public power agencies.
    Where are FERC's priorities? FERC took a year to clamp down 
on the power producers who are reaping massive profits. In the 
same order, FERC illegally attacked the public power agencies 
who are nonprofit government agencies owned by the people. This 
contradiction amazes me. We all know that these public power 
agencies are not large enough to manipulate the market, and we 
all know that the large power producers consistently manipulate 
the market. Efforts to regulate the wrong party, I would 
suspectfully suggest, are misguided. The long-term action FERC 
should take is to significantly strengthen FERC Order 2000 to 
ensure regional transmission organizations are truly 
independent and shielded from market manipulation. Anything 
less, and greedy power producers will continually seek ways to 
manipulate the market for their profit.
    If FERC and the free-marketeers want competition, at least 
it should be real competition. The average American cannot 
afford to pay electricity bills if large corporations are 
allowed to set excessive rates and eliminate competition. If 
FERC is to learn one thing today, their mandate is to protect 
people from monopolies, not monopolies from competition. I 
thank the gentleman.
    [The prepared statement of Hon. Dennis J. Kucinich 
follows:]
[GRAPHIC] [TIFF OMITTED] 81342.004

    Mr. Ose. I thank the gentleman. The gentleman from Idaho, 
Mr. Otter, for an opening statement.
    Mr. Otter. Thank you, Mr. Chairman, and I take--I'm fully 
aware of the comments you made earlier about asking us all not 
to snipe, but it's hard not to do in this environment, and 
considering some of the comments from my good friend, Mr. 
Kucinich, I feel compelled to at least make a few statements 
out of the rest of my statement, which I will submit for the 
record. But I do want to commend you for your leadership in 
scheduling this very timely hearing, and I'm pleased that the 
House just last night, with bipartisan support, passed the most 
important energy legislation in generations, which, by the way, 
I might add, included a dimension of whether or not we ought to 
have price caps and they rejected that opportunity to introduce 
the idea of price capping themselves.
    I do want to begin my remarks, though, by expressing 
particular outrage at the actions of Governor Gray Davis of 
California, who for months now has tried to place the blame of 
his State's energy woes at the feet of President Bush, who came 
into office long after California created the mess that they 
find themselves in. He tried to get away by explaining that 
what they had done in California was deregulate, when in fact 
they never did deregulate. It was a failure of restructuring.
    He's also been quick to criticize other States and power 
companies, such as my own State of Idaho, that are outside of 
California, yet 2 days ago, the Los Angeles Times reported--and 
perhaps this is substance for another hearing of the Government 
Reform Committee--where his own consultants may have used 
inside information to trade the stock of power companies that 
were doing business with the State of California.
    This hearing should not be focused on FERC's handling of 
the deregulation of electricity markets, but rather on whether 
or not Governor Davis himself profited from the power companies 
and sold power away from his own constituents.
    Before the Governor or any of his fellow defenders here 
today try to blame this administration, they should look at the 
actual source of his decisions on California energy policy over 
the last few years and how he and his advisers made their 
money.
    As I said, Mr. Chairman, I'm going to submit the balance of 
my statement for the record, but I would just conclude by 
saying that we've long tried caps. We long tried to manipulate 
the marketplace, and for the most part, what we've ended up 
doing is not creating any more, as in this case we didn't. We 
ended up dividing up scarcity, and we have to use the element 
of government, it seems, from time to time, to inflict the 
government on the free market, and we ended up dividing up the 
scarcity rather than dividing up the planning.
    And I'm convinced that for as long as we want to try price 
caps, we're always going to end up dividing up scarcity and not 
the plenty.
    Thank you, Mr. Chairman.
    Mr. Ose. The gentleman's statement will be entered in the 
record.
    [The prepared statement of Hon. C.L. ``Butch'' Otter 
follows:]
[GRAPHIC] [TIFF OMITTED] 81342.005

[GRAPHIC] [TIFF OMITTED] 81342.006

[GRAPHIC] [TIFF OMITTED] 81342.007

    Mr. Ose. The gentleman from Tennessee, Mr. Duncan, for an 
opening statement.
    Mr. Duncan. Well, thank you very much, Mr. Chairman. I'll 
be very brief. I thank you for calling this very important 
hearing and I agree with the statements by my good friend, Mr. 
Otter, who just referred to the landmark energy legislation 
which we passed last night. It's not been pointed out by many 
people, but that bill, 37 percent of that bill dealt with 
conservation and more funding for alternative and renewable 
energy sources, and frankly, that is far more than any 
President in history has ever done.
    Yet some people don't want to give President Bush credit 
for that, because they want a political issue on certain other 
parts of the bill. But I'm interested in this hearing, and I've 
read that California built no new power plants for 10 years or 
so, and yet this was at a time when demand kept going up. It 
would be interesting to know how people expect you to meet 
increased demands with no increased production. As you know, 
Mr. Chairman, from the hearing we held 2 days ago, I just have 
completed 6 years as chairman of the House Aviation 
Subcommittee. We ``deregulated'' the airline industry many 
years ago. The airline industry remains, and it should remain, 
one of the most heavily regulated industries in the country.
    I assume if we do get into utility deregulation, it will 
still be one of the most heavily regulated industries in the 
country, even after deregulation. So I'm very interested in 
this hearing, and I thank you very much for calling it.
    Mr. Ose. Thank the gentleman. The gentleman from 
Massachusetts, for an opening statement.
    Mr. Tierney. Thank you, Mr. Chairman. I want to thank you 
for holding this hearing and talk a little bit about those who 
advocated deregulation of the electricity markets. When they 
did that, they promised lower prices and workable markets. 
Twenty-four States and the District of Columbia adopted these 
State deregulation plans. However, as these States implement 
their plans, prices have been going up, not spiraling down as 
was promised to us. In California, one of the first States to 
implement deregulation, wholesale prices soared and the entire 
West has been thrown into an energy crisis.
    The Federal Energy Regulatory Commission [FERC], is charged 
with monitoring the wholesale market and making sure that 
prices are just and reasonable. However, FERC's response, or 
you might say, the lack of response, to the energy crisis in 
the West has made me and others concerned that FERC may not be 
committed to actually doing its job. When FERC came to the 
obvious conclusion that wholesale prices in California were 
unjust and unreasonable and the market in the West was flawed, 
you would have expected FERC to immediately take action. You 
would have hoped that they would have rigorously enforced the 
law by ordering sufficient refunds and assessing penalties. You 
would have hoped that by imposing measures to prevent further 
abuse until a workable market was in place, they'd be doing 
their job. And, you would have hoped for monitoring of the 
market and you would have hoped they did that closely with 
respect to future problems.
    Unfortunately, the reality is that FERC has ordered very 
few refunds and penalties. Its investigation of some of the 
overcharges has been, in the estimate of many, inadequate. In 
fact, when conducting an investigation of whether generators 
scheduled outages to influence prices, FERC ignored key 
evidence and vindicated industry on insufficient grounds. I 
look forward to hearing from the Government Accounting Office 
[GAO], on this important issue today.
    In addition, FERC's attempts to prevent further market 
abuses were inadequate. FERC's orders were based on market 
principles when it was widely recognized that the market in the 
West was so deeply flawed that it was unworkable. Although the 
Governors of California, Oregon, and Washington and many others 
asked FERC to impose cost of service based rates until there 
was a workable market, FERC denied their request. In fact, FERC 
did not impose region-wide price caps of any kind until June of 
this year, over a year after the market flaws became apparent.
    Moreover, FERC is apparently not gathering all the 
information needed to monitor the markets now. In June, after 
trying to review the status of California's electricity 
supplies this summer, the GAO released a report explaining that 
it did not have the information about outages that was 
necessary to complete its task. Because GAO can access 
information that FERC gathers, FERC was apparently not 
gathering the important outage information.
    Some may argue that FERC simply does not have adequate 
staff and expertise to monitor deregulated markets. If this is 
the case, we ought to fix that situation. However, I don't 
think we should throw money at a problem unless we're confident 
that FERC is committed to doing its job. FERC needs to be 
committed to ensuring that wholesale prices are just and 
reasonable, even if this means abandoning market principles in 
the face of a broken market. It needs to be willing to hold 
industry's feet to the fire when there are abuses, even if that 
requires complicated market analysis. And it needs to monitor 
electricity markets carefully to prevent further abuses.
    I'm looking forward to hearing about FERC's vision for the 
future, where regional transmission organizations are the first 
line of defense in market monitoring and how it should help 
FERC do its job.
    I ask unanimous consent to include relevant materials in 
the record, Mr. Chairman. I thank you for the time.
    Mr. Ose. Without objection. I thank the gentleman for his 
statement.
    [The prepared statement of Hon. John F. Tierney follows:]
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    Mr. Ose. Now we're going to go ahead and swear our 
witnesses in. We do that for all of our panels. We're not just 
picking on you. So if you'd all rise.
    [Witnesses sworn.]
    Mr. Ose. Let the record show that the witnesses all 
answered in the affirmative.
    Just as an introduction, I'm going to run through everybody 
who is here today, and then we're going to come back to Mr. 
Madden as our first witness.
    Joining us today on your panel are Kevin Madden, who is the 
general counsel for the Federal Energy Regulatory Commission. 
And Shelton Cannon, also from the FERC. He's the Deputy 
Director of Office of Markets, Tariffs and Rates. Gentlemen, 
thank you for joining us.
    Also we have the Director of the Natural Resources and 
Environment for the GAO, Mr. James Wells, Jr. Thank you.
    Also joining us is the president and CEO, and if I'm 
correct from the testimony, the COO of the California ISO. The 
gentleman who has testified before this subcommittee before, 
Mr. Terry Winter.
    Also joining us is the president and CEO of the PJM 
Interconnection Organization. That would be Mr. Phillip Harris. 
And also professor William Hogan from the John F. Kennedy 
School of Government, Harvard University.
    Gentlemen, thank you all for coming. Now, we have your 
testimony. We've read it. You can summarize it. I have a strict 
5-minute rule.
    Mr. Madden, you're recognized for 5 minutes for the purpose 
of testimony.

  STATEMENTS OF KEVIN MADDEN, GENERAL COUNSEL, FEDERAL ENERGY 
REGULATORY COMMISSION; SHELTON CANNON, DEPUTY DIRECTOR, OFFICE 
   OF MARKETS, TARIFFS, AND RATES, FEDERAL ENERGY REGULATORY 
 COMMISSION; JAMES E. WELLS, JR., DIRECTOR, NATURAL RESOURCES 
 AND ENVIRONMENT, GENERAL ACCOUNTING OFFICE; TERRY M. WINTER, 
  PRESIDENT AND CEO, CALIFORNIA INDEPENDENT SYSTEM OPERATOR; 
 PHILLIP HARRIS, PRESIDENT AND CEO, PJM INTERCONNECTION, LLC; 
  AND WILLIAM W. HOGAN, PROFESSOR, JOHN F. KENNEDY SCHOOL OF 
                 GOVERNMENT, HARVARD UNIVERSITY

    Mr. Madden. Thank you, Mr. Chairman. I'm quite aware of 
your 5-minute rule, and I'll be very brief. I want to 
personally thank you and members of the committee for having 
what I consider a very, very important hearing. I learned a lot 
at the field hearings that this committee held in California in 
April, and we applied some of those thoughts to our program. I 
believe the time is right now to discuss key issues facing the 
electric industry, including how energy markets work, market 
monitoring and just how FERC operates in a new competitive 
environment.
    Shelton and I share your views and want to hear a 
constructive dialog between and among the members of the 
committee and the panel members here. We may have been a 
backwater agency. I didn't think so. I've been there 20 years.
    Mr. Ose. That was said with the greatest of respect, I want 
you to know that.
    Mr. Madden. Well, now that we're not, I have, though, been 
hit a number of times by the sniping, and I believe a more 
constructive dialog occurs and a program can be improved 
substantially quicker, more efficiently than having political 
innuendos or the spin doctors in the press attack important 
programs.
    My job as general counsel is to be the adviser, the chief 
legal adviser to the Commission, representing all interests of 
parties before us, and when we make the calls from a legal 
standpoint, not everyone likes our decisions. Contrary to some, 
I believe we've done a pretty damn good job. We may not have 
done the things in hindsight that we should have done, but we 
are, indeed, out to protect the interests of the consumer. We 
are indeed out there to promote a more competitive environment. 
We stand ready to improve our program so that the program is 
more viable, more competitive in this 21st century. Thank you, 
Mr. Chairman.
    [The prepared statement of Mr. Madden follows:]
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    Mr. Ose. Thank you, Mr. Madden. I just want to make sure, 
when I said an obscure backwater agency, my measure of success 
is how quietly you do your job, not how loudly. So it was meant 
as a measure of respect.
    Mr. Madden. Thank you, Mr. Chairman.
    Mr. Ose. Mr. Cannon.
    Mr. Cannon. I would echo that. I'd like to get back to 
being an obscure backwater agency where things are taken care 
of.
    Good afternoon, Mr. Chairman, members of the subcommittee. 
We appreciate the opportunity to be here today. We're pleased 
to offer testimony on some of the current challenges that 
confront regulators in restructured electricity markets. I have 
to add the standard caveat that as staff members, the views 
we're going to express today are our own and don't necessarily 
reflect the view of any particular Commissioner.
    At the Commission, though, we start from the simple premise 
that a competitive market--that is, one with adequate supply, 
enough sellers, the right organizational structures and sound 
market rules--is the best way to protect the public interest 
and to ensure that consumers pay the lowest price possible for 
reliable electric service. However, for competition to 
flourish, it is critical that we have in place adequate market 
monitoring and the capability to promptly step in and take 
appropriate action if markets malfunction or sellers engage in 
market power abuse. The Commission has taken and continues to 
take actions to address these important issues.
    If we are to achieve and maintain competitive power markets 
in the electric industry, a key structural reform necessary to 
support such markets is the creation of regional transmission 
organizations [RTOs]. We expect a great deal from these new 
organizations. But fundamentally--I'm not going to give you the 
12 characteristics and functions--but we expect they will 
operate the interstate transmission grid on a regional basis, 
independent of entities that are buying and selling 
electricity. And we expect them to recognize and to facilitate 
natural wholesale electricity trading patterns, which are 
increasingly regional and multistate in character.
    The independence of RTOs from power market participants is 
essential to the success of competition. The Commission is 
stepping up its efforts to encourage the formation of RTOs that 
provide one-stop shopping and fair and nondiscriminatory 
pricing and terms and conditions for transmission service over 
very large regions.
    Now, competitive power markets also must be supported by 
effective market monitoring. This is critical to ensure that 
wholesale electricity prices remain just and reasonable and 
markets run efficiently. Effective market monitoring entails 
understanding energy markets, getting the market rules right 
and making sure that market participants play by those rules. 
The role of the Commission has changed dramatically from the 
days of command and control cost of service relation, but as we 
rely more and more on competition to discipline the price that 
consumers pay for electricity, we remain responsible for 
ensuring that wholesale electricity prices are just and 
reasonable. This means that we have to be just as good at 
monitoring energy markets as we were at auditing a utility's 
generation costs and awarding a fair return on plant 
investment.
    The Commission has made great strides in transforming our 
organization into the new role of market monitor, not only 
seeking to detect instances of market abuse, but also working 
to improve and standardize market trading rules. Thus, our 
investigation and oversight of the market we regulate will not 
be limited to finding--simply finding someone who is breaking 
the rules, but we're also going to be focusing on trying to 
find rules that are broken and need to be fixed.
    At the same time, we want to establish price signals and 
incentives that make the most efficient use of existing 
resources and encourage investment in new generation and 
transmission facilities where they are most needed.
    Based on our experience with the severe market dysfunctions 
in California and the west over the past year, we are 
continuing to learn and we're working to improve our processes 
and capabilities in this critical area and trying to become 
more proactive in anticipating and addressing market power 
issues before they result in market distortions.
    RTOs can help us in this important function of monitoring 
electricity markets, and they allow us to limit--excuse me. 
They allow us to leverage our limited resources.
    But market monitoring by RTOs is not intended to supplant 
Commission authority. Rather, we envision them as a first line 
of defense that will provide the Commission with an additional 
means of detecting market power abuses, identifying market 
design flaws, and looking for opportunities for improvements in 
market efficiency.
    Thank you again for the opportunity to appear before you 
today and we look forward to addressing your questions.
    Mr. Ose. Thank you, Mr. Cannon.
    Mr. Wells for 5 minutes.
    Mr. Wells. Thank you, Mr. Chairman. It's true. FERC is many 
things to many people. While it's true in the past, it was a 
backwater agency, it's certainly not true today. To some it's 
almost a household word recently, and to others it may be a 
four-letter word. But let me just be brief. The importance of 
FERC's monitoring role is illustrated by the situation in 
California. In response to concerns about high prices and short 
supplies, FERC did undertake a study--it was released in 
February 2001--to determine whether generators were, in fact, 
using plant outages to physically withhold power and drive up 
prices of electricity. FERC's overall conclusion was that the 
generators it audited had not physically withheld electricity 
supplies. Within days of the release of that study, the press 
started with generating companies saying that they had been 
vindicated. The officials of the State of California and other 
parties insisted that market power had indeed been used to 
drive up electricity prices.
    The State went into other studies. They claimed to have 
found market power and demanded that FERC require generators to 
pay refunds. It's at this point the GAO was called in to review 
the thoroughness of what that FERC February study said.
    In that context, let me say that the FERC study was quick. 
It was a few months, and it had a specific scope, and a limited 
timeframe. We found that the FERC study was not thorough enough 
to support its overall conclusion that the audited generators 
were not physically withholding electricity supply to, in fact, 
influence prices. They did state that they found no evidence of 
withholding power, but went into great detail defining their 
findings and that each specific outage that they saw was 
examined and had a reasonable cause. The two academic studies 
that we looked at and studied did, in fact, use broader 
evidence of exercise of market power in the entire market by 
comparing wholesale electricity prices to the estimated cost of 
producing that electricity. They found in their conclusion that 
prices were, in fact, higher than would be expected if the 
generators were acting competitively.
    The bottom line was that none of the studies that was 
presented to the press or to the public was thorough enough to 
truly determine the precise extent to which power market was 
either used or not used versus other factors that cause the 
high electricity prices in California since May 2000.
    Let me conclude here and just say that we believe that as 
the Federal Government's marketing entity, FERC does have a 
very important responsibility to fully investigate the 
potential exercise of market power and clearly report its 
results of its investigations. Perhaps the point is not that 
the FERC study was incomplete or complete, but that it's really 
how the market--how the press, and even the Congress reacts. 
Anything FERC does in terms of publishing information sends a 
message that future studies need to be sharp and clear, and 
they need to be issued quickly.
    Market monitoring capabilities, the subject of today's 
hearing, is critical to the future credibility of FERC. In this 
area, we've begun work to review FERC's monitoring and 
oversight roles and responsibilities with respect to the energy 
market. We hope that this work will include a broad-based 
review of FERC's management, existing practices, staffing and 
their internal organization. We hope to have this report ready 
for the Congress and the result of this study shortly after the 
first of the year.
    Mr. Chairman, you asked what should FERC do. Let me just 
quickly say, my short answer would be they need to have a goal. 
What is market success? I think it's unknown today.
    Second, they need to know how to monitor a market. I think 
that's unknown today.
    Third, I think they need to communicate, communicate to the 
American people and to the industry clearly and quickly, and I 
don't think the past has been great.
    Mr. Chairman that, concludes my remarks.
    Mr. Ose. Thank you, Mr. Wells.
    [The prepared statement of Mr. Wells follows:]
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    Mr. Ose. Mr. Winter for 5 minutes. And before you start, 
welcome back.
    Mr. Winter. I will try not to point fingers. I think a 
couple of things historically we ought to remember, and that is 
that I don't think we can go back, and I think we need to 
understand there was a reason why we went to competitive 
markets, why the Congress itself opened up the generation of 
electricity to independent power producers, why FERC had its 
open access rules of 888 and 889, and I think they play a lot 
on what we are doing today.
    But what is necessary? I totally agree that regulatory 
oversight is probably more demanding in the electric industry 
than others. I agree with the gentlemen that spoke on the 
aviation area. And why is that? One, it is a very competitive, 
capital-intensive market with a lot of barriers to entry, and 
when you can't come in and out of the market easily, you have 
to have regulatory oversight.
    Second, there is no substitutability. If I don't have 
enough wheat, I can buy oat bread. It is pretty hard to 
substitute electricity, and therefore it does need to be 
regulated.
    I think State and Federal coordination is extremely 
important in this area because markets are not made up of only 
the wholesale, but the retail side.
    Second, I think that the monitoring of the responsibility 
of how the markets work has got to be pushed down to the lowest 
level possible. If I have learned one thing from watching those 
markets operate for the last 3 years, No. 1, for the first 2 
years they operated quite well with prices in the $30 range. 
Then I watched the thing become completely disconnected. And 
the analysis of that has to take into account generation 
outages, which is happening in real-time; how the market is 
responding to the rules. And you cannot get that from 
Washington, DC, you have got to be there where the operator is 
making a decision on a day--minute-by-minute basis.
    Second, what is Congress' role? To me, the FPA or the 
Federal Power Act, was, in fact, a consumer protection act. I'm 
somewhat dismayed when people tell me that they can't go back 
and look at the--the activity that occurred that may not be 
appropriate or that people got windfall profits and can't go 
back. So I think that is something we clearly will try and need 
to correct.
    Second, I do believe that you cannot have a market with one 
set of players playing with one group of rules and another 
playing with another. So I would encourage that FERC's 
authority over those, and specifically what they do in a 
market, be governed by FERC or some common entity so that you 
don't have two sets of rules.
    OK. What are the effective elements of a market monitoring 
program? First, I think one of the things that we all 
desperately need is a real-time benchmark so that we can say, 
what is the level of pricing that, in fact, is inappropriate. 
Do we use market clearing price? Against what benchmark? Do we 
allow a percentage of the market to go above what we consider 
competitive prices? For how long? To send encouragement, all of 
these need to be studied, but
above all, we have to have a safety valve, some way to avoid 
the runaway markets that we saw. And I think those only come 
through a very strong and dedicated market monitoring element.
    And with that, I will conclude my comments.
    [The prepared statement of Mr. Winter follows:]
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    Mr. Ose. Mr. Harris for 5 minutes.
    Mr. Harris. Thank you, Mr. Chairman. PJM is the only fully 
functioning, FERC-approved regional transmission organization 
in the country. We operate the largest competitive wholesale 
electric marketplace in the world, and we are the second 
largest centrally dispatched entity in the world. We serve 
within five States and the District of Columbia, and will soon 
include portions of Ohio and West Virginia. We have 12 
transmission owners and over 200 traders involved in our 
marketplace. Those five States plus the District of Columbia 
are involved in retail choice programs.
    The critical test of any economic theory or new business 
practice is the test of use, and what we have discovered over 
4\1/2\ years of use is that competition has worked in the Mid-
Atlantic region. We have discovered that reliability has 
increased, and we have discovered that value has been provided 
to customers over the past 4\1/2\ years.
    Last year, for example, our wholesale prices were below 
$100 over 95 percent of the time. Over 70 percent of the time, 
our wholesale prices were below $40 dollars.
    So I come to you today to talk to you not as an economic 
expert, but simply as someone who has had his shirtsleeves 
rolled up trying to do the job over the past 4\1/2\ years in a 
system where some things have worked out quite well.
    We have certain recommendations that would help FERC's role 
as we move forward in electric competition. One, FERC should 
have full authority and flexibility to adopt and enforce 
reliability standards to integrate market-based solutions for 
maintaining and improving the wholesale electricity system. 
What we have found is that there are no clear distinctions 
between reliability and economics. With the power of technology 
today, it is very difficult to say this is a reliability issue 
or that is an economic issue. There needs to be clear and 
unambiguous authority for the Federal Energy Regulatory 
Commission to deal with those issues.
    Second, we believe that FERC should ensure that there is a 
strong market monitoring function within the regional 
transmission organization. Our market monitoring function has 
been hailed as one that works quite well, and yet we have no 
sanction authority. What our market monitoring unit has is 
data. We have over 30 terabytes of real-time data. The amount 
of information that is necessary to ensure the robustness of a 
market that is trading with hundreds of customers every hour is 
massive. We are using new tools. We have research and 
artificial intelligence so that our market monitoring unit can 
see what is happening, make appropriate analyses of that 
information, and then report appropriately to the respective 
authorities as necessary. It is the ability to access 
information, and it is the ability to have the sophisticated 
tools of the 21st century that can convert that data into 
information responsibly.
    We have been directed by the Federal Energy Regulatory 
Commission to be responsive to each of the States, and we are 
responsive to our States in order to meet their needs and 
information requirements, so that they can understand what is 
going on in the market.
    Third, we believe that the FERC could take a leadership 
role in determining what the RTO Board's responsibility is as 
far as market monitoring. Much like the Security and Exchange 
Commission has determined what an audit committee of the board 
of directors responsibilities are, the FERC should determine 
what the Board's responsibilities are for market monitoring 
along the same way that the SEC does for internal auditing.
    We also believe that there is a clear role for FERC to 
adopt some of these newer technologies and these new 
authorities. It is through these information technologies that 
we find that the State and Federal jurisdictional issues should 
not be as contentious. We work very carefully with the States 
to ensure that the wholesaler and the retailer are adequately 
bonded. And indeed, from a reliability standpoint, 99 percent 
of the outages that occur, occur on the distribution level, 
which is clearly State jurisdictional.
    Electricity is the ultimate e-commerce. It travels at the 
speed of light. Electricity doesn't know from the time it 
passes wholesale to retail. It is the power of information, 
information availability, and the understanding of that dynamic 
that enables the public, enables the States and enables this 
Congress and the FERC to ensure that competition is working 
fairly. And with these improvements, Mr. Chairman, we think 
that we can do go ahead and continue to improve in the Mid-
Atlantic region. Thank you.
    Mr. Ose. Thank you, Mr. Harris.
    [The prepared statement of Mr. Harris follows:]
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    Mr. Ose. Dr. Hogan for 5 minutes.
    Mr. Hogan. Thank you, Mr. Chairman. I too appreciate the 
invitation, and I have remarks that I submitted for the record. 
Let me summarize them.
    Your interest in market monitoring raises an important 
question, which is prior to the evaluation of the success or 
failures in market monitoring, and that has to do with the 
question of how we design these markets to support competition.
    There has been a debate in this country and other 
countries, but especially here, for the last few years. One end 
of spectrum is an argument that markets more or less take care 
of themselves. So if we set a few broad principles, the 
institutional structure will evolve naturally through the 
interplay of the participants. The FERC doesn't have to do that 
much other than announce those broad principles, 1,000 flowers 
will bloom to provide different ways to approach the market.
    The other approach says that electricity markets are 
special because of the technical characteristics of these 
markets and that certain functions, the types of things that 
are the responsibility of the ISOs that have to be performed, 
that have to be performed in a certain way in order to be 
consistent with the operation of the market. And this view 
dictates that FERC has to get much more into the business of 
deciding in the public interest what is the structure of the 
institutional design and how are the details going to work, how 
are the rules going to operate. And that debate has been going 
back and forth in the United States.
    I would say that the--the position of the Commission so far 
has reflected the debate and the positions that they have 
received, and they have been relatively deferential to the 
regions in allowing 1,000 flowers to bloom and experiment and 
so forth. But I think what we have from the experience in 
California, and the experience elsewhere, is plenty of evidence 
now to conclude, as I have concluded, that, in fact, we know 
that we have to take the view that FERC has to be much more 
prescriptive about standard market design in order to make sure 
that these markets work.
    That makes a big difference if you are thinking about 
market monitoring, because if you have a badly designed market 
in the first place, it is going to be extremely difficult to 
monitor it. And, in fact, I would argue that if it is badly 
designed, it may even be impossible to find out exactly what is 
going on. And I think much of the experience in California fits 
that case, that the--the situation there is so murky, because 
the market design is so convoluted, that you have a hard time 
actually untangling actually what happened.
    So before you can get into the question of how to monitor 
these markets you have to address the question of what should 
be the design, And I think the evidence points to the fact that 
the Commission should be much more aggressive about this.
    The good experience in the United States is concentrated in 
the Northeast, particularly in New York and PJM where Phil 
Harris is. We do have a standard market design that has been 
working. It has been working as long or longer than the 
failures that you saw in California. And New England recently 
decided to embrace this standard market design. The common 
elements include bid-based, security-constrained, economic 
dispatch with locational prices, bilateral schedules, financial 
transmission rights, license-plate access charges, and a broad 
scope for market-driven investment.
    The details of this I have discussed in my papers, but I 
wanted to recite them both to get them on the record here, and 
also to indicate that they are at a level of detail which is 
quite a bit below the broad principles announced in Order 2000. 
So it requires FERC to actually do more and to get more active 
in specifying the standard market design.
    If FERC were to do so, then that would be--adopt a standard 
market design--and recommended it for the other RTOs, it would 
be a major step forward. It would make clear that FERC accepts 
responsibility for doing what needs to be done to create 
effective institutions in support of a competitive market. It 
would make clear that FERC recognizes that defining the 
essentials of a standard market design is a task that only 
government can perform in its role of setting the rules under 
which markets can do their magic, and it would set limits on 
the scope of government action to supporting the market rather 
than dictating the outcomes.
    And if we had a sensible standard market design modeled 
after this experience in the Northeast, we also would then have 
a sensible structure for market monitoring, which is the 
question that is before this committee today. That monitoring 
structure would be dictated by the design and would follow some 
of the principles that have already been developed, for 
example, in PJM and New York.
    This is a very important question, but--market monitoring, 
but I think you can't deal with it until you deal with the 
standard market design question that is also before FERC, and I 
hope you can encourage them to be more aggressive in this area. 
Thank you.
    Mr. Ose. Thank you, Dr. Hogan.
    [The prepared statement of Mr. Hogan follows:]
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    Mr. Ose. I want to thank all of the witnesses for their 
summaries, and I'm going to recognize the gentleman from Idaho 
for 5 minutes.
    Mr. Otter. Thank you, Mr. Chairman.
    Dr. Hogan, in the purest sense, and I wasn't here, so I 
don't know what, nor was I in California when they thought to 
call what they did as ``deregulation'' in 1995, but in the 
purest sense in your--from your understanding of deregulation, 
I assume that meant we should create a free market, we should 
let the marketplace discipline and marketplace controls decide 
what happens to price, what happens to quantity, what happens 
to need.
    Would you agree with that idea of what maybe the Congress 
meant by deregulation?
    Mr. Hogan. Well, I think you have to be careful about the 
terminology. I wouldn't call it ``deregulation'' myself, I 
would call it ``restructuring,'' which I tried to use in the 
formal remarks that I submitted, because you are changing the 
rules, not eliminating the rules, and that is important.
    And, second, there are many functions, maybe the most 
important functions that make the biggest difference, that can 
be left to the market: investment decisions and all of the 
kinds of choices that you have described. On the other hand, 
there are other characteristics of these markets over a very 
short period of time, like a day, hours or minutes, where very 
careful coordination of the market is necessary. This is a 
little counterintuitive because we are not used to thinking 
about it that way, but in order to have the kind of market that 
you are talking about, which I think can be done and works well 
in many places and can be successful, it is critical that the 
functions that the ISOs performed are done and done in a way 
that is consistent with the market. The coordination functin is 
not something that can be just left to the marketplace to 
decide for itself.
    Mr. Otter. I guess what I am trying to get back to, Doctor, 
is I am trying to get a sense of what the Congress had on its 
mind when the Congress said, ``let's let these folks deregulate 
if they want to.'' And California was one, and Oregon was 
another that said, ``OK, we are going to deregulate.'' And what 
they did--I agree with you. In fact, if you recall in my formal 
opening statement, I used the term it was a ``failure of 
restructuring,'' it wasn't a failure of deregulation. But I 
believe what Congress conceived was the academic theory, the 
academic idea of what deregulation meant, and I think the end 
result was that there would be freedom in the marketplace, 
freedom of entry, which California did not allow, freedom of 
price control for the market to control the price, which 
California did not allow, and freedom to withhold product, 
which California says that they didn't allow.
    Yet the only thing we really have is we have--under this 
restructuring--and the press continues to call it 
``deregulation,'' which would suggest that the free market 
disciplines were actually in control, and they were not, 
because the only freedom that anybody had was in the middle. 
The retail price was held at a certain level. They were free to 
sell--buy and sell--pardon me. Even the wholesale market wasn't 
free to buy and sell, because they were not allowed to buy 
except, as I recall, on the spot market. And so when they were 
offered long-term contracts--in fact, I have one right here. 
When San Diego requested--Duke Energy offered to meet the 
supply needs of San Diego Electric and Gas Co. for 5 years at a 
price of $55 per megawatt hour, and of course this is a--this 
is 55 times what we are--California and Gray Davis is now 
selling power for, I'm told, at $1 a megawatt. But this is also 
a fraction of the price of $376 paid on the spot market in 
December and $314 in January, and that was because they refused 
to permit its utilities to buy except on the spot market.
    And so where is the marketplace discipline there if you 
still have these controls that say, no, you can't go take 
advantage of a long-term contract, 5 years at $55? I would 
almost guarantee you that in December and January, we in Idaho, 
who were forced to run water through our pen stocks and our 
dams in order to wheel power down the Pacific grid into 
California and displace it, would have loved to have had $55 
megawatt power.
    My point is, I hope you agree with me, and you can just say 
yes or no to this, but did we or did we not have deregulation 
in California?
    Mr. Hogan. Well, that is an easy statement. The answer is 
no.
    Mr. Otter. Thank you.
    Mr. Ose. Your time has expired.
    Mr. Otter. I'm still on yellow, Mr. Chairman.
    Mr. Ose. The gentleman's time has expired. The gentleman 
from Tennessee. We will have multiple rounds.
    Mr. Duncan. Thank you, Mr. Chairman.
    You know, the title of this hearing is ``FERC Regulators in 
Deregulated Electricity Markets.'' This is my 13th year in the 
Congress, and every year I have been visited by companies and 
groups that want to talk about utility deregulation, some for 
it, some against it. And for several years I told them that I 
felt it was such a complicated, difficult problem that I didn't 
think we were going to do it that year.
    I still wonder, but sometimes I think we may be getting a 
little closer to doing something. I do remember, though, when 
Congressman Dan Schaefer of Colorado chaired the Appropriations 
Subcommittee for the Energy and Commerce Committee as it was 
then called, I think, and he is a very good man, but I think he 
thought that was going to be his legacy in Congress, and he 
retired a few years ago. So it is a complicated, difficult 
problem.
    But I wonder, and I direct this to any of you who wish to 
comment, do you think that we are getting closer to real 
deregulation in this industry or now, because of the problems 
in California, further away from it? And whatever you think, if 
we went to, if we somehow could get to what we would call a 
deregulated electricity or power market, do you think it would 
end up--there has been so much consolidation and concentration 
in almost every industry with most industries going toward the 
big giants--would the electricity market in this country end up 
being controlled by two or three or four big giants?
    Mr. Harris. Yes. I would be pleased to address at least 
portions of that.
    What we have found out in the Mid-Atlantic is that 
restructuring, changing the rules, as Bill said, really has 
increased the reliability. We have factual data that shows the 
reliability of our power grid has increased because of 
introducing competition. We have factual data that shows that 
the prices have decreased, as we have seen. We have data that 
shows that the customers have benefited.
    The Energy Policy Act of 1992, or the amendments to the 
Federal Power Act, had as a goal their intention to ensure that 
customers have the benefit of competitive price generation. We 
have seen that with properly structured markets, customers have 
the benefit of competitive price generation.
    We are also discovering, and this is almost an epiphany, 
that because electricity really is the ultimate e-commerce and 
is the only thing that is consumed the very instant it is 
produced, that network information technologies are the very 
tool that are there to enable electricity to be competitive. We 
could not have done this 10 years ago or really even 5 years 
ago. It is the ability to take information and make it 
ubiquitously available that has enabled competition to work. 
That moves us forward. That creates jobs. That creates 
business. That creates a new way of dealing with this thing 
called electricity.
    The sad thing about California, is that it has masked the 
value of moving to competition. We have seen it work in the 
Mid-Atlantic. We have others that are endorsing and moving 
ahead.
    I would agree with you, it is extraordinarily complicated, 
but one of the things that the power of information does, is it 
enables us to make life more simple for the customer and even 
more convenient. So it is a challenge worth taking. We have 
seen the measurable benefits, and it can work, but it must be 
done incrementally. We believe it must be done regionally. It 
must be done with appropriate FERC oversight in the monitoring 
functions, because if you lose the trust of the public, if you 
lose the confidence of business, then you are dead in the 
water. And we spent a lot of time ensuring that the trust of 
the public and the confidence of the business is maintained as 
we proceed and move down this path of restructuring.
    Mr. Duncan. Let me ask Mr. Winter a question somewhat 
related to the question that I just asked, particularly as to 
the consolidation within the industry.
    You mentioned barriers to entry, and I have dealt with that 
in the aviation area. It is very difficult. But I know almost 
nothing about the electricity industry, and it would seem to me 
that the barriers to entry here would be even greater.
    Is there anything on the horizon, or do any of you envision 
a time in the future where it might be possible for even a 
small business or a medium-sized business to get into the 
business of generating electricity, or is this something that 
is going to always have to be dominated by monopoly type 
giants?
    Mr. Winter. No, I don't think it has to be dominated by 
giants at all. Quite honestly, in California we have many 
independent power producers called QFs, or qualifying 
facilities, with 50-megawatt units. They make up almost 10,000 
megawatts in our system. All of these are owned by various 
owners, some small, some large. I think that the open markets 
are a way to get those people in.
    Now, the question is on the huge units that make up the 
gas-fired units and some of the efficiencies that we see, they 
are very clearly--they are gravitating to probably four, five, 
six large entities.
    But, no, there is clearly a spot for wind, clearly a spot 
for renewables, a spot for the qualifying facilities, and we 
see tremendous numbers of those coming into the market.
    Mr. Ose. The gentleman's time has expired. We will have 
multiple rounds.
    Dr. Hogan, in your testimony, if I understand, what you are 
saying is you think FERC, from a national standpoint, needs to 
define the template that the market works under, and then as it 
approves that basic template, perhaps the regional markets that 
would work under--submarkets that would work under the national 
market template can apply to FERC for the little permutations 
that they need to reflect their respective regions.
    Is that your basic message on the market structure?
    Mr. Hogan. That is right, Mr. Chairman. The first part of 
the story is that there is a template. For a long time I have 
been arguing that the model that is embraced, for example, by 
PJM and New York is a way to approach a competitive market, 
that it was internally consistent, it made sense, and it 
worked. I think the evidence is accumulating that it is the way 
to approach the market, and that anything that is dramatically 
different from that is going to be very problematic and will 
create enormous costs during the transition.
    That doesn't mean that everything has to be precisely 
identical, because there are different requirements in 
different places for reliability. For example, New York City is 
not the same thing as the rest of the Northeast. It has special 
reliability requirements and the like. So you have to deal with 
those, and those would be somewhat different in every place.
    But for the basic structure, I think there is a template.
    Mr. Ose. If I understand your testimony further, it is that 
having arrived at a template that works, that the market 
monitoring function thereby is significantly easier, not 
simple, but easier than it otherwise might be?
    Mr. Hogan. That is correct.
    Mr. Ose. All right.
    Mr. Madden, as far as FERC's obvious interest in this 
subject, has FERC given any thought to a template, per se, for 
market structure?
    Mr. Madden. Mr. Chairman, in Order 2000 the Commission gave 
its vision in terms of the functions and characteristics of 
what our regional transmission organization should look like.
    Dr. Hogan, of course, wants to drill down another hundred 
feet to get into all of the details, but more recently the 
Commission in a number of orders said that it would like to see 
in general four regional transmission organizations, one in the 
Northeast, one in the Southeast, one in the Midwest, and one in 
the West.
    PJM, I must say from a personal standpoint, has worked very 
well. The Commission recognized in its order about 2 weeks ago 
that it should serve as the platform upon which a regional 
transmission organization is based.
    At the same time there are good things about what is 
currently existing in New York as well as in New England, and 
we shouldn't necessarily throw out those good things when we 
try to establish a regional transmission organization.
    What we are doing right now is having settlement 
agreements, or mediation agreements, rather, at the Commission 
with all of the parties associated with those regional 
organizations in the Northeast as well as in the Southeast. But 
as to the Northeast, what we are trying to do is to develop a 
plan to have one Northeast RTO that has the principles meeting 
Order 2000, that is the first thing, and then we will drill 
down and get into issues as to license-plate rates, and I don't 
want to dwell on that stuff today.
    Mr. Ose. Actually, if I understood Order 2000, it is FERC's 
desire that the RTO would then get into the regional details, 
if you will, that you want to shift that burden to the RTO.
    Mr. Madden. We set out general principles initially, and 
under those general principles, of course, you have issues 
raised in terms of what type of rates, congestion management, 
etc. We try to have the parties work together on those 
particular issues to reach consensus.
    The Commission will ultimately serve as the umpire, calling 
the balls and strikes, as to how those details should look. We 
set out the parameters. We have addressed some of the details 
in individual RTO filings to date, but we have more work to do.
    Mr. Ose. I suspect you are going to get more work to do.
    Mr. Cannon. I think the Commission is recognizing that 
there is going to be a need to start standardizing certain 
aspects of market design, things like interconnection policy, 
the market rules, particularly where one regional transmission 
organization butts up against another. If you have got 
inconsistent rules on either side of that seam, then that 
becomes an impediment to the efficient operation of the market.
    So I think the whole movement that Mr. Madden just alluded 
to, the Commission pushing toward even larger regional 
transmission organizations, is an effort to reconcile those 
rules and to try to standardize them over a much larger area.
    Mr. Ose. Thank you.
    Mr. Otter for 5 minutes.
    Mr. Otter. Let me begin, Mr. Chairman and members of the 
panel, by making a disclaimer, which I guess I should have. As 
Lieutenant Governor of Idaho the last 14 years, when 
deregulation was offered to the States, I was adamantly against 
it for the State of Idaho. And the State of Oregon and the 
State of California went ahead and did what they thought was 
deregulation. But, just for the record, I want you to know that 
I didn't think the structure was ready to handle the free 
market that was going to be required to set the price either.
    And I would just say one thing to a comment by you, Mr. 
Harris, that energy is one of these things that is consumed or 
used the minute that it is delivered. That may be the case; 
however, the effects of that are ongoing. And for a long period 
of time, because in Idaho we have got a $32 billion economy 
that is reliant almost 90 percent on value-added products, one 
of the key elements in that in this day and age happens to be 
the energy element. It didn't used to be many years ago. But it 
takes 27,000 BTUs to make 1 pound of french fries, and those 
french fries won't be consumed for a long time, because they 
need to continue to consume energy because they need to be put 
in a freezer, and they need to be held until the marketplace is 
ready for them.
    So I just wanted you to know that in our case we see the 
long-term energy use as a long time between the time that we 
might pay for it and actually get our money back. So we have 
got that in it.
    I want to ask either Mr. Madden or Mr. Cannon a question 
about your June 18th price mitigation order for California so 
far, and whether or not you think that is a success.
    Mr. Madden. Mr. Otter, looking at the prices today in 
California, as compared to some of the prior mitigation orders, 
and recognizing the fact, though, that the weather in 
California has been pretty good this year, and that--as 
compared to last year, and that Californians did their part and 
reduced a substantial amount of consumption, and that the 
Governor has added generation, I think our mitigation order, if 
you look at all of those factors, has added stability and lower 
prices to California.
    Mr. Otter. Has it added additional supplies?
    Mr. Madden. Our order recognized the importance that we not 
have a price cap per se, or hard price cap, to affect the 
development of supply.
    I understand that the Governor of California has specified 
that approximately 5,000 megawatts will be built by October. I 
think they are a little bit behind schedule in terms of the 
amount, but there has been additional supply added to 
California.
    Mr. Otter. But, Mr. Madden, I know that part of the action 
was to kind of free the market up. Part of the action that was 
taken was allowing the market to sort of set the price to the 
user, and I don't think it was any regulatory action that 
caused the great wave of conservation that suddenly took place. 
It was a higher price. It was a price that was starting to 
reflect really what the cost of production was.
    And so, you know, up in Idaho we started conserving right 
away, because our we didn't have a cap on our price. And when 
we started exporting that power to California, along with our 
water rights, I was concerned about that. Immediately we 
started conserving electricity. We started shutting down areas 
that weren't necessary to be operating that time of year.
    So I think perhaps I would agree with you that the price 
and conservation was working, but I think that is a result of 
the price going up to the end user. But as far as any 
additional supplies, in fact, it has been reported that the 
power suppliers are beginning to leave the Northwest. Isn't 
that true?
    Mr. Madden. There--I don't--I may have to ask Shelton 
Cannon if that is true relative to the Northwest, but before I 
do, let me make one particular statement. My personal belief is 
this, Congressman Otter, that what the market needs today is 
certainty in the rules and the structure, and that the 
consumers indeed feel comfortable in terms of protection. 
Those, to me, are critical things that must happen.
    Now, I recognize when we did the mitigation order, we had 
to do a balancing, and we had to balance the question of does 
this affect supply against how are market rules working? How 
are the consumers affected? And the Commission believed for an 
interim period, and through September 2002, that mitigation was 
the best approach.
    Mr. Cannon. I would just echo that with any form of 
mitigation you are, by definition, interfering in the workings 
of the market, and that can be dangerous, because it can have 
impact on entrepreneurial decisions of do I invest or do I not? 
Is this a good place to go put money into a new generator? 
There certainly have been allegations of--that people are going 
to not build generation, or they are going to pull out.
    What we have built into that order was an occasion in 
October of this year to go back and take another hard look at 
the mitigation and see if we have struck this balance 
correctly.
    Mr. Otter. Does that provide certainty? You are going to go 
back and relook at it and maybe change the rules in October?
    Mr. Cannon. No, it doesn't. But----
    Mr. Otter. Wasn't I just told that certainty was one of the 
most important things here?
    Mr. Cannon. Certainty is indeed very, very important, but I 
guess it does reflect the fact----
    Mr. Ose. The gentleman's time has expired. Butch, we'll 
come back, if you'd like, on this question.
    Mr. Otter. Thank you, Mr. Chairman. Thank you, members of 
the committee.
    Mr. Ose. Mr. Waxman for 5 minutes.
    Mr. Waxman. Thank you, Mr. Chairman. I want to thank you 
for holding this hearing, and I will pick up where the 
gentleman left off, because I think certainty is an important 
ingredient in decisions that will be made.
    I think that a lot of the decisions by the industry not to 
produce more power plants in California was based on the 
uncertainty after the law was passed, unanimously by the 
legislature, Democratic legislature, signed by a Republican 
Governor. Am I accurate in that, Mr. Cannon? Is that your view?
    Mr. Cannon. Yes. I think any time you have that kind of 
uncertainty in terms of legislative proposals or regulatory 
uncertainty, that is something that very much weighs on the 
minds of someone considering that kind of investment.
    Mr. Waxman. So we had this law, which I think everyone now 
will acknowledge was a serious mistake, on the books. Business 
people were trying to make a decision about their investments, 
and they didn't see it made sense with all of the uncertainty 
to make investments in new power plants.
    And then we were caught off guard when the deregulation 
went awry, and the way the deregulation went awry is that the 
generators saw that they could increase the supply by 
withholding electricity, increasing the price by withholding 
electricity, and driving up the demand without having enough 
supply to meet it. Through this contrivance, they were able to 
make a windfall because that law required that the electricity 
be purchased at the spot market price.
    Is that an accurate evaluation of what went on in 
California, Dr. Hogan? You are an academic. Did you come to 
that conclusion?
    Mr. Hogan. I would certainly agree with parts of that. The 
requirement, for example, that utilities had to buy through the 
power exchange, the spot market, I think everyone recognized 
was a mistake, and it contributed to the financial impact of 
the higher prices.
    The question as to whether or not generators withheld 
supply in order to increase prices and profit from it, I would 
echo the comments that Mr. Wells from the GAO made here earlier 
today. The bottom line, when you look at all of the studies 
that have been done so far, you can't tell.
    Mr. Waxman. I suppose that is true. You can't tell for 
sure, but it seems like a strange coincidence. It seems to me 
also that in this kind of new world that we are living in with 
deregulation, some of which is not thought through, the way 
that California's was not thought through, there is an even 
more important role for FERC.
    Under the law FERC is to make sure that wholesale prices 
are just and reasonable. The problem we had is that FERC 
basically did nothing for a very long time. For months it 
ignored repeated pleas from California for assistance. Most of 
its orders, such as those in December 2000, April 2001, June 
2001, were completely ineffective or even made the problem 
worse.
    And since FERC's latest order in June, electricity prices 
have eased, but we are not so sure whether that is not due to 
milder weather and conservation.
    Do you have any views of that?
    Well, before I ask that question to get your views on it, 
let me state that GAO's investigation seems to confirm the 
inadequacy of FERC's oversight. In the report released last 
month, the General Accounting Office found that, ``FERC's study 
of electricity generator outages was not thorough enough to 
support its overall conclusion that audited companies were not 
physically withholding electricity supply to influence 
prices.'' And, furthermore, GAO explained that FERC officials 
verbally acknowledged that FERC could not determine whether 
generating companies were exercising market power to increase 
prices, because FERC only looked at outages and maintenance 
records of generators.
    The FERC report came at a time when people in this country, 
and particularly in California, were paying colossal 
electricity prices. Consumers, State officials and industry 
experts were looking for answers from FERC about whether 
electricity-generating companies had been charging unfair 
prices, and unfortunately we did not get such answers from the 
FERC report. We are only left with more questions.
    So some of us still have a question, now that FERC finally 
took action, whether that action is going to be sufficient 
should the weather get warm again in California, and we see no 
greater conservation than we already have, which is pretty 
impressive to this point.
    Mr. Madden, do you want to comment on this?
    Mr. Madden. Yes, I would, Congressman Waxman. Let me first 
say, we at the staff level have been involved in this for the 
past year. And, contrary to statements made by many people here 
on the Hill or elsewhere, we have taken a lot of actions.
    Now, I believe if we looked at our orders, we look at 
whether or not the market was dysfunctional first, and we try 
to fix those dysfunctions. In that regard----
    Mr. Waxman. The market was dysfunctional?
    Mr. Madden. Clearly there were market flaws. I'm not 
disagreeing with you. Everyone here agrees with that.
    The question arises, do you cure the market flaws or the 
dysfunctions, or do you go after the refunds from a remedy type 
of standpoint? That issue was squarely before the Ninth Circuit 
Court of Appeals----
    Mr. Waxman. Was it one or the other?
    Mr. Madden. Yes. Here is what the court said in its order 
mandamus from San Diego: That the Commission was correct in 
correcting the market dysfunctions in setting the market rules 
first, and that is the appropriate approach, and then look at 
what refunds or remedies lie with respect to refunds.
    So that issue has already been before the court, and we 
have granted refund authority back to October 2nd. So I think, 
and you can ask the panelists, the important thing is to get 
the rules right, set the structure, and we will have remedial 
authority on that.
    As to the outages and GAO, I believe GAO in its opening 
statement recognized that it wasn't the best study, it was a 
quick study, and they recognized that. It was more of an 
engineering-related type of study, and it is very difficult to 
find physical withholding relative to outages.
    As to the other economists' report, they also found faults 
with that. There was--we are trying to do a better job. For 
example, we have gotten authority from OMB to collect outage 
data from all the generators, even nonjurisdictionals. We work 
daily now with the ISO on the outages. We are still looking at 
the historical patterns of outages. There is not a lot of 
history on outages, as the ISO will admit, in terms of a 
historical standpoint. We are trying to do a better job.
    Mr. Waxman. Thank you.
    Thank you, Mr. Chairman.
    Mr. Ose. I want to followup on the legislation that I have 
introduced, that being H.R. 1941.
    If I understand the current statute that FERC operates 
under, there is a statutory requirement that FERC allow 60 days 
to pass from the date on which a pricing complaint is filed 
before any action can be taken. Am I correct on that?
    Mr. Madden. It is 60 days from the filing of any type of 
complaint, or 60 days after the Commission on its own initiates 
the investigation and is placed in the Federal Register. That 
is correct.
    Mr. Ose. All right. Am I also correct that the remedies 
that can be determined by FERC are restricted to mandating 
refund of the amount determined to be overcharges above just 
and reasonable prices?
    Mr. Madden. We--from a refund standpoint, we only have the 
authority back to, in this particular case, October 2nd to 
those prices above the J&R.
    Mr. Ose. Separate and apart from the August 3rd filing.
    Mr. Madden. That is J&R level plus any interest owed during 
that period. In this particular case, we also got to consider 
the offsets, offsets meaning how much do California parties owe 
the generators for not being paid.
    Mr. Ose. I understand. I am just trying to make sure that I 
have got the understanding of the statute.
    So it is refund of overcharges plus interest, and that is 
the sole financial remedy available to FERC when they find 
overcharges?
    Mr. Madden. Under 206 of the act. We also have authority to 
go after anyone who has violated a particular tariff or 
condition and can ask for a disgorgement of profits.
    Mr. Ose. Now, the question that I have is whether or not 
the proposal to eliminate that 60-day delay has merit, and 
whether or not giving the Commission the ability to assess 
fines and penalties over and above the overcharges they might 
order refunded has merit. I'm particularly interested in Mr. 
Harris's response as operator of PJM, and Mr. Winter's response 
as the CEO/COO of the Cal ISO.
    So, Mr. Harris.
    Mr. Harris. Well, Mr. Chairman, we think as we administer 
the tariff that certainly you have to have prompt response--
capabilities to respond when a complaint has been filed, and to 
be able to be addressed. So we would support such amendments.
    As we were discussing earlier, there is just so much money 
on the table in administering competitive electricity markets. 
Delays do and can create dysfunctions over time. So more prompt 
response is always helpful, assuming that the facts and the 
merits are available so that FERC can make an informed 
decision.
    Mr. Ose. Mr. Winter.
    Mr. Winter. I think clearly timeliness is of major 
importance. Again, I don't want to play attorney, because I am 
not one, but I think the 60-day rules were in there to allow 
people to comment on it. I think a better approach is rather 
than change those that we put in play, the tariffs that allow 
for immediate action by FERC, once we as a, quote, ISO or an 
RTO bring forward a complaint or something in the market that 
we don't think is working right, then if it is clearly a 
violation, and we set the rules up right, we ought to be able 
to act on that immediately and not go through any 160 days, 60 
days, a year, whatever.
    So, while I think people need the ability to have their day 
before FERC and discuss what they have been accused of; if we 
have the documentation, I don't think you can go for a year on 
the prices we have been seeing without taking some type of 
action immediately to at least forestall it until you can make 
your decisions.
    Mr. Ose. There was a discussion over in the Senate last 
week about conditioning the operating certificates that are 
issued to the generators in just such a manner. In other words, 
you attach a condition to the certificate that gives the 
generators the ability to sell power at market rates, and then 
if they violate that provision, you basically pull their 
certificate.
    Do you have any feedback on how this works?
    Mr. Madden, I am going come to you, don't worry.
    Mr. Winters. Yeah. I have some immediate feedback, and that 
is, if you are sitting in a situation where you don't have 
enough generation to serve your load, and I go to a generator 
and say, you have been bad, I am going to take your 1,000 
megawatts offline, I find myself in a real operating dilemma in 
that I am now unable to serve the load that I need to serve. So 
I think there has got to be some kind of--rather than just, 
quote, yank their license--there has got to be some mechanism 
that I can force them to provide that power at the same time 
penalizing them. Did I make that clear?
    Mr. Ose. I think you are arguing in favor of fines and 
penalties as opposed to pulling their certificate.
    Mr. Winter. Only because I am in a situation where there is 
insufficient supply. To take them out of the market would 
really hurt me from a reliability standpoint.
    Mr. Ose. Mr. Harris, do you agree with that?
    Mr. Harris. Mr. Chairman, I am not directly familiar with 
the discussion on the proposal for the licensing conditions for 
generating units. I would like to say, though, that what we 
have found in operating the market over the past 4\1/2\ years, 
that the real secret is spot price transparency of information, 
and if you have information, then you have the information to 
determine if it was or was not a problem.
    One of the discussions that we have is in the approval of 
the RTOs, that FERC has approved some RTOs that have spot price 
administration capabilities and some that do not. We think this 
can create a problem.
    If the RTO is administering the spot market, we publish 
prices every 5 minutes. They are universally available. If you 
want, we will publish the price every 3 to 5 seconds for you. 
Having spot price information then allows the market monitoring 
units to be able to determine what was going on, and 
appropriate information then would lead to appropriate remedy.
    So I think my gut sense is I would rather see a system that 
would ensure that you had spot price information uniformly 
distributed throughout the United States. Then you could take 
appropriate remedial action, whatever that may be.
    Mr. Ose. We are going to come back and finish this 
question.
    Mr. Towns for 5 minutes.
    Mr. Towns. Mr. Chairman, I would like to ask unanimous 
consent to submit some questions and to have them answered. I 
have a conflict, and I won't be able to stay throughout, but I 
would like to just read the questions and then have them answer 
them in writing.
    Mr. Ose. We will be happy to submit the questions to 
record. The record will be left open for 10 days for such a 
purpose. If you would like to read them, that is fine, but we 
will be happy to submit them in writing, too.
    Mr. Towns. On that note, then, I would just read them real 
fast, and then, of course--what studies, economic analysis or 
cost-benefit analyses have been done to justify the regional 
transmission organization ordered by FERC?
    No. 2. What basis is there for setting up this market in 
such an expedited fashion? What is the hurry? What is the rush?
    What impact will this RTO arrangement have on a State like 
New York that has a more sophisticated market?
    And then I guess I probably picked this one up out of 
Professor Hogan's testimony. In your testimony you set criteria 
for RTOs. Which current independent system operator best 
fulfills this criteria?
    So I would like to have those questions answered. Thank you 
very much, Mr. Chairman. I yield back.
    Mr. Ose. If I understand, you want the fourth question 
directed to Dr. Hogan, the first three questions were directed 
to Mr. Madden----
    Mr. Towns. For--yes.
    Mr. Ose [continuing]. And FERC. Well, we've got the general 
counsel and Mr. Cannon. Neither of them are Commissioners here.
    Mr. Towns. Either one of them.
    Mr. Ose. OK. So we've got three for the FERC folks and one 
for Dr. Hogan?
    Mr. Towns. That's correct.
    Mr. Ose. Any for any of the other witnesses?
    Mr. Towns. No. That's it.
    Mr. Ose. All right. So ordered.
    Mr. Towns. Thank you very much. And I yield back, Mr. 
Chairman.
    Mr. Ose. Mr. Otter for 5 minutes.
    Mr. Otter. Thank you, Mr. Chairman.
    Mr. Wells, in GAO's review of the FERC's actions and the 
FERC study and the other two studies referenced in your 
testimony here, was there any analysis that the GAO did outside 
of that, for instance, many of the actions that were taken by 
Governor Davis and his representatives during that same time 
period? Was there any analysis of what kind of disruption and 
what kind of uncertainty that those actions taken by Governor 
Davis made in the marketplace?
    Mr. Wells. We did not do our own analysis in the outage 
work that we did, as well as some other work that we were asked 
to do in terms of commenting on whether there was going to be a 
surplus or shortage, and it came down to the thorny issue for 
us of access to the data. We were not given access to outage 
information or information on outages wasn't available. So, we 
only relied on the critiquing and looking at what efforts had 
been made by others to write their studies.
    Mr. Otter. I see. OK. Mr. Madden, in an answer to a 
question from the gentleman from California, Mr. Waxman, his 
question to you about supply and about suppliers was prefaced 
with the fact that there hadn't been any building, nobody had 
rushed to build a lot of capacity in California since 1995. But 
in fact, did your report discover that there were a lot of 
megawatts in the permitting process and in the request for 
construction process?
    Mr. Madden. Congressman Otter, I believe there hasn't been 
any, really, construction at all since 1990, at least a good 
decade. I don't know what report you're referring to. Is this 
the GAO outage report, or is this our December order?
    Mr. Otter. This is the analysis by the GAO of your report 
on whether or not there was market manipulation by withholding 
supplies from the market.
    Mr. Madden. Well, I think we have somewhat of a 
disagreement between GAO, although I think they did a very good 
report. But the report that staff tried to do was to focus more 
on engineering in terms of whether or not the plants went down 
for any physical reasons. It didn't focus on--and even though 
there's a disagreement between our two agencies, it didn't 
focus on whether or not there was influencing of prices, per 
se, etc. And maybe--I mean, that is something we've got to look 
at.
    Mr. Otter. Before we get too involved in that, I'm just 
concerned that we're only looking at a very, very small part of 
what could have been the reason for some of these things, and I 
am told, either by direct reports or by other investigations, 
that there were some 14,000 megawatts of new generation 
capacity waiting to be permitted and waiting to startup. And if 
I'm a supplier and I see a whole bunch of new products coming 
some way, I'm going to make sure that my price is going to be 
competitive so that there's not a whole lot more enthusiasm for 
getting into my market and driving the price even lower.
    So it goes to that, in part, but I'm also told there was a 
terrific curtailment in some of these plants, which was 
legitimized by the fact that they didn't have pollution permits 
to a certain level, and so that they could run at 60 percent 
capacity or 50 percent capacity, because that's all of the 
``pollution'' permits that they had, because they didn't get 
the bag houses on or for whatever purpose.
    But I think to look at this thing, to go in and look and 
see whether or not they were soldering up cooling tubes in one 
of the production facilities, and that's why they were shut 
down, and if they weren't carrying on some kind of maintenance, 
then they were artificially withholding product, curtailing 
their production. I think there were a lot of reasons. What I'm 
saying is that there was a curtailing of production, and it 
wasn't all simply for market manipulation. That's just my 
statement. I just want to ask you one question.
    We were told last night in the debate on the energy bill 
that a public facility, a municipal electric facility, the Los 
Angeles Department of Water and Power, was charging during this 
time period $285 a megawatt. At the same time period, which 
they said was market manipulation by the private sector, they 
were charging $245. Have you any information about that?
    Mr. Madden. Well, I don't have the figures before me, but I 
do have some information, since I usually deal in information 
at the Commission. The system was set up in California to have 
one clearinghouse with a single price auction, where you buy 
and sell into the PX and the ISO. And you had as part of that 
framework both public utility sellers, sellers over which we 
have direct jurisdiction over, and nonpublic utility sellers, 
LADWP for example, over which we do not have direct 
jurisdiction, selling in, buying out and getting the same 
price. All right? And that, in many cases, it may have sold at 
higher rates than what the sellers, the jurisdictional sellers, 
may have sold on a bilateral basis or whatever the case may be.
    The issue before the Commission is the amount of refunds 
now that LADWP and other nonjurisdictional entities may owe, 
along with the jurisdictional entities, as a result of them 
using that single price clearinghouse and agreeing to be 
subject to those rules during the time period.
    So the bottom line is this: those nonjurisdictional 
entities received the same price through the single price 
auction as did the jurisdictional sellers.
    Mr. Ose. The gentleman's time has expired. I want to come 
back to the question on the 60-day window and the fines and 
penalties, and ask Mr. Madden for his input on that particular 
proposal.
    Mr. Madden. If I may, let me just step back and address the 
license certificates for market-based rates. Let me just tell 
you that with respect to sellers in the West who have market-
based rates, the Commission has conditioned those market-based 
rates now from a prospective basis when it issued its, I 
believe, April order, that they're subject to anti-bidding 
behavior, and they have retroactive refund conditions attached 
to those market-based rates that will give us flexibility to go 
after them. We have not done that yet for the rest of the 
country, but we're looking at our market-based rate program in 
general.
    Mr. Ose. Those conditions last until when?
    Mr. Madden. We've never set a date.
    Mr. Ose. OK.
    Mr. Madden. A term date. They're conditional with the 
market-based rate.
    As to your request for 60 days as to whether or not 
Congress would be, or the consumer would be better off in 
having a refund effective date from the date of complaint or 
when the Commission took action, 60-day action, on its own. I 
have a couple thoughts. One, I think it's hard to apply that to 
the spot market type of transactions, because they move so 
quickly. What I think Mr. Harris said, and I agree with him, is 
that what is important on the spot market is the information, 
the transparency, etc. In terms of the bilateral market, I 
think it could be done, but the problem, from my own personal 
view, again, is that you create more certainty as to whether or 
not bilateral deals, which were mutually agreed upon by the 
parties, get reopened. But should the Congress want to modify 
that, I would recommend at the max to only go back to the date 
that the complaint was filed.
    Mr. Ose. My question is a little more subtle than that. 
Even with the 60-day window on a bilateral contract, if there 
is a pricing complaint and FERC takes action ordering a refund 
and overcharge, you're still voiding a bilateral contract.
    All I'm saying is, should the calculation be from the date 
of the complaint regarding the pricing, or from 60 days after 
that date?
    Mr. Madden. It's a policy call, Mr. Chairman. I could go 
either way on it. This issue was addressed with the Regulatory 
Fairness Act that Congress dealt with in the early 1990's when 
it modified the act itself, and what it did before that was it 
was prospective from the date of the final order of the 
Commission. I could see benefits going back from the date of 
the complaint in order to have more certainty and get the 
Commission to act very quickly and get the refunds moving.
    On the other hand, the question is, is it really a viable 
complaint unless you hear from all the parties and the 
Commission makes its decision? But I think it has some merit, 
but there are pros and cons associated with doing something 
like that.
    Mr. Ose. How about the issue of assessing fines and 
penalties as opposed to just refund of the overcharge plus 
interest?
    Mr. Madden. Here's my personal opinion, and again I don't 
want to speak for the chairman or the commissioners. I 
personally believe in penalty authority. The Commission could 
have a good stick, to go against those--we may not have 
remedial authority with respect to a complaint or a 206, but 
it's something that the Commission can use against it. We do 
have penalty authority under the Natural Gas Policy Act. We do 
have some remedial penalty authority in the Federal Power Act, 
but in my opinion, as we move forward and try to monitor these 
type of markets and make sure that players play by the rules, I 
don't think it's a bad idea to have penalty authority.
    Mr. Ose. Mr. Cannon.
    Mr. Cannon. I would echo that, again as a personal opinion, 
because if you look at how these markets are starting to form 
with some sort of single market clearing price auction, the 
Commission right now is involved in a very tedious and horrible 
exercise of trying to figure out who owes money to whom for the 
last several months in California. Trying to go back and 
reconstruct what might or might not have happened in a market 
is almost impossible.
    It's just a very, very difficult task, and going forward, 
it seems that refunds don't make as much sense anymore. I mean, 
it was a nice paradigm in the days of bilateral cost of service 
regulation. You know, I was dealing with you. We could go back, 
and if I overcharged you, you could bring a complaint to the 
FERC, and we could make sure I gave you back money with 
interest. But going back and trying to reconstruct what might 
have happened in a market, had certain entities done things 
differently, and putting everybody back to where they would 
have been under those different actions is very, very hard. So 
I'm drawn to some sort of penalty that can be assessed against 
the entity that is breaking the rules.
    Mr. Ose. Thank you.
    Mr. Otter for 5 minutes.
    Mr. Otter. Thank you, Mr. Chairman. I recently received 
from Mr. Curt a letter stating that the State of Idaho, Idaho 
Power, the National Marines Fishery, and FERC had reached an 
agreement, and let me refresh you if you're not familiar with 
this. I guess you are familiar with it. I can tell by the look 
on your face.
    Mr. Madden. I'm somewhat familiar with hydro, but my focus 
hasn't been on hydro the past couple of----
    Mr. Otter. Well, if you don't feel----
    Mr. Madden. No, I'll----
    Mr. Otter [continuing]. That this is in your area, just 
tell me you can't answer this. But what the agreement came down 
to, National Marines Fishery came along and they said, ``Idaho 
Power, we want you to release 350,000 acre-feet of water out of 
Idaho and behind your empowerments, and we're not going to give 
you compensation for it, and we need this 350,000 acre-feet of 
water for salmon recovery and the continuum under their 
scientific study,'' which I might add has not been, as far as 
there are many circumstances under which many people are saying 
that this is not working. The flush is not working, but we do 
know what is working.
    But anyway, in an agreement with FERC and NMFS, NMFS backed 
off and said, ``OK, we're going to continue the regular flows 
through the summer months,'' and you know, I appreciate the 
wisdom and not only that, but the logic that NMFS--or that FERC 
obviously used to suggest to NMFS that this was not a good 
idea. Where I want to go with this is the scarce electricity 
months are coming up. Are we going to have that same kind of 
consideration in the months to come? Will we continue that, 
whether we continue the approach that FERC took for the summer 
months into the winter months when the electricity is going to 
be a lot more scarce?
    Mr. Madden. Commissioner--excuse me, Congressman Otter--I 
get used to answering commissioners these days. I'm aware of 
the Hells Canyon Project, and I think it was crucial that we 
brought all the parties in and we discussed it instead of 
having paper flying back and forth, and I think I had to give 
NMFS ultimately credit for, you know, pulling back on their 
proposal and recognizing the importance of generating energy 
and recognizing there is a need to balance environment against 
supply.
    As to your ultimate question, we are working with other 
licensees in order to modify their particular projects to 
generate more electricity, both during the summer and for the 
next year or so, and working with the environmental agencies, 
many of whom support us, by the way, so that more generation 
will be able to occur with less environmental constraints, but 
yet within the environmental law. So we are pulling together a 
dialog with numerous agencies on a number of hydroprojects in 
the west.
    Mr. Otter. Just to make you aware, I have introduced, along 
with several of my colleagues, legislation to actually put the 
U.S. Fish and Wildlife back in charge of the Endangered Species 
until it hits the ocean, and put NMFS back out in the ocean. 
Not only in these circumstances, but we have many, many 
circumstances over the Pacific northwest where it's tough to 
find a place to go to to surrender, because just about the time 
you get permission from U.S. Fish and Wildlife to go ahead with 
a problem on the Endangered Species Act, then you have to go 
get permission also from NMFS, and NMFS doesn't want to dot the 
Is; they don't want to cross the Ts, and so what should take 
maybe 60 days working with one agency, you end up spending 
years, in fact, running back and forth between the agencies.
    So I would be interested some time in a conversation that 
we might have in less formal circumstances how you as a 
government agency, who has to deal with all of these other 
government agencies and the dictates that Congress puts on 
them, like the Endangered Species Act, would feel in being able 
to go to a one-stop shop when it comes to those kinds of 
things.
    Mr. Madden. I can give you my opinion now.
    Mr. Otter. In public?
    Mr. Madden. In public.
    Mr. Otter. On the record?
    Mr. Madden. On the record.
    Mr. Otter. I want to hear it.
    Mr. Madden. Under oath. I believe in one-stop shopping. I 
am firmly a believer of some agency having the ultimate call on 
balls and strikes, working in a collegial fashion with the 
other agencies, recognizing the statutory restrictions that 
have been imposed on other agencies or the authorities as well. 
But I've worked on the pipeline side of the business. I've 
worked on the electric side of the business. I used to run the 
hydro program in my younger days, and I think it's about time 
to cut through the chase and cut through the paperwork and 
timing and have a more collegial framework and one-stop 
shopping.
    Mr. Otter. Thank you. Thank you, Mr. Chairman.
    Mr. Ose. I want to return to something having to do with 
the RTOs and the manner in which they're operated. FERC put out 
an order last week, July 25th, and the order said that while 
DWR is a market participant that competes with other suppliers 
and purchasers of energy in the ISO markets, unlike other 
participants, DWR has had access to the ISO's control room and 
associated written materials, visual observations and oral 
statements regarding ISO's markets, systems, operations and 
activities. This has provided DWR a competitive advantage.
    Now, that is a direct quote from an order dated July 25th 
from FERC. And Dr. Hogan, I'm trying to figure out, DWR is the 
big buyer in California. I mean, in my neighborhood, they're 
the big dog, so to speak. How do you run a market if the major 
participant is in the same room as the operator of the system?
    Mr. Hogan. Well, I think the answer is obvious, and it's 
obvious in your question. We do have a short-run problem which 
was created by a whole series of mistakes, which led to DWR 
buying all this power in the emergency mind-set that appeared 
last spring. But going forward, it simply would not pass muster 
by any objective analysis that you should have one big buyer, 
and you would have one big buyer sitting in the control room 
with special access to all the information.
    No one would call that a market or a sensible market design 
going forward, and I don't think California could call that a 
sensible market design going forward.
    Mr. Ose. It may well just be a happenstance. And Terry, I'm 
going to let you comment. I'm just trying to figure out how we 
fix that. Mr. Madden, Mr. Cannon, do the FERC regulations allow 
this to occur, or is this happening, again, by happenstance?
    Mr. Madden. This is my personal opinion. The DWR buying on 
behalf of the State and utilities in the State is a market 
participant, and as a market participant, it should not be in 
the ISO control room, and it should not have the ability to 
cherry-pick the contracts that come in--the lower price 
contracts, pull them out of the ISO market and enter into 
bilateral sales with them. It gets into the cornerstone 
question underlying the RTOs in a lot of things going forward, 
and that is independence.
    Mr. Ose. You brought this up about 12 or 15 minutes ago. It 
was your comment.
    Mr. Madden. I don't recall that, but I don't recall a lot 
of things these days.
    Mr. Ose. FERC has a desire for independence on behalf of 
the RTO. How do you go about establishing that?
    Mr. Madden. Well, in the RTO, we establish the parameters 
upon which we would see an independent RTO, an independent 
board. Mr. Harris is operating the PJM, and they have met our 
established criteria for independence, and we view their board 
as an independent board.
    Now, as to looking at a particular California----
    Mr. Ose. You have criteria that you've applied?
    Mr. Madden. We look at individual cases in the RTOs and 
determine whether or not they've met the independence standard 
that we specified in Order 2000.
    Mr. Ose. Why does it make any difference? Why have you done 
it? Why do you want an independent RTO board?
    Mr. Madden. I'll pass this to Shelton.
    Mr. Cannon. The primary objective is to totally separate 
transmission decisionmaking--how this interstate grid is 
operated--from decisions of market participants, where any 
particular entity that may have a generator and has an interest 
in trying to influence decisions about how that transmission 
system is operated in its favor. What we want the RTO to do is 
administer the interstate transmission system in a totally 
unbiased manner so that it's fair to any and all market 
participants.
    Mr. Ose. Well, I have to admit to some concern, and maybe, 
Mr. Winter, you can speak to this. DWR is buying a lot of power 
in the State. It's not going to successfully function, at least 
on appearance's sake, without them buying the power. I mean, 
how do we reconcile this?
    Mr. Winter. I guess I have somewhat felt like a patient 
laying on the table with everybody dissecting me and wondering 
how I'm going to respond. But I would like to comment on 
several things, this being certainly one of them.
    Just for the record, I am not for standardization. To me, 
that's like taking a race car that is running well but it 
doesn't have good brakes, so it crashed on the corner. 
Therefore, we throw the race car and everything else away.
    Mr. Ose. Going back to the question I asked Dr. Hogan.
    Mr. Winter. Right. And so I want it on the record that I am 
not for standardization. I think innovation will occur, because 
we all look at things differently. That does not mean we don't 
take the best of what Dr. Hogan has proposed, the best that 
other people have proposed, and take our experience and put it 
together. But just to do standardization for standardization's 
sake, in my opinion, retards innovation and the things that 
Phil was talking about that we really need to go forward with.
    The supply issue, there were several questions asked about 
supply. I made the decision in 1994, along with some other 
people, not to build a 500-megawatt power plant in San Diego, 
and the sole reason for that was because deregulation was on 
the horizon, and we could--we did not know what our 
responsibility as a utility would be under that, and we did not 
know who was going to pay for it. Without those two things, we 
were not going to go forward with generation. That does not 
mean that we did not have over 14,000 megawatts of generation 
in the queue looking to build in the State.
    Where we failed miserably was that we estimated up until 
the year 2004 we would have sufficient supply in California. We 
made two very critical errors. One, we did not see the 
increased growth in the surrounding States, and since we're an 
importer of about 30 percent of our power, we got caught when 
the other States grew, and they used the resource and we had 
not contracted forward for it.
    The second mistake that we clearly made was that we didn't 
recognize the State was going to grow, and so our demand grew 
much more rapidly.
    Having said that, the market failure, in my opinion, was 
the lack of supply. We had two very good years when we had more 
supply. We also got caught with the drought in the year, which 
advanced things.
    So I think, again, we've got to look at the reason, and I'm 
not pointing fingers or looking back. I think we have to learn 
from history before we go forward. The whole power plant outage 
issue, extremely hard. I have run power plants. At any time, I 
could shut the power plant down and have a very good 
justification for doing it, because tubes leak. What acceptable 
leak rates are there?
    I think there you have to go to performance-based criteria 
and say give me availability of 92 percent or something that 
motivates the people to do it, because they can always find 
something that is wrong with it. You asked about DWR on the 
floor. That occurred because, No. 1, the market was not 
functional. It was not working. And it added an element that we 
haven't talked about here and that's bankrupt or creditworthy 
entities on the other end.
    So, as on the floor when we tried to ask a generator to 
supply energy, his first question was, ``Who is the backer of 
this purchase?'' And the only way we could get that information 
in immediate real-time was to have a DWR operator who could 
commit for DWR that they would back those transactions.
    We advised FERC of that, and we're working very hard to get 
them moved out. Now that the crisis has moved along. I think 
the last thing that I would like to say--and I know I'm over my 
5 minutes, but we've asked whether the FERC mitigation has, in 
fact, worked. I firmly believe it's too early to tell, because 
I didn't get in the situation where I don't have enough power 
to meet my load, we don't know what the impact is going to be 
and whether the market is going to take off. I have high hopes 
for it, and I think it's well laid out and will help us, but 
until we get to that point, I don't think we're going to know.
    Now, on the point of independence, which you asked me----
    Mr. Ose. Let me come back. Mr. Otter has been very patient 
here. I'm way over my time. We'll come back to that. OK? Mr. 
Otter for 10 minutes if he so chooses.
    Mr. Otter. Thank you, Mr. Chairman. I would direct my first 
question to Mr. Madden and Mr. Cannon, and let's go back and 
start in December 2000 when as part of your FERC order you 
requested a restructuring of the board. Then, again, certain 
times it was mentioned that it was going to be up until, in 
fact, a couple of weeks ago or a week ago, that it was part of 
the agenda as to when they were going to get the restructuring, 
even after the Governor had gone forward and restructured the 
board himself.
    But yet you continued to put it on the schedule for 
addressing what you felt was a problem or at least a concern 
that you had. And yet you've continued to drop it off the 
schedule as you did this last meeting just before this last 
meeting. When does FERC plan on taking action on what they have 
since for the last 7 months indicated was a problem?
    Mr. Madden. I'm precluded, Congressman Otter, from giving 
you a certain date when the Commission would act on the 
question of whether or not the board is independent or not 
under my regulations. It was on the Commission's agenda last 
week, and it was taken off. It was not on any other agenda 
prior to that time, at least as I recall. The Commission 
recognizes that they have to act swiftly one way or another on 
this issue, and there are different positions of the parties, 
of course.
    California, the ISO believes that they're in compliance 
with our December 15th order and that they file bylaws to 
implement the new changes that the Governor signed in January. 
It's clear from our November order and our December order, 
which essentially required that the old stakeholder board 
remove itself from service and advisory board, and that the ISO 
management under Terry Winter and others serve until such time 
as the consultant selected or gave a list of candidates----
    Mr. Otter. Why do you feel that was necessary?
    Mr. Madden. Because we thought the whole question of 
independence was not occurring with respect to the stakeholder 
board. Under the order that we authorized back in 1998 that we 
allow the State to pick 50 percent of the stakeholders because 
the retail--we recognized that there were major problems with 
the stakeholder boards where the Commission, in its draft order 
in December, recognized the importance of independence and 
wanted things to be changed.
    Mr. Otter. And why didn't you feel that they were 
independent?
    Mr. Madden. There were questions as to whether or not they 
were--the stakeholder board was representing the particular 
interest of their group and not the interests of the ISO, among 
other things.
    There are a number of party--or pleadings before the 
Commission which were scheduled last week which raised concerns 
about the independence of the board right now. Like I said, the 
Commission had that matter taken off, and it will be before the 
Commission quickly, but I can't tell you when.
    Mr. Otter. Mr. Winter, how would you characterize the 
relationship with the State agencies with the DWR?
    Mr. Winter. I guess I don't understand. The relationship 
with State agencies and DWR?
    Mr. Otter. Your relationship.
    Mr. Winter. Oh, our relationship with DWR. Clearly, they 
are our biggest purchaser of power, although I should clearly 
state that the IOUs self-provide about 48 percent of the power. 
DWR buys another 20 and some small real-time, and then the 
municipalities provide their own. So they're not in the sense 
of being a 60 or 70 percent buyer of power. That is not the 
case. They're buying the shortfall, but the investor-owned 
utilities cannot purchase with their folks.
    Clearly, we have tried to work with them and are working 
with them to set up procedures so that they can get the 
information they need. When you have utilities with 
insufficient credit ratings, they're the only creditworthy 
person that is purchasing power, and therefore we work with 
them to make sure that we've got the available resources to 
meet the load.
    Mr. Otter. Do you believe that the CAISO board now meets 
the requirements that were laid out for independence?
    Mr. Winter. Let's see. I want to be sure I understand your 
question. Do I believe that the current board meets the 
independent requirements that are laid out in the FERC rules 
for independence? I think that we have a concern that as long 
as the State has a buyer, that there is an issue in having the 
State and the buyer with the board. Beyond that, who a board is 
appointed by, just like regulatory agents are appointed by the 
President, I think they still function very independently.
    So just the fact that the Governor--you say the Governor, 
but in fact, legislation was passed that gave him the authority 
to appoint the current board. I clearly think that from that 
standpoint, they're independent from the market.
    Mr. Otter. Thank you, Mr. Chairman.
    Mr. Ose. If I might followup. As I understand the 
legislation, was it AB 5X?
    Mr. Winter. I believe so. I get 5X and 1X confused.
    Mr. Ose. That's the problem I have, too. Well, one of them 
actually made the pleasure appointments of the Governor? Is 
that not correct? They're not subject to Senate confirmation.
    Mr. Winter. That is correct.
    Mr. Ose. Or anything? And I think that's different. I want 
to be sure I understand that difference between, say, a FERC 
appointee who is confirmed by the Senate or any of the others.
    Mr. Winter. That is correct. That is different.
    Mr. Ose. One case here at the Federal level, we have a 
Senate confirmation process, but under AB 1X or 5X, whatever it 
is, these are pleasure appointments who can be terminated on no 
notice, if I understand it correctly, by the Governor.
    Mr. Winter. That is my understanding also.
    Mr. Ose. OK. I'm trying to figure out what happens if we 
cannot satisfy FERC as to the independence of the ISO board. 
What transpires? Mr. Madden, maybe I should ask you that.
    Mr. Winter. Yeah. Please ask FERC, because I don't know.
    Mr. Madden. Mr. Chairman, the matter is pending before the 
Commission, but let me give you a scenario. Should the 
Commission find that the board is not independent, does not 
meet our independence as defined in Order 2000, the Commission 
could require--it does have the authority of pre-emption. The 
whole Cal ISO is wholesale, is subject to the Federal Power 
Act, subject to rates, terms and conditions. The authority 
under that and the conditions established there are therefore 
under the Federal Power Act.
    So what it could do is clearly enforce our rules and 
require what we did in December 15th if we wanted to do that, 
and that is to establish an advisory board, pending an 
independent consultant being given a slate of candidates, etc.
    Mr. Ose. Did FERC sign off on having the DWR employee or 
the DWR buyers on the floor of the ISO?
    Mr. Madden. There has, to my knowledge, never been 
Commission action on that matter.
    Mr. Ose. Mr. Winter, did somebody request--I'm seriously 
concerned about this independence issue, because if we can't 
solve it, I mean, it almost seems like everything just gets 
gridlocked, and then we're potentially back at square one. 
Somebody must have asked whether or not the DWR employees could 
come on the floor, or there's got to be some understanding. Is 
that accurate?
    Mr. Winter. Yeah. Let me give you the scenario of what 
transpired. Clearly, the generators were refusing to supply 
power based on the fact that, ``the backers of our market were 
uncreditworthy.''
    Mr. Ose. So they were concerned about getting paid?
    Mr. Winter. Correct. DWR, on the other hand, felt that it 
had a very strong fiduciary responsibility to be current on 
what the prices were for their purchases and also have--give us 
immediate response, because I'm buying in 10-minute intervals 
here, so it was not a case where we could, in fact, wait around 
till people approved a purchase. So DWR said that well, to meet 
their requirements, they wished to be on the floor. To meet my 
requirements, I had to have a creditworthy entity approving the 
contract.
    So I made the decision that we would allow them on the 
floor during the emergency crisis here and notified FERC with a 
letter that they were on the floor and that we were doing this 
under the emergency situation that we found ourself.
    Mr. Ose. And the concern had to do with the ability of the 
alternative buyer, if you will, or the first line of buyers to 
be able to pay for the power that they purchased from the 
generators?
    Mr. Winter. That's correct. DWR was backing all the 
purchases that we were making in real-time.
    Mr. Ose. Why not extend the same offer to someone other 
than DWR, who had the significant liquidity, to stand behind 
their purchases?
    Mr. Winter. If someone would have stepped up and said they 
were willing to back the purchases, I'm sure we would have.
    Mr. Ose. Mr. Madden, I don't know how to evaluate this 
issue of independence of the board as it relates to the 
apparent conflict between DWR's purchasers having access to the 
floor and the interests of the consumer in getting the best 
price at the end of the day. Is this one of the criteria that 
FERC is going to use, or is this one of the things that we need 
to fix in California to satisfy FERC about the independence 
issue?
    Mr. Madden. Mr. Chairman, I think the issue of whether or 
not DWR has been the ISO can be easily remedied by Commission 
action. So I don't think you need any type of congressional 
action on to that particular matter. And as I mentioned to 
Congressman Otter, the question of the independence in general 
of the board will be before the Commission soon. In Order 888 
and Order 2000, independence is the linchpin. You've got to 
have independence in order for the market to work. People have 
to trust the market. You can't have--you know, we try to 
separate out the generators from the transmission. You can't 
have them working together. You have to have the confidence, I 
believe.
    I think the Commission will answer that question very, very 
soon.
    Mr. Ose. Mr. Otter for 5 minutes.
    Mr. Otter. Mr. Winter, how many--how many employees, if any 
number, work or consult with both CAISO and the State of 
California?
    Mr. Winter. I'm sorry. How many employees do what?
    Mr. Otter. How many State employees wear two hats, so to 
speak? In other words, how many or do you know if there are 
employees of the State of California that also consult or work 
with CAISO?
    Mr. Winter. I'm sorry. People in the--an employee of the 
State of California?
    Mr. Otter. Yes.
    Mr. Winter [continuing]. That works----
    Mr. Otter. That also consult with California ISO.
    Mr. Winter. Well, when you say ``consult,'' I mean, if a 
person from the Electric Oversight Board or the Energy 
Commission calls us and asks us about how we came up with our 
projection for outages or how we came up with our projection of 
loads this summer, is that--I mean, there's many, many of them, 
because we're constantly sharing information with all kinds of 
people.
    So if that's the tenor, then, you know, high numbers within 
the company are actually sharing those kind of information with 
State employees, as we do with FERC and we do with every other 
group that asks us questions.
    Mr. Otter. And also with the CW--or CDWR?
    Mr. Winter. Correct.
    Mr. Otter. Do you have a--when you say high numbers, it 
sounds like--could that be----
    Mr. Winter. Yeah. That could be 40, 50 people. I mean, we 
have Enron call us. We have Reliant call us and ask us 
questions. We talk to those folks all the time.
    Mr. Otter. Would you have a list of those? Could you make a 
list available of those folks?
    Mr. Winter. I would have to qualify it by saying, until I 
go back and ask if they ever had a phone call from a generator, 
I'm not sure how productive that would be, because I'm not 
understanding what it is you're really after.
    Mr. Ose. If I might interject here.
    Mr. Otter. I yield.
    Mr. Ose. Is it the gentleman's objective to find out who 
has had access to the ISO floor while they are employees of DWR 
charged with providing the power to the State? Is that what 
you're trying to get at? The name of the people who have been 
on the floor?
    Mr. Otter. As usual, the chairman has asked the question 
much better than I could.
    Mr. Ose. OK. Could we get that?
    Mr. Winter. Yes. We can give you the names of the DWR 
employees who have been on the floor. That is no problem.
    Mr. Ose. He's--OK. And you'll be able to tell which of 
those have been trading and which of them have not?
    Mr. Winter. Yes.
    Mr. Ose. I think that's what Congressman Otter's interest 
is in.
    Mr. Winter. Yes. All right.
    Mr. Otter. All right.
    Mr. Ose. Mr. Winter, you mentioned that DWR first came on 
the floor under an emergency provision. I mean, obviously we 
did have a problem.
    Mr. Winter. Yes, we did.
    Mr. Ose. I live in the State, so I'm familiar with it. They 
came on the floor under an emergency provision. Circumstances 
at least from a supply or pricing standpoint have changed 
significantly from, say, January or February. Does that 
emergency order still stand?
    Mr. Winter. Yes.
    Mr. Ose. DWR employees are still coming on the floor.
    Mr. Winter. That is correct under the emergency order of 
the Governor.
    Mr. Ose. OK. At this point, can you tell me whether any of 
those people who--I don't remember if it's the Times or the Bee 
or somebody reported they'd been let go. Are any of those 
people part of the group of the DWR employees?
    Mr. Winter. I do not know. I have not gone back, mainly 
because I don't know the list of the--I assume the folks you're 
talking about are the ones that were doing something, and I 
don't have the list of those names of those people, so I don't 
know whether they were ones that were on the floor or not. We 
certainly can give you the list of the people that were on the 
floor and we----
    Mr. Ose. OK. Mr. Harris, at PJM, how do you balance the 
independence of the ISO or the RTO with the need to provide 
power? I mean, out in California, obviously, we've got some 
concerns here. Any suggestions?
    Mr. Harris. A few things, yes, sir. I think, first of all, 
it begins with the fiduciary duties of the board. The board's 
fiduciary duties were very, very important to us when we were 
forming our market in the 1995, 1996 timeframe. We had a lot of 
discussion with our States. The States did not want a self-
perpetuating board. They wanted a board that was accountable to 
the stakeholders. So we set up a board that the articles that 
are filed to incorporate the board state that the board has 
three fiduciary duties, and upon these three fiduciary duties, 
they are subject to all corporate law, practices and so forth.
    The first fiduciary duty of our board is to ensure we 
operate a safe and reliable interaction. That's very important, 
because we want it safe largely because of the nuclear 
concerns. We operate more nuclear capacity in our area than any 
other area. The second fiduciary duty of our board is to ensure 
that we create and operate robust nondiscriminatory electric 
power markets.
    The third fiduciary duty of our board is to ensure that no 
member or group of members has an undue influence over the 
interaction.
    Additionally to that, our board has adopted a very strict 
code of conduct, which we have filed with the Federal Energy 
Regulatory Commission. In that code of conduct, no employee, 
nor any member of the board, can have any financial interest in 
any market participant. That means zero. And with over 200 
members in all their subsidiaries, you can imagine the list is 
getting quite long.
    As far as daily operations, we do not allow any market 
participant to even enter the control room building. On certain 
occasions for a tour, for example, a company wants to bring 
some employees just for information, we will allow them under 
escort to the overhead viewer gallery, and then escort them off 
so they can at least see the floor, but that's the only time 
they have access. Outside of that, they're totally barred from 
the control room.
    Mr. Ose. In terms of your daily obligations to provide 
power, does your operating team meet once a day to talk about 
what might be the unique challenges of that day?
    Mr. Harris. Yes, sir, we do. We have a schedule of events. 
We also have what we call a performance group that actually 
oversees and monitors--we log every telephone call that comes 
in and out. We have videotape that we have. We have a 
performance function that looks at all the operations 
previously, and we go over that.
    Mr. Ose. I didn't ask my question very well. I'm thinking 
more in terms of, say, a management team that meets before the 
market opens, so to speak, and says, all right, it's hot over 
here. There's low water over there. We've got a bottleneck here 
on transmission. Do you meet regularly in a conference setting 
where the different teams of the management--different members 
of the management team can provide input and you can work out a 
lot of these problems?
    Mr. Harris. Yes, sir, in short we do. It's a continual 
theme, since electricity is 24 by 7, and we have a mobilization 
plan, depending on the severity of the events in front of us, 
that we mobilize different levels of management to deal with 
the situation that is in front of us. And we rehearse and train 
on that several times a year on the mobilization plan.
    Mr. Ose. Members of this team are all subject to these 
parameters that you defined here?
    Mr. Harris. Yes, sir, every employee is subject to that. We 
audit that, and they also have to fill out certificates 
periodically that they've met all the concerns. Every employee 
has.
    Mr. Ose. OK. Mr. Otter for 5 minutes.
    Mr. Otter. Mr. Harris, if I might continue, I appreciate 
your reiteration of your three standards of conduct. I don't 
know how much information that you have available--I mean, you 
were knowledgeable of before this panel and before today, but 
recognizing the lack of independence or the apparent lack of 
independence, recognizing FERC's early on concern, clear back 
in December and their continuing concern for the appearance of 
a lack of independence, does the board meet your standard of 
conduct for independence?
    Mr. Harris. Are you talking about the California board?
    Mr. Otter. Yes.
    Mr. Harris. No, sir, it would not.
    Mr. Otter. Would--I mean, would that----
    Mr. Ose. Would the gentleman yield?
    Mr. Otter. Yes.
    Mr. Ose. I want to be very clear. Mr. Winter did not 
appoint the board. All right? I don't want to hang this around 
his neck.
    Mr. Otter. No.
    Mr. Ose. And I yield back.
    Mr. Otter. I wasn't suggesting who did. I think I know who 
did appoint the board. But let me be clear on this. No. 1--your 
No. 1 covenant was you've got to operate a safe operation.
    Mr. Harris. Yes, sir.
    Mr. Otter. Your operations, you're going to ensure that the 
operations that you operate are safe, and I'll assume that's 
for the employees but also for the customer base.
    Mr. Harris. Yes, sir.
    Mr. Otter. So that there's no damage there. Do you feel 
that the lack of independence or the apparent lack of 
independence of the California board makes the potential for 
what they do operate unsafe?
    Mr. Harris. I can't opine on that, because I'm just not 
that close to the way that California operates.
    Mr. Otter. The second principle, ensure that we create an 
operation with nondiscriminatory groups. Does the California 
board meet that test?
    Mr. Harris. Well, from what I've heard today, there 
certainly are questions, you know, when you have people that 
are bidding and trading there, that makes it questionable. Our 
goal is to create and operate robust, nondiscriminatory 
electric power markets, and it's very clear and that's what we 
have to manage to do.
    Mr. Otter. And of course, the No. 3, no undue----
    Mr. Harris. Yes, sir. Our board is accountable to the 
membership. We're a limited liability company, so they're 
elected by the members under staggered terms, and the members 
have insisted that they have to ensure that no group or single 
group has an undue influence over the operations of the PJM 
interconnection.
    Mr. Otter. Mr. Hogan, from your perspective, do those seem 
to be reasonable covenants that Mr. Harris enumerated?
    Mr. Hogan. Yes, I think they're very reasonable, and I 
would emphasize particularly the first one, safe and reliable, 
is not controversial. The controversial one is the part about 
operating robust nondiscriminatory markets with no undo 
influence by any participants. And the pressure is always on 
the ISO, the pressure has certainly been on the California ISO. 
When you get into these tight situations the pressure is to 
essentially take sides, to line up with the buyers against the 
sellers or the sellers against the buyers or something like 
that.
    And the trick is to have a set of rules and procedures that 
the ISO could administer without taking sides in that matter, 
and to try to do so in and even-handed way. That's an extremely 
difficult task. It's especially difficult if you have a very 
badly designed market, and so I don't envy Terry Winter his job 
at all. He didn't design the market. He didn't create this 
mess, and he's had to live with it. I have thought for a long 
time the California design was simply unworkable, but that's 
the task that he has to get back to, which is to meet that 
second fiduciary responsibility, which circumstances have made 
impossible.
    Mr. Otter. Mr. Madden and Mr. Cannon, would FERC agree that 
those are good standards of integrity that should be adopted by 
most boards to operate with that level of independence that you 
obviously suggested in your December 15th report?
    Mr. Madden. Congressman Otter, PJM filed those with the 
Commission, and the Commission approved those standards as to 
PJM. So the Commission has spoken on that. I cannot speak 
because of the pending matter on the California independence, 
though.
    Mr. Otter. I see. And let me not speak--let me not ask you 
specifically, then, as it applies to California, but for a 
board that needed independence, wouldn't those be three good 
pillars of----
    Mr. Madden. We approved them, so I assume the Commission 
thought they were good.
    Mr. Otter. Do you agree with that, Mr. Cannon?
    Mr. Cannon. Yes.
    Mr. Otter. Let me just ask one other question. And maybe I 
have to ask it across the board, and I know I'm over my time, 
Mr. Chairman. But when the Governor appointed the board, is 
this correct now that there was no requirement for Senate 
confirmation, Mr. Winter?
    Mr. Winter. That is correct.
    Mr. Otter. Was there an investigation of any potential 
conflicts of interest of the board members for the board that 
they were going on?
    Mr. Winter. Clearly, each of the board members had to sign 
a certificate saying that they did not hold market positions, 
etc., in other corporations.
    Mr. Otter. At that time?
    Mr. Winter. Market participants.
    Mr. Otter. At that time?
    Mr. Winter. That's correct.
    Mr. Otter. Would they be required to not acquire a stock 
which could be considered a conflict of interest during their 
time that they were served on the board?
    Mr. Winter. Yes. I'm almost positive--I haven't read it in 
the last day or two, but that does prohibit them from investing 
in stocks that are in the market.
    Mr. Otter. Do you know if anybody on the board has invested 
in any stock?
    Mr. Winter. No, I do not know.
    Mr. Otter. Thank you, Mr. Chairman.
    Mr. Ose. I might followup. It's my understanding that the 
members of the ISO board have to file financial disclosure 
statements with FERC. Am I correct?
    Mr. Madden. I don't know. I'd have to get back to the 
committee on that. They currently have filed their bylaws to 
implement--I think it's AX 1, and the Governor's selection of 
the boards, and that's pending--as part of an independence 
filing. But I don't think they have to file the financial, per 
se. I have to get back with you, sir.
    Mr. Ose. How about senior staff members such as might exist 
at Cal ISO, such as Mr. Winter, or over at PJM, Mr. Harris. Do 
they file such statements with FERC?
    Mr. Madden. We have general standards of conduct that the 
employees of the ISOs are to abide by. I do not think--and, 
again, I have to get back to the committee on whether we also 
review their financial records.
    Mr. Ose. OK. I've always found it helpful, as Mr. Harris 
and I discussed, to talk about a challenge amongst the people 
that work with me.
    Mr. Winter, does that same kind of activity take place at 
Cal ISO on any given day? I mean, do you have a regular 
gathering or a conference call? And I'll tell you why I asked 
that question. We've had some interviews, and it has been 
suggested to us that there are daily meetings where spot market 
prices and conditions are talked about in advance, potential 
this, potential that. I'm just trying to clarify.
    Mr. Winter. I don't know specifically that prices are 
discussed in those meetings. We have an operational meeting and 
during the crises times, those would last 24 hours a day. We 
have always been open line with the operators talking. We have 
a 9 a.m. meeting that we talk to all the operators. We tell 
them what we see as the load. If it looks like we're going to 
have a bad day the next day, there's a 7:30 a.m. meeting, as 
well as a 2:30 p.m. meeting where they talk about where the 
load is going and what kind of demand responsiveness we've got 
and whether a rain cloud is coming in, all those kind of things 
are discussed.
    The actual discussion of prices, I do not believe take part 
in those meetings, but I've not sat in all of them, so I can't 
tell you that a price wasn't mentioned in some meeting.
    Mr. Ose. But you are in those meetings, or some of them at 
least?
    Mr. Winter. No. My vice president of operations and the 
director of operations sit in on those meetings.
    Mr. Ose. Help me out here in terms of who might sit in on 
those meetings. You have the vice president of operations.
    Mr. Winter. The director, the person who is over all the 
dispatchers on the floor, the emergency notification people, 
because they're impacted if we have to declare an emergency. We 
have the investor-owned utilities calling in, who are the 
operators who have to implement any load shedding.
    Mr. Ose. Of the native generation, such as it still exists?
    Mr. Winter. Correct.
    Mr. Ose. OK.
    Mr. Winter. We have members of the Electric Oversight 
Board, the Energy Commission. Matter of fact, just about 
everybody sits in on those to hear what the status is during 
the day. Then we also--we've recently started publishing our 
load information, etc.
    Mr. Ose. I have a couple questions. I just need to 
understand whether or not the following people are 
participating in this. Is Vikram Budhraha?
    Mr. Winter. Vikram Budhraha, no, he is not.
    Mr. Ose. How about Mark Skowronski?
    Mr. Winter. I am not aware that he is.
    Mr. Ose. Bruce Willison?
    Mr. Winter. No. He's on the EOB board, but he is not in 
those calls.
    Mr. Ose. How about Richard Ferreiro?
    Mr. Winter. No, I do not believe he is. He is a DWR 
employee. He may have, but I do not know for a fact that he 
did.
    Mr. Ose. Is David Freeman in on those meetings?
    Mr. Winter. No, he is not.
    Mr. Ose. Or Scott Maviglio?
    Mr. Winter. No. On Scott or--is it Scott or Steve?
    Mr. Ose. Steve Maviglio. You're right.
    Mr. Winter. I don't know whether he's ever listened in on 
those or not.
    Mr. Ose. Are any of the people who are actually making the 
decisions as to which power to take or not take involved in 
those meetings?
    Mr. Winter. There could be, because the people from DWR who 
also are the operating people who approve the transactions 
occasionally have sat in those, but, again, remember we're 
talking about supply and demand, not the prices in those 
meetings.
    Mr. Ose. Has William Mead ever sat in those meetings?
    Mr. Winter. I'm not aware--I'm not even sure I know who he 
is.
    Mr. Ose. How about Herman Leung?
    Mr. Winter. I don't know who he is.
    Mr. Ose. Constantine Louie?
    Mr. Winter. No. I'm not saying no he didn't sit in. I'm 
saying I don't know him.
    Mr. Ose. Peggy Cheng.
    Mr. Winter. I don't know.
    Mr. Ose. Elaine Griffin.
    Mr. Winter. I don't know.
    Mr. Ose. Bernard Barretto.
    Mr. Winter. Again, I do not know.
    Mr. Ose. OK. All right. I want to shift back to something, 
if Mr. Otter will allow me to, that Mr. Madden brought up some 
minutes ago. You had said that FERC and everybody in the room 
knows it, FERC's working through a process by which it can 
determine what, if any, refunds may or may not be due as a 
result of alleged overcharges, they are by the jurisdictional 
or nonjurisdictional entities in California, and that's 
something that is in process right now.
    Mr. Madden. That is in hearing right now.
    Mr. Ose. OK. Do you have a list of the--I think the number 
that comes to my mind that I'm familiar with is $8.9 billion. 
Do you have a breakdown of the $8.9 billion number by--item by 
item by company or by entity, the amount of the alleged 
overcharge?
    Mr. Madden. I do not have that. If the Commission would 
have it, it would come at the hearing, because the judge would 
require the Cal ISO to specify under its methodology that the 
Commission--who owes what.
    Terry may be in a better position to----
    Mr. Ose. Yeah, but I'm asking the questions here. So----
    Mr. Madden. Well, I don't have--I don't have----
    Mr. Ose. You don't have it?
    Mr. Madden. I don't have it.
    Mr. Ose. Terry--or Mr. Winter, do you have it?
    Mr. Winter. We clearly have an indication of how we arrived 
at those dollars, and I would have to check to be sure, but I'm 
quite certain we gave those to the settlement folks.
    Mr. Ose. Can we get a copy of it? It's going to be a public 
record here soon anyway.
    Mr. Winter. Again, I can't answer, because of the FERC 
tariffs and the settlement kind of restricted what I could give 
out. But clearly I'll check on it and give you an answer based 
on what information is available and who it was given to.
    Mr. Madden. Mr. Chairman, if it's filed with the judge, I 
think there's an August 9th or 10th date for the filing of 
information. That is a public hearing, and I will see that if 
it's filed, I will provide the committee with a copy of it.
    Mr. Ose. The gentleman from Idaho.
    Mr. Otter. I have nothing more, Mr. Chairman.
    Mr. Ose. All right. Let me work through the rest of my 
questions, then. Mr. Winter, do Cal ISO employees have to 
submit financial disclosure forms?
    Mr. Winter. Yes. I wouldn't characterize it as a disclosure 
form. In other words, they don't have to tell us all their 
investments and give us criteria. What they have to sign is a 
disclosure that they have not traded any stocks that are 
controlled by the people whom they are doing the business with, 
that they don't have employment with folks and so----
    Mr. Ose. It's a code of conduct.
    Mr. Winter. Yes, it is.
    Mr. Ose. Much like what Mr. Harris has.
    Mr. Winter. Yes, it is.
    Mr. Ose. Now, are these statements of economic interest or 
affidavits saying they will not and they have not?
    Mr. Winter. I think they are statements saying they will 
not and they have not. I'm familiar with the ones as officers 
we sign, which is we divest ourselves of all stocks that are in 
the market and don't deal with those. I haven't looked at the 
employees signs.
    Mr. Ose. Now, those are the Cal ISO employees?
    Mr. Winter. Correct.
    Mr. Ose. Do you know what conditions apply to the DWR 
employees who might be on the floor?
    Mr. Winter. No, not at all.
    Mr. Ose. OK. I need a moment here.
    Mr. Madden, or the balance of the witnesses, I don't have 
any more questions, but you can tell from my questions and my 
curiosity the degree to which I'm concerned about this issue of 
independence of the Cal ISO board. I don't have a solution for 
you. I worked a month to make some suggestions to Mr. Madden 
and his colleagues over at FERC, and they were kind enough to 
take them under advisement, but at some point or another, this 
issue of independence has to be resolved, and it has to be 
resolved positively so that FERC, No. 1, can be satisfied. And 
as important, it has to be resolved positively because of the 
difficulty California Members are having here in Congress in 
working in the best interests of California.
    We get, if you will, blindsided regularly, and it 
undermines our credibility here, and it compounds the 
difficulty that we have in being representatives for the State 
of California. I don't know about this stuff that I've read in 
the paper lately, I don't know who's right or who's wrong, but 
it's a serious issue for us here to try and resolve this 
positively. Think on that.
    If any of you have any comments about or suggestions as to 
how we could expedite that, I'd certainly appreciate them.
    Mr. Harris.
    Mr. Harris. Mr. Chairman, I just want to echo the fact of 
how extremely important independence is. What we have found is 
that because we have the central planning function, we do all 
the planning. We operate the market. We have all the functions. 
It's the largest wholesale competitive marketplace in the 
world. There were only about 300 employees. Without the bedrock 
of independence, we wouldn't have the trust of the public or 
the customers. It is absolutely crucial for the functioning of 
our marketplace.
    The other thing that applies to market monitoring, when we 
talked earlier about the meetings that we have as we plan the 
days and the weeks, our market monitoring function that reports 
to our board is integral to that. They have to be coupled with 
what is going on. We have some sophisticated tools that can 
provide check points and highlight things, and the market 
monitoring then can talk freely and understand what is going on 
in the system with many different players. And you wouldn't 
have that freedom if you didn't have the independence.
    So independence is the bedrock upon which the other layers 
are built to enable you to have a competitive effective 
marketplace.
    Mr. Madden. Mr. Chairman, let me just add a couple things. 
As I mentioned to you earlier, it is squarely before the 
Commission and I will let the Commission know the urgency of 
acting quickly, at least based on what I'm hearing today. Terry 
Winter is not part of the building. Terry Winter is the CEO, 
CEO of the ISO. In my personal opinion, he has done a great job 
under very difficult situations. I trust him. He's honest. And 
I value his advice.
    Mr. Ose. I share your analysis and evaluation.
    Anybody else? Dr. Hogan.
    Mr. Hogan. I certainly agree with everything about 
independence, and I think it's independence on both sides. You 
don't want the ISO owning shares and the generators, and you 
don't want the ISO representing the State at refund hearings. 
The ISO should be providing information for all of those 
purposes, but you don't want to get into this taking sides.
    Furthermore, you could have the most independent board in 
the world, and if you don't have a well designed market, it 
isn't going to help. So I think that independence is just the 
tip of the iceberg, and it's to easy to think that if I could 
just appoint an independent board, that FERC could go home 
early and this committee wouldn't have any more work to do. I 
just don't think that's right. Independence is just the 
beginning, not the end, and you've got to get into these 
details, as much as people hate to do it. But we have the 
benefit of things that work, and we know that they work, and we 
should be using them. If people could innovate and provide 
something that is better, I'm all in favor of it. But when they 
come forward and they give you something that doesn't work in 
theory, that's never been tried any place else, and the only 
reason they do it is they say markets are so powerful, markets 
can overcome anything--the evidence is, you shouldn't give that 
credence. It just isn't that way. This market is too 
complicated. We should do what we have experienced actually 
works.
    Mr. Ose. Mr. Otter.
    Mr. Otter. I have nothing.
    I want to thank the panel. Thank you very much for being 
here.
    Mr. Ose. I do want to close. I had the opportunity to go 
over to FERC's new market monitoring room the other day, and it 
was very interesting. It's probably very much like Mr. Winter's 
office, where it's got all the different markets and the 
transmission lines and the generation facilities and what have 
you. I think that's a great step in the right direction, to 
bring the tools that are available to FERC staff into the 21st 
century. I know that they exist or similar equipment, similar 
technology exists at the Commodity Futures Trading Corp., and 
the SEC and similar regulatory bodies, in terms of monitoring 
markets, and I know that Enron online has it. I haven't been to 
see it, but I know they have it.
    What you do in Pennsylvania or PJM in putting your 5-minute 
prices on your Web site, it's a great idea. Transparency 
galore. Here it is. Love it or leave it kind of thing. I'm 
hopeful that we can refine what FERC has from a transparency 
standpoint. I haven't figured out the licensing thing with the 
provider of the service in terms of aggregating and 
dissemination, but I hope we can provide through FERC some 
similar vehicle for the RTOs to use to monitor their respective 
or regional markets. I think that would be a great step 
forward.
    I want to thank the witnesses today. This has been very 
educational for me, very informative. I know some of you have 
travelled a long way to come today. We appreciate that. Thank 
you again. This hearing is adjourned.
    [Whereupon, at 5:20 p.m., the subcommittee was adjourned.]
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