[Senate Hearing 107-49]
[From the U.S. Government Printing Office]



                                                         S. Hrg. 107-49

                           ELECTRICITY RATES

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

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   on

                                     

                           S. 26                          S. 287

                           S. 80                          Amdt. to S. 287


                                     
                               __________

                             MARCH 15, 2001


                       Printed for the use of the
               Committee on Energy and Natural Resources

                               ----------

                   U.S. GOVERNMENT PRINTING OFFICE
72-886                     WASHINGTON : 2001


_______________________________________________________________________
            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402


               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  FRANK H. MURKOWSKI, Alaska, Chairman
PETE V. DOMENICI, New Mexico         JEFF BINGAMAN, New Mexico
DON NICKLES, Oklahoma                DANIEL K. AKAKA, Hawaii
LARRY E. CRAIG, Idaho                BYRON L. DORGAN, North Dakota
BEN NIGHTHORSE CAMPBELL, Colorado    BOB GRAHAM, Florida
CRAIG THOMAS, Wyoming                RON WYDEN, Oregon
RICHARD C. SHELBY, Alabama           TIM JOHNSON, South Dakota
CONRAD BURNS, Montana                MARY L. LANDRIEU, Louisiana
JON KYL, Arizona                     EVAN BAYH, Indiana
CHUCK HAGEL, Nebraska                DIANNE FEINSTEIN, California
GORDON SMITH, Oregon                 CHARLES E. SCHUMER, New York
                                     MARIA CANTWELL, Washington

                    Brian P. Malnak, Staff Director
                      David G. Dye, Chief Counsel
                 James P. Beirne, Deputy Chief Counsel
               Robert M. Simon, Democratic Staff Director
                Sam E. Fowler, Democratic Chief Counsel
             Howard Useem, Senior Professional Staff Member


                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Abraham, Hon. Spencer, Secretary, Department of Energy...........    15
Baum, Stephen L., Chairman, President and CEO, Sempra Energy, San 
  Diego, CA......................................................    66
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................     5
Bryson, John E., Chairman, President and CEO, Edison 
  International, Rosemead, CA....................................    62
Burns, Hon. Conrad, U.S. Senator from Montana....................    14
Campbell, Hon. Ben Nighthorse, U.S. Senator from Colorado........     6
Cantwell, Hon. Maria, U.S. Senator from Washington...............    13
Craig, Hon. Larry E., U.S. Senator from Idaho....................     7
Feinstein, Hon. Dianne, U.S. Senator from California.............     8
Fetter, Steven M., Managing Director, Global Power Group, Fitch, 
  Inc., New York, NY.............................................    78
Hagel, Hon. Chuck, U.S. Senator from Nebraska....................    12
Hebert, Curt L., Jr., Chairman, Federal Energy Regulatory 
  Commission.....................................................    48
Hecht, William F., Chairman, President and CEO, PPL Corporation, 
  Allentown, PA..................................................    73
Landrieu, Hon. Mary L., U.S. Senator from Louisiana..............    13
Locke, Hon. Gary, Governor, State of Washington..................    41
Martz, Hon. Judy, Governor, State of Montana.....................    45
Murkowski, Hon. Frank H., U.S. Senator from Alaska...............     1
Smith, Hon. Gordon, U.S. Senator from Oregon.....................    11
Thomas, Hon. Craig, U.S. Senator from Wyoming....................    15
Worthington, Bruce, Senior Vice President and General Counsel, 
  PG&E Corporation, San Francisco, CA............................    70

                               APPENDIXES
                               Appendix I

Responses to additional questions................................    91

                              Appendix II

Additional material submitted for the record.....................    99

 
                           ELECTRICITY RATES

                              ----------                              


                        THURSDAY, MARCH 15, 2001

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:10 a.m., in 
room SH-216, Hart Senate Office Building, Hon. Frank H. 
Murkowski, chairman, presiding.

         OPENING STATEMENT OF HON. FRANK H. MURKOWSKI, 
                    U.S. SENATOR FROM ALASKA

    The Chairman. Good morning, ladies and gentlemen. The 
Committee on Energy and Natural Resources will convene.
    Today we have a very interesting panel led by the Honorable 
Spence Abraham, one of our own, as Secretary of the U.S. 
Department of Energy. We were chatting in the back room, and it 
occurred to me that the responsibilities of the Department of 
Energy were kind of what we thought the world looked like 
before Columbus proved it was round: seemingly flat; it has no 
end. As a consequence, I am not suggesting you are here to end 
it by any means, Mr. Secretary, but the dimension is beyond 
comprehension.
    On panel 2, we will have the Honorable Curt Hebert, 
Chairman of the Federal Energy Regulatory Commission, which is 
expected to solve many of these problems that we are going to 
hear about today.
    We have panel 3: the Honorable Gary Locke, Governor of the 
State of Washington, and the Honorable Judy Martz, Governor of 
the State of Montana.
    Panel 4: Bruce Worthington, senior vice president and 
general counsel of PG&E, San Francisco; John Bryson, chairman, 
CEO, and president of Edison International of Rosemead, 
California; Steve Baum, chairman, CEO, and president of Sempra 
Energy, San Diego, California; William Hecht, chairman, CEO, 
and president of PPL Corporation, Allentown, Pennsylvania; and 
Steve Fetter, managing director of the Global Power Group at 
Fitch, New York.
    Senator Bingaman and I are going to chair this hearing this 
morning. About 9:25 I am going to have to go downtown for a few 
minutes on another matter that was previously scheduled, but I 
will be rejoining the hearing.
    We are having fast-breaking news. I understand that there 
was a press conference and perhaps some concurrence between two 
of our members, and they can tell us about that.
    I cannot help but note the Wall Street Journal this morning 
makes a rather startling statement that this energy shortage is 
not unique to California by any means. The Wall Street Journal 
suggests this morning that the New York independent system 
operators said that 8,600 megawatts of new power capacity, a 25 
percent increase from what currently exists, must be 
constructed by 2006 or shortages will become so pronounced that 
they will push up prices and raise the specter of blackouts.
    Whether we want to adhere to that projection, I think we 
ought to at least recognize that we have heard these 
projections at previous times and, unfortunately, we have not 
taken action. As a consequence, we find ourselves in a rather 
embarrassing position today, and it appears to be getting 
worse.
    In any event, let me make a brief statement here. Then I 
will call on Senator Bingaman and then we will go around with 
the members.
    What we have today, at least currently, are three bills by 
Senator Feinstein and Senator Boxer that attempt to address the 
California electric supply problem, and the methodology is 
price controls on wholesale power sold, as I understand it, in 
all Western States.
    Before we proceed, I think we must decide what are we 
really trying to fix. Are we trying to fix power shortages and 
price spikes as the fix-all? Or are these symptoms of perhaps 
deeper problems: inadequate generation, inadequate 
transmission? Unfortunately, in my opinion, these three bills 
do not fix the supply problem in California, and I emphasize 
``supply.''
    I would note that in the 1970's we did impose price 
controls on oil and natural gas. We have had some experience 
with it. At that time it did not work. Those who forget 
history--we have heard this before--are condemned to repeat it. 
Simply put, price controls in my opinion will not solve 
California's supply problem.
    Let me point out a couple relevant facts.
    First, California is dead last--dead last--in the Nation in 
terms of electric generation per person. Yet, I believe it 
ranks sixth in the world economy in comparison.
    Second, California has very low monthly electric bills in 
comparison to other areas. Consumers in 37 other States have 
higher bills. For example, consumers in Oregon paid about 
$61.40 per month in 1999, which are the latest available 
figures from the Secretary's office, as compared with $58.70 
per month in California. The nationwide average residential 
bill is about $70.88.
    The staff has prepared a detailed summary of the bills but 
briefly, as I understand it, S. 287, the Feinstein/Boxer bill, 
requires FERC to impose cost-of-service price controls on 
wholesale electricity sold in the West. Cost-of-service price 
control is the price set on a generator-by-generator basis, 
calculated by adding the actual cost of generating power plus a 
rate of return on invested capital.
    S. 80, the Boxer/Feinstein bill, requires FERC to impose a 
price cap on wholesale electricity. Now, the wholesale price 
cap is a single maximum price which may not be exceeded 
regardless of the cost of production. I think we have to ask 
ourselves if that, in fact, stimulates generating capacity 
coming into California. I think we know what the answer is.
    S. 26, the Feinstein/Boxer bill, requires the Secretary of 
Energy to impose either a price cap or a cost-of-service price 
control on wholesale electricity. Now, that basically takes the 
authority from an independent regulatory agency, FERC, which we 
assume is an objective agency, and gives it to a political 
appointee. No offense, Mr. Secretary, but the Secretary of 
Energy is given that authority. I think that is contrary to the 
object of initially establishing FERC because it sets it in a 
political arena.
    In addition, amendment no. 12 by Senator Smith, as I 
understand it, would require the States to allow the pass-
through of costs to consumers if they are to receive wholesale 
price controls. I think there is some justification for this, 
certainly, in ensuring that we have some relief by increasing 
power generating capacity because unless there is the assurance 
of a pass-through, I doubt very much if it is going to be 
economically viable to attract those that want to put in 
facilities. In my opinion, this would address the problem of 
California denying the utilities the pass-through of their 
costs, which I understand is about $13 billion to date.
    I am of the opinion that if you receive the power, you are 
entitled to pay for it. Clearly the California consumers got 
consideration. They got power. Whether the price was reasonable 
or unreasonable I think is an obligation of FERC, but the 
utilities are certainly entitled to payment. The question is, 
who is going to pay for it? Is it going to be the taxpayer of 
California or is it going to be the ratepayer of California?
    The three price control bills I think raise some policy 
concerns for the committee.
    First, imposing price controls on wholesale power, as I 
indicated, in my opinion will discourage construction of new 
generation. Why will investors build powerplants in California 
subject to price controls if they can build them elsewhere and 
not be subject to price controls?
    Second, it appears that the bills are intended to exempt 
municipally owned utilities from price controls. If that is 
true, with only part of the wholesale power market subject to 
price regulation, loopholes and market distortions certainly 
could be created. I would note that California ordered its 
investor-owned utilities to divest their fossil fuel fired 
generation and to purchase power exclusively from the spot 
market but, in doing so, exempted or they opted out 
California's municipally owned utilities from doing the same 
thing. It is my understanding they were given a choice. The 
independent utilities could not have that choice.
    I think it is interesting to wonder and speculate that the 
Los Angeles Department of Water, which is owned by the city of 
Los Angeles, has made hundreds of millions of dollars of profit 
from selling electricity to the power-short investors and the 
investor-owned utilities during this crisis. I think there 
should be some accountability there.
    Third, imposing price controls on existing contracts may 
result in their abrogation. It is my understanding that the 
Governors of California, Washington, and Oregon support the 
legislation in general; yet, the Governors of eight other 
Western States are opposed to price controls. We will hear from 
some of those Governors today.
    So, what is the solution? Well, first and foremost, 
California itself must act responsibly. We must assist 
California in every possible way.
    But on the supply side, California must get over its 
aversion to new powerplants and transmission lines. California 
has not allowed a new major powerplant to be built in almost a 
decade. California's extremely limited transmission capacity, 
the so-called Path 15 problem, directly contributes to the 
shortage problem in California.
    On the demand side, California must get over its 
unwillingness to pass through wholesale costs. As a result, 
California utilities owe banks some $13 billion, which 
continues to grow daily. California's legislature has also 
authorized the issuance of $10 billion in bonds to purchase 
power, and it has already spent $3 billion before they have 
even been issued. So, California's taxpayers are certainly at 
risk.
    California is driving independently owned utilities to the 
brink of bankruptcy. There is a lot of finger-pointing going 
on, which is understandable. Everybody wants to duck when the 
flack is flying. They are having the State buy power, take over 
transmission lines, seize utility assets. I do not think this 
necessarily resolves the problem of supply and demand. The 
demand is there; the supply is not. It only prolongs the agony. 
It reminds me of busily rearranging the deck chairs.
    The recent survey, according to I believe the Washington 
Post--so we can all question the accuracy----
    [Laughter.]
    The Chairman [continuing]. Allegedly found that two out of 
three people in California would rather have the lights go out 
than have any price increase. I will leave it up to the 
witnesses to comment on that. But in any event, if they 
continue to oppose powerplants and transmission lines, they 
might get their wish.
    There is no question that California faces serious 
problems, but we must work together to find a meaningful 
solution. We do not want a band aid patch that just creates 
different problems that are going to have to be addressed by 
different people sitting in this same chair in a different 
month or a different year.
    Last week FERC took action to rein in wholesale prices in 
California by declaring high prices unjust and unreasonable and 
ordering millions of dollars in refunds. It may not solve the 
problem, but it is certainly going to get the attention of 
those that sold power at extremely high rates.
    Likewise, California has taken some tentative steps, I 
think in the right direction, by trying to expedite powerplant 
permit approval. But the first real test is the start-up of an 
existing 450 megawatt gas powerplant for this summer, and I 
understand it is already encountering several areas of local 
opposition. If that powerplant is prevented from going on line, 
I wonder what can save California.
    Again, I would encourage that we be sympathetic to 
recognize that we are all somewhat in this together in the 
sense that we are intertied, but nevertheless, I think we have 
to recognize patterns here that suggest that we are not really 
addressing adequately the issue of supply.
    One other thing that occurs to me. We were looking at some 
matters the other day relative to where is the energy going to 
come from. If we look at the moratoriums that exist on the east 
coast, roughly from Maine to Florida, look at the moratoriums 
that exist on the west coast, roughly from Canada down to the 
start of Mexico, and the withdrawal of the overthrust belt and 
the roadless areas in the forests where some 23 trillion cubic 
feet of commercial gas have been put off limits, I think it is 
time we came to grips with just where the energy is going to 
come from.
    I look forward to hearing from the witnesses on whether 
they think this legislation is going to solve California's 
problems and ensure an adequate and reasonable supply and price 
of electricity over the long term. I think that is the real 
question before the committee.
    I want to commend my friends from California and Oregon and 
the other States that have been most affected initially by 
this, but as the Wall Street Journal points out, it is going to 
move right across the country and do not think New York and the 
east coast corridor is not going to be exposed to this because 
it is a reality. It is coming and we better take action.
    Senator Bingaman.

         STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR 
                        FROM NEW MEXICO

    Senator Bingaman. Thank you very much, Mr. Chairman.
    At the last hearing we had on this subject, we learned that 
there is a variety of suggestions for what has caused the 
problem in California: structural flaws in the restructuring 
plan in California, high natural gas prices, hot summers, cold 
winters, insufficient rainfall, too few powerplants, too few 
transmission lines, too many environmental laws, and price 
gouging. Those were all suggested as causes.
    But whatever the cause is, the result has been runaway 
wholesale power rates that have brought the California system 
to the point of collapse and have driven its largest utilities 
into debt and is rapidly draining California's State treasury 
to the tune of some $45 million a day, as I understand it.
    The California electricity crisis is, as the Federal 
Reserve Board Chairman testified 2 months ago, a national 
concern. Obviously, California represents a very large part of 
our economy and its problems are the Nation's problems.
    The Federal Energy Regulatory Commission and the Bush 
administration's response to this crisis have been largely to 
let the market resolve the problem. The senior Senator from 
California has argued forcefully that the market forces are not 
solving the problem and that we at the Federal level have an 
obligation to step in and to fix the problem.
    California's wholesale rates first started spiking about 10 
months ago in May. The Federal Energy Regulatory Commission, 
which is the agency charged with regulating those rates, found 
them to be unjust and unreasonable in November. That was 5 
months ago.
    The law is quite clear, as I read it, on what the 
commission is required to do when it finds a wholesale rate to 
be unjust and unreasonable. The Federal Power Act says the 
commission must set a just and a reasonable rate. The 
commission has yet to do so. It has, instead, taken a number of 
half-hearted actions to try to bring down California's 
wholesale rates. It is clear that these actions have yet to 
bring those rates down to a just and reasonable level, as the 
law requires.
    Both the commission and the Bush administration have 
offered various explanations and excuses for why a rate cap or 
a cost-of-service rate would not work. They indicate that it 
would send the wrong signals to generators and consumers. It 
would discourage generators from building more powerplants and 
more transmission lines. It would discourage consumers from 
saving energy. The commission has said that the cost-of-service 
rates will take too much time and be too difficult to 
calculate. The commission and the administration embrace an 
economic theory, the theory that an unregulated, competitive 
market will cause supply to increase, will cause demand to fall 
until those two are in balance, and this will necessarily lead 
to reasonable prices.
    But the Federal Power Act does not, obviously, enact an 
economic theory. It does not provide an exception for 
administrative difficulty. It simply says if wholesale rates 
are unjust and unreasonable, the commission is required to make 
them just and reasonable. This has not been done. To the 
contrary, by its action last Friday, the commission appears to 
have given its approval to many millions of dollars of 
manifestly unjust and unreasonable charges.
    Perhaps a cost-of-service rate mandate is not the ideal 
solution to the problem and perhaps the bills that have been 
introduced and referred to by Senator Murkowski are not 
perfectly drawn, but they are a proposed solution. If the 
administration objects to carrying out its obligations under 
the Federal Power Act, then I believe it must come forward with 
a credible alternative solution if it is not anxious to embrace 
these.
    Why do we not go ahead and have short statements from any 
of the committee members who want to make them, and then we 
will go to our witnesses. I am advised that according to the 
order that people arrived here, Senator Campbell is next.
    Senator Campbell. Mr. Chairman, I will just introduce a 
statement for the record. Thank you.
    Senator Bingaman [presiding]. Very good.
    [The prepared statement of Senator Campbell follows:]

   PREPARED STATEMENT OF HON. BEN NIGHTHORSE CAMPBELL, U.S. SENATOR 
                             FROM COLORADO

    Thank you, Mr. Chairman. I would like to thank you for holding this 
hearing and all of the witnesses here to testify, especially my friend, 
Secretary Abraham. This hearing will delve into the ongoing problems in 
California and some of the bills that are attempting to fix portions of 
the problem. This should be an interesting discussion on how we are 
going to proceed on the electricity crisis in California, especially 
since it is affecting the entire West.
    As you all know, many Western states are joined together in one 
enormous power grid. We are so interdependent that the breakdown of a 
generator in one part of the grid will affect power in another part. 
The entire Western grid's electric system is under severe stress. High 
prices and insufficient supplies of energy are likely to burden many 
Western states for months to come. But, the long-term problem is the 
supply of electricity which is smaller than the demand in the region. 
Also, California has not built a new power generation facility in years 
which would help alleviate the increasing demand for electricity.
    The Western power grid is already overworked because of the energy 
needs created by booming economies and population growth, but not just 
in California. My home state of Colorado, along with other Western 
states, has increased demand for electricity as well.
    Also, with the soaring price of electricity and the environmental 
concerns surrounding coal-fired generation plants, natural gas will 
play a key role in supplying our nation with sufficient power. But, we 
have certain problems with natural gas as well. In California, they 
have been experiencing particularly high natural gas prices--more than 
twice as high as recent national averages.
    There are some proposals being offered to help address this power 
crisis like S. 26, S. 80 and S. 287 which my friends from California 
have introduced. But, concerns have already been voiced regarding these 
bills. Regardless of the controversy, whichever way we decide to go, we 
have to consider all proposals so that the problem can be solved, even 
if that means consideration of an electricity ballot initiative in 
California.
    I am approaching the California crisis debate very carefully so 
that the best interests of my home state are not compromised and hurt. 
I have some questions for the witnesses that I would like them to 
address so that we can further explore this issue during the time for 
questions.
    Thank you Mr. Chairman.

    Senator Bingaman. Senator Craig.

        STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR 
                           FROM IDAHO

    Senator Craig. Mr. Chairman, thank you very much.
    Ladies and gentlemen, witness this marvelous act of 
bipartisanship that the U.S. Senate is now working in. We think 
it can work. It is working and you are seeing it firsthand this 
morning, Mr. Chairman.
    [Laughter.]
    Senator Craig. And I appreciate that.
    Senator Bingaman. I will ask for another 45 minutes I 
expect.
    [Laughter.]
    Senator Craig. But I do want to thank Chairman Murkowski 
for holding these hearings. I think they are tremendously 
important to address the current energy crisis that the West is 
experiencing.
    But first, Mr. Chairman, I want to commend Senator 
Feinstein for her diligence and I believe honest effort to both 
define and resolve the difficult energy-related problems that 
are crippling the economies of California and the West. Senator 
Feinstein I think has been tireless in her search for answers.
    I will also say she has been bold against considerable 
political odds as it relates to rate caps on retail sales to 
consumers. She has publicly acknowledged the critical need for 
California to expedite permitting of new powerplants that need 
to be sited in her State. That goes against some of the 
political mainstream in her State, but again, when you are in a 
crisis, it is time to lead.
    As she has candidly stated in recent Investor Daily 
articles, without expedited permitting for new powerplants and 
true market pricing, there is no incentive to conserve. And we 
are finding in polls coming out of California today that the 
average California consumer does not recognize that they are in 
an energy crisis.
    Mr. Chairman, these are not easy decisions for a California 
Senator to make or to acknowledge and the actions she has taken 
and legislation introduced and these hearings today are 
important for all of us.
    Mr. Chairman, I am sure that it is largely because of her 
willingness to be honest and openly address these issues that 
these hearings have been scheduled and that we will move 
forward as we work on this very difficult problem. I am 
committed to giving this legislation attention.
    However, I hasten to add, Mr. Chairman, that I am 
fundamentally skeptical of the ability to price cap in any way 
and to call that a solution to an energy problem in the West. 
Price caps have not had much economic success in years past. 
They have always proven to be very difficult to remove once in 
place. Moreover, they have often proved to be a distraction 
that creates short-term chaos in balancing load and resources.
    Mr. Chairman, I am grateful that our Energy Secretary is 
here, the Chairman of FERC is here. Clearly, this issue has 
their attention, as it should. I think we all look forward to 
their insights in it.
    I must say I am also grateful to the Governors who are here 
today to speak. We in the West are experiencing the California 
crisis in rather dramatic ways. In fact, rates are going up 
much faster outside California than inside California. That is 
true in the State of Oregon. It is true in the State of 
Washington. It is true in the State of Idaho. It is true in the 
State of Montana because, as you said, Mr. Chairman, we are all 
linked together and that grid and wholesale rates and 
California's inability to get itself under control is driving 
us into a very real crisis.
    Mr. Chairman, let me ask unanimous consent that a letter 
from my Governor, Governor Dirk Kempthorne of Idaho, become a 
part of the record, as well as a letter of February 6 from the 
Governors of Arizona, Colorado, Idaho, Montana, Nevada, New 
Mexico, Utah, and Wyoming, very clearly expressing that price 
capping is not the issue to solve the problem. It only creates 
a greater problem. Siting, regulation, getting on with the 
business of building production capability is the issue. They 
obviously express concern about California and the decision it 
is making, but they also recognize the importance of actions 
taken. This is a letter to Secretary Spence Abraham as a result 
of his trip out there and his expressions of cooperation of 
help, but at the same time, a recognition to stand true to the 
market and let the market forces work. And I ask that those 
become a part of the record.
    Senator Bingaman. Those will be included in the record.
    Senator Feinstein.

       STATEMENT OF HON. DIANNE FEINSTEIN, U.S. SENATOR 
                        FROM CALIFORNIA

    Senator Feinstein. Thank you very much, Mr. Chairman. Let 
me thank you and the chairman for holding this hearing. I would 
also like to thank my colleague from Idaho for his remarks. I 
appreciate them very much.
    Earlier Senator Gordon Smith of Oregon and I held a press 
availability, and what we announced was essentially agreement 
on a piece of legislation which would, in essence, say that 
once the Federal Energy Regulatory Commission finds that rates 
are unjust and unreasonable, that that commission would be 
bound to either set a temporary regional wholesale price cap, 
one, or two, set cost-based rates, provided that the State 
would then respond and pass on those rates to the consumer.
    Now, the State would have the option of setting the timing 
and the manner in which those rates would be passed on. That 
could be tiered pricing, real-time pricing. It would include a 
baseline for those on the lowest part of the economic ladder. 
It would give the State flexibility in that regard. But it 
would seek to correct what in California today is a broken 
market.
    That brokenness really came from a bill passed in 1996 
which deregulated the wholesale end and yet kept regulated the 
retail end, which forced California to buy electricity on the 
day-ahead market, 95 percent of it, and required the utilities 
to divest themselves of their generating facilities. In 
hindsight, all of this came together in a catastrophic scenario 
so that today California buys power at what are, if you look at 
rates 5 years ago, astronomic prices.
    We believe that FERC should act, but we believe that FERC 
should act in a way that it can be sure that the market also 
will have a chance of responding correctly.
    Let me just quickly take a look at electricity prices in 
California. In 1998 and 1999, the average energy price for a 
megawatt of electricity consistently averaged about $30. The 
green bar is 1999 and the purple bar is 1998. The red bar is 
the year 2000. You clearly see what happened. The price of 
electricity jumped to $150 a megawatt hour in the summer, and 
then in December it increased to over $350 per megawatt hour. 
The late fall/early winter season is normally the time of the 
year when demand is low, and California has such an ample 
supply of electricity, that it usually exports its surplus. 
This season, however, there were serious shortages of power.
    Chart number 2 compares the hourly prices of electricity 
for two July days in 1999 and 2000. The line graph and the 
number on the right indicate the available power supply for 
that day. As you can see, the demand is the same for these two 
days. However, the purple bar represents the hourly prices for 
the day in 1999, and the red bar represents the price for 2000. 
Again, you can look at those price differences.
    The discrepancy in price exists in the early morning and it 
exists late at night. So, even though the supply is the same 
and we know that there should be ample supply to meet demand 
late at night, prices for energy still skyrocketed. The only 
way to explain the differences in price is to conclude that 
someone is gaming the market and the market is broken.
    Now, I am not going to spend a lot of time on natural gas 
prices. The ranking member and I had the privilege of meeting 
with El Paso, and I think both of us saw one of the problems 
and I want to quickly state what it is. The real cost of 
transporting natural gas is less than $1. Based on cost, when 
natural gas is selling for $5 in San Juan, New Mexico, directly 
adjacent to the California border, it should not be selling for 
anything more than $6 in southern California.
    But as you can clearly see from the second spike on the 
graph, at the end of last year when natural gas was averaging 
$5 to $7 nationally, it was as much as $37 in southern 
California. That is additional evidence that the market was not 
working.
    Now, the Federal Power Act gives the exclusive authority to 
regulate the interstate transmission of power, and I think the 
statute is pretty clear. Let me quote from it. ``Whenever the 
Commission, after a hearing had upon its own motion or own 
complaint, shall find that any rate, charge, or classification 
demanded, observed, charged, or collected by any public utility 
for any transmission or sale subject to jurisdiction of the 
Commission, or that any rule, regulation, practice, or contract 
affected such rate, charge, or classification is unjust, 
unreasonable, unduly discriminatory, or preferential, the 
Commission shall determine the just and reasonable rate, 
charge, classification, rule, regulation, practice, or contract 
to be thereafter observed and in force, and shall fix the same 
by order.''
    Now, I agree California has to fix the brokenness of its 
market on its own. It has to build additional generation. It is 
moving in that direction and anticipates at the end of 2002 
there should be greatly increased power generation within the 
State.
    So, what is the appropriate Federal role? The appropriate 
Federal role in my view is, at a time of crisis, to provide a 
period of reliability and stability in the marketplace. This in 
my view FERC has refused to do. So, this unusual price market 
has continued.
    The State has spent nearly $4 billion of its surplus to 
date buying power. It spends about $45 million a day. About $30 
million of that is lost forever. That is an extraordinarily 
difficult situation to sustain into time, and I would suspect 
that by the end of this year, the State will probably spend 
close to $10 million buying power. That is gone. It does not 
buy a school. It does not repair a road. It does not build the 
water system many of us believe the State needs. As a matter of 
fact, some of that money has also gone to buy power.
    This is one of the reasons that I feel so strongly that any 
legislation that comes out of this body must also fix the 
brokenness of that market. Thanks to Senator Smith of Oregon, 
we have come together I believe now with a bill that says, 
FERC, do your job but, California, you also must do your job 
and fix your market. So, we hope that this bill will have 
favorable consideration by this committee and that we will be 
able to move it forward. I think long term it is the right 
thing to do.
    There is a program of conservation now asking for 10 
percent conservation in the State. But what is the greatest 
incentive to conservation is if the retail market functions so 
that when supply is limited, people have incentive to control 
their use. They can use smart meters. They can buy new 
refrigerators which save a lot. The computer industry has 
indicated that if people just take their computers and instead 
of putting them on sleep, put them on off, that saves totally 
about 7 percent of the State's supply. That was amazing to me 
to find out. But people have to respond and the marketplace is 
one of the ways in which people can respond.
    I want to thank Senator Smith. I believe we now have a 
piece of legislation that can fix the brokenness of the market 
and also demand, in effect, that FERC provide this period on a 
temporary basis, a period of reliability and stability in 
prices which can be a big help.
    I would like to take this opportunity just to welcome those 
people from California who have come a long way, Mr. Chairman, 
to testify this morning.
    Senator Bingaman. Thank you very much.
    Let me just alert Senators here. We have six more Senators 
who are here and ready to make statements. I would urge that 
people keep the statements short so we can get to our witnesses 
as quickly as possible.
    Senator Smith.

         STATEMENT OF HON. GORDON SMITH, U.S. SENATOR 
                          FROM OREGON

    Senator Smith. Thank you, Mr. Chairman.
    Mr. Secretary, welcome. Thank you for being here.
    I believe in free markets, but truly we have never had a 
free market in electricity, not one that is truly free. What we 
now have is a broken market and a duty to do something.
    When this crisis erupted, many rushed to re-regulate. I 
have withheld any impulse to do that, believing that until 
California fixed the fundamental flaw in its law, a re-
regulation would amount to little more than putting a band aid 
on cancer.
    Senator Feinstein and I have reached a conceptual 
agreement. We are going to advance it as legislation. We 
believe the administration should respond and favorably and 
help us to do this because truly what you have now is 
converging a perfect storm, both environmentally and 
economically, for the States in the Western United States.
    I think it is important that everyone understand the 
fundamentals of the agreement that we are going to pursue.
    The legislation should direct the Federal Energy Regulatory 
Commission, FERC, to impose a just and reasonable wholesale cap 
that could be load-differentiated or cost-of-service based 
rates in the Western energy market. That market is comprised of 
the States in the Western Systems Coordinating Council: 
Arizona, California, Colorado, Idaho, Montana, Nevada, New 
Mexico, Oregon, Utah, Washington, and Wyoming.
    The wholesale price cap or cost-of-service based rate will 
not apply to wholesale sales for delivery in a State that 
imposes a price limit on the sale of electric energy at retail 
that precludes a regulatory utility from recovering costs under 
the price cap or on a cost-of-service based rate or precludes a 
regulatory utility from paying its bills.
    The ratemaking body of a State can determine, however, 
would be allowed to determine how and when the wholesale rates 
will be passed on to ratepayers, including the setting of a 
tiered pricing, real-time pricing, and baseline rates. With 
respect to the Bonneville Power Administration, BPA will be 
encouraged to seek to reduce rate spikes to economically 
distressed communities, while ensuring costs are recovered by 
the end of the next contract period in 2006.
    Three, the wholesale rate cap or cost-of-service based 
rates shall remain in effect until such time as the market for 
electric energy in the western energy market reflects just and 
reasonable rates, as determined by the Commission, or until 
March 1, 2003, whichever is earlier.
    In addition, as to natural gas transmission costs, the 
legislation would reimpose FERC tariffs for natural gas 
transportation into California and require natural gas sellers 
to declare separately the transportation and commodity 
components of the bundled rate for gray market transactions.
    Additionally, after the date of the enactment of this 
legislation, utilities should not be ordered to sell 
electricity or natural gas into a State without a determination 
by FERC that the seller will be paid.
    Finally, in the event that a State in the Western energy 
market does not meet the criteria described in this agreement, 
State public utilities commissions in the western energy market 
should be able to ensure that regulated utilities within their 
jurisdiction meet demand for electric energy in the utility's 
service area before making sales into any such State.
    Mr. Chairman, I believe that this approach, while 
temporary, will help us to avert an economic and environmental 
catastrophe. I hope that we can pass this on a bipartisan basis 
and I hope the administration will be a party to it because we 
would be unwise servants if we just sat while Rome got ready to 
burn.
    Thank you.
    Senator Bingaman. Thank you very much.
    Senator Hagel, did you wish to make a statement?

          STATEMENT OF HON. CHUCK HAGEL, U.S. SENATOR 
                         FROM NEBRASKA

    Senator Hagel. Very briefly, Mr. Chairman. Thank you.
    This issue of energy is the most pressing issue America 
faces, bar none. This is an issue that crosses all boundaries, 
all walks of life, all socioeconomic dynamics of our country. 
It affects our national security. It affects our productivity, 
our economic growth. It affects agriculture. It affects the 
environment.
    I find it a bit ironic, Mr. Chairman, that there are some 
who are shrieking around America this morning who are concerned 
that this President has decided not to cap carbon dioxide 
emissions for utility plants when we are here today about a 
most urgent issue and that urgent issue is about energy supply. 
It is not complicated. It is a very clear case of energy demand 
outstripping energy supply.
    As Chairman Murkowski said before Chairman Bingaman took 
the gavel, we are all in this together. This is a national 
problem. It is not going to get better. It is only going to get 
worse. We are here today because of that problem.
    We need a national energy policy. We need a short-term and 
a long-term policy. We need energy supply. We need a broad, 
deep portfolio of energy supply. That is connected to the 
environment. It is connected to every part of our lives.
    We can talk about amendments to energy legislation and we 
can talk about quick fixes for particular States, and that is 
of great importance and great urgency and we understand that. 
But we must also understand we have an obligation here to take 
a bigger view and a national responsibility because if we do 
not, the consequences of this will be catastrophic. We think we 
have market problems today. It will be nothing compared to the 
economic downturn that will essentially spread to all of the 
globe if we do not fix this and we do not have a market that 
believes we are going to fix it both for the short term and the 
long term.
    So, I am obviously like all of us on this committee, Mr. 
Chairman, appreciative of the leadership that you are giving 
and Chairman Murkowski, obviously our colleagues, Senator 
Feinstein and Senator Smith and others who are grappling with 
the immediacy of this. It is difficult and we understand that. 
But my only point is this is a big issue that is going to 
require big-time, long-term solutions and we should not tinker 
around or just edge around the bush on this with the American 
public. We need to tell them straight out we are in trouble.
    Thank you.
    Senator Bingaman. Thank you very much.
    Senator Landrieu.

       STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR 
                         FROM LOUISIANA

    Senator Landrieu. Thank you. I waive my right to an opening 
statement because I am anxious to hear the testimony and 
actually have another hearing in a few minutes. Let me just 
state this in three questions really.
    I commend my colleagues for working together in a 
bipartisan way to try to address this difficult situation in 
the West.
    My first question would be, what would be the potential 
effects on prices in other regions of the Nation as a result of 
this bill?
    Second, will we address the authority of FERC to site new 
powerplants, require the expansion of powerplants and to 
require transmission lines, possibly even over local 
opposition, which has been a real stumbling block to any 
solution to this problem?
    Third, would the legislation allow those States that are 
aggressively pursuing new supplies of energy such as oil and 
gas and coal, to be compensated for our good efforts in trying 
to increase the Nation's supply? States such as Louisiana and 
Texas should be recognized for their efforts.
    So, I throw those three questions out for right now and I 
will have others as we debate this legislation. Thank you.
    Senator Bingaman. Thank you very much.
    Senator Cantwell.

        STATEMENT OF HON. MARIA CANTWELL, U.S. SENATOR 
                        FROM WASHINGTON

    Senator Cantwell. Thank you, Mr. Chairman, and I would like 
to thank Chairman Murkowski for holding this hearing.
    As stated by my colleague from Idaho, this is truly a 
bipartisan effort, in the sense of this hearing and the 
committee working together, the legislation being offered by my 
colleagues from California and Oregon, and in the testimony 
that we are going to hear from two Governors from the West.
    We in Washington want to make sure that the point is not 
lost today that we are seeing both economic impacts to 
industries and to consumers. The Northwest continues to suffer 
the harsh consequences of this market instability, obviously 
exacerbated by our below-average rainfall and snowpack. This is 
the worst drought in our State since 1977, and it is only 
March. So, there is much to do to address this issue.
    BPA is predicting more than a 45 percent water flow 
shortfall this summer and predicts rate increases of over 200 
percent this fall. Rates are already up 43 percent with 
residential users and 75 percent for some industrial customers 
in Tacoma, and up 28 percent in Seattle.
    Northwest officials and we in the Northwest congressional 
delegation continue to look for mid- and long-term answers to 
this problem. I congratulate FERC on their press release 
yesterday in which they went through a variety of issues that I 
believe are mid-term and long-term answers to increasing energy 
supply by expediting processes and procedures.
    But I think it is very important that we look at not just 
the mid-term and long-term solutions to this issue, but the 
immediate consequences to the economy of the Northwest. We need 
to stop the bleeding first before we look for a cure for this 
disease. That is why I join in support of my colleagues from 
California and Oregon in S. 287, which will try to address 
these issues.
    I cannot emphasize enough--and I am very proud that our 
Governor, Gary Locke, is here today to talk about these 
economic consequences to our region. The effect of these energy 
prices could mean 23,000 fewer jobs in Washington State over 
the next few years, and that is on top of a 20,000-job loss in 
water and energy-intensive businesses such as aluminum 
smelting. This was referred to in a Wall Street Journal article 
that I would like to submit to the record.
    I would also like to submit to the record an article that 
appeared in the Seattle Post Intelligentser about the fact that 
this is not just about California bashing. While there have 
been problems created by distorted spot market pricing, this is 
a larger issue that we need to address if we are to help the 
Northwest economy survive these high prices.
    I appreciate the attention of the committee to this issue. 
I appreciate the fact that our Governor has flown across the 
country, I think on a red-eye, to be here today to give 
testimony on this. And I appreciate the Secretary's immediate 
attention to these Northwest issues.
    Senator Bingaman. Thank you very much.
    Senator Burns, did you have a statement?

         STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR 
                          FROM MONTANA

    Senator Burns. May I just say to the Senator from 
California that the last time we sat in these chairs, I said 
that we have to address this nationally. California's economy 
is so large--and I think they are still a member of this 
Union--that it affects all of us. We want to be a part of the 
solution, not a part of the problem.
    I want to congratulate her and Senator Smith for working 
out this arrangement. It is not a knee-jerk approach to this. 
It has been given great forethought.
    Rather than standing and shouting and worrying--I worried 
ever since I was in Las Vegas and picked up that newspaper. The 
Los Angeles Times on the front page about a month ago, Senator 
Feinstein, said 54 percent of the people in California do not 
believe there is a power shortage. Now, that told me we have 
got some credibility gaps here. So, we have to address those.
    Senator Hagel is right. This is a national problem. It is 
just not local. But we are situated such in relevancy to the 
Northwest that it impacts our State of Montana.
    I want to congratulate our Governor for being here. And do 
not worry about Governors taking red-eyes. They are no better 
than we are. They can take them just like everybody else.
    [Laughter.]
    Senator Burns. So, I am not going to feel sorry for 
Governor Locke because my Governor did the same thing. She is 
here today and will offer her points.
    I want to thank the chairman for calling this hearing. I 
plan to be part of the solution rather than part of the 
problem. I congratulate them for it. Thank you.
    Senator Bingaman. Thank you very much.
    Senator Thomas, you are the cleanup hitter here. Do you 
have a statement?

         STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR 
                          FROM WYOMING

    Senator Thomas. Yes, sir, very briefly.
    Mr. Secretary, glad to see you. I thought I was going to 
miss you, but I see you are still here. You have not had a 
chance yet.
    [Laughter.]
    Senator Thomas. What we really need to focus on is our 
energy policy, and this local thing is a little different. I 
think we need to deal with it. I am ready to deal with it.
    But I have to tell you I want to see from California some 
decisions made out there, some changes made out there. There 
were market messages coming out for a number of years. You 
cannot accept the notion that your use is going up and your 
production is going down and not know it. So, I am anxious to 
hear of some of the decisions with regard to caps on retail and 
so on that have been made out there.
    Then we need to move and our emphasis needs to be on the 
broader emphasis in my view. The national problems are quite 
different than the California problem. We tend to put them 
together, but I think there is quite a difference and we need 
to deal with it that way. So, I am anxious to hear.
    Thank you, sir.
    Senator Bingaman. Thank you very much.
    Secretary Abraham, we are glad to have you before the 
committee today and we look forward to hearing from you.

         STATEMENT OF HON. SPENCER ABRAHAM, SECRETARY, 
                      DEPARTMENT OF ENERGY

    Secretary Abraham. Mr. Chairman, thank you. I could not 
help but reflect upon my first months in the Senate when, as 
the most junior member, 100th in seniority, I used to wait at 
committee hearings to get a chance to make my opening 
statement, and I see that things have not changed much since I 
moved from the Senate to the administration.
    [Laughter.]
    Secretary Abraham. Mr. Chairman and members of the 
committee, I just want to thank you all for having me here 
today. I look forward to this testimony and to continuing to 
work with all of you on the challenges that we face in the 
energy arena.
    I would just say at the outset I agree strongly with the 
points that have been made that this is not an isolated 
situation or a short-term challenge. The approach we intend to 
take as an administration is to look at this in a broad, 
national, and long-term sense.
    However, over the past year, as we know, California has 
experienced three major blackouts that affected hundreds of 
thousands of Californians in progressively larger numbers. The 
problem will get worse and blackouts this summer appear 
inevitable when peak demand is expected to be about 61,000 
megawatts while supplies are anticipated to be only about 
56,000 megawatts. Consequently, some analysts project that 
California may experience up to 20 hours of rolling blackouts 
this summer, while others project 200 or more hours of 
blackouts.
    The clear cause of this electricity crisis, as has been 
stated here today, is an imbalance between supply and demand. 
Over the past 5 years, electricity demand in California grew by 
6,300 megawatts while generating capacity has, as a result of 
regulatory and other impediments, decreased by 1,200 megawatts 
due to plant retirements and no new sources of power 
generation.
    I believe Governor Davis has acknowledged that California 
has principal responsibility to address this crisis, and thus, 
he has taken a variety of actions designed to increase supply 
and reduce demand. If these measures prove successful, the 
situation this summer will be improved. In a variety of ways, 
this administration has been trying to help California in those 
efforts, as I will later discuss in my testimony.
    Unfortunately, the national focus and the focus of this 
hearing has been diverted away from the challenge of inadequate 
supply to price controls. Yes, it is true that California is 
paying high prices for energy, but California is not alone. The 
rest of the West, as we have heard today, as well as other 
regions of the country, have also experienced significantly 
higher energy costs, particularly this winter.
    Although other areas of the country are confronting energy 
supply and pricing challenges, the problems in California are 
unique because of the aforementioned lack of new generation and 
the electricity purchasing constraints the State itself applied 
to its own utilities. By refusing to permit its utilities to 
buy power except on the spot market, can set into motion the 
process which drove its costs through the roof.
    For example, last summer Duke Energy offered to meet the 
supply needs of San Diego Electric and Gas Company for 5 years 
at a price of $55 per megawatt-hour. This is just a fraction of 
the average price of $376 per hour paid on the spot market in 
December and $314 paid in January. If the State had approved 
new generation in a timely manner or had allowed utilities to 
enter into long-term contracts, such as the one offered by 
Duke, we would not be here today discussing price caps.
    This administration is absolutely and certainly concerned 
about high energy prices, whether they are in California or 
anywhere else in the United States. We believe that energy 
prices should be just and reasonable and we support the recent 
action by the Federal Energy Regulatory Commission to order 
refunds to Californians charged unjust and unreasonable rates 
instead of market rates. And this administration will continue 
working closely with California and the West to develop 
measures to help reduce its projected energy shortages.
    But let me make one point clear. Any action we take must 
either help increase supply or reduce demand because that is 
real challenge. If a proposal does not increase supply or 
reduce demand, it is not a real solution. If it decreases 
supply or increases demand, it will only make the current 
crisis worse, especially as we go into the peak summer season.
    And it is within that framework that the administration 
opposes the imposition of price controls. Price caps will not 
increase supply or reduce demand. In fact, in our view they 
will seriously aggravate the supply crisis since they will 
discourage investment in new generation while eliminating 
incentives to reduce demand.
    Now, this is not a theory. It is the product of experience. 
Price caps have already been tried and have already failed. 
California has long had a ceiling price for electricity sales 
into the State. That price was steadily lowered throughout last 
year from $750 to $500 to $250 to finally $150 per megawatt-
hour. Proponents of price caps then made the same arguments the 
proponents make today, that price caps will control high prices 
without diminishing electricity supply.
    They were wrong. Price caps failed because some power 
suppliers were subject to the price cap while others were 
exempt. The result was market distortion. Price caps gave in-
State generators every incentive to sell power out-of-State and 
power exports from California rose 85 percent. As a 
consequence, 3,000 megawatts of power were exported.
    And what happened to prices? The lower the price cap was 
set, the higher average electricity prices rose.
    Notwithstanding that failure, we are here today discussing 
price caps for the entire West. However, these proposals I 
think suffer from the same flaws contained in previous ones.
    Regional cost-based price caps will discourage investment 
in new generation at exactly the time it is needed the most.
    Furthermore, imposition of cost-based price caps will also 
split the electricity market in the West into two markets, one 
that is subject to price controls and the other which is 
exempt, much as has been the case in California. This will 
occur for a very simple reason. FERC only has jurisdiction over 
47 percent of the electricity generation in the Western Systems 
Coordinating Council. The other 53 percent, municipals, 
cooperatives, and so on, fall outside of the Federal 
Government's power to regulate.
    Now, a cost-based price cap that applies to only half the 
region has four fundamental flaws.
    First, the California experience with price caps, where 
part of the market was subject to the cap and part was exempt, 
will be repeated. We believe the result will be the same: 
distortion of electricity markets, reduction in electricity 
supply, shifts in electricity supply from capped markets to 
uncapped markets, and most importantly, failure to control 
prices.
    Second, because of this separation or division, we believe 
that electricity exports to the United States from Canada and 
Mexico will almost certainly decrease, since these producers 
could get a higher price selling electricity within their own 
countries. And we cannot control the price that it is sold 
extraterritorially.
    Third, a split electricity market would create winners and 
losers. Winners would be large municipal utilities in the West 
that have significant surplus generation, since they would be 
exempt from the price caps, and the losers, of course, would be 
buyers that cannot purchase electricity from an entity subject 
to the price caps.
    Fourth, a creation of two electricity markets will likely 
induce cheating and circumvention like that which occurred in 
the days of oil price controls. That will occur because as the 
prices in the two markets diverge sharply, prices in the 
unregulated market will be increasing and rising higher than 
existing levels, whereas prices in the regulated market will 
not. Electricity is like oil: it is a fungible commodity. Some 
unscrupulous parties could easily take advantage of the split 
markets and sell capped electricity at market-based prices. In 
fact, that is exactly what Marc Rich's company is accused of 
doing under oil price controls.
    The only way to apply price controls to all generation in 
the West would be to amend Federal law and grant FERC authority 
to set rates for wholesale power sales by State and municipal 
utilities and rural electric cooperatives. However, if we did 
that, it would be inconsistent with 70 years of Federal 
electricity legislation, and I would just make it clear that 
the administration would not support such a proposal.
    Finally, I would just like to note that one popular 
variation on the cost-based price cap idea, which has been 
espoused by several Governors and a recent FERC chairman, would 
actually reduce electricity supplies in the most immediate 
sense. This approach would actually not even guarantee cost 
recovery because basically it would set a rate at variable cost 
plus 10 percent or $25 per megawatt-hour, whichever is less. 
Since powerplants would fix costs in excess of $25 per 
megawatt-hour, presumably not elect to operate at a lost, the 
region's electricity supply in those cases would be immediately 
reduced if we adopted this approach.
    Last month, 8 of the 11 Western Governors sent me a letter 
expressing opposition to price caps. In that letter they 
stated: ``Caps will serve as a severe disincentive to those 
entities considering the construction of new electric 
generation at precisely the time all of us, and particularly 
California, are in need of added plant construction.'' We share 
this view and we believe that our responsibility is to help 
minimize electricity shortages and the blackouts and the 
resultant economic and security dislocations such shortages 
produce. So, for those reasons, we do not favor price controls.
    Regrettably, I think our opposition to price caps has been 
claimed by some to suggest that the administration either does 
not care about California and the West or is doing nothing to 
help. That is simply untrue.
    One day after being sworn into office, President Bush asked 
me to call Governor Davis to see how we could help address 
California's power shortages.
    Three days after taking office at Governor Davis' request, 
we extended the emergency electricity and gas orders to give 
California time to enact reform legislation aimed at 
maintaining electricity supplies.
    Last month, President Bush issued an executive order 
directing Federal agencies to expedite permits relating to 
construction of new powerplants in California. The U.S. 
Environmental Protection Agency has issued air permits for 
three powerplants in the past 3 weeks.
    President Bush and I have engaged in extensive discussions 
with the Government of Mexico about increasing electricity 
imports from Mexico to California.
    Last week, at the behest of Governor Davis, we sent a 
letter to FERC asking that the agency act on his request for an 
extension of the waiver for qualifying facilities from certain 
fuel requirements. Yesterday that waiver was granted.
    Also last week, FERC determined that some suppliers had 
charged unjust and unreasonable rates and then compelled them 
to refund those overcharges to California buyers. And new FERC 
orders, intended I think to again address these issues, were 
just announced yesterday.
    Moreover, today we will be responding favorably to Governor 
Davis' request that we review his plan for ensuring the 
financial health of the California utilities.
    Mr. Chairman, we are committed to working with California 
and the West to develop effective solutions to this crisis and 
we will continue to do so. Moreover, the administration, under 
the leadership of Vice President Cheney, has embarked on a 
multi-departmental task force project, much as was recommended 
by members of this committee to me during my confirmation 
hearing, to try to look at our energy challenges on a broad, 
interdepartmental, national, long-term and short-term basis. 
And as results from that task force effort are completed, we 
will be taking additional action.
    The only action the administration will not take is the 
implementation of price caps.
    In that each of the legislative proposals before this 
committee today basically are premised on the types of price 
controls I have just addressed and for the reason which I have 
just outlined, we do not support them. There are, however, 
additional concerns which we have with each proposal and I will 
address those concerns as part of the fuller written testimony 
which we submit today.
    Mr. Chairman, that concludes my testimony. I look forward 
to answering any questions you or the other members of the 
committee might have and look forward to working with people as 
we address these various energy challenges on a very broad-
based approach in the future. Thank you very much for having me 
here today.
    [The prepared statement of Secretary Abraham follows:]

        PREPARED STATEMENT OF HON. SPENCER ABRAHAM, SECRETARY, 
                          DEPARTMENT OF ENERGY

    Mr. Chairman and Members of the Committee, I welcome the 
opportunity to testify before you today on various electricity measures 
pending before the Committee, namely S. 26, S. 80, S. 287, and the 
Smith amendment to S. 287.
    All of these legislative proposals address the electricity crisis 
in California and the West. Before I get into the Department's specific 
comments on these bills, it may be useful to step back and offer our 
views on how this crisis developed, the real nature of the problem, and 
an analysis of proposed solutions.
             electricity crisis in california and the west
    As everyone knows, California is in the middle of a serious 
electricity crisis. Over the past year, the State has experienced three 
major blackouts that have affected hundreds of thousands of 
Californians in progressively larger numbers. The problem will get 
worse, and blackouts this summer appear inevitable when peak demand is 
expected to be 61,125 megawatts, while supplies are anticipated to be 
only 56,159 megawatts. Consequently, some analysts project California 
may experience up to 20 hours of rolling blackouts this summer, while 
others project 200 or more hours of blackouts.
    The clear cause of this electricity crisis is an imbalance between 
supply and demand. Over the past five years, electricity demand in 
California grew by 6,300 megawatts while generating capacity decreased 
1,200 megawatts due to plant retirements. The State siting process 
constituted a barrier to entry for power producers that sought to build 
new generation. Over the last four years, independent power producers 
tried to build new generation, filing applications to build 14,000 
megawatts of new generating capacity. None of this new generation is 
operating yet. Moreover, anticipated political resistance undoubtedly 
discouraged serious consideration of other new generation options.
    Governor Davis understands the nature of the problem and recognizes 
the State of California has principal responsibility to address this 
crisis. As the Governor stated in January: ``The problem is primarily 
of California's making, and we will solve the mistakes we made in 
1995.''
    To that end, Governor Davis has taken a variety of actions designed 
to increase supply and reduce demand. The Governor proposed a series of 
executive orders intended to increase supply by 5,000 megawatts and 
reduce demand by 10 percent this summer. If these measures prove 
successful and the weather is mild the situation this summer will be 
improved.
    We are helping the State in its efforts, and the Administration has 
taken a number of actions to support the State in recent weeks. I will 
discuss the actions taken by the Administration later in my testimony.
    Mr. Chairman, the national focus, and the focus of this hearing, 
has unfortunately been diverted from the challenge of inadequate supply 
to price controls. It is true that California is paying high prices for 
energy, although, because of retail rate caps, consumers have been 
largely protected from these price increases. But California is not 
alone.
    The rest of the West and other regions of the country have also 
experienced higher energy costs, particularly this winter. Unlike in 
California, where retail rates are frozen, higher wholesale electricity 
prices have impacted consumers in other Western States. Heating oil 
prices are at near-record levels, which affect consumers in the 
Northeast. Regions that rely heavily on natural gas for home heating 
have also experienced sharp price increases. In every instance, these 
problems arise from an imbalance between supply and demand triggered by 
an inadequate development of new generation, unique climate factors 
and/or higher natural gas prices that have resulted from recent, 
significant increases in demand for natural gas as a preferred energy 
source.
    Yet, although other areas of the country are confronting energy 
supply and pricing challenges, the problems in California are unique 
because of the electricity purchasing constraints the State itself 
applied to its own utilities. By refusing to permit its utilities to 
buy power except on the spot market, California set in motion the 
process that drove its costs through the roof.
    For example, last summer, Duke Energy offered to meet the supply 
needs of San Diego Electric and Gas Company for five years at a price 
of $55 per megawatt-hour. This is a fraction of the average price of 
$376 paid on the spot market in December and $314 in January. Even the 
average $69 per megawatt-hour price of the contracts announced by 
Governor Davis compares unfavorably to prices available last summer. If 
the State had approved new generation in a timely manner or allowed 
utilities to enter into long-term contracts, we would not be here today 
discussing price caps. Instead, California utilities have until 
recently been required to buy huge quantities on the spot market, 
driving up wholesale costs for themselves and others in the West. 
Hence, the effects have extended beyond California's borders.
    This Administration is certainly concerned about high energy 
prices--whether in California or anywhere else in the United States. We 
agree that energy prices should be reasonable and support the recent 
action by the Federal Energy Regulatory Commission (FERC) to order 
refunds to Californians charged unjust and unreasonable rates. And this 
Administration will work closely with California and the West to 
develop measures to help the State and the region meet its projected 
energy shortage.
    The Task Force chaired by Vice President Cheney will soon make a 
series of recommendations on meeting America's energy demands. In the 
meantime, we will continue helping expedite California's efforts to 
increase generation and reduce demand.
    But let me be clear on this, any action we take must either help 
increase supply or reduce demand. If a proposal does not increase 
supply or reduce demand, it is not a solution. If it decreases supply 
or increases demand, it will only make the current crisis worse.
    It is with that framework in mind that the Administration opposes 
imposition of price controls such as those proposed in the legislation 
that is the subject of this hearing. Price caps will not increase 
supply or reduce demand. In fact, they will aggravate the supply 
crisis, since they will discourage investment in new generation while 
eliminating incentives to reduce demand.
    This is not theory, but the product of experience. Price caps have 
already been tried and have already failed. California has long had a 
price cap that set a ceiling price for electricity sales into the 
State. That ceiling price was steadily lowered throughout last year, 
from $750 per megawatt-hour to $500 to $250 to finally $150. Proponents 
of price caps then made the same arguments that proponents make today: 
price caps will control high prices, while guaranteeing adequate 
electricity supply.
    They were wrong.
    Price caps failed in California in part because they only applied 
to part of the market--some power suppliers were subject to the price 
cap, while others were exempt. The result was market distortions. Price 
caps gave in-State generators every incentive to sell power out-of-
State and power exports from California rose 85 percent. Price caps 
reduced California's electricity supply, since 3,000 megawatts of power 
were exported. The lesson was clear: price caps on only part of the 
market will distort the market and drive supply out of markets with 
price controls into unregulated markets.
    And, what happened to prices? The lower the price cap was set, the 
higher average electricity prices rose.
    Notwithstanding that failure, we are here today discussing a 
different kind of price cap on a broader scale: the entire West. 
Proponents argue that a price cap that limits power producers to cost-
recovery plus a fixed rate of return, if imposed across the entire 
West, will succeed where price caps that set a ceiling price failed. 
However, these proposals suffer from the same flaws contained in 
previous proposals.
    First, imposition of cost-based price caps will reduce electricity 
supplies in the short-term. Governors Davis, Locke and Kitzhaber, along 
with a former Chairman of FERC, have proposed a version of cost-based 
price caps that would actually not even guarantee cost recovery, but 
instead set a cap at variable costs plus ten percent or $25 per 
megawatt-hour, whichever is less. Since power plants with fixed costs 
in excess of $25 per megawatt-hour will presumably not elect to operate 
at a loss, the region's electricity supply will be immediately reduced.
    Regional cost-based price caps will also discourage investment in 
new generation at a time when it is most needed. If cost-based price 
caps are imposed, independent power producers that are building most of 
the new power plants will simply decide to build new generation in 
another region or country.
    Imposition of cost-based price caps will also split the electricity 
market in the West into two markets, one subject to price controls and 
the other exempt. This will occur because FERC only has jurisdiction 
over 47 percent of the electricity generation in the Western Systems 
Coordinating Council. FERC has no jurisdiction over wholesale sales by 
State and municipal utilities, rural electric cooperatives, and does 
not have authority to impose cost-based rate on Federal power marketing 
administrations.
    A cost-based price cap that applies to only half the region has 
four fundamental flaws. First, the California experience with price 
caps--where part of the market was subject to the cap and part was 
exempt--will be repeated. The result will be the same: distortion of 
electricity markets, reduction in electricity supply, shifts in 
electricity supply from capped markets to uncapped markets, and, most 
importantly, failure to control prices. Power producers would seek to 
make sales through entities not subject to price caps and independent 
power producers would have an incentive to build projects in the 
service areas of entities not regulated by FERC and make exempt sales 
through those entities.
    Second, electricity exports to the U.S. from Canada and Mexico will 
almost certainly decrease since these producers could get a higher 
price selling within their own countries. In short, we would lose 
supply just when we are encountering shortages.
    Third, a split electricity market would create winners and losers. 
Winners would be large municipal utilities in the West that have 
significant surplus generation, since they would be exempt from price 
caps. These utilities have been collecting substantial revenues from 
sales at market-based levels. Indeed, according to FERC most of the 
excess power costs that the California Independent System Operator 
claims were collected in January 2001 were collected by entities not 
regulated by FERC. These utilities are not subject to refund orders and 
would be exempt from price caps. Not surprisingly, some of these 
utilities are advocates of price caps that would apply only to others.
    The losers, of course, would be buyers that cannot purchase 
electricity from an entity subject to the price cap that must resort to 
the unregulated market where prices will be extremely high.
    Fourth, the creation of two electricity markets recalls the days of 
natural gas price controls--with ``old gas'' and ``new gas.'' Prices in 
the two markets will diverge sharply, with prices in the unregulated 
market rising higher than existing levels. A buyer that needed more 
power would obviously look first to the market subject to price caps. 
However, if the buyer could not purchase power in the capped market, he 
would have to resort to the uncapped market, and pay even higher prices 
than current market levels. Since electricity is a fungible commodity, 
some unscrupulous parties would take advantage of the split markets and 
sell capped electricity at market-based prices, as occurred under oil 
price controls.
    Some advocates of cost-based price caps have proposed exempting new 
generation from the cap, which implicitly concedes that price caps 
discourage investment in new generation. A more practical concern, 
however, is that this scheme would also fail because of the fungible 
nature of electricity.
    Although FERC lacks authority over the Federal power marketing 
administrations, the Secretary of Energy has authority to impose a 
cost-based price cap on the Federal power marketing administrations. 
Such a step would be highly risky. A cost-based price cap would reduce 
Bonneville's ability to generate revenue through seasonal surplus sales 
outside the region, since Bonneville would be forced to sell 
electricity at a rate far below market levels, foregoing revenues that 
could have been used to defray Bonneville costs and lower rates charged 
to preference customers.
    At the same time, Bonneville must purchase power at certain times 
of the year. There is no reason to assume that Bonneville will be 
fortunate enough to purchase power from only those entities subject to 
the price cap, and Bonneville may well have no choice but to purchase 
power at extremely high prices from nonjurisdictional entities. Cost-
based price caps would thus put Bonneville in a position where it also 
sells low and buys high, and could force Bonneville to raise wholesale 
rates charged to regional customers.
    The only way to apply price caps to all generation in the West is 
to amend Federal law and grant FERC authority to set rates for 
wholesale power sales by State and municipal utilities and rural 
electric cooperatives. However, doing so would be inconsistent with 
nearly 70 years of Federal electricity regulation. FERC has never had 
authority over these sales, and any such proposal would be opposed by 
many in the West, including presumably members of this Committee. I 
certainly would not support such a proposal.
    These are the reasons for the Administration's opposition to 
imposition of cost-based price caps in the West. The Administration is 
not alone in its opposition to price caps. Last month, eight of the 
eleven Western governors sent me a letter expressing opposition to 
price caps. In that letter, the eight governors stated ``caps will 
serve as a severe disincentive to those entities considering the 
construction of new electric generation, at precisely the time all of 
us--and particularly California--are in need of added plant 
construction.''
    By contrast, advocates of price controls have failed to indicate 
how price caps would increase supply, decrease demand, or prevent 
blackouts this year.
    In that price controls and power shortages are inversely related, 
the ultimate question thus becomes whether our goal is to control 
prices or lessen the frequency of blackouts. This Administration 
believes our responsibility is to help minimize electricity shortages 
and the blackouts and the economic and public health and safety 
problems such shortages produce. Therefore, we do not favor price 
controls.
    Regrettably, our well-founded opposition to price caps has been 
claimed by some to suggest the Administration either does not care 
about California and the West, or is doing nothing to address the 
problem. This is simply untrue. One day after being sworn into office, 
the President directed me to call Governor Davis to discuss the crisis 
and ask how we could help address the power shortages. Three days after 
taking office, at Governor Davis' request, we extended the emergency 
electricity and gas orders to give California time to enact reform 
legislation aimed at maintaining electricity supplies. Last month, also 
at the request of Governor Davis, President Bush issued an executive 
order directing Federal agencies to expedite permits relating to 
construction of new power plants in California. The U.S. Environmental 
Protection Agency has issued air permits for three power plants in the 
past month. President Bush and I have engaged in discussions with the 
Government of Mexico about increasing electricity imports from Mexico. 
Last week, at the behest of Governor Davis, I sent a letter to FERC 
asking that the agency act on his request for an extension of the 
waiver for qualifying facilities from certain fuel requirements. In 
response to a request by the State of California, the U.S. 
Environmental Protection Agency has provided other assistance, 
clarifying rules relating to operation of backup generators. And FERC 
recently required suppliers who charged unjust and unreasonable rates 
to refund those payments to California buyers, as provided by the 
Federal Power Act. We will continue to work with California and the 
West to develop effective solutions to this crisis.
    In short, the only action the Administration has opposed is price 
caps.

                         LEGISLATIVE PROPOSALS

    I would like to offer some comments on the legislation that are the 
subject of this hearing. All of these bills provide for imposition of 
cost-based rate caps in California and the West, so the general 
arguments against price caps detailed above apply to all four 
proposals. Following are our views on the major provisions of these 
bills:
S. 26
    This bill, introduced by Senator Feinstein, would amend the 
Department of Energy Organization Act to compel the Secretary of Energy 
to impose price caps on wholesale power sales in the Western Systems 
Coordinating Council by jurisdictional entities whenever FERC or the 
Department make certain findings, although the findings the two 
agencies can make to trigger price caps are entirely different. The 
Western Systems Coordinating Council is a region composed of eleven 
Western States (Arizona, California, Colorado, Idaho, Montana, Nevada, 
New Mexico, Oregon, Utah, Washington, and Wyoming), Baja California, 
and western Canadian provinces that share an interconnected 
transmission system.
    In effect, the bill directs the Department to take over FERC's 
ratemaking role, although the Department has no capacity to discharge 
FERC's responsibilities. Unlike FERC, the Department does not have 
expertise in ratemaking.
    The standards used in S. 26 are unclear. The bill compels the 
Secretary of Energy to impose price caps whenever he determines rates 
exceed marginal costs ``by a significant amount or for a significant 
length of time'' and continued existence of such rates ``threatens 
public health and safety or the economy of any State or region'' and 
FERC ``has otherwise failed to act to improve the situation.'' None of 
these terms are defined and none have meaning in Federal electricity 
law.
    The bill would diffuse Federal authority over wholesale power 
sales, giving both FERC and the Department authority to set wholesale 
power rates. It would be a mistake to bifurcate Federal authority to 
establish rates under the Federal Power Act. Under S. 26, both FERC and 
the Department could set price caps, but under very different statutory 
standards. FERC would retain its discretion under the Federal Power Act 
to impose price caps if it finds rates are unjust and unreasonable, a 
standard that has governed Federal rates for wholesale power sales for 
nearly 70 years. Under S. 26 the Department would have no discretion, 
but would be compelled to impose price caps if it finds rates exceed 
marginal costs, either ``by a significant amount'' or ``by a 
significant length of time.'' Since rates can be just and reasonable 
while exceeding marginal costs the situation could arise where FERC 
determines rates are just and reasonable and declines to impose price 
caps, the Department agrees with that determination, but concludes 
rates exceed marginal cost by an insignificant amount but for a 
``significant length of time.'' The Department would have no choice but 
to impose price caps, since S. 26 affords the agency no discretion. 
Since electricity is traded in both real-time and hour-ahead markets, a 
``significant length of time'' could be a very short period.
    For these reasons, the Department opposes S. 26.
S. 80
    This legislation, introduced by Senator Boxer, would require FERC 
to order refunds of rates and charges for wholesale power sales or 
transmission if it finds such rates or charges are unjust, 
unreasonable, unduly discriminatory or preferential. The bill 
significantly expands FERC's authority to order refunds. Under current 
law, the effective refund date is limited to no earlier than 60 days 
after the filing of a complaint. S. 80 provides for retroactive refunds 
extending back two years.
    S. 80 also mandates that FERC establish cost-based price caps in 
the West--and only the West--if it determines that rates charged for 
wholesale power sales are unjust, unreasonable, unduly discriminatory 
or preferential. The bill does not expressly grant FERC authority to 
remove price caps. S. 80 compels FERC to impose treble penalties on any 
person who violates these new refund and price cap provisions.
    S. 80 would significantly discourage investment in new generation 
in the West. The independent power producers that are building most 
generation in the U.S. are unlikely to expose themselves to refunds 
that stretch back as far as two years. In addition, there is 
significant uncertainty about the duration of price caps. Since the 
refund and price cap provisions only apply to the eleven States in the 
Western Systems Coordinating Council, investment in new generation 
would shift away from those States and towards the rest of the United 
States and other countries.
    Notably, the refund provisions of the bill are limited to 
jurisdictional entities. Nonjurisdictional entities such as State and 
municipal utilities, rural electric cooperatives, and Federal power 
marketing administrations have also sold power at market-based rates. 
According to FERC, most of the excess power costs that the California 
Independent System Operator claims were collected in January 2001 were 
collected by nonjurisdictional entities. To the extent those entities 
sold power at market-based rates, they received the same rates as 
jurisdictional entities. However, they would be exempt from both the 
refund provisions and price caps. Two classes of wholesale power 
sellers who made sales under same rates are treated very differently 
under S. 80.
    For these reasons, the Department opposes S. 80.
S. 287
    This measure, introduced by Senator Feinstein, directs FERC to 
impose cost-of-service based rates on wholesale power sales by 
jurisdictional entities in the ``western energy market'' within 60 
days. The term ``western energy market'' is defined to include the 
States of Arizona, California, Colorado, Idaho, Montana, Nevada, New 
Mexico, Oregon, Utah, Washington, and Wyoming.
    Under this bill, the Congress would assume FERC's authority under 
the Federal Power Act to set ``just and reasonable'' rates. The bill 
makes a legislative finding that current wholesale power rates are 
``unjust and unreasonable'' and compels FERC to implement a ratemaking 
decision made by Congress. With all due respect, Congress has no 
expertise to make ratemaking decisions. If this bill were to be 
enacted, we would find ourselves on a slippery slope. Decisions 
regarding rates would be made in a political environment by a political 
body, not by an independent regulatory commission that relies on nearly 
70 years of experience, is guided by a statute whose meaning is well-
understood, and whose decisions are subject to judicial review.
    S. 287 will significantly discourage investment in new generation 
in the West at a time when it is most needed. The duration of the price 
caps is uncertain, and may be more permanent than temporary. The fact 
that price caps only apply to the West will likely encourage investment 
in new generation to shift from the West to other regions of the U.S. 
and other countries. Moreover, the fact that price caps would apply to 
only 47 percent of the electricity supply in the West guarantees that 
price caps will create two electricity markets, distorting the market 
and driving up prices in the uncapped market even higher than current 
levels.
    For these reasons, the Department opposes S. 287.
Smith Amendment to S. 287
    The Smith amendment waives application of price caps imposed by S. 
287 on wholesale power sales in States that prohibit public utilities 
fro m either (1) passing wholesale power costs through to retail 
consumers or (2) paying for such purchases. Since California has not 
permitted State-regulated utilities to pass these costs through to 
retail consumers, the amendment waives price caps on wholesale power 
sales in California by public utilities. The Smith amendment also 
prohibits the Department or FERC from ordering electricity and natural 
gas sales in States that prohibit public utilities from either passing 
wholesale power costs through to retail consumers or paying for such 
purchases unless there are guarantees the full purchase price will be 
paid when due.
    The Smith amendment authorizes States in the Western Systems 
Coordinating Council to prevent public utilities from selling 
electricity in States that prohibit public utilities from either 
passing wholesale power costs through to retail consumers or paying for 
such purchases if a public utility is not meeting electricity demand in 
its service area. In effect, the amendment authorizes Western States to 
regulate interstate commerce, a power otherwise reserved to the 
Congress and the Federal government by the U.S. Constitution. This 
authorization is inconsistent with nearly 70 years of Federal 
electricity law.
    The Smith amendment reflects the concerns of the Pacific Northwest 
about the impact that the failure of the California electricity 
regulatory scheme has had on the region. The impact of this regulatory 
failure has been felt more in the Pacific Northwest than in California, 
as a result of the retail rate caps in California. I appreciate these 
concerns of Senator Smith and his colleagues from the Pacific 
Northwest.
    The Department opposes the Smith amendment, for the reasons stated 
above.
    I appreciate the opportunity to share the Department's views on the 
legislation, and look forward to responding to your questions.

    Senator Bingaman. Well, thank you very much for being here.
    I think we will have 5-minute rounds of questions, each 
Senator asking questions for 5 minutes. Let me start.
    I take it from your testimony that the bipartisan bill that 
Senator Feinstein and Senator Smith talked about in their 
opening statements is something that will not get the support 
of the administration and is opposed by you in any variation 
that you can envision.
    Secretary Abraham. Mr. Chairman, what I would say is this. 
I have not, obviously, looked at the new legislation. I heard 
the report that Senator Smith outlined, and so there seemed to 
be a lot of components to it. I would not say, without studying 
it, that every part of the bill would be something we would 
oppose.
    But to the extent, as I have tried to outline in my 
remarks, that we move in the direction of price controls, then 
we are going to find ourselves I think in clear opposition to 
legislation, especially if it is at a time like this where we 
are trying to deal with shortages that present real immediate 
crises in terms of blackouts, in terms of resultant economic 
and other sorts of consequences. That is our view.
    Senator Bingaman. Let me ask about the real immediate 
crises that you are referring to. This idea that we are going 
to resolve this or to some extent resolve it by increasing 
electricity imports from Mexico. I do not know. I have not made 
a real study of it, but that is not a solution to an immediate 
problem, is it? Maybe long term there is some benefit we could 
gain from increasing imports from Mexico, but there is no 
infrastructure to accomplish that at the current time.
    Secretary Abraham. Actually it is interesting, Mr. 
Chairman. Right now in the State of California, as I outlined, 
we are dealing with an immediate challenge for the summer of 
trying to address an approximately 5,000 megawatt differential 
between projected peak demand and supply. Every megawatt counts 
in that kind of setting, or else we will find ourselves with 
the sort of rolling blackout projections coming through that I 
mentioned in my statement.
    Last week at a hemispheric energy ministers conference in 
Mexico, I followed up earlier discussions which we have had 
with the Mexican Government about the possibility, over the 
next 6 to 9 months, of increasing the possible imports of power 
generation, electricity generation, from facilities in Baja. 
The Mexicans and our administration feel there is actually a 
very significant possibility of increases.
    The biggest problem we have with respect to infrastructure 
is on our side of the border between the border and San Diego 
where right now we cannot bring very much power beyond what is 
currently being sent. But there is the potential for some 
increase. Right now we are looking for every possible way that 
we can provide assistance to increase California's capabilities 
for the summer. So, in fact, there is that possibility for the 
next 6 months that we would see increases.
    Senator Bingaman. I guess what I am still unclear on is, if 
the Feinstein and Smith legislation is unacceptable and all of 
the other proposals that have been developed here are 
unacceptable, what is the solution that the administration 
offers for this problem of a $45 million a day cost being 
charged to the treasury of California? I do not see that coming 
to an end. If anything, as we get into the summer and 
electricity use increases, I would expect that the crisis could 
worsen, and I do not see any solution being offered to deal 
with it.
    Secretary Abraham. Mr. Chairman, let me say this. There are 
two issues here. As I said in my testimony, I am afraid we have 
diverted attention away from what I believe to be and what the 
administration believes to be the central crisis facing 
California this summer, which is people without power at 
periods of time when this would have significant lifestyle 
impact, significant impact in terms of the potential health of 
residents of the State, impact on the economy of California. 
That is what we are trying to work on primarily.
    Now, I am not in any way suggesting we do not care about 
higher prices. We do. I believe the action which was taken by 
FERC last week in its decision to follow up on earlier 
decisions it had made with respect to the reasonableness and 
the justness of prices being charged was an important step 
within the context of Federal actions that can be taken about 
prices.
    But our primary goal right now is to try to make sure that 
California does not start a wave of blackouts that could reach 
beyond its borders. What we are doing in that respect, as I 
outlined, is a variety of things we have been working with the 
Governor of California on to try to address either an increase 
in supply or a decrease in demand. I am not saying that people 
in California do not want lower energy costs, but I know that 
for sure they do not want to be sitting this summer without 
electricity at all, and our goal is trying to avoid that as the 
primary public interest responsibility of this administration.
    Senator Bingaman. My time is expired. Mr. Chairman, it is 
your turn I guess.
    The Chairman [presiding]. Thank you, Senator Bingaman.
    Mr. Secretary, are you familiar with the situation in 
Pennsylvania where they have wholesale caps, retail caps, but 
they are quite high? So, there is a lot of flexibility in 
there. It is my understanding that in their deregulation plan, 
they made sure that there was plenty of supply within the State 
of Pennsylvania before they tied into this. So, unlike 
California where I understand about 25 percent of the power 
comes from outside the State, they have a situation that seems 
to be working, at least in the realm of price caps on wholesale 
and retail. Is there an application for that concept that would 
be workable in your opinion?
    Secretary Abraham. Well, as I indicated in my opening 
statement, there has been a soft price cap in California. There 
was throughout the year 2000. Every time it was brought down, 
it was allegedly going to lead to lower prices. The average 
price for electricity actually went up, even as the price cap 
was reduced.
    At the end of the day, the biggest challenge, as I said in 
my comments, that California faces I think is the decision that 
was made that did not permit the California utilities to have 
an ability to diversify the means by which they acquired power 
which they had to purchase beyond that which they generated 
themselves. When last summer they had the opportunity to enter 
into long-term contracts, as I mentioned, for instance, one 
with Duke power at $55 per megawatt-hour, they were in a 
situation where they would have been paying a price lower than 
that which the Governor of California today is able to pay for 
long-term contracts. Instead, they were forced to buy all of 
their wholesale power on the spot market without sufficient 
generation within the State to be able to keep prices under 
control. But the real escalation in the prices was, in large 
measure, a result of the unique limitations that were placed on 
California's utilities with respect to the purchase of power.
    The Chairman. Now, let us follow that through a little bit 
because, as Senator Bingaman suggested, what we want is a 
solution, and the long-term solution sought, obviously, is more 
power availability within the State of California as opposed to 
outside the State of California. Now that is, of course, a 
decision that Californians should make as to where they want to 
get their power. But if they are dependent on outside the 
State, unless they have long-term contracts, they have some 
real exposure on price spiraling, which they have already 
experienced rather dramatically.
    My question to you though, is, is there enough available 
power outside of California that would come in if, if you will 
pardon the bottom line expression, they were assured they were 
going to get paid? Right now we have got a difficult time 
understanding the situation in California because they have not 
passed on the true cost of that peaking power to the consumer. 
It has been first the capital of the three major utilities that 
have basically seen their capital base exhausted, and now it is 
a combination of loans and bonds that the State is prepared to 
guarantee.
    The question is, of course, is the State going to bear that 
responsibility, or ultimately are they going to pass it on to 
the consumer, or is there any difference really between the 
consumer and the taxpayer? It may be politically a little 
easier to finesse it off to the taxpayer than the consumer.
    But we are looking at trying to address California's need 
to get through this crisis, and I am wondering what role you 
might recommend of FERC or whatever agency to ensure that the 
outside power that has to supply California until they can 
generate more capacity within the State would come in and what 
assurances do they need from the standpoint of getting payment? 
Because when you order payment, what does that really mean? Is 
that an obligation of the Federal Government ultimately if 
California ratepayers do not pay or the State of California 
does not pay the producers of that power? Whose obligation is 
it?
    So, we have got everybody kind of drifting around here 
trying to look for a solution, but if there is enough power out 
there to supply California during this interim and they get 
assurance that they are going to pay for it and the 
representatives from California know that their consumers are 
not going to be gouged by necessarily peaking prices, we ought 
to be able to work through this thing.
    Secretary Abraham. Well, Mr. Chairman, we are working with 
the State of California, as I indicated in my testimony. I 
called the Governor of California on the Sunday after the 
inaugural to find out what immediate things we could do. I 
believe you will recall that one of those actions, which I also 
mentioned, was to extend for 2 weeks the orders that were in 
place with respect to the sale of electricity, natural gas 
because Governor Davis indicated that if he had those 2 weeks 
and Senator Feinstein and others who talked to me about that 
indicated that that would give them time to get the State in a 
position to begin buying on long-term contracts to have the 
whole faith and credit, if you would, of the State behind the 
purchases so that out-of-State sellers would have the 
confidence and assurance they could make those sales.
    We have since then worked with the Governor on a variety of 
other issues that relate to expediting the permitting processes 
with respect to new power generation to try to find additional 
sources.
    The Governor I know is trying to initiate a variety of 
conservation measures. Senator Feinstein recently wrote to me 
with regard to the issue of conservation as it might affect the 
Federal Government, and the fact that quite a significant 
amount of Federal Government activity goes on in the State of 
California at our facilities. We are looking into that as 
another way to try to make the supply level that will be 
available at peak points this summer meet the demands that are 
anticipated.
    I cannot tell you today, as I indicated in my testimony, 
that we are at the point where we can guarantee that there will 
not be blackouts. There still is a gap. But if the various 
actions that the Governor is taking are all successful, then 
that gap can be closed.
    The Chairman. Along with FERC.
    Secretary Abraham. Yes, FERC has played a role. In fact, 
FERC made several decisions last week, which I suspect Chairman 
Hebert will explain in greater detail, that related both to the 
prices that had previously been charged in the month of 
January. I suspect and understand there will be another ruling 
with respect to prices that were charged in December.
    The one thing that I would just note also, because it was 
touched on by others and in my testimony as well--I believe you 
also mentioned it--is that many of the very entities which we 
do not have jurisdiction over are responsible for some of the 
most excessive charges that have recently been outlined in 
FERC's rulings. Now, those are State entities.
    It would seem to me that as we talk about what the Federal 
Government should do, it has at least been interesting guidance 
to me that no efforts have been undertaken to address any 
changes with respect to the pricing policies of those entities. 
I am not recommending that. I think it would have the same 
negative effect to the extent that I have outlined price 
controls' effects can be. I am just saying I think we need to 
look at this in a broad context and understand what the Federal 
Government role can be and what it cannot be.
    The Chairman. But the implication is the power is out there 
if there is some degree of certainty that they are going to get 
paid.
    Secretary Abraham. We are working with California. I again 
do not want to make any assertion today that there will not be 
rolling blackouts this summer. I indicated the difference that 
exists as we project it today. I saw indications in the 
California press this morning, in fact, that there may have 
been an underestimation of the magnitude of the delta between 
supply and demand. We will continue to monitor it very closely.
    The Chairman. Thank you very much.
    In the order of attendance, Senator Craig.
    Senator Craig. Well, Mr. Chairman, thank you.
    Mr. Secretary, first of all, let me congratulate you for 
the work you have done to come up to speed on this issue very 
rapidly. Obviously, by your testimony today, you have 
demonstrated your willingness to do so by the very facts that 
you put forward and the knowledge you are displaying on this 
situation.
    I am not going to ask a question. I am going to make a 
statement. You may choose to respond to it.
    First of all, I agree if we create an artificial market, we 
will send the wrong signals without doubt. It has happened in 
the past. You have cited those situations, and clearly the 
greatest example is now the catastrophe facing California.
    In my State of Idaho, a week ago I suggested to its 
citizens that they may have to turn off their air conditioners 
this summer, except for those elderly who truly need a cooler 
environment in which to live. The reason that message might be 
heard in Idaho is because most citizens are going to be looking 
at 25 to 35 percent rate increases, and they can 
correspondingly react by saying, yes, if I do that, I may save 
myself some money. Tragically enough in California, that same 
suggestion probably would not follow through. It will follow 
through in Oregon if a variety of options are given and 
citizens are allowed to see how they can effectively conserve 
and lower or at least sustain the cost of their power bill as 
prices go up. But again, in a false market, those kinds of 
signals mean little to nothing, especially if you do not have 
to make those kinds of choices.
    Idaho is not unlike Washington, and we heard those figures 
this morning. We are going to hear from Governor Locke, who was 
on national television this morning standing in a middle of a 
dry lake. There are many dry or drying-up reservoirs in the 
State of Idaho. Our watershed is at 38 to 50 percent of normal. 
Our utility people are talking about the rolling brownouts of 
California being the rolling brownouts of Idaho. And yet, we 
have got to retain a stable power supply, a quality power 
supply for some of our industry that cannot afford to shut down 
or turn off or intermittently bring themselves on line.
    If we work together, we can get through this summer, but 
working together does not mean to send a false signal to the 
market. Clearly, our utilities are hustling now to try to see 
where they can bring additional energy on line in the future. 
But in the immediate, cooperative actions on the part of both 
the consumer and the producer are going to have to be, in large 
part, I believe some of the solution we deal with, Mr. 
Secretary.
    But I would suggest for those of us in the Pacific 
Northwest--and you have heard from Senator Smith this morning--
one of our major players is Bonneville, of course. We will sit 
with you very quickly to see where we can offer them optimum 
flexibility to deal with the market. They are doing a 
reasonable job now as it relates to market pricing and how they 
handle it and how they respond and what consumer has 
flexibility to go off line to allow greater use of that 
resource somewhere else. That will affect Oregon, Washington, 
Idaho, and part of Montana.
    But I do agree with you that to suggest that we just simply 
fix the market now by freezing the market or shoving it down 
does not a message send to produce and to solve a problem. So, 
thank you very much for what I think is an important and direct 
statement in that regard.
    Also, let me thank you and the President for being bold and 
correcting or clarifying a point that is so essential as it 
relates to CO2 and how we deal with that emission. 
We cannot continue to send false signals to the market. The 
market deserves stability of decision making at the Federal 
level. They deserve to know where this Congress and this 
President will go, as it relates to Federal regulations, so 
they can adjust and adapt appropriately to it. I think that 
statement yesterday was key toward heading us in that 
direction. It is important that the country understand that we 
are truly, as I think the Senator from Nebraska said, in an 
energy crisis of substantial proportion, and if we fail to deal 
with it responsibly, we will fail our country and our country 
will fail.
    Thank you very much, Mr. Secretary.
    The Chairman. Thank you, Senator Craig.
    Now we will hear from and be enlightened by the Senator 
from California, whom we are very pleased to have on the 
committee. Senator Feinstein.
    Senator Feinstein. Thank you very much. Thanks, Mr. 
Chairman.
    Mr. Secretary. I was really surprised by the ideologic 
hardness of your statement. I must tell you that.
    I happen to agree with you that we are going to be about 
5,000 megawatts short in California this summer. It is enough 
power for 5 million homes. It is a lot of shortness.
    How do we keep prices down this summer? You addressed 
supply and demand issues mostly long term. My question is, what 
do we do right now?
    California, as you know, is expediting permits, is 
expediting peaker plants, is moving as rapidly as it can to 
build additional power sources. The 5,000 megawatt shortfall is 
not going to be the only shortfall. They are going to be 
charging $5,000 a megawatt this summer. What does California do 
about that if it is not going to get any help to provide that 
stability and reliability over that period of time?
    Secretary Abraham. Let me begin by saying that our position 
is not a hard ideological position. It is a common sense 
position I believe.
    Let me tell you what I do not think we should do. I do not 
think that we should impose through FERC or the Federal 
Government or through congressional action, in the form of a 
bill that simply mandates it, the kinds of price controls that 
will make the delta between supply and demand worse. And that 
is exactly what I think will happen. If we tell people who 
generate power in Canada that there is going to be a price cap 
on what they can sell that power for in the United States, then 
they will not sell it here and your summer differential between 
supply and demand will get worse. So, then you will be back and 
we will all be back here talking about what do we say to the 
people who now are subject to even more energy shortages that 
we currently contemplate.
    Senator Feinstein. But you are sending a signal that it is 
okay to charge $5,000 a megawatt-hour. We know they charged as 
much as $3,000 in the past.
    Secretary Abraham. Actually I believe the signal that was 
sent last Friday by FERC is a signal that you cannot charge 
unjust and excessive rates. I think that as people realize that 
they are going to be, in fact, forced to respond to FERC orders 
and to refund those rates that are above market level, that 
they in fact will respond accordingly.
    Now, again, this administration is not for unjust and 
unreasonable and excessive rates. In fact, we have authority 
through FERC to address that. They did that last week with 
respect to January. They will be doing it again, I assume 
fairly soon, although Chairman Hebert's testimony will probably 
comment on this more specifically, with respect to December. 
That is the way to address prices that are excessive and 
unreasonable.
    But in my view to take an action that places an artificial 
cap in place is going to cause the shortage problem this summer 
to get worse. Moreover, it is going to send a signal, I think, 
with respect to new generation that is going to make it much 
harder for California and the rest of the West to encourage 
people to develop new generation in that region. Companies who 
build generation have a choice. They do not have to build it in 
the West. They can build it anywhere they want, and they are 
more likely, I would think, to build it in areas where they 
believe they are not going to be, after they have made major 
investments, significant changes in policy with regard to what 
the likely return on their investment is going to be.
    At the same time, I would just say this. If we impose a 
price control that fails to work effectively with respect to 
the demand side of the equation, right when the goal of the 
Governor of California is to reduce demand, then I think again 
you are likely to see the differences between supply and demand 
even greater at exactly the time the greatest threat is posed 
to the people of your State.
    Senator Feinstein. Let me just say this. The Governor of 
California is also asking for the help. He is asking for the 
help to just create a reliable and stable situation for a short 
period of time so that California can get through this crisis.
    Let me put it another way.
    Secretary Abraham. Can I just comment on that, though? The 
Governor of California and I have had a number of meetings and 
conversations. The first and foremost thing that he has made 
clear to us I believe that he wishes help with is to try to 
meet the crisis he sees forthcoming this summer with regard to 
shortages, blackouts, and the resultant economic and security 
challenges they pose. That is our top priority. I am not in any 
way suggesting high prices are a good thing. What I am saying 
is that our first priority, according to what your Governor 
have indicated to me, is to try to address the shortages and 
the blackouts, because I think they would be catastrophic.
    I am sorry to have interrupted, but I did want to clarify 
that.
    Senator Feinstein. Let me just put it in another way. I 
would agree with you that the California Public Utilities 
Commission was wrong to prohibit long-term contracts. Let me 
give you an example. In November, Duke was offering power at 
$50 to $55 for 5 years. Today, 3 months later, the State has 
had to sign contracts for double that amount and double that 
length of time. Why in a span of 3 months has this changed so 
dramatically?
    Secretary Abraham. Well, again, I think that is a long-term 
contract. I do not know whether they were identical contracts, 
and I am frankly going to have to defer to the experts at FERC 
to try to distinguish that.
    But let me point out just a simple fact which you made. If 
the State of California had simply allowed its utilities to 
purchase either last summer or fall contracts at the $55 per 
hour rate, we would be in a whole different situation. We would 
not be here today. Again, the question becomes after these 
consistent decisions that were made that have precipitated and 
forced the purchase of wholesale power on the spot market that 
got us into this situation, it is not going to be that easy to 
get out of it under any condition.
    I would just urge everybody to consider what the first 
challenge we have is. The question is not how do we undo bad 
contracts that were entered into last year. It ought to be how 
do we protect the citizens of California this summer from the 
blackouts and the shortages.
    Senator Feinstein. Let me just say one thing.
    Secretary Abraham. Maybe that is not important to others. 
To me it seems to be the primary consideration.
    Senator Feinstein. Just one quick comment. I agree with you 
it is the State's problem to resolve its bad law. I agree with 
you that the market should be able to fluctuate freely. All we 
are asking for is help to prevent price gouging.
    Secretary Abraham. And I share that view.
    Senator Feinstein. And it is taking place.
    Secretary Abraham. Senator, I share that view and I believe 
that FERC has the responsibility and has last Friday 
demonstrated the willingness to address excessive and unjust 
prices. That is the proper way to do it.
    I do not think the right way to do it is to impose price 
caps that will exacerbate the problems the State faces. I am 
telling you, I think this summer, if California has worse 
blackouts than currently projected, that that would have been a 
disservice to the people of your State. If the rest of the West 
finds the Canadian energy providers refusing to sell at the 
same levels because of price caps and the shortages that are 
projected in other States are increased because of that, I 
think that is, in my judgment, an irresponsible carrying out of 
our public responsibilities here.
    So, I just think we have to look at these in terms of 
priorities. To me our first priority to the American people 
ought to be to try to ensure that there is a reliable 
availability of energy this summer when we know there is a 
crisis for a variety of factors from the climate issues to the 
issues that relate to supply and demand differentials.
    Senator Bingaman [presiding]. Senator Smith.
    Senator Smith. Spence, I understand supply and demand very 
well from many years in a commodity business, but I want to 
associate myself with Senator Feinstein's questions because I 
am afraid this summer we are going to be in the middle of a dry 
lake bed explaining to very angry farmers and homeowners and 
former factory workers the lessons of supply and demand. I do 
not think they are going to listen. I think we need to increase 
our effort to help.
    I do not want to send the wrong signals to the marketplace 
to produce or to conserve. I do not want to send the wrong 
signals, but I will tell you the wrong signal is a recession. 
Nobody is going to be investing in an environment when you have 
not just energy rates going up, but unemployment rates going 
up.
    Let me go to where Senator Feinstein was questioning you as 
to the ruling that FERC issued in January. It set the just and 
reasonable rate at $273 per megawatt, but I think you are 
saying that that will discourage investment. I do not think 
that will discourage investment. Can we not do that?
    We heard lots of economists in an earlier hearing saying 
that short-term temporary caps at a high enough rate would not 
retard investment. All I am saying is I think we need to give 
you more authority and I think you need to use it to mitigate a 
catastrophe.
    The Wall Street Journal says Washington State is going to 
lose 43,000 jobs. My State will not be far behind. I do not 
want to be seen as giving economics lessons when we have our 
States heading southward in every direction in every economic 
indicator.
    Can you help me a little more?
    Secretary Abraham. Well, of course. Let me just say this. 
First of all, I know that people who are concerned about 
economic consequences recognize the relationship between 
blackouts and economic recessions very clearly. I think that it 
would be important and I recommend that the members of this 
committee make it very clear to their constituents what we are 
trying to make clear, which is that our first goal is to 
prevent them from seeing their businesses close down because 
there is no electricity, because we see Canadian imports 
disappear, because we find, because of price caps, in the long-
term sense there is not enough generation being built in your 
region because people decide they ought to build it in the 
Southeast.
    Now, I am concerned about that. In my judgment there could 
be immediate economic consequences if a price caps regime is 
placed in effect that makes the summer's shortages even worse. 
In my view that should be the primary goal of all of our 
efforts here, to deal with the summer crisis in terms of power 
shortages.
    Now, what do we do about prices? That is a separate issue. 
It is not unrelated, but it is a different crisis than the 
crisis that I think should occupy our primary focus.
    With regard to prices, I believe FERC acted properly last 
week in the decision that it rendered, and I believe it has an 
ongoing duty to monitor prices to determine if they are unjust 
and unreasonable. And we will support that effort. The refunds 
that will be required under their order with respect to 
January--and I assume there will probably be some kind of 
decision, as I have said, made fairly soon with respect to 
December--will be ones that I think send a very strong signal 
to those who might try to exploit or take advantage of a 
situation that we all recognize to be a serious one, that they 
are not going to be allowed to get away with it.
    In my judgment, that is a way to balance the issue of 
making sure prices that are excessive and unjust are not 
charged with the separate issue of making sure that the power 
does not go out. In my view we have got to try to make sure, as 
we approach this, we do it in a way that balances those two 
considerations. I do not think you want to say to your 
constituents: Good news, FERC just ordered a price cap; bad 
news, you are not going to have power for the whole summer. 
Now, obviously that is an extreme rendition. But our goal is to 
try to address the power shortage crisis first and foremost.
    Senator Smith. Spence, I think some of the refund you hope 
will be there will be there too late for a lot of small 
businesses and a lot of northwesterners. I think we need to 
show them we are doing more than I am hearing that we are 
prepared to do.
    Many have already rushed out and criticized President Bush 
to regulate us into safety. I have not done that. I have waited 
until I got a signal from a California official that said I 
understand the central problem in California is a law that is 
broken and it is broken because it caps the retail rate so 
there is no conservation signal being sent. If you want to send 
a lot of signals to conserve, Senator Feinstein has just done 
that or opened up that possibility whereby California, on a 
rate they determine, can allocate retail rates that will pass 
through costs. That will conserve power.
    I believe the caps--we are literally talking about 20 
months--will not discourage incentive if the rate is put high 
enough and we can go home to very angry people and say we are 
helping short term and long term the future is very bright.
    But the worst signal in the world, in my opinion, is that 
we are unwilling to exhaust every measure, overturn every stone 
to try and find a way to help through this crisis because I 
think it is going to be very serious.
    Secretary Abraham. Senator, as you well know, even before I 
appeared for my confirmation hearing and since, you and I have 
had numerous conversations with respect specifically to the 
Northwest about a variety of issues, especially those that 
relate to the Bonneville Power Administration. We have had 
meetings with various folks from the region, some of which you 
and I both participated in, and our office has, on a regular 
and ongoing basis, been working with BPA to try to address the 
rate issues that are confronting it as a consequence of a 
variety of the factors we have talked about today, the climate 
issue in particular.
    We are doing our best to try to address that. We hope to 
have a plan which will take into account a number of different 
kinds of ways of trying to focus on the rate issues that are 
particularly significant and sensitive to you. And your 
leadership on that in bring these issues to our attention and 
making sure we keep focused on them is extremely important.
    With respect to the broader issue of price caps, I would 
only say this. It is our view that, in fact, the signals will 
be very substantial if we move in a direction that suggests 
that caps are not only in place, but that a regime now exists 
that will significantly affect future investment decisions. We 
are trying to look at it for the summer. We are trying to look 
at it in terms of how to keep prices under FERC's authority 
within the just and reasonable category. And we are also trying 
to see how at BPA we can make changes in terms of policy that 
will address some of the rate increases projected there. We 
will do our best.
    We may have a difference of opinion on the effect of rate 
caps. Obviously we do, but it is not because of lack of 
sensitivity about higher prices.
    Senator Smith. Long term we do not. I agree with you 
completely. Rate caps are the wrong signal long term. But we 
have a short-term emergency. And if California is willing, 
under a Federal directive, to change its law, we will conserve 
more and we will still incentivize producing more, and that is 
what we have to do. Anything less than that is going to leave 
the West higher and dryer than it has ever been before.
    Senator Bingaman. Senator Cantwell.
    Senator Cantwell. Thank you, Senator Bingaman.
    I too would like to join my colleagues in encouraging the 
administration to think more openly about this policy. We seem 
to be trying to draw a conclusion here today that somehow, by 
not ensuring that FERC does its job on reasonable rates, that 
the opportunity to make sure that Californians or others are 
not left in the dark this summer, that that is the flag that we 
are waving, when in fact the reality is, with triple digit 
increases, there will be people in the Northwest sitting in the 
dark. There will be aluminum facilities that will be shut down. 
There will be small businesses that will be shut down. So, 
while we are talking about protecting people from blackouts, 
the reality of inaction here is going to cost us those same 
consequences.
    I would like to ask a couple of specific questions, and I 
appreciate your attention and newness to the job. But 
understanding where the administration is as it relates to the 
Northwest on a couple of different policies.
    First of all, you mentioned the FERC's decision to order 
power producers to refund millions to utilities. That was 
directed specifically at California. The Northwest and 
Washington, even though some of those same providers do 
business in Washington, was not included. What about including 
those refunds to the Northwest?
    Secretary Abraham. This would be a decision that I think 
ought to be, obviously, directed at the next witness here who 
is the Chairman of the Federal Energy Regulatory Commission.
    Senator Cantwell. Do you support including Washington 
State, Oregon?
    Secretary Abraham. I believe that there is a process by 
which any allegation of unjust rates can be addressed by FERC, 
and if there is an allegation that that has taken place in any 
region, I believe that there is a mechanism in place for that 
to be judged by the agency. If they concluded that with respect 
to Washington, then they are empowered, as I understand it, to 
make similar declarations there.
    I am not sure what the process has been that has led to the 
decisions so far in terms of whether or not Washington has 
sought an appeal or whether or not this was exclusively brought 
to their attention by the California ISO. I honestly do not 
know the process enough to tell you whether that is why it was 
exclusively limited to that one State.
    Senator Cantwell. We will certainly ask the question when 
he comes up but would seek an opinion from the administration 
on that as well.
    The second issue, you mentioned the Canadians a couple of 
times. Are you currently engaged in the supply side with the 
Canadian Government on helping the Northwest on supply?
    Secretary Abraham. As a matter of fact, last week in Mexico 
City at the hemispheric energy ministers meeting, we had the 
first of what I suspect will be an ongoing and growing 
trilateral set of meetings with Mexico, Canada, and the United 
States to discuss a North American energy strategy or 
initiative. We hope to work more closely with the Canadian and 
the Mexican Governments with regard to broad continental energy 
challenges.
    Prior to that, I actually had a separate bilateral set of 
meetings with my counterpart, Ralph Godale, who is the energy 
minister for Canada. We are in active discussions in terms of 
future opportunities to expand the relationship between the two 
countries on a bilateral basis.
    Senator Cantwell. But those are long-term discussions? 
Nothing for the immediate----
    Secretary Abraham. No.
    Senator Cantwell. Do you expect any results out of that on 
the supply side in the next 6 to 7 months?
    Secretary Abraham. Because of the nature of the history of 
the relationships between Canada and the United States, there 
have not been quite as many immediate issues as we have had in 
terms of working with our counterparts in Mexico in terms of 
power exportation issues. But we intend to continue those 
discussions with both Canada and Mexico. I am not prepared 
today to make any prediction with respect to a Canadian/
American change in terms of levels of support. That is 
something still in discussion.
    Senator Cantwell. The third question, if I can. I am 
running out of time here. The picture of our citizens from 
Washington and Oregon and other parts of the Northwest standing 
in dry lakes has been conjured up a couple of times here. I 
guess the fact that we are facing these triple digit increases 
brings, I think, a very important point to be put on the table, 
and that is that sometime this spring we will be facing the 
choice about what to do about the shortfall in water supply as 
it relates to the biological opinions about salmon. What is the 
administration's position on what we should do and options?
    Secretary Abraham. At this point, as we examine a variety 
of options which confront us with regard to BPA, we are still 
in the policy development stage. We, I think, have made it very 
clear that the administration does not support the breaching of 
dams as a solution. We do not believe in foregoing treasury 
payments from BPA as a way of solving the problem either 
because I think that would lead to serious reconsideration of 
the relationship. And we do not support at this time some of 
the proposals we have had to somehow turn Bonneville into a 
regional facility.
    But we are looking at a variety of other options that range 
from voluntary conservation, to purchasing load reductions, to 
other sorts of things, and the use of fish mitigation credits 
as we try to develop a policy. But when we have a more concrete 
proposal to offer, we will be submitting it.
    Senator Cantwell. Mr. Chairman, I know my time has run out, 
but it would just like to leave the point that I think some of 
these questions show that the problems for the Northwest, 
without immediate action here, only get worse. So, we are 
trying to work in a constructive way to give relief to the 
individuals, businesses, and to the environment in the 
Northwest.
    I would also, at some other point in time, like to ask you 
about the DOE's proposed cutting on the energy efficiency 
program and what we need to do to make sure that that 
investment level gets restored.
    Secretary Abraham. I am confident that this committee will 
have a number of budget related questions to pose to me when we 
finally release our specific budget information in the next 
couple of weeks, and I will be glad to try to address all of 
them.
    Senator Cantwell. Thank you, Mr. Chairman.
    The Chairman [presiding]. Thank you, Senator Cantwell.
    Senator Thomas.
    Senator Thomas. Thank you, Mr. Chairman. I know there are 
many witnesses remaining.
    One of the important things if we are to get support for 
the California idea of some of these kinds of things is I think 
we need to be more assured that California is doing some of the 
things that clearly need to be done. I must tell you I am not 
certain. For instance, the powerplants that are now down could 
be brought back into service with some repairs and some 
maintenance. Do you know, is that being done?
    Secretary Abraham. Senator, I do not know specifically what 
might be going on at every facility. I know, as I commented 
earlier, that Governor Davis understands or has at least 
reflected in statements he has made that the principal 
responsibilities with respect to getting California's energy 
problems resolved lie in California. They are now targeting new 
generation and conservation as part of that solution. But I am 
not sure, and I would have to get back to you.
    Senator Thomas. I understand. But I think we need to be a 
little more assured, if we are going to make some changes and 
put some impact on some of the rest of us that will be 
impacted. Implementing emergency demand for reduction in use. 
Have they done that? I do not know the answer. I do not know 
what has been done on the retail pricing for sure.
    So, I am sympathetic to the problem. I know that it is a 
very difficult one, and obviously the answer is somewhat over 
time. But I tell you what. Before I am willing to go ahead with 
a great deal of support for doing things there, I want some 
assurance that they are going to do some of the things, that 
clearly should not have been done in the first place, to find a 
remedy for those kinds of things. I will not take more time, 
but I can tell you that I am interested in that response.
    Thank you.
    The Chairman. If I may, before I call on Senator Domenici. 
We got into a situation in the last administration where there 
were six or seven coal-fired plants that EPA alleged the life 
was being extended rather than the position of the operators 
who claimed that they were simply maintaining the plant up to 
the level of permitting which was required. EPA indicated that 
they were prepared to file criminal charges against the 
management if these plants were allowed to continue. Now, I do 
not know the factual information, but clearly when you are 
faced with that kind of a threat, it becomes a full employment 
act for many lawyers to make a determination of was the 
maintenance done to simply extend the life of the plant or 
simply to operate.
    It seems to me, Mr. Secretary, that these are some areas 
that we need some enlightenment on because if, indeed, those 
plants have a capability of producing energy and are not, we 
ought to be able to settle that differential because they 
clearly can make a significant difference.
    We have seen the administration's position on 
CO2 which is pretty definitive. They said it was not 
a pollutant. Period. I think those of us in the Northwest would 
encourage the rest of you to go out and grow some trees because 
that helps too.
    Senator Domenici.
    Senator Domenici. Mr. Secretary, it is good to be with you. 
First of all, I want to compliment you. I always knew that you 
were a quick learner and certainly you have learned in this 
field in enormous leaps. Your statement today is very 
interesting in terms of its comprehensive nature, and I 
compliment you.
    What I want to talk about here today is I want to tell you 
a little history. To the Senator from California, I would like 
to tell you I have been here long enough to where the price of 
natural gas was 7 cents a million cubic feet. You are talking 
about $60. Well, that was because the entire natural gas fields 
of America in production were regulated by a strange 
interpretation of a case that held that the National Government 
had authority to regulate, so a group regulated it. We did not 
have any natural gas, literally none. A trickle.
    We started deregulating. The first bill we did we 
deregulated only new gas, deep gas, and gas in wells that you 
could easily determine if you put another well in, you do not 
hurt anything. We eventually deregulated.
    The United States does not know how many million cubic feet 
of gas we have it is so many. But, Mr. Secretary, something is 
wrong when a producer in New Mexico gets $5 and the gas is sold 
to somebody at $60. Somebody has to find out what is happening. 
Since I am not going to be here for the FERC Chairman, I am 
going to ask the chairman if he could ask him to study that and 
give us a report as quickly as he can on what is happening.
    The Chairman. Yes.
    Senator Domenici. Now, this is not just a California 
problem. So you will know, Mr. Secretary, in Senator Bingaman's 
and my State, we have 990 workers, the most highly paid workers 
in one part of New Mexico, working in a copper mine. They may 
be laid off within the next month because their cost of 
electricity went from 3 to 4 cents to 21 to 22 cents, and they 
are not sure they can produce copper and pay the workers. There 
is another one close at hand with similar proportions. Now, 
that is on the one hand.
    On the other hand, the Senator from California, there are 
two major, major powerplants being considered in the State of 
New Mexico. One is already completed and New Mexico has given 
the go-ahead in a little town of Deming, New Mexico. That is 
$250 million to $300 million. Over on the east side of the 
State in the city of Clovis, they are looking at another one 
and it is bigger.
    I get the rumble that the companies that are doing that 
have every option to go to California, but they are not going 
to go to California because I would suggest to you that there 
are still regulations and rules that inhibit the investment as 
it is being made in other States that have less of that. And 
that may be California's desire. When you talked to me, it was 
not. You said we want to build new powerplants in California.
    I suggest we ought to find out the reality of it. Is 
California today really willing, by its regulatory--and this 
will not solve your temporary problem. I know you would 
immediately say, Senator, that will not help that. I know that. 
But I think we ought to find out. The State of California went 
12 years without a powerplant, and while demand went up, it 
peaked out. I think we ought to know as a Nation if they are 
really ready to let natural gas--that is the simplest one. It 
is pure white. Are they really letting them come in or are they 
going to expect powerplants to be built around the country and 
go in there because they want to keep rules that are harder 
than other States have and they are still complying with the 
ambient air standards of America?
    So, those are my two observations. One, how come the 
producer is getting so little and the market is getting so 
much? Somebody ought to follow that gas from the panhandle in 
New Mexico and Texas or Wyoming and just see what is happening 
to it. It comes out at $4, $5 from your field. Where does it 
get to $60? I think that would be an interesting thing for us 
to find out.
    I also want to say to FERC you have to be concerned. Where 
is the FERC leader sitting? I cannot be here, but you have got 
to be concerned. If you have some regulatory power, you have 
got to say there is a number of States getting hit by this 
because eventually the price of natural gas in California seeps 
through the system. It does not get there overnight, so the 
Northeast is not going to get hit with it yet. But New Mexico 
may because it is close, and eventually that little piece of 
gas that has mobility to move around in the system, which needs 
it, is going to feel this extraordinary price that is being 
paid in California.
    Now, I do not have an answer, Mr. Secretary. But I respect 
your statement and I truly respect your concern that we do not 
cut off supply and investment and make things worse. But I do 
suggest for many States it is pretty bad right now, and can 
everything stay as it is for the next 3 or 4 years while we 
finally get some natural gas on board? Long term, it may take 
10 years to get the supply up. So, I leave that before you. I 
say that is a problem. I believe everybody understands that is 
a problem.
    If you care to comment, I would very much appreciate it. 
The Chairman asked for that study and I would certainly hope 
that you would pay extra attention to the fact that a number of 
us are going to get hit by it and what is the solution to that.
    Thank you, Mr. Chairman. Thank you, Senator Bingaman.
    The Chairman. Thank you very much, Senator Domenici.
    Would you care to respond?
    Secretary Abraham. It is obviously an area that we will be 
glad to work together with you on, Senator.
    The Chairman. In deference to the agenda, I would hope that 
we could conclude our questioning with one round. But as a 
consequence of the concern of the Senator from California and 
the Senator from Oregon, I would be prepared to allow them one 
question, should they wish. Then I would like to move on to the 
other panel. As you have observed, you have taken much more 
time than we thought.
    I want to commend you for your forthright answers and I 
think particularly the lack of equivocation, which we have been 
exposed to from time to time. You have been very responsive and 
very knowledgeable, recognizing the fact you have been aboard a 
very short time. So, I must commend you.
    Senator Feinstein, do you have in conclusion one question? 
I am just extending this courtesy to the two of you.
    Senator Feinstein. If I may, I would just like to enter 
into the record the March 9 letter, signed by the three 
Governors, Governor Davis, Governor Locke, Governor Kitzhaber, 
essentially asking FERC to help them with the prices.
    The Chairman. It will be entered into the record.
    Senator Smith.
    Senator Smith. Mr. Secretary, would you agree with me that 
the central problem of our current crisis is the retail cap in 
California?
    Secretary Abraham. I believe that the combination of a 
half-regulated and half-unregulated California market, combined 
with the decisions that were made to prevent the utilities in 
California to diversify the way that they obtain that 
electricity they needed to purchase beyond what they generated 
themselves--those two factors combined with one last factor, 
which I talked about, and that is the fact that over the last 5 
years, there has been approximately 6,300 megawatts of new 
demand in California while simultaneously the total generation 
in the State declined. Those combined in large measure, I 
think, to precipitate the crisis.
    Senator Smith. I believe Senator Feinstein and I are 
working on a bill that fixes those short term without hampering 
the long-term vision that you and President Bush have for 
energy in the West and throughout the country. I would just 
invite you to work with us on this and see if there is not 
something that we cannot do to fix those two issues short term 
and long term.
    Secretary Abraham. Senator, I would just say that since I 
took this job, I have spent a substantial amount of every 
single day working on the issues that confront us in California 
and the rest of the West, and I do not foresee at least any 
days in the near future, probably the long term either, where 
we will not have, as part of our agenda, working with you all 
on these issues.
    Senator Smith. Thank you.
    The Chairman. Thank you very much. I want to thank you 
again, Mr. Secretary, and wish you a good day. You have got 
more than a half a day left.
    What I would like to do now is call panel 2 and 3 together 
to expedite our time sequence. That would be the Honorable Gary 
Locke, Governor of the State of Washington, along with the 
Honorable Curt Hebert, Chairman of the FERC, and the Honorable 
Judy Martz, Governor of the State of Montana. We trust we have 
got a compatible group here that will proceed as they see fit.
    I understand that two of the Governors are catching 
airplanes. I always thought Governors had their own airplanes. 
But, nevertheless, if they do not, they ought to, at least from 
the West. Whoever has the tightest schedule, please respond by 
going first. You drew the straw. Governor Locke, please 
proceed.

            STATEMENT OF HON. GARY LOCKE, GOVERNOR, 
                      STATE OF WASHINGTON

    Governor Locke. Governor Martz indicates that she has her 
own airplane.
    [Laughter.]
    The Chairman. Good for you.
    Governor Locke. Chairman Murkowski and members of the 
committee, I want to thank you very much for the opportunity to 
address you about an issue that is of fundamental concern to 
the economic health of the State of Washington and, in fact, 
all the Western States.
    The so-called California energy crisis is really a Western 
United States crisis, with high energy costs causing serious 
economic harm to citizens, farmers, businesses, schools, 
universities, as well as local and State governments. We share 
the same electric grid which enables us to share power but also 
each other's misfortunes. Now the crisis is hurting irrigators 
in Arizona, resort hotels in Nevada, industries in Oregon, and 
homemakers in Idaho.
    In Washington alone, Georgia Pacific, a woods product 
giant, laid off 850 workers just before Christmas. And just a 
few days ago, a Tacoma chemical company laid off 80 workers and 
cut production in half. They make chemicals for hospitals and 
other institutions.
    Last summer, I had to invoke emergency powers to help the 
State's largest cold storage facility remain open and keep over 
1,000 workers employed, as well as to protect frozen fish that 
had been caught in Alaska and vegetables and fruit harvested in 
our State of Washington.
    Public agencies, hospitals, schools are being forced to cut 
programs, and homeowners and businesses have experienced in our 
State increases in their electricity bills of up to 75 percent, 
with more increases expected.
    The Bonneville Power Administration has already announced 
that it will have to raise rates by at least 100 to 200 
percent, and many rural co-ops are 100 percent customers of 
Bonneville Power and will have to pass on those price increases 
to irrigators, farmers, and food processing plants in eastern 
Washington. It will cripple the agricultural economy of our 
State of Washington.
    I have seen estimates that merchant powerplant operators 
are extracting $1.4 billion per month from the Pacific 
Northwest economy, $1.4 billion that was not extracted just a 
year ago because just a year ago wholesale power prices were 
ranging anywhere from $20 to $40 a megawatt-hour. And now they 
are in excess of $300 to $400 a megawatt-hour, and a few weeks 
ago or a few months ago were as much as $2,000 a megawatt-hour.
    The situation is untenable and simply cannot continue. It 
cannot continue without permanent damage to the economies of 
Washington State and, indeed, the other Western States of 
America. Our crisis is getting worse in Washington, in fact, 
the Pacific Northwest, because our hydroelectric dams are 
threatened by one of the worst droughts in Washington State 
history.
    The drought notwithstanding, the Western energy crisis is a 
Federal problem, and we in our individual States have been 
doing all that we can to alleviate the crisis. For example, I 
have directed Washington agencies and local government agencies 
to reduce their use of consumption by 10 percent, and our State 
and local agencies have, in fact, taken up the call and have 
responded.
    We have also asked residents and businesses to reduce 
energy consumption. We received reports that some of our 
largest utilities from Seattle to Tacoma have, in fact, cut 
energy consumption by 6 to 10 percent in just 1 month alone.
    I have used the emergency powers to allow utilities and 
industries to operate diesel engines and other temporary 
generators to produce the electricity they need.
    I have reached agreements that allow operators of older 
peaking plants to run continuously 24 hours a day, 7 days a 
week, and we have done it with the cooperation of Region 10 of 
EPA.
    And I have asked the legislature to dedicate funding for 
low income assistance to augment Federal block grants to help 
people in eastern Washington pay very, very high utility and 
electricity bills.
    We have a legislative package that offers tax incentives 
for the cogeneration of electricity, as well as tax incentives 
for the purchasing of energy efficient appliances and lighting.
    We have, in fact, over the last several years, sited, 
permitted both local and State permits for about a half a dozen 
powerplants which, when completely completed, will produce 
electricity that will power some 3.5 million households in the 
State of Washington. And more are in the process of seeking 
approval.
    But the real key to reducing outrageously high energy costs 
is for the Federal Government to repair the broken wholesale 
market structure. We need short-term, temporary wholesale price 
caps, or the western economy will remain in jeopardy.
    The FERC's cautious actions have brought no relief to the 
State of Washington and the Pacific Northwest. Moreover, FERC 
is relying on market mechanisms to resolve the problem even 
though it has formally found that the markets are dysfunctional 
and unable to produce just and reasonable prices for wholesale 
energy.
    I commend President Bush and the administration for its 
efforts to produce a national energy policy, a policy which 
will focus on conservation, renewables, tax incentives for 
renewables, as well as developing more energy supply.
    It is a question of supply and demand, and with a growing 
population, we must have more supply of energy. But we in the 
West cannot wait 7 to 10 years until new energy sources are 
discovered and tapped and brought to market. Washington State's 
economy and the economies of the other Western States must be 
stabilized and protected now to prevent permanent, irreparable 
damage, not in 5, not in 7, not in 10 years.
    I believe that we must have short-term, temporary price 
caps so that California can get its energy house in order and 
so that other States can get more generation on line. I support 
cost-of-service based rates, cost-of-service based rates that 
ensure full reimbursement for both direct and indirect costs of 
producing power, plus an adequate rate of return. Setting the 
caps high enough will enable producers to recoup their full 
cost of producing power, whatever it might be, and a 
sufficiently high rate of return so that it is also an 
incentive to continue to pursue additional generation plants.
    We simply need a time out. We need a time out for 
California to correct its flawed deregulation scheme, but a 
time out to allow other Western States to protect their 
economies and to get their citizens back to work. We hope that 
the Senate and this committee will act favorably on the 
legislation that is before it. Thank you
    [The prepared statement of Governor Locke follows:]
  Prepared Statement of Hon. Gary Locke, Governor, State of Washington
    Thank you, Chairman Murkowski, and members of the Committee. I am 
pleased to be here to speak to you today about the energy situation in 
the Pacific Northwest and the challenges that are facing the citizens 
and businesses in my state as the result of continued volatility in the 
wholesale energy markets.
    You have heard a great deal about the ``California energy crisis.'' 
But by now you know that what some still call the ``California energy 
crisis'' is really a region-wide energy crisis, with high energy costs 
impacting citizens, farms and businesses, schools and universities, and 
state and local governments throughout the western continental United 
States.
    It impacts irrigators in Arizona, resort hotels in Nevada, 
industries in Oregon, and residential ratepayers in Idaho.
    Let me give you some idea of what is happening in Washington State, 
where wholesale energy prices have gone up from ten to twenty times the 
prices of a year ago:

   High energy costs have forced several businesses to curtail 
        operations and lay off hundreds of workers. Georgia Pacific 
        laid off 850 workers in Bellingham just before the Christmas 
        holiday. Pioneer, a chemical manufacturer in Tacoma, has 
        curtailed operations by 50 percent and taken steps to lay off 
        80 employees. Nine of the ten aluminum plants in the 
        Northwest--and thousands of aluminum workers--are now idle. 
        There are many other examples.
   High energy costs are hurting our agricultural sector. Many 
        farmers worry that they won't be able to afford to pay the 
        pumping costs for irrigation. And last summer, high energy 
        prices forced the state's largest cold storage facility, 
        Bellingham Cold Storage, to curtail operations just as peak 
        harvest season was under way for both berries and ocean fish. 
        Only by invoking emergency powers was my office able to secure 
        an affordable power supply to the facility--not only keeping 
        1,200 employees at the facility on the job but keeping hundreds 
        of ocean fishers and family farms from bankruptcy due to lack 
        of cold storage for their products.
   Public agencies, schools and universities are faced with the 
        possibility of curtailing programs to meet unexpected energy 
        costs that are double or triple the levels of a year ago.
   And utility ratepayers are now facing surcharges as high as 
        75 percent of their monthly retail power bills. This is not 
        just a problem for residential customers on a tight budget. For 
        many small and medium-size businesses--restaurants, coin-
        operated laundries, and retail shops--this can be the 
        difference between profitability and bankruptcy. And the 
        continued high costs of wholesale power threatens the very 
        solvency of some of our utilities.
    This situation is untenable. The Pacific Northwest is losing as 
much as $1.4 billion a month due to high wholesale power costs--money 
flowing out of our economy into the pockets of merchant power plant 
operators.
    Clearly, high energy costs affect not just individual companies, 
but all the companies with which they do business. Wood products 
manufacturers worry that they will no longer have a steady supply of 
sodium hydroxide. Hospitals worry that they no longer have a steady 
supply of bottled oxygen and nitrogen. Farmers worry that frozen food 
processors will not be around to purchase their crops.
    And it is not just an economic issue. The high cost of wholesale 
electricity is forcing many businesses and utilities to look at diesel 
generation as an alternative source of power. While this may help 
utilities make it through the winter, it carries an environmental price 
tag of hundreds of tons of particulates polluting our air. And forcing 
the Bonneville Power Administration to increase generation to make up 
for the power being withheld from the market damages our fish runs and 
undermines federally-mandated salmon recovery efforts.

                      WASHINGTON STATE'S RESPONSE

    Unlike other states, Washington declined to deregulate its energy 
markets. Yet it has been affected by California's flawed experiment in 
deregulation as well as the federal wholesale deregulation that severed 
wholesale power generators from utilities' traditional obligation to 
serve. The problem's created by these market structures are now 
compounded by the record low rainfall and snowpack this year in the 
Pacific Northwest, where we are reliant upon hydropower. So while we 
did not create the problems with the market structure, we are 
nonetheless forced to respond to them.
    In Washington, we are taking several steps at the state level. 
First, I have called on the citizens and businesses of my state to 
reduce energy use by 10 percent. That's an ambitious goal, but citizens 
are responding to my call and we are nearing that target. I have also 
directed state agencies and local governments to reduce energy use by 
10 percent. By reducing demand, we are doing what we can to put 
downward pressure on price and help utilities from having to purchase 
power on the high-priced wholesale spot market.
    Second, we are taking steps to increase power generation, both 
long-term and short-term. In January, I declared an energy alert under 
state law to allow utilities and industries to install and operate 
temporary generating facilities this winter. We have also reached 
agreements with our utilities to allow continual operation of older 
``peaking plants'' that are usually limited to a few hundred hours a 
year. These actions have brought several hundred megawatts of power on-
line to address the immediate need for additional power supplies.
    Third, we asked the Washington State Legislature to dedicate 
funding for low income assistance to augment the federal block grants 
we currently receive. The demand for assistance this year has far 
outstripped the federal funding available. The Legislature recognized 
this need when it passed its first bill of the 2001 session last 
Saturday.
    Fourth, we are continuing to site and approve construction of new 
power plants, just as we have for the past decade. The state and local 
authorities have already approved power plants that will produce more 
than 3,200 megawatts of power. Many of these projects are now under 
construction or ready to break ground. And the state is in the process 
of reviewing proposals for plants that can generate another 4,000 
megawatts. Clearly, we are taking appropriate steps to increase 
generating capacity in our region.
    But there is only so much a state government can do. The key to 
reining in energy prices is to fix the wholesale market structure. And 
that's a federal, not a state, matter. Without federal action to bring 
high energy costs down to just and reasonable levels, the prosperity we 
have worked so hard to achieve during the past decade could be 
undermined in a matter of months.
    federal policy must ensure just and reasonable wholesale prices
    I am pleased that President Bush has appointed Vice President 
Cheney to chair an energy task force, and I hope that the task force 
will work with western governors as it develops its strategies. 
However, based on what I read in the press, I am concerned that the 
administration's response to the energy crisis so far is simply to 
focus on the exploration and development of new oil and gas supplies in 
the Arctic and elsewhere.
    Such a strategy ignores our immediate problems. It will take 
several years before that oil and gas will reach consumers in my state. 
Because we face potential energy shortages this summer and fall, and 
because our utilities and businesses and citizens continue to face 
volatile energy prices, it is imperative that the administration and 
Congress direct their attention to those actions they can take to bring 
stability to the wholesale energy market as soon as possible.
    I have also been disappointed by the lack of action by the Federal 
Energy Regulatory Commission (FERC), the federal agency charged with 
overseeing the wholesale energy markets. FERC is required by law to 
ensure that prices for the wholesale energy are ``just and 
reasonable.'' On November 1, 2000, and again on December 15, 2000, FERC 
found that prices for the sale of short-term energy were unjust and 
unreasonable. It also found that California's wholesale short-term 
energy markets were severely flawed, and that those flaws provide 
sellers both the ability and incentive to exercise undue market power.
    Yet, FERC's response has been to rely on market mechanisms to solve 
the problem, even while acknowledging that the markets themselves were 
dysfunctional and would not by themselves produce just and reasonable 
prices.
    Indeed, last Friday FERC essentially said that any costs at or 
below $273 per megawatt hour during a Stage 3 alert would be deemed 
just and reasonable. In my opinion, prices in this range are exorbitant 
and clearly unjustified. They have no bearing on the costs of energy 
production--even with today's high natural gas prices--and are more 
than ten times the costs of wholesale power from those of a year ago.
    Moreover, where FERC has imposed modest price caps, they have done 
so on wholesale power sales in California only, once again ignoring 
that the problems of high energy costs are a problem affecting the 
entire western United States.
    Frankly, I think FERC has been asking the wrong questions. The 
issue is not whether we can make energy deregulation work in the long 
run. The issue is not whether deregulated markets can be improved. The 
issue is not whether we should have patience during a long transition 
to deregulation.
    The issue--the only issue which FERC should now be addressing--is 
how to bring wholesale energy prices down now. We can't afford to 
wait--not a month, not six months, not a year. We need action now.
    It is unfortunate that FERC has resisted calls for direct action to 
bring price stability to the wholesale energy market. Yet with each 
passing day, the economy of my state and all of the western states 
continue to suffer as the result of high energy costs. I am hopeful the 
new members of FERC less trusting of market mechanisms, and will be 
more open to taking strong actions to address these adverse economic 
impacts.
    I applaud this Committee for considering strong measures to bring 
stability to the wholesale energy markets in the months to come. I look 
forward to working with members of the Committee as it moves forward in 
its deliberations.

    The Chairman. Thank you very much, Governor Locke.
    Governor Martz.

            STATEMENT OF HON. JUDY MARTZ, GOVERNOR, 
                        STATE OF MONTANA

    Governor Martz. Thank you, Mr. Chairman and members of the 
committee. For the record, my name is Judy Martz and I am the 
Governor of the Big Sky State of Montana.
    I appreciate the interest of this committee that you have 
shown in the struggles of the Western States to deal with this 
emerging energy crisis.
    I would like to frame my testimony around a simple concept 
which is supply. As you know, the Western United States has 
experienced substantial growth in population and energy needs 
in the past decade. While we have seen increasing power needs 
for economic development and other consumptive uses, we have 
seen nearly zero development in sources to provide additional 
power.
    The primary reason that we have not seen interest in 
developing power generation is what we have been living in, the 
regulated energy market. There have been no incentives to 
develop additional power, and to make matters worse, while we 
have not developed additional power generation, there also has 
been a move to dismantle existing power generating facilities.
    Montana entered into deregulation in 1997 in an effort to 
stay ahead of the curve. Our industrial customers have been 
deregulated since 1997 and our residential customers will enter 
into a free market in 2004.
    Unforseen circumstances hit the Western States last summer 
with historically low winter snow packs and drought continuing 
to present time. This gave us less water to produce electricity 
through hydroelectric facilities while maintaining stream flows 
to comply with mandates under the Endangered Species Act.
    California compounded our problems, both as the largest 
user of electricity and as a partially deregulated electricity 
market. California capped retail prices and did nothing to 
address wholesale generating prices. Adding to the problem, 
they had not built a generating plant within the past decade.
    With this scenario on place, there was almost no incentive 
for investment of additional power nor an investment for 
California consumers to conserve. The result was a power drain 
from all Northwestern States to meet the demands of the 
California consumers.
    This chain of events has hit Montana hard. Montana 
industrialists that gambled on declining future power prices 
have been hurt by the resulting power prices. I could go on 
over the same litany that Governor Locke has of lost 
businesses. We have seen several closures in Montana, a State 
whose economic base cannot afford to lose even one single job.
    Montana currently has significant or sufficient energy 
supplies to meet our own needs. However, because we are tied 
into the Western grid, any excess energy is pulled to other 
States. This past summer, industries that chose to shop for 
energy found their traditionally low rates of about $30 per 
megawatt rise to about $300. The artificially high prices 
brought ``closed for business'' signs to several businesses in 
Montana.
    While Montana is facing one of the biggest challenges we 
have ever experienced, we are looking at one of the biggest 
opportunities we have seen for quite some time.
    Montana is a resource rich State. From vast super-compliant 
coal fields to miles of timberland in the west, Montana has the 
natural resources to quench the thirst for energy across 
Nation. Montanans are anxious for the opportunity to contribute 
to the economic health of this country through responsible and 
environmentally sensible development of these resources.
    This Nation has the ability to generate affordable and 
reliable energy. But we must be careful that we do not stifle 
the increasing interest to development with additional power 
caps. An overly heavy-handed Federal Government can stymie 
efforts to address the long-term solution for our current 
energy problem. Capping prices regionally will take away 
individual States' flexibility to address the problem. Capping 
does not take into consideration the difference in economies or 
per capita income. A reasonable cap to California may be 
prohibitive to Montana. And importantly, it extinguishes 
incentives to invest not only in conservation methods, but also 
additional generating capabilities.
    Just yesterday before coming here, I had a conversation 
with a representative of an out-of-State interest that is 
considering investing $200 million in a power generating 
facility in Montana. Now, $200 million may not be a lot of 
money to this body because you always talk in billions, but to 
Montana that is a tremendous investment. And the beauty of this 
proposal is that it helps address generation concerns not only 
for Montana and the West, but also helps create good paying 
jobs.
    It is important to note that I had a simple message 
delivered to me in that very conversation, and it was this. 
``Just keep government out of the way.'' They want to compete.
    Mr. Chairman and members of this committee, all of us in 
the Western States are struggling to deal with a situation that 
has no easy answers. While I recognize the intent of the price 
caps is to protect the consumers, I believe it will only 
exacerbate an already difficult situation. We need to address 
our energy needs for the long run. Short-term responses such as 
this will only deter serious efforts to come up with long-term 
solutions. The ultimate long-term solution is the creation of 
additional power sources and transmission. Capping prices does 
not provide incentives to conserve. And capping prices does not 
provide incentives for additional generation.
    The Western Governors Association recently reviewed 
possible solutions to the Western crisis, including capping 
electricity rates. However, some of the Western Governors, 8 
out of 10 that were at the meeting in Portland, voted 
ultimately and delivered a letter to the President opposing 
price caps. And as Governor of Montana, I signed that letter, 
recognizing that capping prices creates disincentives for long-
term solutions for our State.
    While we do not want the Federal Government to come down on 
Western States with a heavy regulated hand, we do want to work 
with the Federal Government to arrive at meaningful solutions. 
So, I ask you to work with us in an effort to address problems 
associated with the Western grid straining to keep electricity 
flowing. Work with us by allowing individual States the 
flexibility to address the energy shortage by creating new 
generating facilities and transmission capabilities, and work 
with us to create incentives to conserve existing resources 
while developing new resources. Work with us, please, not 
against us.
    Thank you.
    The Chairman. Thank you, Governor.
    The hour is about 11:25 and we have got other witnesses. 
So, I am going to ask you to try to summarize your statement. 
We will try to be brief with our questions.
    The Honorable Curt Hebert of FERC, good morning. Please 
proceed.

          STATEMENT OF CURT L. HEBERT, JR., CHAIRMAN, 
              FEDERAL ENERGY REGULATORY COMMISSION

    Mr. Hebert. Good morning, Mr. Chairman. I will certainly do 
that. I have a brief summary here on a couple of pages. I would 
ask at the conclusion of that that my summary, as well as my 
entire statement, be entered into the record, please.
    The Chairman. Without objection.
    Mr. Hebert. Thank you for the opportunity to appear here 
today to discuss the topic of Western energy markets and 
possible legislative reforms.
    Wholesale and retail electricity markets in California and 
throughout much of the West are in a state of stress. Wholesale 
prices have increased substantially for a variety of reasons. 
Consumers are implored to conserve as much as possible, and 
utilities are facing growing financial difficult. As a result, 
many now argue that we need to return to cost-based regulation 
instead of relying on market-driven solutions.
    First, in my view price caps are not a solution. We need to 
promote new supply and load reductions. Market prices are 
sending the right signals to both sellers and buyers, at least 
those not subject to a rate freeze over which the FERC has no 
control. Market prices will increase supply and reduce demand, 
thus correcting the current imbalance in the system. A price 
cap imposed through regulation or legislation will have exactly 
the opposite effect.
    Second, infrastructure improvements are greatly needed 
throughout the West and especially in California. We need to 
create the appropriate financial incentives to ensure that new 
generation is built, that the transmission system is upgraded, 
and that new gas pipelines are built as well.
    Finally, we need a regional transmission organization, an 
RTO for the West. California is not an island. It depends on 
generation from outside of the State, as the two Governors to 
my left have made clear. The shortages and the prices in 
California have affected the supply and prices in the rest of 
the West. A West-wide RTO will increase market efficiency and 
trading opportunities for buyers and sellers throughout the 
West.
    Consistent with these three points, the FERC has been 
aggressively identifying and implementing market-driven 
solutions to the problems: by stabilizing wholesale energy 
markets, by identifying additional short-term and long-term 
measures that will increase supply and delivery infrastructure, 
as well as decrease demand, by promoting the development of a 
West-wide regional transmission organization, and by monitoring 
markets and market conditions.
    Let me highlight the commission's most recent actions.
    Last Friday, the Commission took further steps to mitigate 
prices in California, specifically the prices charged in 
California's spot markets during stage 3 emergencies in January 
of this year. After examining prices charged in these periods, 
the Commission identified many transactions that warranted 
further investigation. The Commission required these sellers to 
either refund certain amounts or offset these amounts against 
amounts owed to them or provide additional justification for 
those prices. Specifically, the Commission required potential 
refunds or offsets of approximately $69 million based on the 
market clearing price that would have occurred if sellers had 
bid their variable costs into a competitive single price 
auction.
    The ISO and the California Electricity Oversight Board 
asked the Commission to require larger refunds. However, the 
Commission's order explained the difference between their 
approach and the FERC's.
    First, they include over $170 million for refunds for non-
public utility sellers, such as the Los Angeles Department of 
Water and Power. The Commission has no authority to order any 
refunds from those sellers.
    Second, they include refunds for sales during all hours of 
January. The Commission limited its approach to stage 3 
emergency hours when supply and demand imbalance is most severe 
and sellers know their power is most needed.
    Third, they use a pay-as-bid approach instead of the 
Commission's proxy market clearing price approach and they use 
bids only slightly above variable costs.
    Finally, they include refunds for December 2000. The 
Commission will address the December transactions in a separate 
order. The Commission's approach fully protects consumers from 
exercises of market power during emergency conditions while 
still providing clear price signals encouraging sorely needed 
new generation and load reductions.
    Also last Friday, the Commission's staff issued a proposal 
on how the Commission should monitor and mitigate prices in 
California's wholesale spot power markets. This proposal is 
based on monitoring and mitigating prices on a before-the-fact 
basis instead of through after-the-fact refunds.
    After receiving and considering public comment, the 
Commission intends to implement appropriate changes to its 
current market monitoring and mitigation requirements by May 
1st of this year.
    Yesterday, the Commission issued an order seeking to 
increase energy supplies in California and the West. It is our 
intention to squeeze absolutely every megawatt out of the 
California system that is possible for this summer.
    The Commission implemented certain measures immediately. 
For example, the Commission streamlined regulatory procedures 
for wholesale electric power sales, expedited certification of 
natural gas pipeline projects in California and the West, and 
urged all licensees to review their FERC-licensed hydroelectric 
projects in order to assess the potential for increased 
generating capacity.
    The Commission also proposed and sought comment on other 
measures such as incentive rates for new transmission 
facilities and natural gas pipeline facilities completed by 
certain dates this year or next.
    Let me close, Mr. Chairman, by emphasizing that the 
Commission remains willing to work in a cooperative and 
constructive manner with other Federal and State agencies. The 
Commission will continue to take steps that, consistent with 
its authority, can help to ease the present energy situation 
without jeopardizing longer-term supply solutions. As long as 
we keep moving toward competitive and regional markets, I am 
confident that the present energy problems, while serious, can 
and will be solved. I am also confident that market-based 
solutions offer the most efficient way to move beyond the 
problems confronting California and the West.
    I cannot emphasize enough to you, Mr. Chairman and members 
of this Senate committee, the importance of our RTO process and 
order 2000 and how we understand what both of these Governors 
just told us, that in fact we are in this together and that we 
sink or swim together, that we cannot survive it alone.
    We do remain at the Commission vigilant in monitoring the 
market. Yesterday's show cause order of Williams and AES, which 
is the first show cause order against generators and marketers 
in the 3\1/2\ years that I have been with the Commission, 
proves our vigilance and the fact that we do not approve of 
unjust and unreasonable rates and are willing to look into 
those.
    Mr. Chairman, you, as well as the other members of this 
committee, know that the Commission is willing to work with 
you. Senator Feinstein and I had a meeting. Senator Boxer and I 
have had meetings. And I have heard their approaches and I do 
have an open mind and the Commission has an open mind. We will 
continue to be vigilant. We will continue to work and we look 
forward to your comments and questions.
    [The prepared statement of Mr. Hebert follows:]

  PREPARED STATEMENT OF CURT L. HEBERT, JR., CHAIRMAN, FEDERAL ENERGY 
                         REGULATORY COMMISSION

    Wholesale and retail electricity markets in California and 
throughout much of the West are in a state of stress. Wholesale prices 
have increased substantially for a variety of reasons, consumers are 
constantly implored to conserve as much as possible, and utilities are 
facing growing financial problems. As a result, many now argue that we 
need to return to cost-based regulation, instead of relying on market-
driven solutions.
    First, price caps are not a long-term solution. We need to promote 
new supply and load reductions. Market prices are sending the right 
signals to both sellers and buyers (at least those not subject to a 
rate freeze). Market prices will increase supply and reduce demand, 
thus correcting the current imbalance. Lowering prices through 
regulation or legislation will have exactly the opposite effect.
    Second, infrastructure improvements are greatly needed throughout 
the West and especially in California. We need to create the 
appropriate financial incentives to ensure that new generation is 
built, that the transmission system is upgraded and that new gas 
pipelines are built.
    Finally, we need a regional transmission organization (RTO) for the 
West. A West-wide RTO will increase market efficiency and trading 
opportunities for buyers and sellers throughout the West.
    Consistent with these three points, the Federal Energy Regulatory 
Commission has been aggressively identifying and implementing market-
driven solutions to the problems: (1) by stabilizing wholesale energy 
markets; (2) by identifying additional short-term and long-term 
measures that will increase supply and delivery infrastructure, as well 
as decrease demand; (3) by promoting the development of a West-wide 
regional transmission organization; and, (4) by monitoring market 
prices and market conditions.
    Other regions that have not adopted California-type restrictions on 
electricity competition have demonstrated that consumers can and do 
gain from electricity competition and restructuring. California and 
Western consumers similarly can share in these gains, once market rules 
are in place that will make California and other Western states an 
attractive place for investment.

                              I. OVERVIEW

    Mr. Chairman and Members of the Committee:
    Thank you for the opportunity to appear here today to discuss the 
topic of Western energy markets and possible legislative reform. 
Wholesale and retail electricity markets in California and throughout 
much of the West are in a state of stress. Wholesale prices for 
electricity have increased substantially for a variety of reasons in 
the last year. California power consumers face near-daily pleas to 
conserve. California load-serving utilities are under severe financial 
stress. Companies supplying wholesale power into California are unsure 
how much, or even whether, they will be paid for their supplies.
    While the situation in California is not representative of other 
parts of the country that are successfully developing competitive 
markets, it nevertheless underscores the fundamental infrastructure 
problems facing the country. The demand for electricity continues to 
expand while supply fails to keep pace. The development and licensing 
of new hydroelectric capacity--which provides much of the existing 
power supply in the West--is nearly exhausted. Very little fossil-fired 
generation has been added in many regions of the country over the last 
few years, and in California no major plants have been added in the 
last decade. And the existing electric transmission grid is often fully 
loaded and, absent necessary expansion, is often incapable of 
delivering power to those regions where it is valued the most.
    I would like to make three main points with respect to these 
problems and to identify the steps the Commission is taking to address 
these problems.
    First, price caps are not a long-term solution. We need to promote 
new supply and load reductions. Market prices are sending the right 
signals to both sellers and buyers (at least those not subject to a 
rate freeze). Market prices will increase supply and reduce demand, 
thus correcting the current imbalance. Lowering prices artificially 
will have exactly the opposite effect.
    Second, infrastructure improvements are greatly needed throughout 
the West and especially in California. We need to create the 
appropriate financial incentives to ensure that new generation is 
built, that the transmission system is upgraded and that new gas 
pipelines are built.
    Finally, we need a regional transmission organization (RTO) for the 
West. California is not an island. It depends on generation from 
outside the State. The shortages and the prices in California have 
affected the supply and prices in the rest of the West. The Western 
transmission system is an integrated grid, and buyers and sellers need 
non-discriminatory access to all transmission facilities in the West. A 
West-wide RTO will increase market efficiency and trading opportunities 
for buyers and sellers throughout the West.
    Consistent with these three points, the Commission continues 
aggressively to identify and implement solutions to the problems:
    First, in recent months, the Commission has issued a number of 
orders intended to restore market stability. The Commission has acted 
to move utilities out of volatile spot markets to enable them to 
develop a portfolio of risk reducing and credit-worthy contracts.
    Second, my fellow Commissioners and I are working to identify and 
adopt additional measures that will increase supply and delivery 
infrastructure, as well as reduce demand for electricity in the Western 
Interconnection.
    Third, the Commission is continuing to work with market 
participants on developing, as quickly as possible, a West-wide 
regional transmission organization. Such an organization will bring a 
regional perspective and offer regional solutions to regional problems.
    Fourth, the Commission is monitoring market prices and market 
conditions with the goal of ensuring long-term confidence in Western 
markets. Moreover, the Commission's staff has proposed a new plan to 
monitor and, when appropriate, mitigate the price of electric energy 
sold in California's spot markets on a before-the-fact basis, instead 
of addressing prices through after-the-fact refunds. The Commission 
intends to act on this proposal by May 1, 2001.
    By itself, however, the Commission can contribute only a small part 
of the solution to today's energy problems. A more comprehensive and 
permanent solution requires the involvement of the states and other 
federal agencies and departments. I am encouraged by all of the hard 
work and effort undertaken in recent months by the State of California 
and other Western states. The issues are difficult and the stakes are 
high. While reasonable minds can differ over the appropriate solutions 
to these problems, the Commission is committed to resolving these 
problems deliberatively.
    An attachment to my testimony provides an analysis by Commission 
staff of the specific provisions of pending bills (S. 26, S. 80, S. 
287, and amendment No. 12 to S. 287) that are the focus of today's 
hearing.

                II. HOW DID WE GET INTO THIS SITUATION?

A. Legislative Design
    The State of California has been widely questioned for its 
restructuring legislation (A.B. 1890), enacted in 1996. While mistakes 
were made, California is to be commended for realizing that consumers 
are better off if supply and pricing decisions are based on market 
mechanisms, not bureaucratic fiat. The premise of this legislation is 
that consumers will enjoy lower rates and increased service options, 
without compromising reliability of service, if electricity providers 
are motivated to serve by market forces and competitive opportunities.
    There were two major flaws in California's market design. First, 
the three utilities were forced to divest almost half of their own 
generation, and buy and sell power exclusively through the spot markets 
of the California Power Exchange (PX). This prevented the utilities 
from hedging their risks by developing a portfolio of short-term and 
long-term energy products. Second, the State mandated a retail rate 
reduction and freeze, eliminating any incentives for demand reduction, 
discouraging entry by competitors for retail sales and, more recently, 
threatening the financial health of the three utilities by delaying or 
denying their recovery of billions of dollars in costs incurred to 
provide service to retail customers.
    However, California's situation does not demonstrate the failure of 
electricity competition. To the contrary, it demonstrates the need to 
embrace competition fully, instead of tentatively. Other states, such 
as Pennsylvania, have been successful in implementing electricity 
competition. California needs to move forward on the competitive path 
it has chosen, allow new generation and transmission to be sited and 
built, and allow its citizens to benefit from the lower rates, higher 
reliability, and wider variety of service options that a truly 
competitive marketplace can provide.

B. Other Factors
    Until last year, California's spot market prices were substantially 
lower than even California's mandated rate freeze level. This allowed 
the California utilities to pay down billions of dollars of costs 
incurred during cost-of-service regulation. However, several events 
resulted in higher spot electricity prices beginning last summer. Those 
events included one of the hottest summers and driest years in history, 
as well as several years of unexpectedly strong load growth. Other 
factors influencing prices recently include:

   Unusually cold temperatures earlier this winter in the West 
        and Northwest;
   California generation was unavailable to supply normal 
        winter exports to the Northwest;
   Very little generation was added in the West, particularly 
        in Washington, Oregon and California, during the last decade;
   Environmental restrictions limited the full use of power 
        resources in the region;
   Scheduled and unscheduled outages, particularly at old and 
        inefficient generating units, removed large amounts of capacity 
        from service; and
   Natural gas prices increased significantly, due to higher 
        commodity prices, increased gas demand, low storage, and 
        constraints on the delivery system.

    Taken together, these factors demonstrate that the present problems 
in electricity markets are not just ``California'' problems. Normal 
export and import patterns throughout the West have been disrupted. 
Reserve margins throughout the West are shrinking. Already this winter, 
when the demand for electricity is relatively low, Stage 3 emergencies 
in California have become commonplace.

         III. THE COMMISSION HAS TAKEN IMPORTANT STEPS TO HELP

    These problems require bold and decisive action. Both the federal 
government and state governments have critical roles to play in 
promoting additional energy supply and deliverability and decreasing 
demand. Through its authority to set rates for transmission and 
wholesale power and to regulate interstate natural gas pipelines and 
non-federal hydroelectric facilities in interstate commerce, the 
Commission can take a range of measures to promote a better balance of 
supply and demand, but its jurisdiction is limited. The Commission can 
set pricing policies which encourage entry, but it is state regulators 
that have siting authority for electric generation and transmission 
facilities, as well as authority over local distribution facilities 
(both for electricity and natural gas). These authorities can go a long 
way in improving the grid for both electricity and natural gas. More 
importantly, state regulators have the most significant authorities to 
encourage demand reduction measures, which can greatly mitigate the 
energy problems in California and the West.

A. Promoting Market Stability
    In an order issued on December 15, 2000, the Commission adopted a 
series of remedial measures designed to stabilize wholesale electricity 
markets in California and to correct wholesale market dysfunctions. The 
Commission recognized that the primary flaw in the California market 
design was the requirement for the three California utilities to buy 
and sell solely in spot markets. The Commission concluded that the 
foremost remedy was to end this requirement and allow the utilities, 
first, to use their own remaining generation resources to meet demands 
and, second, to meet much of their remaining needs for power through 
forward contract purchases. This measure freed up 25,000 MW of 
generation that the utilities owned or controlled, which could be used 
directly to serve their load without having to sell it into the Power 
Exchange and buy it back at a much higher spot price. Our action 
returned to California the ability to regulate over one-half of its 
peak load requirements.

B. The Commission's Latest Efforts
    Last Friday, the Commission took further steps to mitigate prices 
in California, specifically the prices charged in California's spot 
markets during Stage 3 emergencies in January of this year. After 
examining prices charged in these periods, the Commission identified 
many transactions that warranted further investigation. The Commission 
required these sellers to either refund certain amounts (or offset 
these amounts against amounts owed to them) or provide additional 
information justifying their prices. Specifically, the Commission 
required refunds or offsets of approximately $69 million dollars, or 
all prices charged during Stage 3 hours in excess of $273 per 
megawatthour. This analysis seeks to use a proxy price based on the 
market clearing price that would have occurred had the sellers bid 
their variable costs into a competitive single price auction.
    The ISO and the California Electricity Oversight Board 
(``California parties'') asked the Commission to require larger 
refunds. However, the Commission explained the difference between their 
approach and the Commission's. First, they included over $170 million 
for refunds from non-public utility sellers, such as the Los Angeles 
Department of Water and Power. The Commission has no authority to order 
any refunds from these sellers. Second, they included refunds for sales 
during all hours of January; the Commission limited its approach to 
Stage 3 Emergency hours, when the supply/demand imbalance is most 
severe and sellers know their power is most needed. Third, they used a 
pay-as-bid approach instead of the Commission's proxy market clearing 
price approach and they used bids only slightly above (10 percent) 
variable costs. Finally, they included refunds for December 2000; the 
Commission will address the December transactions in a separate order. 
In sum, the Commission's approach fully protects consumers from 
possible exercises of market power during emergency conditions while 
still providing clear price signals encouraging sorely needed new 
generation and load reductions.
    Also last Friday, the Commission's staff issued a proposal on how 
the Commission should monitor and mitigate prices in California's 
wholesale spot power markets. This proposal is based on monitoring and 
mitigating prices on a before-the-fact basis, instead of through after-
the-fact refunds. Comments on the staff's proposal are due on March 
22nd. After receiving and considering public comment, the Commission 
intends to implement appropriate changes to its current market 
monitoring and mitigation requirements by May 1, 2001.

            IV. OTHER WAYS IN WHICH THE COMMISSION CAN HELP

    Since the supply of electricity in California and the West this 
summer may be significantly less than the demand, we must do more than 
just hope for mild weather and rain. We must focus on measures that 
will promote electricity supply and deliverability and decrease demand. 
Such measures are critical if we are to meet our goal of ensuring an 
adequate supply of power for consumers at reasonable prices.
    An important element in this effort is upgrading energy 
deliverability--through enhancements to electrical transmission and 
natural gas pipeline systems. Without these upgrades, constraints and 
bottlenecks increasingly will block energy supplies from reaching load.
    With these concerns in mind, the Commission must remove obstacles 
to increased generation and supply in Western markets. Similarly, the 
Commission must identify and develop strong incentives to build 
necessary electric and natural gas infrastructure. The Commission, by 
itself, cannot solve all of the energy problems facing California and 
the West. But, we may be able to offer valuable short-term 
contributions to help ease the current shortages, as well as medium- 
and long-term contributions to help avert future recurrences. My fellow 
Commissioners and I have discussed such steps and we hope to implement 
a wide range of such steps in the near future.

                 V. PRICE CAPS WOULD MAKE THINGS WORSE

    Some advocate price caps or cost-based limitations as a temporary 
way to protect consumers until longer-term remedies alleviate the 
supply/demand imbalance. The issue of price caps in the West has been 
raised on rehearing of the Commission's order of December 15, 2000, 
and, accordingly, is pending before the Commission. For this reason, I 
cannot debate the specific merits of price caps for California or the 
West. However, I will reiterate briefly the views I have stated 
publicly on this issue.
    As a general matter, I do not believe that price caps promote long-
term consumer welfare. Price caps will not increase energy supply and 
deliverability or decrease demand. Instead, price caps will deter 
supply and discourage conservation. At this critical time, legislators 
and regulators need to do everything they can to promote supply and 
conservation, not discourage them.
    My belief is based on experience, not just economic theory. The 
summer of 1998 demonstrates my point. Then, wholesale electricity 
prices in the Midwest spiked up significantly. The Commission resisted 
pleas for immediate constraining action, such as price caps. 
Subsequently, suppliers responded to the market-driven price signals, 
and today the Midwest is not experiencing supply deficiencies.
    In short, price caps can have long-term harmful effects because 
they do not provide appropriate price signals and may exacerbate supply 
deficiencies. Supply and demand cannot balance in the long-term if 
prices are capped.
    With respect to the bills that are the subject of today's hearing, 
I do not believe Congress should mandate specific ratemaking standards 
for the Commission to carry out. The Commission already has sufficient 
authority to implement price caps if the Commission determined they 
were needed.
    S. 26 and S. 287 would require ``cost-of-service based rates,'' 
while S. 80 would require ``cost-based rates.'' Either of these 
``cost'' standards likely would require on-the-record, trial-type 
procedures which would be lengthy, costly and contentious. Litigating 
such a rate case for one seller requires a significant commitment of 
resources. Concurrently litigating such cases for scores of sellers in 
the West would be overwhelming both for the Commission and the 
industry. Moreover, neither buyers nor sellers would be sure of the 
prices until the conclusion of this litigation. This delay in price 
certainty would be unfair to customers and discourage new investments 
by suppliers.
    Many leaders share these views. In a letter to the Secretary of 
Energy, dated February 6, 2001, eight Western governors expressed their 
opposition to regional price caps. They explained that ``[t]hese caps 
will serve as a severe disincentive to those entities considering the 
construction of new electric generation, at precisely the time all of 
us--and particularly California--are in need of added plant 
construction.''
    In the face of the current challenges, we all must have an open 
mind to any proposals that may mitigate the energy problems in the 
West. I remain unconvinced that price caps will help solve the problems 
and I do not believe they are in the long-term interest of consumers.
                             vi. conclusion
    The Commission remains willing to work in a cooperative and 
constructive manner with other federal and state agencies. The 
Commission will continue to take steps that, consistent with its 
authority, can help to ease the present energy situation without 
jeopardizing longer-term supply solutions. As long as we keep moving 
toward competitive and regional markets, I am confident that the 
present energy problems, while serious, can be solved. I am also 
confident that market-based solutions offer the most efficient way to 
move beyond the problems confronting California and the West. Thank 
you.

    The Chairman. Thank you, Chairman Hebert.
    Let me ask you just very briefly on your show cause 
investigation on the peaking power price that you just 
mentioned. What is your specific authority if you find, indeed, 
that these are deemed to be unrealistic peak prices that were 
charged? On the other hand, you offset that with whatever the 
traffic will bear, which may be the case and may not. What 
enforcement authority do you have? Do you have authority for 
refunds, penalties, fines?
    Mr. Hebert. As you know, the penalties themselves are not 
something that we possess. We do have market-base rate 
authority. We do have the ability to issue refunds. This matter 
itself, Mr. Chairman, to be clear, is a non-public matter and 
is something that I am not at liberty to discuss. The record 
will speak for itself.
    The Chairman. Do you have authority to do it?
    Mr. Hebert. Yes, sir.
    The Chairman. Why have you not moved on it sooner?
    Mr. Hebert. Well, we just issued the order yesterday, Mr. 
Chairman.
    The Chairman. I know but this has been around for a while. 
We have heard from our California friends about the tremendous 
price of this peak power once they deregulated and the shortage 
became evident.
    Mr. Hebert. As you know, Mr. Chairman, I have been Chairman 
for about 6 weeks and that is about as quickly as I could move.
    The Chairman. That is a good answer. You better quit there.
    [Laughter.]
    The Chairman. Governor Locke, you talk about the 
conservation, the emergency orders, the other aspects of action 
that have to be taken, including the increase in the supply. 
From the standpoint of one unique case that I have always kind 
of wondered about, the theory of Bonneville was to recognize 
the tremendous hydroelectric resource that you had there for 
the region, to serve the region. It was paid for by all the 
taxpayers of the United States, but it benefits primarily your 
State, Oregon, to a degree Idaho and a few other States. But 
over the period of time we have seen Bonneville go down, say, 
to California. It benefits California. It does not benefit 
Washington.
    A case in point is your municipal utility, Seattle Power 
and Light. It contracts with Bonneville because they can buy 
long term and then they wheel down to southern California and 
contract with the Nordstrom stores and displace investor-owned 
power in California. That causes a shortage in the Pacific 
Northwest and higher rates. Is that, in your opinion, 
appropriate procedure for Bonneville to follow? Or does charity 
begin at home?
    Governor Locke. Some of this is beyond my expertise, but 
let me just say that Bonneville has always been part of a 
region-wide system. Bonneville has sold electricity and 
produced electricity normally in the wintertime for California 
when the needs of electricity are very low for our customers. 
Excuse me. In the wintertime, we normally receive power from 
California because our nights are longer and it is a colder 
temperature. So, we normally receive power from California in 
the wintertime, and then when our days are warmer in the summer 
and the days are longer, we use that water from the reservoirs 
and the runoff from the snow to supply electricity to 
California as they experience heat waves and need air 
conditioning and so forth. We have always had this exchange.
    The Chairman. Are you buying power from California now?
    Governor Locke. Except this time, this winter we had to 
send California electricity and we had to really conserve as 
much as possible to free up that electricity to help California 
avoid the rolling blackouts.
    The Chairman. But as you help California, you do so at the 
expense of your own constituents.
    Governor Locke. Many of our utilities, private-owned 
utilities, investor-owned utilities, have sold power to 
California without any guarantee of repayment. Our utilities 
are owed tens of millions of dollars. Now, Bonneville has been 
able to ship electricity down to California, but actually has 
gotten that electricity back on an exchange basis. But because 
we are not receiving that electricity that we normally do in 
the wintertime, it has caused considerable angst amongst our 
citizens because it is otherwise power that we could be using 
for ourselves. But we realize that we are part of the grid and 
we have to help each other out.
    The Chairman. This is a parallel and it is a little closer 
to home, but in view of the limited time and the fact that we 
only get one round, I want to present you with a parallel that 
I think affects your State, Washington, of course, Oregon and 
California to a degree. The parallel is this. California has 
found itself dependent on outside energy by about 25 percent of 
what it consumes. As a consequence, because of that shortage, 
they have had to buy outside and prices have spiraled.
    The entire west coast is dependent on Alaskan oil. 
Washington. Oregon does not have any refineries. Certainly 
California. As our oil production declines, if it is allowed to 
decline, these three States particularly are going to get their 
oil anyway. They are going to get it from foreign sources in 
foreign tankers. It does not create the jobs or the U.S. flag 
vessels that carry Alaskan oil from my State to your State or 
the State of California.
    I just wonder if the residents of those areas really care 
where their oil comes from, whether it comes from the scorched 
earth of a Columbian rain forest where there is no 
environmental oversight. There just does not seem to be a 
conscious awareness, Governor, of whether or not they care 
where their oil comes from or what environmental sensitivity is 
associated with the development of that.
    As you know, you have been to Alaska. You know that Prudhoe 
Bay has supplied this Nation with about 20 percent of the total 
crude oil for the last 27 years. It is in decline. We have 
opportunities to open other areas. The question is can we do it 
safely.
    But there does not seem to be much awareness or 
consideration as to where the oil comes from, as long as it 
comes. My point in making this statement is if you do not get 
it from us, you are going to get it. And you are going to be 
dependent not on a neighboring State; you are going to be 
dependent on the whims of foreign governments and foreign parts 
of the world. So, I would encourage the ladies from Washington 
and California, as well as the Governor and others, to spend a 
little time and consideration of the merits of where you want 
it to come from.
    My time is up. Senator Bingaman.
    Senator Bingaman. Thank you very much. Let me ask 
Commissioner Hebert a couple of questions.
    As I understand it, the commission last fall set $150 per 
megawatt-hour as a so-called breakpoint or a benchmark for 
wholesale rates. I believe that was agreed to by the 
commission. Then last Friday, you came out with the decision 
that charges in excess of $273 per megawatt-hour would be 
unjust and unreasonable or would be required to be refunded.
    I guess I am having trouble figuring out how this 
calculation is made. Is it just every month or every few weeks? 
How do you make the decision as to what is unjust and 
unreasonable?
    Governor Locke made, I thought, a pretty good point where 
he said that your decision Friday essentially said that any 
costs at or below $273 per megawatt-hour during a stage 3 alert 
would be deemed just and reasonable. Is that what you decided 
on Friday?
    Mr. Hebert. Senator, what we decided, consistent with what 
I believe to be the December 15 order, was that the $150 
breakpoint was never intended to set a proxy price. It was in 
fact to set the bid at which anything above that, reporting 
information would be required to the FERC on a weekly basis. We 
envisioned an opportunity to use those reportings that were 
made to the FERC so if we did see problems in the market 
breaking down at some point.
    What we deemed necessary with the $273, which is a separate 
order, which we had the opportunity to look at those reporting 
requirements that were brought to us, is that the proxy of the 
$273 is what we believe to be an accurate reflection of a 
clearing price under competitive conditions. And that is how we 
came up with that amount.
    So, the $150 and the $273 are not inconsistent. If 
anything, they are very consistent with each other.
    Senator Bingaman. So, your idea of just and reasonable is 
that you look at essentially what the market will pay for the 
power, and that is the price. Is that how you determine what is 
just and reasonable? You say if there is a competitive market, 
the market will pay the $273 and so that is all we are going to 
allow people to charge.
    Mr. Hebert. What we said, Senator, is anything over the 
$273, that we would require them either to refund those amounts 
or explain to us why and how they can cost justify those 
amounts.
    Senator Bingaman. There is some cost determination in your 
calculation, though.
    Mr. Hebert. Absolutely. The $273 indicates what we believe 
the amount to be, what the staff believes the amount would have 
been had there been a competitive market. And we are going to 
look at anything above that.
    Senator Bingaman. It is not tied to the cost of providing 
the power. It is tied, instead, to what the market will pay for 
the power at that time and place.
    Mr. Hebert. What it accurately reflects is an inefficient, 
high-cost generating unit on the margin in California. It is 
tied to cost----
    Senator Bingaman. You think it is tied to the cost.
    Mr. Hebert. It is tied to the cost of the generation of 
that unit.
    Senator Bingaman. Why did the Commission limit the refunds 
to sales during stage 3 alerts? Last November, the Commission 
said prices were unjust and unreasonable. That was before there 
were any stage 3 alerts. So, why did you limit the refunds to 
the stage 3 alert?
    Mr. Hebert. The Commission wanted to make certain that, as 
we move down this road of trying to correct this market in 
California, that we distinguish between scarcity and high 
prices and a point at which supply would end and the lights 
would go out. In doing that, when the margins get at around 1.5 
percent at a stage 3, we deem that is the point that the FERC 
should inject itself into the process.
    I know it leads into a conversation, Senator Bingaman, 
about how far do we go here. How much farther are you willing 
to go in coming in and injecting yourself into price 
mitigation? We have to be very careful through this process 
because, quite frankly, the one thing that we must give to this 
industry is certainty.
    Senator Bingaman. Which industry is that?
    Mr. Hebert. The energy industry. We have got to give 
certainty because it is only fair to give certainty so that the 
consumers in the end can get not only the supply they deserve 
but the supply at a cost that they deserve to receive it at. If 
we get this out of balance and if we start injecting ourselves 
anytime prices might get high, we are going to cut off any 
conservation measures, we are going to cut off price 
indications which, quite frankly, would bring in needed 
infrastructure to regions like California.
    Senator Bingaman. Why did you limit your order to January? 
Do you intend to address other months?
    Mr. Hebert. We are addressing February by the end of the 
week.
    Senator Bingaman. But you are not going to address anything 
prior to January?
    Mr. Hebert. Well, we are. The problem that we are running 
into right now, as far as turning it around as quickly as we 
did January, when we set the December 15 order into motion, 
when we issued it, the $150 breakpoint which required the 
reporting requirements, which this will prove the necessity of 
that and the benefit of it, did not kick in until January 1. 
So, we did not automatically get the information that is 
required to make that type of decision. We are gathering that 
now. I have instructed the staff to move at all deliberate 
speed and we are going to turn this around quickly I assure 
you. So, we are looking at December as well and we are looking 
at the other months.
    Senator Bingaman. The other months being prior to December.
    Mr. Hebert. Forward. The other months are subject to 
rehearing at this point and we will rule on that later.
    Senator Bingaman. Thank you very much, Mr. Chairman.
    The Chairman. Senator Bingaman, we have got a vote on. We 
have two votes, as I understand it. I believe you have agreed 
to be kind enough to come back after the votes. I have an 
annual commitment that occurs today beginning at noon. So, I 
would encourage the Senators to probably recess and come back 
and catch both votes. I was under the impression that there was 
one vote, but now there are two.
    Senator Craig. Mr. Chairman, you have got a time crunch 
with these Governors.
    The Chairman. I understand. Let us go ahead and ask a 
question. Perhaps we can conclude with the Governors at least. 
I do not know how else to play it.
    Senator Feinstein. Mr. Chairman, I think it is 
extraordinarily important to hear from the utilities. That is 
where there is $13 billion of debt.
    The Chairman. We will ensure that. Let us finish with the 
Governors.
    Senator Craig.
    Senator Craig. Thank you, Mr. Chairman. I will be brief. I 
appreciate our circumstance and the circumstance of the 
Governors.
    Governors, as a neighboring State, do not think I am not 
sensitive to this problem. Oregon and Washington quite often 
get mentioned in this. Idaho is under the same circumstance, as 
is Montana, at this moment. We are all inside that market and 
we are at the headwaters of the problem, if you will. At the 
same time, it is a very similar situation.
    Obviously, you two are at conflict as to how we approach 
this short term as it relates to price caps. I have already 
entered into the record the statement of my Governor, Mr. 
Chairman, Governor Kempthorne as it relates to his agreeing 
with the Governor from Montana and other Governors of the West 
that price caps send a wrong signal.
    At the same time, Governor Locke, I do not dispute the 
immediacy that obviously the Senator from Oregon is attempting 
to respond to at this moment, as is the Senator from 
California. My guess is, absent price caps, that we have got to 
come together on a short-term approach toward this difficulty. 
My guess is that we have to send some pretty bold signals to 
the consumer out there to get them to do some things for us, 
including reduce their power usage substantially so we can keep 
our industries operating.
    It is unique that we have industries in your State whose 
employees often live in my State. Industries have put their 
folks on furlough and turned their pots off--and I am talking 
about the aluminum industry--and are selling the power and 
making more money than operating their industry. That is a 
tragedy in the making. Soon those contracts will no longer be 
in existence, and that will have to change dramatically.
    So, I hear you. I have no questions for you, but we must 
get this resolved short term, at least to get us through the 
summer. I flew out of Boise the other day and the tops of our 
mountains are brown. That means there is no snow on them. When 
there should be 10 and 12 feet of snow, there is no snow. 
Therefore, our runoff this spring at the headwaters of the 
Columbia is going to be very, very sparse. As a result, there 
will be little hydro or less hydro.
    Commissioner Hebert, let me thank you very much for the 
leadership that is emerging out of the FERC at this moment to 
deal head on with this within the confines of the Federal law 
that you have to deal with and the decision making that you are 
moving on. We appreciate that.
    I guess it is a request more than it is a question because 
we have got 4 minutes left in this vote and we have all got to 
get there to vote.
    We have got a crisis in the West. Let me suggest to you 
that you bring the Commission West. Sit down and listen to our 
people and listen to our utilities. Get out there on the ground 
with us and see where we are. I think it would be extremely 
valuable, and I would recommend you do it sooner than later. 
Within the confines of your authority, I think that would be 
extremely valuable. We understand the California situation: You 
can deal with 50 percent of it but you cannot deal with the 
other 50 percent. We understand that. But there is a great deal 
you can deal with, and I think it can be very helpful. You can 
send the right signals to the market, absent the kind of 
capping that could go on at the request of some that might send 
the wrong signals. So, would you consider that in behalf of us 
westerners? We think it would be extremely valuable to have you 
and your other commissioners on the ground.
    Mr. Hebert. I would do that, Senator Craig. What I will 
make certain and do as well, because as a part of our E-1 
docket that we issued yesterday in trying to come up with some 
short-term remedies, as well as some long- and medium-term 
remedies, one of the things that we discussed in there was 
having a conference of some type, a Commission conference, in 
the Northwest. I will make certain that it is understood that 
it would be your request that we do so quicker rather than 
later, and at the same time, I am assuming that that would be 
an invitation to have it in Idaho.
    Senator Craig. Well, it certainly is. We would be more than 
proud to facilitate that. I am not quite sure, but we could 
probably open up one of our rodeo stadiums. The crowds will be 
rather large.
    [Laughter.]
    The Chairman. Let me call on Senator Feinstein, followed by 
Senator Cantwell. We are basically out of time. I apologize, 
ladies, and I apologize to the two Governors and the 
Commissioner, but that is just the way it is. So, please 
proceed.
    When you leave, the hearing will be recessed until Senator 
Bingaman comes back and we will start on the last panel.
    Senator Feinstein. Excellent. Thank you very much.
    Mr. Hebert, I have real differences with your commission. I 
do not think the commission's responsibility is only to provide 
certainty for the industry. I think it is also to provide 
certainty to the people that they can afford electricity.
    I would like to get your explanation of this chart. This 
chart shows that in the last 2 years in California demand has 
remained essentially the same. Here there is a 4 percent 
differential between lines. Also during this period, natural 
gas prices were low. Look over the 2-year period. This is 
November 1999 into the year 2000. Look at the price spike. What 
is your explanation for that price spike?
    Mr. Hebert. Well, I think there can be a lot of different 
reasons for it. If you understand--and I know we do--that 
certainly supply was tight during that time period, demand was 
high----
    Senator Feinstein. Demand was the same over the 2-year 
period.
    Mr. Hebert. Show me your demand curve. I am sorry.
    Senator Feinstein. This is the demand curve between the 2 
years. Right in here there is a 4 percent differential. That is 
all.
    Mr. Hebert. Could I read the bottom of the chart, please? I 
am sorry.
    Senator Feinstein. What it says is: ``Markets do not 
produce competitive prices. Under similar medium load 
conditions, 2000 prices have increased 700 percent over 1999 
levels.''
    Mr. Hebert. I think it is clear that the market was working 
in 1999. I think that is probably the first assumption we could 
make. I guess the question that we come up with is what is 
broken about the market. Why is it not at competitive levels? 
Or is it, in fact, at competitive levels for 2000?
    Senator Feinstein. This has nothing to do with putting 
price on consumers. This is just straight demand and price.
    Mr. Hebert. I am sorry. I thought he was saying something.
    Senator Feinstein. No. Well, clearly there is no fast 
explanation. This is a 700 percent increase in electricity 
wholesale prices during that period of time. That is what we 
are trying to get FERC to address, to not have this happen this 
summer because I believe it will happen absent some control. I 
can relate this directly. I do not begrudge anybody making a 
profit, but the profit is extraordinary.
    Mr. Hebert. Let me say this. I will be glad to give you a 
formal answer, as I have done on some other measures that you 
have requested, on this chart.
    Let me just say I do want to make it clear obviously to you 
and for the record itself, I have never felt like, nor do I 
currently feel, that we should not be very clear in what we are 
trying to do for consumers as well. Actually my comment a 
moment ago said that. Give certainty to the industry and 
consumers as well when it comes to not only getting adequate 
supply and having it delivered, but having it delivered at a 
reasonable price.
    Now, we are moving forward with measures right now--I know 
you have seen the orders. I have forwarded them to your 
office--where the staff is recommending market mitigation. It 
will be ex ante mitigation, so we will do it immediately as 
opposed to coming back and dealing with refunds. It would 
certainly give the type of certainty that you are looking for I 
believe.
    I do not think there is any question. I think you and I 
agree we had a great conversation in your office. The market 
has problems certainly during periods. We have seen some price 
volatility. We are going to figure out a way to get through 
that. I think we are doing that right now.
    I know that you know the commitment of the Commission and 
that the Commission is working very hard to respond to these 
problems. We have almost issued something on a weekly basis in 
trying to respond and correct this. I will give you a further 
comment on it, but I want you to know we are resolving it.
    Senator Cantwell. I want to thank the panel as well, and I 
think I will submit my question in writing, Mr. Hebert, about 
your decision as it relates to last Friday on power producers, 
on refunds, and specifically consideration of Washington State 
and the Northwest.
    Unfortunately, we have to go and vote and I want to make 
sure our Governor has a chance to talk to some of the Northwest 
folks who are here before adjourning. We will be back and would 
love to, if you are still available, either individually 
respond to some of these questions. But I do want to thank the 
Governors for being here as well.
    Notwithstanding the previous comment about the red-eye, I 
want to thank Governor Locke. Given that our State's earthquake 
has caused significant damage to the State capital, your office 
is not without a home but is not in the State capital right now 
and we have been greatly displaced. So, your time and focus on 
this issue, as well as that, is much appreciated. Thank you.
    [Recess.]
    Senator Bingaman [presiding]. Could we find the witnesses 
and we will go ahead with this next final panel.
    [Pause.]
    Senator Bingaman. Why do we not go ahead. What we would 
like to do, if we could, on this panel is to have everybody 
summarize their statement, make the points that they believe 
are most essential, and we will try to limit every witness to 
about 5 minutes here in summarizing their statement. We will 
have this light to indicate when your 5 minutes are up. Then 
Senator Feinstein and I and any other Senators who have shown 
up will have a few questions.
    So, why do we not start with you, John Bryson with Edison? 
Please go right ahead. Welcome. Welcome to all of you. We are 
glad you are here. Sorry it has taken so long to get to this 
panel.

   STATEMENT OF JOHN E. BRYSON, CHAIRMAN, PRESIDENT AND CEO, 
               EDISON INTERNATIONAL, ROSEMEAD, CA

    Mr. Bryson. Senator Bingaman, Senator Feinstein, thank you 
very much for this opportunity and thanks also to the other 
members of the panel.
    I actually will not summarize my statement at all because 
there is something that I think is more striking, more 
important, and more promising. I did not know that Senator 
Feinstein and Senator Smith this morning would come together 
with a joint conceptual proposal for how to deal with this 
problem. This has been a very, very difficult 10 months in 
California. There have not been many heartening moments. The 
proposal, Senator Feinstein, that you and Senator Smith propose 
to jointly co-author is one of the few heartening moments we 
have had.
    It seems to me the kind of practical, problem-solving 
leadership approach that we need at a point of urgent crisis. 
One of the big challenges that we have faced in seeking 
practically at the point, frankly, where the rubber hits the 
road, at the point of buying power and serving it to 
consumers--one of the few practical approaches to bring 
together the core problem--and the core problem has been a 
large and vastly growing gap between retail prices under the 
jurisdiction of the California regulators and wholesale prices 
under the jurisdiction of the Federal regulators.
    We at Southern California Edison and others in California 
have been in a position for a long time where in retail rates 
we receive only 6 cents to 7 cents a kilowatt hour. I think 
PG&E actually slightly less. But at the wholesale level, the 
prices being paid are steadily rising and, in the last month, 
have been about 35 cents a kilowatt hour. So, the multiple of 
the wholesale rate to the retail rate is something like 10 
times, and it is likely to be yet higher this summer.
    In the wake of the FERC decision just this last week, the 
so-called refund decision that has been discussed this morning, 
the forward price at Palo Verde, one of the gate points to 
California, was in excess of 50 cents a kilowatt hour, 53 cents 
to be specific.
    The FERC refund decision, because it was so limited and so 
narrow and so unexpected, has been reacted to in the market as 
a kind of further pass on disciplines in the market. It was 
limited to only stage 3. Senator Bingaman, you addressed that 
point. It did not bear at all on the previously set $150 per 
megawatt hour cap. It appeared not to discipline the market 
but, rather, to further open the door in an already broken 
market.
    So, the notion that a bipartisan approach, one that 
addresses both Federal regulation and State regulation, one 
that would establish a kind of halt on the broken market in a 
period of what Senator Feinstein described as stability and 
reliability, to bring together all the pieces towards a 
practical solution so that we can get through this summer and 
beyond at lower cost than likely otherwise will prevail, is 
extremely important. I hope the committee and ultimately the 
Senate and other public leaders will see the practical elements 
of that approach and move towards it.
    I want to underscore just how intense the situation is in 
closing. We are in a situation now in which Southern California 
Edison and Pacific Gas & Electric have borrowed to the limit of 
their borrowing ability. We have no further credit worthiness. 
We are, in a practical sense, substantially insolvent unless a 
practical solution is found.
    Most of the focus now is on providing adequate supply of 
generation power. That is an appropriate focus. There is 
nothing about $500 per megawatt prices that will bring more 
power on this summer. Nothing whatsoever.
    It, I believe, is a mistake to reach the conclusion that 
somehow prices at this level are essential to bring new supply 
on. They simply are not. Competitive markets are a desirable 
approach to bringing electricity supply to customers, but those 
markets have to be competitive and they have to work. And these 
are broken markets; they are not working.
    So, we need a kind of temporary time out and that is what 
has been proposed by many this morning. We need the regulators 
to act on that.
    Because of the lack of credit worthiness now of Southern 
California Edison and Pacific Gas & Electric, we can no longer 
procure power for customers. In fact, for some period of time, 
there has been a kind of risk premium on the part of generators 
that had to sell into California, and the State had to take up 
procurement. That is not a good step. The State has no 
experience in it. The Wall Street Journal now reports that the 
State itself at these high prices has gone through 64 percent 
of California's very considerable budget surplus just to buy 
power on an interim basis.
    So, we cannot allow to continue this gap between the State 
on the one hand, where there is a preference that the Federal 
regulators act, and the Federal regulators who prefer that the 
State regulators act. There needs to be a coming together.
    So, I confine my remarks entirely to what seems to me the 
promising and practical step that is being proposed by Senator 
Feinstein and Senator Smith and that seems, judging by the 
panel's reaction, to be endorsed by others on the panel. I 
think it is extremely important.
    Thank you very much.
    [The prepared statement of Mr. Bryson follows:]

  PREPARED STATEMENT OF JOHN E. BRYSON, CHAIRMAN, PRESIDENT, AND CEO, 
                   EDISON INTERNATIONAL, ROSEMEAD, CA

    Good morning Mr. Chairman and Senators. I am John E. Bryson, 
Chairman, President, and CEO of Edison International, parent company of 
Southern California Edison. I appreciate the opportunity to testify 
before you on federal legislation to address the crisis in electricity 
supply and prices now affecting California and the Western United 
States. I use the word ``crisis'' deliberately. There is no other word 
for California's experience with electricity markets since last May. 
And there is no other word for what is facing California and the entire 
West in the months ahead.
    On January 31, 2001, my colleague, Steve Frank, President and CEO 
of Southern California Edison, testified before you on the very serious 
problems threatening Southern California Edison, California and the 
West. A month and a half later, the same threats remain, becoming more 
immediate with every passing day. I will not repeat Mr. Frank's 
testimony, but some review is necessary.
    As of the end of January of this year, after nine months of buying 
wholesale electricity at unjust and unreasonable prices and reselling 
at artificially low prices, Southern California Edison incurred $5.5 
billion in undercollections. We financed the shortfall by borrowing in 
unprecedented amounts until we exhausted our credit. To preserve our 
limited cash reserves we suspended payment for power and some of our 
outstanding debts. Our creditors have been extraordinarily patient, 
largely because everyone realizes that there are no real winners in a 
bankruptcy and because we and the state are taking steps to address 
this crisis. Southern California Edison has implemented major cost 
reduction measures including reduced capital expenditures and layoffs. 
And we eliminated common dividend payments for the first time in our 
100-year history. Now, we are essentially out of the power procurement 
business, although it remains somewhat uncertain whether we will be 
expected to pay for power that the state is procuring through the 
Department of Water Resources.
    Since January, the Department of Water Resources has been the major 
buyer of electricity in the state. It is spending $45 million or more 
per day to keep the lights on. To date, the state has spent 
approximately $3 billion in power procurement costs, quickly going 
through its reserves. Although the state is attempting to reduce its 
reliance on the spot market by entering into long-term contracts with 
generators, this has been a difficult task because prices for the near-
term remain extraordinarily high throughout the West.
    The Governor and the state legislature have also been working to 
return Southern California Edison and Pacific Gas & Electric to some 
semblance of fiscal health. A key feature of the Governor's plan is the 
purchase of the utilities' transmission systems by the state. I 
understand that some in Washington have reservations about this. 
Certainly, we would have preferred not to do this. We would have 
preferred to obtain gradual retail rate increases and meaningful 
federal action to reform a broken wholesale electricity market. Our 
countless efforts to this end--in the courts, at FERC and elsewhere--
have met with no success. Indeed, many of the people who have been most 
critical of the state's purchase of our transmission have opposed an 
affirmative federal role in addressing this crisis and have told 
California to solve this problem itself. I ask them to put themselves 
in our position. What choice do we have? What better alternative do you 
offer?
    We continue to negotiate the details with the state. However, 
nothing we, or the state, can do will adequately address the broken 
wholesale market. Make no mistake, this broken market continues to 
guarantee unjust and unreasonable prices that are a principal 
impediment to a realistic solution to this crisis.
    The Federal Energy Regulatory Commission (FERC) is obligated under 
the Federal Power Act to ensure just and reasonable rates. FERC found 
wholesale rates in California to be unjust and unreasonable on November 
1, 2000. FERC reiterated this finding in its December 15, 2000 order 
when it imposed a ``soft cap'' of $150. Since then, and possibly as a 
result of FERC's order, wholesale prices have climbed and have stayed 
at levels more than twice the soft price cap. As illustrated in the 
chart attached to my testimony, prices before the FERC finding averaged 
up to as much as $152.65/MWh in August 2000. After the FERC finding on 
November 1, prices continued to rise to $219.28/MWh in December and 
reached $260.23 in January 2001 after the FERC order imposed the ``soft 
cap''.
    After months of complaints and literally thousands of pages of 
pleadings, reports and evidence establishing that California's 
wholesale electricity market is broken, FERC at long last issued an 
order on March 9 that might require 13 California power sellers to 
refund $69 million for sales in January 2001. Even if FERC actually 
orders such refunds, this would be less than one and one-half days' 
worth of state spending on power. In contrast, the Independent System 
Operator (ISO) petitioned FERC for refunds totaling $315 million in 
January.
    FERC ruled that prices up to and including $273 per megawatt hour 
were acceptable for January, and apparently that any prices charged at 
times other than periods of Stage 3 emergencies are acceptable also. 
There is good reason to question the economic assumptions underlying 
FERC's order. I will note one of those concerns here.
    $273 per MWh is nearly ten times higher than the average wholesale 
price in January 2000 of $30 per MWh. A more legitimate definition of 
``just and reasonable'' rates would have resulted in refunds for 
January five times higher. And what about preceding months? FERC itself 
found wholesale prices in California to be unjust and unreasonable long 
before any Stage 3 emergencies were ever declared.
    Of additional concern is the FERC staff Recommendation on 
Prospective Market Monitoring and Mitigation, also issued on March 9 of 
this year. Under this proposal, the soft caps will end on May 1, 2001, 
and a limit on real time market prices equal to the highest-cost 
generator will be put in place only during emergency conditions such as 
Stage 3 alerts. At other times, no market power mitigation will exist 
whatsoever for California's dysfunctional market. If adopted, this 
proposal would leave California at a much greater risk of market power 
exploitation than during 2000.
    FERC's ``too little, too late'' attempt to address this crisis 
makes it all the more important to adopt Senator Feinstein's bill, S. 
287. Only temporary cost-plus wholesale caps will adequately address 
the problems in our broken market. Without federal action compelling it 
to do so, it is clear that FERC will not act to ensure just and 
reasonable wholesale rates in California or the rest of the West.
    Those who argue against such intervention should be aware that 
FERC, itself, has now imposed a cost cap (at least for January), but 
one that appears to us to be too high and too selectively applied to be 
useful. Moreover, it is established after-the-fact. This means that 
those selling into California do not know at the time they sell what 
price will be deemed acceptable by FERC. I would suggest that 
establishing, for some limited period of time, a system of cost-plus 
regulation for all WSCC generators, as Senator Feinstein's bill would 
do, is far preferable to FERC's after-the-fact caps. I emphasize here 
that this is a remedy for the West.
    If wholesale prices are not comprehensively, though temporarily, 
regulated it will not matter what the state does. The extraordinary 
transfer of wealth from California and the West to power generators 
will continue to benefit only a handful of companies at the expense of 
the economies of the entire region.
    Were there mistakes in how California designed and implemented its 
restructuring? Absolutely. But, as I think is now apparent to this 
Committee, this is not only ``a California problem,'' and California 
alone cannot resolve it. Other states in the West are already feeling 
the effects of unprecedented growth and a tight supply of electricity. 
Many states have raised rates and imposed strict conservation measures. 
Others, including California, have acted to expedite siting and 
construction of new generation. While these actions will help address 
the long-term problems in a manner that may ultimately produce a 
workably competitive wholesale electricity market in the West, we will 
never get there if the short-term crisis is not addressed.
    For this reason, we urge prompt passage of S. 287. It provides for 
temporary imposition of cost-plus rates similar to those with which 
FERC has ample experience. It offers generators a healthy return on 
their investment, especially when you consider that some generators in 
the California market have already recovered all of their initial 
investment in the plants they bought.
    We understand Senator Gordon Smith's concerns in wanting California 
to raise retail rates in line with increasing wholesale electricity 
prices. We, after all, have borne directly the brunt of California's 
failure to do this, and have done everything we know, from litigation 
to negotiation, to obtain an increase in the costs we may recover from 
retail consumers. We agree that an increase in retail rates is long 
overdue, but such action must be complemented by federal action on 
cost-plus wholesale rates to bring this market under control. Senator 
Smith's amendment acknowledges the need for action at both the state 
and federal levels, and we appreciate that acknowledgement.
    Some argue that cost-plus profit caps will discourage additional 
generation, but: 1) it should not take exorbitant profits to encourage 
entry into the California market; 2) much generation is being planned 
elsewhere in the country where electricity prices are far lower; and 
finally, 3) if a generator's costs are covered and they are assured of 
earning a reasonable profit, this will be an attractive proposition.
    Some may also argue that this regulation will be too difficult to 
implement and too burdensome. Let's all remember that before FERC 
authorized market-based rates for this generation, all except the 
newest of this generation was subject to cost-of service regulation. It 
has been done. It can be done again. There is nothing novel or unduly 
complicated about this.
    Let there be no misunderstanding about the absolute necessity of 
federal action here. Average prices per KWh have increased from 5 or 6 
cents to as high as $1.80. If consumers were exposed to all of these 
price increases, it would be analogous to paying $20 for a gallon of 
milk or a gallon of gasoline. If this were any other product, continued 
federal inaction would be intolerable. It should not be different just 
because we are talking about electricity. If anything, the case is more 
compelling because electricity is not a luxury; it is an essential 
service. And no one can afford the luxury of waiting any longer for 
federal action.
    Finally, let there be no doubt that continued inaction will only 
serve to further erode trust in our governmental institutions' ability 
to respond adequately to economic crises. Throughout this crisis and 
our efforts to work our way out of it, we have heard plenty on the 
principles of a free market. But a workable free market in California 
does not exist. California may have been the first to restructure, 
admittedly with disastrous results, but it is also clear that state and 
federal agencies have shown themselves incapable of responding 
efficiently to a very dynamic situation. The California Public 
Utilities Commission failed to provide timely authority for power 
contracting and failed to affirm our right under federal law to recover 
our wholesale procurement costs in retail rates. The FERC has been 
similarly slow to act to ensure just and reasonable wholesale rates or 
to deal adequately with this crisis. For example, we are still being 
fined by FERC for not scheduling load in a day-ahead market that has 
been non-existent for two months.
    California's mistakes aside, we can understand other states 
stepping back from deregulation until they develop more generation and 
receive stronger signals that our governmental institutions are up to 
the task and can be trusted to respond efficiently to avoid results 
diametrically opposed to the consumer benefits sought by deregulation.
    Thank you.

    Senator Bingaman. Thank you very much.
    Steve Baum, who is chairman, CEO and president of Sempra. 
Glad to have you here.

  STATEMENT OF STEPHEN L. BAUM, CHAIRMAN, PRESIDENT AND CEO, 
                  SEMPRA ENERGY, SAN DIEGO, CA

    Mr. Baum. Thank you very much for the opportunity to 
address this panel, and thank you, Senator Feinstein, and 
thanks to Senator Smith for their leadership in putting forth 
S. 287.
    I would like to echo what John Bryson said, and I do not 
want to repeat it. But I would like to bring up a couple of 
other items and to emphasize some items.
    I do believe we face, at the root of the problem in the 
West, a serious supply and demand problem. There has not been 
an adequate number of new generating plants built nor have 
there been an adequate number of new transmission facilities 
sited to meet the rising demand not only in California, but 
also in the surrounding States. I do not think it is lost on 
anyone that California has, in the past, depended upon 
neighboring States to supply its energy, its excess needs, and 
those States themselves have now grown dramatically, at rates 
exceeding those of California. So, we really do have a supply 
and demand problem that has to be addressed.
    One of the things that is a characteristic of the broken 
market in California and in the West that I would like to 
emphasize--and it is something that John Bryson and others have 
mentioned--and that is the lack of demand-side response that 
exists in California because of the retail price caps. Any 
attempt to cap wholesale prices needs absolutely to be 
accompanied by an easing of retail price caps. I believe it 
would be a serious error to continue with those caps because 
there would not be the response necessary to the price signals 
that we need to have to have conservation. California does make 
a large, kind of sucking noise in the West and brings in energy 
from surrounding States because it has not curbed its own 
demand. And I believe that is absolutely a necessary 
concomitant to wholesale price caps.
    We endorse temporary, targeted, cost-based caps for old 
generation in the West for a medium period, as contained in S. 
287, in order to carry us through to a time when the coming 
construction will bring new generation. I completely agree with 
John Bryson that there is adequate price stimulation currently 
and with these proposed caps to have that generation come on 
line, particularly since new generation would not be subject to 
those caps.
    Affiliates of my company are building in excess of 2,500 
megawatts of new power both in Arizona and northern New Mexico 
and in California. I can tell you directly that we will 
continue to do that to meet the needs of California regardless 
of price caps being put in place.
    I would also like to address another issue and that is the 
interplay of natural gas prices with generation in the West. I 
know that witnesses that have come before this panel in 
previous hearings have suggested that the price of power in the 
West is largely driven by high natural gas prices. Well, I 
think there is a relationship between high fuel costs and high 
generation costs. I do not believe there is a correlation 
between the spikes we see in electric costs and rising natural 
gas prices. One can see that through the comparison of natural 
gas prices last summer to natural gas prices today and the 
price of power last summer, as well shown in Senator 
Feinstein's chart, and the price of power today. There were 
price spikes that went to $2,000 a megawatt-hour last summer 
when natural gas prices were still quite low.
    That is not to say that there is not an issue with natural 
gas prices and, in particular, an issue with the transportation 
costs to California for natural gas. When prices spiked up into 
the $50 range for delivered gas at the California border, the 
basin prices were still under $10. So, that transportation 
differential is caused by a squeeze in that market and it is an 
area that I think FERC ought to address.
    We think two things ought to happen. Our company has filed 
a complaint at the FERC asking the FERC to look into 
transportation costs. We believe that is an area that ought to 
be investigated. But also we believe there should be an order 
unbundling the cost to the commodity--that is, the natural 
gas--from the cost of transportation so that customers and the 
market can distinguish those costs.
    But in summary, I would like to say that we fully endorse 
temporary, targeted, cost-based price caps for old generation 
in the West. We believe that will cause California to be able 
to remedy its problems. We are encouraged by the conservation 
efforts that Governor Davis has recently come out with. For 
example, it is a bid to consumers who are willing to reduce 
their demand by up to 20 percent to get paid for that. That I 
think will help. We would encourage him also to raise 
residential rates.
    [The prepared statement of Mr. Baum follows:]

   PREPARED STATEMENT OF STEPHEN L. BAUM, CHAIRMAN, PRESIDENT & CEO, 
                      SEMPRA ENERGY, SAN DIEGO, CA

    Good morning. I am Steve Baum, Chairman, President & Chief 
Executive Officer of Sempra Energy. Sempra Energy is a Fortune 500 
energy services holding company whose subsidiaries provide electricity 
and natural gas services. Sempra Energy's two California regulated 
subsidiaries are San Diego Gas & Electric (SDG&E) and Southern 
California Gas Company (SoCalGas). I want to thank you for the 
opportunity to provide input on S. 287, and to discuss events in the 
California electricity marketplace.
    Let me begin by commending you, Mr. Chairman, and Senator 
Feinstein, for working toward helping to solve the ongoing energy 
crisis. Sempra Energy recently testified before this Committee 
regarding actions that we believe the federal government must take to 
stabilize the chaotic energy marketplace, actions that only the federal 
government can take because it pre-empts state action in this wholesale 
market. We are pleased that Senator Feinstein's bill, S. 287, seeks to 
implement ``Cost of Service Plus'' electric energy rates, an action 
that we have advocated as a necessary, near term step in solving the 
energy crisis.
    First, I would like to speak to a question I have heard regarding 
whether the order issued by the Federal Energy Regulatory Commission 
(FERC) last Friday, March 9, addresses the problems in the western 
market. Let me be very clear about our assessment of that order. In 
that order, the FERC drastically limited potential refunds for sales 
into the electricity market during January. After numerous FERC 
pronouncements on the California electricity crisis, the Commission has 
crafted a strange, new, one-price-fits-all cut off point for reviews of 
transactions that does not appear to be based upon any of its preceding 
work. While after many months of inaction we are heartened by FERC's 
attention to this crisis, the Commission's action is far too little and 
far too late. As noted in the dissent, ``this order, limiting the 
potential for refunds to transactions that occurred during State 3 
alert hours and bids in excess of a $273 proxy market clearing price, 
is arbitrary, capricious and an abuse of discretion.'' This order will 
do little to discipline the wholesale electricity market. If anything, 
this order solidifies my support for S. 287.

                                 S. 287

    S. 287 takes a critical step toward instituting a much needed 
cooling-off period for California's chaotic energy market by imposing 
``Cost of Service Plus'' rates. Under ``Cost of Service Plus'' rates, 
each existing generator would provide to FERC the unit cost per kwh to 
operate its plants. FERC would then include a profit margin to the 
price per kwh that is high enough to provide generators with an 
incentive to continue producing energy but low enough to meet 
consumers' concerns regarding energy prices. It is important to note 
that nothing in this proposal should be viewed as a disincentive to new 
construction. I strongly believe that new generation facilities should 
not be subject to such a cap. To stimulate additional investment in 
needed generation facilities in the West, new construction should be 
rewarded by being permitted to charge market rates.
    Other market participants involved in the energy crisis have 
testified before this Committee and have argued that the cause of high 
electric commodity prices is the high cost of natural gas and the high 
cost of environmental compliance. They have pointed out that the costs 
of operating the different types of generation facilities vary widely, 
and that a flat cap would be a disincentive to supply. These arguments 
are all addressed by the proposal in S. 287, as the actual costs of 
operating each plant would be accounted for in the price that could be 
charged. By avoiding the implementation of a ``one size fits all'' 
price cap, ``Cost of Service Plus'' rates would protect both consumers, 
by providing price stability, and generators, by assuring that plant 
costs, including a profit, will be fully covered.
    I endorse this concept with the understanding that price caps are 
clearly not a long-term solution to the energy crisis. However, when a 
market is as broken as the western region is today, failure to protect 
consumers from runaway prices while the market is being fixed is simply 
not an acceptable alternative. When astronomically high prices were 
passed directly through to consumers in San Diego over the summer of 
2000, the economic shock was severe. In fact, in California we 
experienced a reality that some economists are ignoring in this 
situation: there is also an issue of ``political elasticity;'' which is 
that consumers will not long tolerate prices that are so completely 
disconnected from actual costs. The magnitude of the crisis requires an 
immediate tempering of the market to reach a solution that is fair and 
reasonable to both electric producers and consumers. ``Cost of Service 
Plus'' rates offer that solution.
    At the same time, I would be remiss if I did not mention efforts 
undertaken by me and others at Sempra Energy to argue strenuously 
before Governor Davis, the California Public Utilities Commission, and 
the Legislature for a demand side response to help solve this crisis. I 
believe that an orderly and predictable relaxation of the retail price 
caps will provide appropriate incentives for consumers to reduce their 
energy consumption. We expect that a demand response to incrementally 
increased retail rates will enable California to avoid blackouts during 
the upcoming summer months. We would also expect that reduced demand 
would place downward pressure on the wholesale price of electricity. 
Demand can be also reduced if rate designs are developed to charge more 
for increased use of electricity and if customers had energy meters 
that allowed them to see on a real time basis the impact of higher 
usage on the price they will pay for electricity.
    Because Senator Feinstein's proposal addresses a dysfunctional 
market, I strongly agree with the concept in S. 287 that the caps must 
only be a temporary provision. Some opponents have argued that there is 
no such thing as a temporary cap. I disagree. Building into the 
authorization a sunset provision, whether a date certain or, as in this 
bill, a change in condition in the marketplace, fully addresses this 
argument.
    Another argument used against caps is the pragmatic one: that they 
simply don't work. Opponents have pointed to the caps in California to 
show that caps failed to control prices. Indeed, caps triggered actions 
to circumvent them. The major way to circumvent them was to move into 
the broader western regional market instead of the one-state market of 
California. Again, S. 287 addresses that problem by imposing a cap that 
is region wide, protecting all of the consumers in the western states.

                     HIGH GAS PRICES IN CALIFORNIA

    As I have already stated, the approach to price caps proposed in 
this bill addresses the impact of natural gas costs on the costs of 
generation. Nonetheless I would like to take a moment to address that 
particular question.
    First, I do not concede the statement that some witnesses have made 
before this Committee that natural gas prices of themselves explain the 
explosion in electricity prices in California. That is simply an 
oversimplification of natural gas supply and demand, which I will 
discuss later in my testimony. Rather, while there is limited cost-of-
service justification for the astronomically high price of electric 
energy that has been seen over the past nine months in California, the 
interrelationship between the price of natural gas and the magnitude of 
change in electric commodity prices is terribly out of alignment. For 
example, in the summer of 2000, the price of natural gas was $3.50 per 
mcf, yet the electric commodity price was as high as $2,000 per MWh. To 
me, these numbers provide little justification for the skyrocketing 
electric prices that have been charged in the wholesale market, 
contrary to what has been argued.
    A good example of this argument can be found in the letter sent to 
this Committee by Mr. Keith Bailey, CEO of the Williams Company on 
February 14, 2001. In his letter, Mr. Bailey concluded that the cost of 
electrical generation in California is high, largely due to the high 
cost of natural gas. We have reviewed that letter and rebutted some of 
its conclusions in a letter that we have sent to the Committee under 
separate cover.
    In short, I have heard no explanation that adequately or reasonably 
correlates high electric prices with the increased cost of natural gas. 
While it is fair to suggest that there has been upward pressure on 
electric rates as a result of increased natural gas prices (resulting 
from year round rather than cyclical demand and storage shortages), I 
have seen no evidence suggesting that high natural gas prices justify 
the skyrocketing electricity prices we have seen recently.
    However, we do believe that the recent escalation in natural gas 
prices at the California border has made it exceptionally difficult to 
negotiate with sellers of electricity for reasonably priced power, has 
led to extremely adverse impacts on the California economy, and has 
rendered largely meaningless FERC's ``soft cap'' on wholesale electric 
prices. On February 6, 2000, FERC issued Order No. 637 on an 
experimental basis. In that order the Commission waived its regulations 
that had capped capacity release transaction rates at the interstate 
pipeline's maximum firm transportation rate. The result of this failed 
experiment has been a substantial increase in the price of natural gas 
at the border of California--not because of an increase in the cost of 
the commodity, but because of vast increases in the imputed value of 
using the pipe.
    While well intentioned, eliminating the cap did not achieve the 
objective of a more transparent and liquid market, and in fact had the 
unintended consequence of increasing the price of delivered gas at the 
California border to levels far beyond what the market had experienced 
to that point. For example, at one point last December the average 
daily cost of gas delivered to California shot up to $59.42/mmBtu (with 
some purchases at the $70.00 level), while the cost of the gas itself 
was around $10.00/mmBtu. Thus the imputed value of delivery to the 
California border, which under regulation was $0.67/mmBtu, rose to 
S49.00/mmBtu.
    If Congress were to address this problem in conjunction with the 
electricity ``Cost of Service Plus'' price cap under consideration in 
S. 287, the combined impact could help lower the ultimate price of 
electricity throughout the western region. This is the case because the 
cost-of-service cap would make wholesale electricity sales reflective 
of the actual cost-of-service, and reinstatement of the cap on pipeline 
capacity transactions would help limit the input costs of generators 
and eliminate demands for pricing premiums based on stated concerns 
over the delivered price of natural gas.
    Furthermore, the price of gas in California has compounded the 
price impact of electricity for residential consumers and businesses, 
some of whom are seeing price spikes for both commodities at the same 
time. If the Congress were to require FERC to terminate the ill-fated 
experiment in waiving the cap on the secondary market, we would 
anticipate a substantial reduction in the average price and volatility 
of delivered natural gas prices at the California border.
    Congress should also require FERC to develop regulations that 
require interstate shippers to disclose separately the cost of the gas 
and the cost of the transportation of the natural gas when selling 
bundled gas and transportation services. Such a provision will clearly 
identify to natural gas market participants the key components of 
pricing of natural gas and, by leading to greater price transparency, 
would provide FERC the tools it needs to enforce the cap. By clearly 
delineating pricing information, market participants can make better 
decisions about their gas purchases, and regulators will be better 
equipped to enforce their regulations and understand the economic 
drivers in the current natural gas marketplace.
    I would reiterate that the provision for a ``Cost of Service Plus'' 
electricity price cap in S. 287 already addresses any impact of natural 
gas prices on electric generation costs, by factoring them into the 
allowable charges for each facility. But these prices themselves 
exhibit problems that must be addressed. As a result, it is imperative 
that FERC be required to re-impose caps on interstate natural gas 
transportation services.

                               CONCLUSION

    Nationally, we are confronted with a need to develop our overall 
energy infrastructure. We have, in part, turned to the market to guide 
this transition. What we are confronting now are problems that arise as 
we make the transition, and in particular, we are confronting the 
question of how we assure some economic stability while still allowing 
the market signals that will guide our investment.
    S. 287 offers both near and long-term solutions to alleviating the 
current energy crisis. The bill takes into account the need to create a 
temporary ``time out'' to bring market participants to the table today 
so that a lasting long-term solution can be reached. We strongly urge 
the Committee to quickly pass S. 287, and send the bill to the Senate 
floor as soon as possible. Federal legislative action is urgently 
needed to fix the wholesale market, and S. 287 takes the necessary 
steps to achieve this objective.
    There is clear and compelling evidence that the electric wholesale 
market is not working in the western region, and that without ``Cost of 
Service Plus'' rates, it will continue to flounder and spread economic 
harm. The states in the region are moving aggressively to address the 
disastrous impacts of the existing market structure, and to expand the 
supply. Senator Feinstein's bill, S. 287, offers a much needed 
``cooling off'' period to protect consumers, and our economy, as we 
resolve this critical situation.
    Thank you again for the opportunity to testify today. I appreciate 
your interest in this important issue, and am available to answer 
questions,

    Senator Bingaman. Thank you very much.
    Next would be Bruce Worthington, who is senior VP and 
general counsel with PG&E Corporation.

   STATEMENT OF BRUCE WORTHINGTON, SENIOR VICE PRESIDENT AND 
      GENERAL COUNSEL, PG&E CORPORATION, SAN FRANCISCO, CA

    Mr. Worthington. Thank you very much, Senator Bingaman and 
Senator Feinstein, as well. I appreciate the opportunity to be 
here to talk about this. I am a substitute for Bob Glynn, and 
his comments I would like to have submitted to the record of 
this proceeding.
    Senator Bingaman. They will be included in the record.
    Mr. Worthington. Thank you.
    Senator Feinstein, I want to really acknowledge your 
concern and help and involvement and fortitude for persisting 
in this crisis in California and in the West.
    I echo the comments of the other two California-based 
utilities in the urgency in which this needs to be addressed. 
We have talked about long-term and medium-term solutions for 
this, but for the upcoming summer, the proposal embedded in S. 
287, I think, is absolutely necessary. We do not normally think 
that the sort of market-distorting caps or cost-based rates are 
a good thing, but in California for the summer, I am not aware 
of any other measure that is going to do it. We are going to do 
all we can to reduce demand. There are short-term peaking 
supplies that I know the Governor in permitting is trying to 
get on line faster, but that is not going to bridge the gap. If 
the Secretary was right this morning that there is a 5,000 
megawatt gap, I do not understand how that is going to 
otherwise be met.
    So, in order to avoid that chart that you showed us this 
morning being duplicated again in the summer or 2001, I do 
think we need either the Secretary or the FERC to exercise 
their wholesale price controls. The market, where it is clearly 
broken, where you can set short-term temporal limits on it and 
apply it to existing generation so we do not discourage the 
siting and development of new generation, which we absolutely 
need for the long run, I think is an appropriate mechanism to 
control the prices.
    With that summary, I will finish. Thank you.
    [The prepared statement of Mr. Glynn follows:]

     PREPARED STATEMENT OF ROBERT D. GLYNN, JR., CHAIRMAN, CEO AND 
                      PRESIDENT, PG&E CORPORATION

    Good morning, Chairman Murkowski, Senator Bingaman, and members of 
the committee. I'm Robert D. Glynn, Chairman, CEO and President of PG&E 
Corporation. Thank you for the opportunity to appear before you today, 
as you continue your examination of California's electricity shortages 
and related price impacts across the West. Let me also acknowledge my 
own Senator from California, Senator Feinstein, and thank her for her 
interest and fortitude in helping find solutions to these difficult 
problems.
    As you know, wholesale electricity prices in California and the 
West remain at unprecedented levels--the estimated average price for 
February in California was $228 per megawatt hour, with no relief in 
sight for consumers or the utilities and retail energy providers 
serving them. Supply, both in terms of available megawatts and the 
natural gas used to produce electricity, is extraordinarily tight. 
Hydropower, in particular, continues to be short. At this point, it 
appears certain that the availability of hydropower across California 
and the Pacific Northwest will be substantially below normal. Recent 
storms have improved the California hydro outlook slightly from as 
recently as a month ago, and our utility currently forecasts hydro 
availability of about 70 percent of normal. The Northwest outlook 
however, is unchanged: BPA continues to forecast hydro at just over 60 
percent of normal.
    As we look to the peak usage summer season, the dire predictions 
you heard at the last hearing on this subject seem, if anything, to be 
optimistic now. At best, according to the California ISO, the state 
will be short 2 to 3 thousand megawatts for the summer, and that 
forecast may not fully reflect current hydro conditions in the 
Northwest.
    In that context, the implicit theme of your hearing today, ``How 
can we moderate or limit electricity price impacts this summer, while 
simultaneously sending the correct market signals to promote supply-
demand equilibrium?'' is precisely the correct short-term question. 
Given the fact that broad resolution of the supply problem is 
necessarily a longer-term activity, the immediate answer to the price 
impact component of the question in the short time frame between now 
and summer is that California and the West will be scrambling to use 
all tools currently available to address the problem: 1) bringing power 
plants now down for maintenance and repairs back on line; 2) siting and 
building new ``peaking'' power plants in an expeditious manner; and 3) 
implementing emergency demand reduction efforts. All three of these 
measures are the best mechanisms available to address the very top of 
the demand peaks that will occur--and to help mitigate prices without 
exacerbating the supply problem.
    In short, we must act immediately to provide market-oriented 
solutions that attack the supply problem first and encourage fast-track 
supply projects, such as is being done now with peaking units. In the 
interim, a combination of supply and demand initiatives is imperative--
everything from the longer-term bilateral contracts being implemented 
now between the state of California and suppliers, as well as demand-
reduction incentives comparable to those that were initiated last 
summer. We also believe that prices at the retail level in California 
need to be adjusted further to better reflect the true cost of 
electricity so that adequate signals can be sent to encourage more 
responsible electricity use.
    Even then, given the extent of the expected supply/demand imbalance 
for this summer, it is not clear that these tools will fully mitigate 
the potential economic impact this summer. This leads us to the pieces 
of legislation before you today that address price caps in one way or 
another.
    Historically, PG&E Corporation has not supported price caps; over 
the long term, they create market distortions and have unanticipated 
and perverse consequences. In a functional market, they mask the peak 
price signals that spur conservation, changes in usage patterns, 
investment in energy efficiency and in new supply. Often, they make 
matters worse. That said, in June of last year we recognized that in 
circumstances where power markets are not fully competitive, short-term 
implementation of price caps might be necessary.
    We adopted a corporate policy statement (attached) that addressed 
those circumstances, which can be summarized as follows: where markets 
are clearly broken, for example, where FERC has determined that prices 
are not ``just and reasonable,'' short-term offer caps may be 
warranted.
    This was not an easy decision on our part, because in addition to 
Pacific Gas and Electric Company, the utility that serves much of 
northern and central California, we also own the National Energy Group, 
which builds, owns and operates power plants across the country. So, as 
you might anticipate, there was a fair amount of discussion and thought 
in the process that led to our corporate policy.
    With that process in mind, I'd like to address regional price caps 
for the West, for the summer of 2001. Based on what we know today, 
there is a very good chance that the West is heading for a meltdown 
where--due to short supplies--the price of power could increase from 
today's already historically-high levels to sustained stratospheric 
levels for the summer. That would inflict severe hardship on households 
and the economies of the Western states to no good end; prices are 
already high enough to incent new generation, which is being built as 
fast as it can be permitted and constructed.
    In order to avoid that meltdown, policy makers should create a 
mechanism, which would allow either the Secretary of Energy or the FERC 
to implement temporary price caps, should our worst fears be realized. 
It seems only prudent to create the policy tool and carefully describe 
the circumstances under which the tool can be used, including the 
duration of use. For example, any price cap should have an explicit 
start and sunset date, for instance, May 1 and September 30 of this 
year. And in order not to inadvertently discourage new, badly needed 
power plants, the price cap should apply only to existing generation.
    With respect to setting a price cap, it must be simple enough to be 
easily administered, and it should allow suppliers to make a reasonable 
profit. Most options being given serious consideration involve 
benchmark rates that build up from a cost basis. Frequently discussed 
are technology-specific caps that would cover suppliers' costs plus a 
stipulated profit margin. Under this approach, caps would be set at 
different levels based on the type of generating resource--natural gas, 
coal, hydro, etc. Other options include fixed price caps at levels high 
enough to accommodate input price fluctuations, such as variations in 
the price of natural gas, or indexed caps equal to some multiple of 
current input prices.
    I strongly believe in markets; if I didn't, we would not have 
invested money in building power plants across the United States to 
participate in competitive wholesale power markets. A meltdown in the 
Western power market this summer would be a huge setback to the 
development of a national wholesale power market, and markets in 
general.
    Mr. Chairman, I would be pleased to answer any questions.

    Senator Bingaman. Thank you very much.
    Next is William Hecht, who is the chairman and CEO and 
president of PPL Corporation in Allentown, Pennsylvania. Thank 
you for being here.

STATEMENT OF WILLIAM F. HECHT, CHAIRMAN, PRESIDENT AND CEO, PPL 
                   CORPORATION, ALLENTOWN, PA

    Mr. Hecht. Thank you, Senator.
    PPL Corporation is an energy company that markets 
electricity in 42 States and Canada and operates about 10,000 
megawatts of generating capacity in Pennsylvania, Montana, and 
Maine and delivers electricity to about 6 million customers on 
three continents.
    In addition to representing the views of PPL, I am also 
appearing on behalf of the Electric Power Supply Association, a 
national trade association representing competitive suppliers.
    While there are many contributing factors to the 
electricity supply crisis in the West, the underlying problem 
is that California does not have enough electricity supply. The 
State has an electricity load of about 48,000 megawatts and in-
State generating resources of only about 38,000 megawatts.
    The real solution to the problem is not in artificial price 
controls but in a focus on the forces of supply and demand 
which will both discourage consumption and encourage 
production. Reflecting actual current economic value of 
electricity through retail prices in some form for at least 
some users would exert downward pressure on consumption, 
immediately helping to reduce the mismatch between supply and 
demand. This in itself would help reduce wholesale prices.
    Even more importantly, prices set by supply and demand will 
send the proper price signals to investors, encouraging the 
construction of new generating facilities.
    Price caps would, on the other hand, reduce the incentive 
to invest in new production and unnecessarily prolong and 
exacerbate the existing supply and demand imbalance. This free 
market lesson is one that we have learned elsewhere in the U.S. 
energy industry as a failed experiment with natural gas price 
controls would attest. Allowing the free market to function and 
to send the right price signals will result in the significant 
capital investments that are needed to build the next 
generation of American powerplants.
    There is ample evidence that such a process is working in 
places other than California. Across the country, more than 
125,000 megawatts of generating capacity are under construction 
or in advanced development in markets where investors believe 
they can successfully site plants and receive a fair return on 
their investment.
    My company is but one example of this process at work. PPL 
has explored acquisition and development of power generating 
facilities at more than 100 locations in the United States and 
even overseas. In each case, we carefully study available 
supplies in the region, our estimate of future marketplace 
prices, the likelihood of success in constructing a facility, 
and a host of other factors. This very selective process has 
resulted in our acquisition of about $1 billion in generating 
assets, principally in the State of Montana, and PPL is 
developing plants in eastern Pennsylvania, Eastern United 
States, and in Western U.S. markets that could result in an 
investment of approximately $2 billion more. As I speak today, 
we are developing powerplants in Connecticut, on Long Island, 
in Pennsylvania, in Washington State, and in Arizona.
    It goes without saying, of course, that we are developing 
these plants, which will add more than 4,000 megawatts of 
supply, because they are located in key markets where the power 
is needed and that offer long-term opportunities for our 
shareowners. Put another way, if the wholesale markets in these 
regions were not sending the appropriate price signals, we 
could not justify building the plants there.
    I am convinced that there is only one way to ensure 
adequate supplies of electricity for the people of California 
and the rest of the country: We must encourage the building of 
new powerplants. These new supplies, however, will be put at 
risk if we begin to artificially manipulate or threaten to 
artificially manipulate the wholesale markets. For the reasons 
I have detailed in my written testimony, imposition of price 
caps or a return to cost-based rates would actually result in 
two very problematic, unintended results: reduced likelihood of 
new powerplant construction and, ironically, over time higher 
average prices for electricity.
    The bills before you also propose refund requirements on 
companies that own generating facilities, essentially rewriting 
the rules under which the transactions were made. These 
interventions in the market not only would hurt the very 
companies that are part of the potential solution, they would 
also discourage those who are considering such development.
    Some say that the building of new powerplants is too 
complicated, too environmentally threatening, and too time 
consuming to address the current situation. This is simply not 
true. New generation can be installed rapidly in compliance 
with existing laws and regulations that fully protect 
environmental quality.
    Further, modern electric generation technologies are 
cleaner and more efficient than those in use only a few years 
ago. Higher efficiencies mean that less fuel is used to produce 
each kilowatt hour of electricity and cleaner technologies mean 
that even the fuel that is burned produces fewer emissions.
    There are some steps that the Federal and State governments 
can take to ensure that new generating units can be built 
quickly and efficiently.
    For instance, environmental review can be accelerated 
procedurally without reducing the participation of 
knowledgeable intervenors or compromising the quality of the 
outcome. Government can also make sure that the electric 
transmission system is fully open and accessible to all market 
participants. Such enhancements, combined with the time-proven 
forces of supply and demand, can result in new supplies being 
available in as little as 24 months for conventional generation 
and sooner for distributed generation which has higher cost.
    In conclusion, I believe that the California experience 
underscores the need for a renewed commitment to competitive 
electricity markets.
    Thank you very much.
    [The prepared statement of Mr. Hecht follows:]

   PREPARED STATEMENT WILLIAM F. HECHT, CHAIRMAN, PRESIDENT AND CEO, 
                     PPL CORPORATION, ALLENTOWN, PA

    I am William F. Hecht, chairman, president and chief executive 
officer of PPL Corporation. Thank you for the opportunity to appear 
before this Committee to share my views on S. 26, S. 80 and S. 287.
    These legislative proposals raise issues that are central to the 
future of the nation's energy supply.
    In addition to representing the views of PPL, I am also appearing 
on behalf of the Electric Power Supply Association, a national trade 
association representing competitive suppliers, including independent 
power producers, merchant generators and power marketers.
    PPL, with headquarters in Allentown, Pa., is a rapidly growing 
international energy company with revenues of nearly $5.7 billion.
    We operate four principal subsidiaries:

   PPL EnergyPlus markets wholesale electricity in 42 states 
        and Canada and markets competitively priced retail electricity 
        in several Eastern and Western states. PPL EnergyPlus also 
        provides energy services in the Mid-Atlantic and New England 
        regions.
   PPL Generation owns and operates U.S. power plants. Its 
        portfolio includes nearly 10,000 megawatts of generating 
        capacity in Pennsylvania, Maine and Montana. In the East, our 
        8,500 megawatts areis primarily coal-fired and nuclear 
        generation. In Montana, our 1,150 megawatts are coal-fired and 
        hydro generation. Our Montana plants were acquired from The 
        Montana Power Company in late 1999, and since that time have 
        been used primarily to serve Montana electricity customers 
        under a wholesale agreement that we signed with Montana Power 
        at the time of the purchase. We have sold a limited amount of 
        wholesale power into the California market since acquiring the 
        plants.
   PPL Electric Utilities delivers electricity to 1.3 million 
        customers in eastern and central Pennsylvania.
   PPL Global owns distribution businesses in the United 
        Kingdom and Latin America that deliver electricity to 4.4 
        million customers. The company also develops and acquires 
        generation in key U.S. markets. It now has more than 4,000 
        megawatts of capacity under active development.
        the solution for the california market is new generation
    The electric supply situation in California has reached nearly 
crisis proportions. California and other Western states now face 
economic dislocations due to the high cost of electric power, and 
California itself also faces a fundamental reliability problem.
    There are many reasons for the current economic and reliability 
problems. Gas prices increased. Electricity demand increased rapidly. 
It was a ``low-water'' year for hydroelectric generation. The West 
Coast experienced a heat wave.
    However, the underlying problem in the Western System Coordinating 
Council--the interconnected system of which California is a part--is 
that there simply is not enough generating capacity to meet load 
requirements. This generating capacity shortfall is directly traceable 
to California, which has a load of about 48,000 megawatts and in-state 
generating resources of only about 38,000 megawatts.
    This means that California must import large quantities of 
electricity to satisfy its demand. And, much of the in-state generation 
is old and inefficient. California has not built a significant 
generating facility in more than 10 years. Further, transmission 
limitations sometimes exacerbate the generation shortfall.
    The solution to this problem is to permit the forces of supply and 
demand to set prices, and to allow those prices to both discourage 
consumption and encourage production.
    Reflecting the actual economic value of electricity through higher 
retail prices--in some form for at least some users--will cut 
consumption, immediately reducing the mismatch between supply and 
demand. This, in itself, would help reduce wholesale prices.
    Even more importantly, prices set by supply and demand will send 
the proper price signals to investors, encouraging the construction of 
new generating facilities. And, additional generation is the solution 
to the root problem.
    This additional generation can be installed rapidly, with existing 
laws and regulations fully protecting environmental quality. Further, 
modern electric-generation technologies are cleaner and more efficient 
than those in use only a few years ago. Higher efficiencies mean that 
less fuel is used to produce each kilowatt-hour of electricity. And, 
cleaner technologies mean that even the fuel that is burned produces 
fewer emissions.
    There are a number of steps that federal and state governments can 
take to ensure that new generating units can be built quickly and 
efficiently. For instance, environmental review can be accelerated 
procedurally, without reducing the participation of knowledgeable 
intervenors or compromising the quality of the outcome. Government also 
can make sure that the electric transmission system is fully open and 
accessible to all market participants, especially new generators.
    Even with such enhancements, however, new generation will be 
developed only if we allow the forces of supply and demand to operate 
unencumbered, to freely set the price of electricity. Price caps would, 
on the other hand, reduce the incentive to invest in new production and 
unnecessarily both prolong and exacerbate the current supply and demand 
mismatch.
    This free-market lesson is one we have learned elsewhere in the 
energy industry. When the federal government limited the wellhead 
prices of natural gas, producers had no incentives to develop wells, 
resulting in severe supply shortages and restrictions of customer hook-
ups. As soon as the price caps were lifted, drilling activity expanded, 
resulting in ample supplies and lower prices for customers.

                              DEREGULATION

    Under the regulated structure of the past, public utilities 
operated in franchised service territories and had mandatory 
obligations to serve customers. As part of this obligation, the 
utilities were required to build capacity to meet load requirements.
    This structure, which proved to be inefficient, has been replaced 
with a deregulated marketplace in which generation is built based on 
the forces of supply and demand. Power plants are now built in response 
to price signals with increasing prices signaling the need for new 
capacity. Over the long-term, this deregulated marketplace will lead to 
prices for end-users that are lower than they otherwise would have been 
under regulation.
    In a deregulated energy marketplace, the mere existence of high 
prices does not necessarily mean that a market is dysfunctional. In 
fact, in any correctly functioning market, high prices are simply a 
proper and normal signal of demand outpacing available supply.
    This is not to suggest that we should--in any way--tolerate market 
power abuse or collusion. In cases where there are proven instances of 
abuse of market power, the Federal Energy Regulatory Commission has 
adequate powers to correct those abuses. Certainly, the Justice 
Department and state agencies also will address any issues of collusion 
or anti-competitive behavior.
    Allowing the free market to send the right price signals except in 
the case of illegal activities will encourage the capital investment 
that we need to build the next generation of American power plants. 
There is ample evidence that such a process is working in places other 
than California. Across the country, more than 125,000 megawatts of 
generating capacity are under construction or in advanced development.
    My company is a good example of this process at work.
    PPL has explored acquisition and development of power generation 
facilities at more than 100 locations in the United States--and even 
some overseas. In each case, we carefully studied available supplies in 
the region, our estimate of future marketplace prices, the likelihood 
of success in siting and constructing a facility and a host of other 
factors.
    This very selective process has resulted in our acquisition of 
about $1 billion in generating assets, principally in the state of 
Montana. And, PPL is developing plants in key Eastern and Western U.S. 
markets that could result in additional investment of approximately $2 
billion.
    As I speak here today, we are developing power plants in 
Connecticut, on Long Island, in Pennsylvania, in Washington state and 
in Arizona. It goes without saying, of course, that we are developing 
these plants--which will add more than 4,000 megawatts of supply in 
these key regions--because we believe they will benefit our 
shareowners.
    Put another way: If the wholesale markets in these regions were not 
sending the appropriate price signals, we could not justify building 
plants there.
    I am absolutely convinced that there is only one way to ensure 
adequate supplies of electricity for the people of California and the 
rest of the country:
    We must encourage the building of new power plants.

                               PRICE CAPS

    These new supplies, however, will be put at risk if we begin to 
artificially manipulate the wholesale markets. Imposition of price 
caps, or a return to cost-based rates, actually will lead to decreased 
supplies--and thus, higher prices.
    Price caps interfere with the most important part of any functional 
market--the price signal.
    Caps are designed to clip the peaks of price movement in the 
market, with the goal of thereby reducing average prices. The 
California experience itself has shown that price caps tend to 
encourage higher average prices, which could actually lead to an 
increase in costs to consumers. Caps also can result in a transfer of 
capacity to higher value markets. That will surely happen in the West, 
as resources seek higher-priced markets elsewhere or even, in certain 
circumstances, shut down if they cannot achieve sufficient revenues for 
operation.
    Second, the caps signal developers to go elsewhere. Developers of 
generation look for the best returns they can find, on a risk-weighted 
basis. They are not limited to California, the Western United States or 
even the United States as a whole. Putting a cap in place will send a 
strong signal to developers that the western United States is coming 
more and more under price controls and government interference. 
Developers will respond to that signal by avoiding those markets. 
Moreover, the history of price caps so far in California has been one 
of change. Price caps in California last year changed regularly between 
$150 and $750 per MWh. Such uncertainty and changeability produces 
additional caution, leading to higher required returns for project 
development, eventually resulting in higher prices for consumers. In 
the extreme, price caps, along with their variability and lack of 
predictability, may lead to generation development being canceled in 
favor of projects elsewhere.
    Third, a cap tends to reduce the volatility of a market, which can 
lead to reduced trading and hedging instruments. A critical part of 
evaluating any market is understanding the volatility of that market. 
Volatility is the tendency of prices to move up or down--higher 
volatility means that prices change more often and to a greater degree. 
A price fixed by government fiat has essentially zero volatility. By 
limiting the upper range of price spikes, prices will change less often 
and by not as much. Since energy traders make their money on price 
changes, a less volatile market will have fewer traders in it providing 
liquidity. Reduced liquidity results in less price discovery--the 
knowledge about what the price of electricity may be in the future. 
Developers need as much knowledge of future prices as possible to make 
informed decisions about investments. Traders, generators and consumers 
also need the forward market to allow for the hedging through long-term 
contracts that has been touted as a short-run solution to California's 
woes.
    There is a fourth harm from caps that also stems from the loss of 
volatility--developers will make the wrong decisions. A volatile market 
is sending out a price signal for peaking generation. Prices 
occasionally spike upwards (or downwards); the appropriate generation 
response to such spikes is a peaking unit that only runs occasionally. 
The peaking unit will pick-off the higher prices, thereby reducing 
them. Alternatively, if there is lower volatility and higher average 
prices, the appropriate business decision is to build baseload plants 
that are designed to run relatively cheaply and all the time. This 
takes advantage of higher average prices and does not really address 
price peaks.
    Caps tend to distort the market signal in favor of baseload 
generation. With the scarcity problem in California, that may not seem 
like an important problem right now since any generation would be 
helpful. However, baseload plants can cost several times as much as 
peaking units and take considerably longer to construct. The market 
will either pay to recover those costs or those plants may go bankrupt 
and cease operations in the future. Regardless, efficient economic 
decision-making by developers requires the correct price signal coming 
from the market.
    For all these reasons--higher average prices, reduced development, 
reduced forward liquidity and inefficient price signals--price caps are 
inappropriate and dangerous for California and the Western United 
States.
    The legislation before you also proposes refund requirements on 
companies that own generating facilities, essentially rewriting the 
rules under which the transactions were made. These interventions in 
the market not only would hurt the very companies that currently are 
part of the potential solution to the supply crisis, they would 
discourage those who are considering such development.
    Returning to cost-based rates can be a particular problem. Under 
regulation, vertically integrated public utility companies had 
mandatory obligations to serve within their franchised territories. 
This meant they were required by state regulators to build whatever 
capacity was required to meet demand.
    Because of the mandatory obligations to serve, regulated companies 
had to build whatever capacity was needed even though rates were capped 
or cost-based. Today, however, that archaic system is gone in many 
parts of the country. In California, Pennsylvania and many other 
states, independent generating companies, not regulated public 
utilities, now build generation. Local electric distribution companies 
no longer have an obligation to build generating facilities, and the 
generation function has been deregulated.
    If rates for generation are ``capped'' or returned to old ``cost-
based'' structures or if other economic restrictions are placed on 
these new unregulated generating companies, they simply will not build 
the facilities needed to serve the public because they will have no 
incentive to build and there is no obligation to construct plants. The 
capital with which those plants would have been built will go 
elsewhere.
    Ironically, price caps may actually serve to benefit companies such 
as PPL, which currently own significant amounts of low-cost, efficient 
generation--our Montana power plants, for example.
    The reason for this benefit to companies like PPL is 
straightforward. Price caps would have the effect of prolonging the 
time before new, efficient generation is constructed. Prices that 
otherwise would have declined with added generation will remain at 
capped levels for a longer time--and for more hours--than would have 
been the case. Existing generation would remain more valuable than 
otherwise would have been the case.

                               CONCLUSION

    The real solution to the long-term supply issues in California and 
the West is inescapable: We need to build new power plants. And, those 
new plants will be built only if we allow the competitive market to do 
its job.
    If we use the California experience to further improve our 
commitment to truly competitive electricity markets, then our nation's 
energy supply future can be a bright one.
    And, I am confident that--after considering all the facts--we will 
reach the conclusion that electricity deregulation not only is sound 
public policy . . . it is the only way that we will be able to ensure 
adequate electricity supplies at fair prices.

    Senator Bingaman. Thank you very much.
    Our final witness is Steve Fetter, who is the managing 
director of the Global Power Group with Fitch. Welcome.

STATEMENT OF STEVEN M. FETTER, MANAGING DIRECTOR, GLOBAL POWER 
                GROUP, FITCH, INC., NEW YORK, NY

    Mr. Fetter. Thank you, Mr. Chairman and Senator Feinstein. 
I appreciate the opportunity to offer my views with regard to 
the important issue of Federal price caps or controls for the 
protection of consumers.
    I note that in some ways, though, you have presented me 
with my own worst nightmare. I am surrounded on this panel with 
Fitch bond rating clients and they have taken positions on all 
sides of this issue.
    Senator Bingaman. Now you know how all of us in politics 
feel.
    [Laughter.]
    Mr. Fetter. Yes, exactly. So, now you have asked me, Mr. 
Fetter, so what do you really believe? So, I guess the only 
path I can take is to offer my sincere thoughts.
    As a former State regulator, I see nothing wrong with 
continued cost-based regulation for service obligations that 
the traditional utilities are still mandated to provide for 
core customers who have chosen not to receive alternative 
competitive supply from a third party provider.
    At the same time, from my vantage point on Wall Street, I 
believe that if you are going to have competition, policy 
makers have a duty to let markets operate.
    To the extent possible, under a competitive framework, it 
is important to reduce the role of government. I have long 
adhered to the controversial view offered years ago by then 
California PUC president Greg Conlon who said that divestiture 
of transmission was the best model for dealing with market 
power concerns and ensuring non-discriminatory market access 
for new energy providers. It could even reduce or even 
eliminate the need for quasi-governmental organizations, such 
as the California ISO and the Power Exchange and similar 
entities elsewhere. But divestiture of transmission was never 
ordered due to political concerns and timeliness issues at that 
time.
    Instead, California took the flawed path of encouraging, 
virtually to the point of mandating, utility divestiture of 
most of their generating capacity. California government also 
placed strict limitations on a utility's ability to procure 
electricity supply for its core residential customers. We are 
all familiar with the sad results of that strategy.
    So, from where we find ourselves now, can price caps help 
the situation?
    I am willing to go so far as to admit that Federal 
enactment of a uniform price cap at a high level--let us say 
$1,000 per megawatt-hour--might serve a useful purpose. It 
could operate as a circuit breaker or safety valve to cap 
wholesale prices during the brief periods of time when 
extremely volatile circumstances result in a market that cannot 
be contained by any manner of competitive forces. It also 
probably would not interfere with strategic decision making by 
generation suppliers because prices at the $1,000 per megawatt-
hour level do not enter into their financing models.
    However, to go below that level, indeed to go anywhere near 
the $250 per megawatt-hour or even $150 levels that proved 
ineffective in California would in my opinion slow the Nation's 
movement towards an efficient, competitive wholesale market. 
Suppliers would seek alternative market outlets or slow their 
production of electricity and they certainly would reassess 
further investment in the generation sector where such price 
caps were in place.
    I would also not be surprised to see litigation brought by 
those who purchased generation assets at very high prices based 
on reliance on State legislative enactment of laws defining the 
new competitive market orientation, the theory being an 
unconstitutional taking of private property in the form of 
decreased valuations without fair compensation.
    I offer further thoughts in my written testimony that the 
ongoing negotiations over sale of the three California 
utilities' transmission assets could conceivably provide a 
second chance to take the road not taken several years ago.
    I would be happy to respond to any questions that you may 
have. Thank you.
    [The prepared statement of Mr. Fetter follows:]

PREPARED STATEMENT OF STEVEN M. FETTER, MANAGING DIRECTOR, GLOBAL POWER 
                    GROUP, FITCH, INC., NEW YORK, NY

    I appreciate the opportunity to testify before the Committee on 
Energy and Natural Resources to offer the views of Fitch on S. 26, a 
bill to amend the Department of Energy Authorization Act to authorize 
the Secretary of Energy to impose interim limitations on the cost of 
electric energy to protect consumers from unjust and unreasonable 
prices in the electric energy market; S. 80, the California Electricity 
Consumers Relief Act of 2001; and S. 287, a bill to direct the Federal 
Energy Regulatory Commission to impose cost-of-service based rates on 
sales by public utilities of electric energy at wholesale in the 
western energy market, and amendment No. 12 to S. 287. I will speak 
from the perspective of a member of the financial community as well as 
former Chairman of the Michigan Public Service Commission.
    In 1995, Fitch formulated an Electric Industry Time Line (see 
attachment) that forecast the general evolution of power markets within 
the United States. I am happy to say that restructuring activities 
across the country have to a large degree tracked Fitch's predictions. 
However, substantial divestiture of generation assets in many states, 
most notably California, left the endpoint of the analysis--that 
utilities would be operating under regulated and competitive supply 
models concurrently--in question.
    Fitch's conclusions were based on the belief that when competition 
was in place after 2000, utilities would be operating under a 
bifurcated structure: a lower risk regulated market and a higher risk 
competitive market. Within the lower risk regulated market, integrated 
utilities would generate or purchase power to meet an obligation to 
serve core residential customers, much as they have under the 
traditional system of cost-of-service-based regulation. But in addition 
to that familiar framework, there would be a competitive market under 
which utility generation subsidiaries, independent power producers, and 
power marketers could compete to supply electricity to industrial and 
large commercial users, and aggregated smaller customers (both small 
commercial and residential). This half of the model, by its very 
nature, would be a higher risk undertaking for both seller and 
purchaser.
    California's restructuring plan encouraged utility divestiture of 
generation and substantial government involvement in the operation of 
the transmission grid (through an independent system operator, or ISO) 
and the power market (through a power exchange, or PX). For those who 
believe that the catastrophic events in California in late December and 
early January came without warning, I invite attention to ``Procuring 
Power in California: A Potential Stranded Cost,'' a September 2000 
Fitch report by Lori Woodland, detailing the pressures soon to be faced 
by California's three investor-owned electric utilities, Pacific Gas & 
Electric (PG&E), Southern California Edison (SCE), and San Diego Gas & 
Electric (SDG&E). A copy is attached.
    California's restructuring model called for a high proportion of 
customer demand being met by spot market supply from day-ahead or 
hourly transactions. This exposed the state's three investor-owned 
utilities, which were operating under retail price caps, to extreme 
financial risks due to wholesale market volatility. By contrast, in 
more rational market structures for electricity and other energy 
commodities, approximately 85-90% of demand is normally provided 
through long-term contracts, with at most only 15% subject to spot 
market fluctuations. The extreme volatility of price at the wholesale 
level has given rise to urgent calls for a ``fix'' in the form of lower 
and lower price caps.
    So will price caps provide the solution?
    I am willing to go so far as to admit that federal enactment of a 
uniform price cap at a high level--such as $1000 per mwh--might serve a 
useful purpose. It could operate as a circuit breaker to cap wholesale 
prices during the brief periods when extremely volatile circumstances 
result in a market that cannot be contained by any manner of 
competitive forces. It also probably would not interfere with any 
strategic decision making by industry participants since builders of 
new generation or transmission would not employ prices at that level 
(or higher) in their financing models.
    However, to go lower than such a safety valve-type level would 
undoubtedly slow the nation's movement toward an efficient competitive 
wholesale market. We have already seen that imposition of a low price 
cap, such $250 per mwh or even $150 per mwh, can have the negative 
effect of encouraging suppliers to seek alternative market outlets or 
even to slow production. Continued tinkering with market rules, 
especially if at the macro federal level, is sure to create uncertainty 
among energy investors and delay implementation of their business 
plans, especially in light of recent ambiguous economic signs.
    A further concern for market participants is that major investments 
have been made in California and other states based on the particular 
competitive frameworks mandated by state legislatures. Price levels for 
generation asset auctions were driven by the new market orientation; a 
retrenchment by state policymakers back to a form of cost-of-service 
regulation could be challenged as an unconstitutional taking of private 
property without fair compensation. Below-market price caps would 
contribute to this situation and could conceivably result in the 
government being ordered to pay the difference between the market value 
of assets in a competitive environment versus in a newly-tariffed 
regime.
    Interestingly, the ongoing negotiations about sale of the 
California transmission grid to the state hearkens back to a 
controversial point of view then-California Public Utilities Commission 
(CPUC) President Greg Conlon espoused during the early stages of 
implementation of electricity industry competition. Speaking to the 
National Association of Regulatory Utility Commissioners Electricity 
Committee in July 1997, Conlon explained that an ISO was not the first 
choice of the CPUC for controlling the market power of utilities owning 
transmission lines. Rather, Conlon said, the statewide ISO was a 
compromise; the best model he believed for dealing with market power 
concerns and ensuring nondiscriminatory market access for new entrants 
was divestiture of transmission to third parties. That action was never 
taken because of political concerns and timeliness issues. (See 
attached Fitch report, ``Divestiture Gets A Boost,'' August 18, 1997.)
    Now it appears California will revisit the question of divestiture 
of transmission through its negotiations to sustain the financial 
viability of its state's utilities. However, early signs are that a 
purchase of the transmission systems from PG&E, SCE, and SDG&E may be 
followed by the leasing of the assets back to the utilities to operate. 
Instead, the state might want to consider seizing this new opportunity 
to create an independent owner or, at least, operator of the state's 
transmission grid. Such a step would allow the state to remove itself 
from amidst the electricity supply morass and reduce its activities to 
the more appropriate role of facilitating private sector investment in 
enhancing the state's energy infrastructure. This of course could 
include increased generation investment by the three California 
investor-owned utilities without fear of creating competitive conflict. 
Breaking the tie between generation and transmission would allow the 
state's utilities and third-party players to compete on a level playing 
field with minimal state interference.
    I continue to believe that the bifurcated utility structure 
described above creates the proper balance between retail choice and 
customer protection. In the final analysis, policymakers who thought 
retail choice could only be a win-win proposition need to reassess 
their stance. There are customers who believe themselves savvy enough 
to participate in energy markets in an attempt to improve their 
financial situation while bearing the risk that they will not. They 
should be given that option. At the same time, there is another group 
of consumers the vast majority of residential users who never wanted 
things to change. For them, the provision of a cost-of-service 
regulated alternative is a necessity.

    Senator Bingaman. Thank you very much. Thanks to all of you 
for your very good testimony.
    Let me ask Mr. Hecht. I am concerned. I guess I am still 
confused. In order to incentivize companies like yourself, your 
own company and others, to generate power for sale in the 
California market, why is it essential that you allow prices to 
go as high as they have gone? I can understand how you would 
want to have a good return on your investment, but why do you 
need prices in the ranges that they have been? Why should we be 
concerned about protecting the ability of people to charge 
prices in those ranges, on the theory that they are going to 
lose interest in producing power, if we do not protect those 
rights?
    Mr. Hecht. There are several good examples that I will give 
you.
    First of all, fuel cost alone in a few cases has exceeded 
$500 a megawatt-hour. In a few cases, delivered price of 
natural gas has been in the range of $50 a million Btu's. And a 
good round number for some gas turbine generators is 10,000 
Btu's per megawatt-hour. Simple arithmetic: $500 a megawatt-
hour.
    Some other examples. There are some things that can be done 
in the near term to increase supply even for this summer. For 
example, it is true that installing conventional generation can 
take 24 months and longer. But installing some forms of 
distributed generation can be done much more quickly but at 
much higher cost. Sending the right price signal to the end 
user will give that end user the economic incentive to install, 
even for this summer, some distributed generation, which can be 
done in that time frame. So, there are some important reasons 
why prices should be allowed to follow the market.
    The prices are high. The market has been called 
dysfunctional. I do not think that there is evidence that the 
market is dysfunctional. Those high prices are telling you 
something, telling you that there is a dramatic mismatch, not a 
mild mismatch, between supply and demand. And we ignore that 
signal at some peril.
    Senator Bingaman. We have this chart that Senator Feinstein 
has got up there. Could you put that one up? The way I read 
that is the two lines that run across there show the power 
generation in 2000 and the power generation in 1999.
    Mr. Hecht. Yes.
    Senator Bingaman. And the gap between those is modest.
    Mr. Hecht. Yes.
    Senator Bingaman. And you are saying that the mismatch is 
so enormous that that explains the prices that are reflected on 
the chart. The truth is the mismatch is pretty minimal compared 
to the price changes that have been observed.
    Mr. Hecht. Yes. I saw that chart this morning, and I am 
anxious to speak to it because that chart just plots price 
against time. If you were to plot price against demand, at 
periods of low demand, periods when there is a surplus of 
generation, the curve would be relatively flat, plotting price 
against demand. At periods of high demand, periods when demand 
and supply are almost matched, when demand is on the verge of 
exceeding supply, as it has in California during the stage 3 
alerts, the price/demand curve gets very steep. So, modest 
increases in demand or even small reductions in supply can 
produce dramatic changes in price. If you were to look behind 
the numbers on that simplistic chart, I think you would see 
that.
    What that chart does not reflect is the example I gave 
earlier of $50 a million Btu gas resulting in a fuel price 
alone of $500 a megawatt-hour for a 10,000 Btu per kilowatt 
hour plant.
    It also does not reflect reductions in capacity which 
occurred in California. Some small power generators actually 
shut down because they were not paid. Some hydro facilities 
were less available because it was a low hydro year. There was 
also a reduction in capacity resulting from other forces as 
well.
    Senator Bingaman. You are saying that that much was not 
generated. Basically you are saying that that red line there 
that shows how much was generated in the year 2000 is wrong.
    Mr. Hecht. No. The generation matches load on an hour-to-
hour, minute-to-minute basis, but the generation that was 
called for approached the absolute capability of the system. In 
fact, that is the definition of the stage 3 alerts that have 
happened in California that we have all read about. And during 
those periods, it is perfectly expected for prices to get high.
    I can give you some other examples as well. This is not 
unique. Those prices are in the several hundred dollars a 
megawatt-hour range. As early as 1998 in the Ohio region, the 
so-called east-central area reliability region, during a period 
of a number of nuclear plants being forced out of service, 
prices hit $3,500 a megawatt-hour and higher. So, that is not 
unprecedented.
    In PJM in the Eastern part of the country, prices have hit 
$1,000 a megawatt-hour during short periods.
    Senator Bingaman. Let me give you my lay person's view of 
why prices may be hitting these very high levels, and then I 
will defer to Senator Feinstein because my time is up here.
    What you have here is a requirement on the utilities, the 
certificated utilities, in the area to provide power, and they 
are required by the commissions in their respective States, in 
this case California, to provide that power in whatever way 
they can. So, when they see a shortage, they will pay whatever 
they have to pay to obtain that power. So, in a lot of ways, it 
is not a traditional market where you can either buy or not buy 
depending on whether the price is to your suiting.
    Mr. Hecht. That is correct.
    Senator Bingaman. In this case, you have got utilities that 
are under legal obligation to buy that power at whatever price 
they have to pay and continue to buy that power at that price 
until they themselves go bankrupt.
    Mr. Hecht. You make a very good point. The forces of supply 
and demand in most markets are allowed to act not only on the 
supply side of the equation but also on the demand side of the 
equation. And because retail prices are fixed in California, 
there has been no demand response. You are absolutely right. 
That has increased the volatility of those markets.
    Senator Bingaman. Yes, and the legislation that Senator 
Feinstein and Senator Smith have put together would try to 
address both, as I understand it.
    Senator Feinstein.
    Senator Feinstein. Thanks very much, Mr. Chairman.
    Mr. Baum, do you remember our conversation in San Diego and 
you told me that when Sempra had to purchase power in the 
middle of the night, it was 500 times higher in cost?
    Mr. Baum. Yes, I do.
    Senator, I would like to, if I may, make a comment about 
your chart and respond to some of the things that have been 
said.
    Senator Feinstein. I would appreciate it.
    Mr. Baum. First of all, I think we could correct the record 
that during the period of time shown in that chart, at least 
through the summer spike period, I do not believe California 
had a stage 3. The stage 3's have come up subsequently. So, the 
assumption that we actually had a shortfall of whatever--I 
think it is once they go below a 1.5 percent reserve, that it 
is stage 3--did not occur.
    Furthermore, natural gas prices remained fairly steady 
during that period. They have recently spiked, particularly 
through the transportation costs.
    So, neither of those factors in this picture that is 
portrayed on this chart--and it defies any reason to believe 
that in the nighttime hours, when demand is actually quite low, 
that prices would have remained at very, very high levels, 
above $100 a megawatt-hour quite often during that summer 
period and even higher today in the nighttime hours. That can 
only be accounted by market distortions or irregularities in my 
opinion.
    Senator Feinstein. Thank you very much.
    PG&E, Edison, and Sempra together sell power to how many 
customers? Mr. Bryson?
    Mr. Bryson. The number would be about 10 million customers, 
approximately. It is the largest part of the State of 
California. 10 million customers would probably mean 25 million 
people, something like that.
    Mr. Baum. I think that is about right. I think there are 
about 12 million meters in the State, something like that. The 
other two would be with the municipalities.
    Mr. Worthington. We have 4.8 million meters and a lot more 
people represented by that.
    Senator Feinstein. So, these are, in effect, the largest 
distributors of power in our State.
    Now, one of the things that was pointed out and is very 
much correct is that the 1996 law forced these utilities to 
divest themselves of their generation facilities. I wanted to 
ask this question. When you generated electricity, what was 
your megawatt cost?
    Mr. Bryson. Our cost for a long period of time had been on 
the order of $35 a megawatt or 3.5 cents a kilowatt hour.
    Senator Feinstein. PG&E, could you respond?
    Mr. Worthington. I am not exactly sure of the number but I 
believe that is the order of magnitude for our historic cost-
based rates as well.
    Senator Feinstein. Mr. Baum.
    Mr. Baum. Yes. That is about correct, depending on which of 
the generating units, whether they were nuclear or gas fired 
units.
    I would comment too that those very plants that produced 
that electricity at those costs were the plants that were 
bought by the generators when we divested.
    I wanted to go to one of the points about the targeted caps 
and whether that would be an ex post facto taking or somehow 
unfair. Those very generators that bought those plants made a 
filing at the FERC, not long after they had acquired them, 
asking the FERC to recognize that the costs that they had paid 
the utilities for those plants were to be considered, should 
cost-based rates be put in place, the cost that they should 
have in their rate base. As I recall, the FERC said no, that it 
should be the book cost that existed on the books of the 
utilities at the time those plants were acquired. So, I would 
dispense immediately with any notion that there was some 
unfairness or lack of notice or taking that would occur should 
cost-based rates be imposed on an old plant that was acquired, 
which is all I believe targeted caps would do.
    Senator Feinstein. Thank you. That is very helpful.
    The point I am trying to make, Mr. Chairman, is they were 
able to generate power at $35 a megawatt hour. A year or so 
later, the people that bought those same facilities were 
charging these same people up to what a megawatt-hour? Mr. 
Bryson?
    Mr. Bryson. Certainly the market at times has gone--there 
was one case when it went to $800 a megawatt-hour. That is not 
standard. But if you take again the Wall Street source 2 days 
ago for the entire market--so that would include these people 
that bought our plants--$353 a megawatt-hour I believe was the 
number. So, approximately 10 times what the prior cost-based 
pricing had been.
    Now, an important reality addressed today is that natural 
gas prices in that period had gone up. Some underlying costs 
had gone up. So, cost-based pricing would be substantially 
higher than the traditional $35 a megawatt-hour, but we do not 
believe it would be anywhere near the 10 times that.
    If I could, there has been much reference this morning, 
including on the part of Mr. Hecht whose views I respect, that 
the price of current wholesale cost needs to be seen by the 
retail consumer. But as a practical matter, increasing utility 
rates by 10 times overnight would have such enormously 
dislocating and disruptive consequences that it just is not a 
practical or desirable thing to do.
    What I am concerned about is when people address this 
problem strictly as a matter of theory, they come to nice 
solutions that in practical effect would hurt deeply lots and 
lots of people and already have hurt badly the California 
utilities and California customers. We have this theory 
competition between those who say rates ought to not go up at 
all, that current rates were fine a year ago so do not raise 
them, and those that say current price signals ought to be put 
into retail rates all the time. That theory competition has led 
to an absence of real action and real practical problem 
solving. We have to get urgently now the practical problem 
solving, and that will mean, unavoidably, some increase in 
retail rates. I believe it absolutely will require, to be 
practical, some controls on a fundamentally broken market that 
is vividly demonstrated by that chart.
    Senator Feinstein. Mr. Baum, could you comment on the 
highest prices you paid on a generation of $35 a megawatt-hour? 
What prices were you required to pay?
    Mr. Baum. Well, SDG&E would have paid similar prices to 
Edison because we were mandated to make all of our purchases 
from PX and/or whatever was passed through from the ISO, which 
was common essentially to the utilities. So, the answer would 
be very similar.
    I would like to make a comment about what Mr. Bryson just 
said. San Diego was the first to pass through real-time prices, 
which it did during that time last summer, and it caused what I 
call a French Revolution syndrome that people were looking for 
heads to cut off not only of politicians but of utility 
executives. I believe, just as John Bryson has said, that it is 
impossible or impracticable to pass through prices that are 10 
times what people are paying. But I do believe that prices 
should be passed through in an orderly and predictable fashion.
    Let me say that what we saw during that time in San Diego 
was an immediate drop in consumption of about 10 percent. I do 
not believe--and I think there is ample evidence and research 
at the Electric Power Research Institute--that one needs to 
have double or triple the bill to get a 10 percent reduction. 
There is some significant elasticity of demand even at lower 
price increases.
    But there is a secondary effect too if price increases are 
predictable and come in over time, and that is that then 
consumers and businesses can take the time to plan and can 
justify capital expenditures as against these higher prices for 
energy efficiency in their operations. So, I think there is 
reason to believe that as much as a 20 percent reduction can be 
achieved over a longer period of time.
    So, I fully endorse the notion that at both ends, both the 
supply and the demand side, we need to be orderly in what we 
do. We need to raise prices in an orderly, predictable fashion, 
but we also need to cap them temporarily.
    Senator Feinstein. Yes.
    Mr. Worthington, could you respond to my question as well? 
And my question is, when you were generating at $35 a megawatt-
hour and you then sold that facility, what was that facility 
then charging you for power at its most?
    Mr. Worthington. Much like was just said. When we first 
sold them, the prices remained near the price that we had 
encountered when we owned them. It was only really later, 
starting about June 2000, that the prices from those very same 
facilities started skyrocketing in price. In fact, in that one 
month of June 2000, we under-recovered from our customers $700 
million compared to what was embedded in the rates that we were 
entitled to charge under the retail frozen rates. To give you 
just an order of magnitude, in one month it popped up $700 
million and that was the delta over what was embedded in our 
rates, and that was more than enough to cover the cost of those 
plants ahead of time.
    Senator Feinstein. My concern is how do we get through this 
summer. Respectfully, Mr. Hecht--I listened very closely--I do 
not think your solution would get us through this summer----
    Mr. Hecht. May I give you some suggestions for the summer?
    Senator Feinstein. Can I just finish? Let me just make my 
point. I will be happy to listen to you.
    Mr. Hecht. Sure.
    Senator Feinstein. We are building power. Powerplants are 
being fast-tracked. As a matter of fact, I have a list of nine 
plants due to go on line with about 7,000 megawatt-hours of 
capacity. That is happening. I mentioned earlier the peaker 
plants. Just as fast as the Government can process them. They 
are not going to be there this summer. Ergo, this summer is 
going to be the same situation. You have got the major 
utilities close to bankruptcy right now. What would you advise?
    Mr. Hecht. Let me make a number of suggestions. I, in fact, 
thought about the short-term issues and what might be done.
    I already mentioned increasing retail prices, not by a 
factor of 10, carefully explained, merely for at least some 
consumers in some fashion. As Mr. Baum pointed out, sometimes 
even modest increases in price do constrain demand.
    Secondly, the installation of new capacity in small amounts 
in certain ways can be accomplished for this summer, 
particularly if the end user sees a higher price. Distributed 
generation, small powerplants, micro-turbines, fuel cells can 
be installed for this summer and can be done if the consumer 
has the right pricing because they are more costly per 
kilowatt-hour than larger generating plants that take longer to 
install.
    Thirdly, I would suggest that the State closely examine all 
environmental regulations that may impede or inhibit the 
utilization of existing facilities, existing generation. Might 
there not be at least some regulations that could be amended at 
least temporarily in some minor way that would increase 
production capability? Some production was off line during 
periods of very high prices during this past year because they 
ran out of NOX emission allowances.
    Another thing that might be considered--and I do not mean 
this facetiously--is that the utilities and the State pay for 
the energy that has been used but not paid for. Energy 
marketers and producers do have choices. Opposite party credit 
risk is one of the factors influencing that choice. To the 
extent that they have choices, producers and energy marketers 
will sell energy elsewhere than California where they perceive 
the opposite party credit risk to be less. It has been 
commented that these high prices are unjust and unreasonable. 
Prices set by supply and demand, reflecting the actual 
imbalance between the two, may well be one definition in 
competitive markets of just and reasonable. I would submit that 
paying zero for energy which has been consumed is, in fact, 
unjust and unreasonable.
    I also think that even the conversations about price 
controls can reduce new production, even for this summer. Let 
me give you one very small example.
    My company, jointly with Duke, is constructing a powerplant 
now in Kingman, Arizona which will be part of the Western 
market. That plant is due to come on line this summer. Each 
company has put more than a million dollars additional into 
incentive awards for the contractors working on the facility to 
get the facility in service merely 4 weeks early. That is a 
multi-million dollar commitment that must be recovered in a 
matter of weeks.
    So, there are things that can be done for this summer. I do 
respect the fact that a lot has been done for this summer. I do 
not believe this summer need be the crisis that it is shaping 
up to be.
    Senator Feinstein. Mr. Bryson, Mr. Baum, Mr. Worthington, 
would you respond?
    Mr. Bryson. I would be pleased to. I think much of what Mr. 
Hecht presents is old history and out-of-date and does not 
apply in a practical way to the urgent and difficult situation 
we face in California. Part of the problem that we face here is 
that so much time is spent on theory and in pointing at the 
past and mistakes made or allegedly made in the past.
    The reality is that in a practical way California now is 
doing every practical thing that I know that can be done to 
site powerplants, to allow existing plants to produce and 
produce at full capacity, to allow existing facilities to go 
beyond contracts and nameplate and produce more, to site small 
facilities, to waive or change environmental requirements that 
might restrict production.
    Believe me, as utilities we believe and would want nothing 
more than the ability to pay for past incurred power. We simply 
do not have the capacity to do that, and now the State is 
taking that up.
    Practical steps are being taken, but they are not much 
solved by application of pure theory and old bromides.
    With all due respect, I have just been handed a note that I 
think puts an accent on this. The reason that I try to get 
concrete and use numbers is to get away from theory. That is 
textbook.
    I am told that this morning, I believe, the California 
Independent Operators Market Surveillance Committee--now, that 
is an independent group of primarily economists that were 
established with the adoption of the California deregulation to 
review the competitiveness of the market and make judgments 
about it. As perhaps you are aware, they have repeatedly 
concluded--and these are people who have no commercial stake. 
These are a combination of academics and other independent 
close observers--that regrettably the wholesale market in 
California is not competitive.
    Here is the practical situation we are facing. They are 
projecting, as of today, a 10-fold increase in the price of 
power in the aggregate to California, from $7 billion in 1999--
and 1999 is a benchmark because it was prior to any of the run-
up in prices that began last May--all the way up to $70 billion 
projected for year 2001. The number in 2000 was $28 billion.
    So, this is a terrible problem. And just the experience of 
8 months in the year 2000 put us into practical near 
insolvency. Projecting, going forward, for 2001, current year, 
is more than double the cost of last year.
    So, something absolutely has to be done, and it does not 
do, in my judgment, to say just let markets go forward. The 
markets are not working. I believe in competitive markets. I 
believe that competitive markets can work in electricity, but 
they are not working now and we have a terrible crisis and we 
need a practical solution. Imposition of cost-based rates in my 
judgment ought to be temporary. It ought to be short. It ought 
to exist only under clear parameters. The proposed legislation, 
Senator, offered by you is clear on that point. All the 
comments I have heard this morning have been clear on that 
point, but we simply cannot go forth with inaction on the part 
of either the State or the Federal Government.
    Mr. Baum. Let me say that in my opinion there is little 
that can be done that has not already been done or is in the 
works for the supply side for this summer. I think we are 
pretty much baked as far as that is concerned. There are plants 
in the works and there are some peaking turbines and a variety 
of other efforts that are underway.
    But I do think there is a lot that can be done with respect 
to price. Mr. Hecht does have a point in bringing up the credit 
issue. I believe that built into the prices that we are seeing 
currently is a significant portion of the price that relates to 
the uncertain credit worthiness of the ISO, of the utilities 
themselves, and frankly, unfortunately, even the State of 
California. Mr. Fetter may want to comment on what Fitch's view 
of California's continuing credit worthiness may be at these 
prices. But I believe that unless we do something to stabilize 
the price, to stabilize the ability of the market participants 
to pay, that we will see that continuing credit component 
appearing.
    But last, I think the main thing that can be done for the 
summer, apart from this bill that you have put forth, is to 
work on the demand side of the equation. I think much can be 
done in that area.
    Mr. Worthington. I would concur with the comments that I 
think the State and we have done what we can with respect to 
the supply side for this coming summer. It is mid-March 
already. Not many months left.
    On the demand side, I know the Governor about a day and a 
half ago came out with his proposal to provide an additional 20 
percent rebate to customers who save 20 percent of energy usage 
over this coming summer. I think that type of proposal does 
need to get attention and other demand-side management. But I 
do not think even with an aggressive demand-side management 
program, as fully implemented as we could for this summer, will 
meet the gap that we are going to have.
    That is why I fully endorse the temporary limits of price 
caps or cost-based rates for existing generation. I do not see 
any other way that we are going to otherwise avoid those very 
startling numbers that we just heard of what the estimate for 
the total California energy cost could be for the year 2001.
    Senator Feinstein. Mr. Fetter, and then I will conclude. I 
think if you could comment on what might happen to the State's 
credit rating as well.
    Mr. Fetter. I would say the expectation of everyone on Wall 
Street, not only on the credit rating side, but on the equity 
side as well, from the start of this crisis would be that rates 
would go up. Rates going up would improve the credit profiles 
of the three companies represented here. In fact, all four 
companies would be strengthened if rates came closer to what 
the market structure was intended to be.
    As far as the State's credit rating, we recently reaffirmed 
it at AA. We are in the process of reviewing bridge financing 
which will fill the gap until the $10 billion bond issuance 
occurs later this year.
    But one question that has come up on the generator side is 
the Division of Water Resources which is an agency of the State 
and so is not backed by the State's full faith and credit. It 
is making certain purchases where the generators are not sure 
what is backing those purchases and whether, at a later time, 
that agency may say that the prices they agreed to purchase 
power at were unjust and unreasonable, so we do not intend to 
pay those prices. And that I think is chilling some of the 
interest on the part of generators, both in State and out of 
State, and their willingness to supply power to California.
    Senator Feinstein. Let me just thank you all very much. I 
appreciate your coming so far for this. Thank you.
    Senator Bingaman. I also wish to thank all the witnesses. I 
think it has been a useful hearing. We will try to get a 
consensus to move ahead. Thank you very much.
    [Whereupon, at 1:26 p.m., the hearing was adjourned.]
                               APPENDIXES

                              ----------                              


                               Appendix I

                   Responses to Additional Questions

                              ----------                              

                      Federal Energy Regulatory Commission,
                                    Washington, DC, April 17, 2001.
Hon. Frank H. Murkowski,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Senator Murkowski: Thank you for your letter of March 26, 
2001. In that letter, you requested that I provide responses to 
questions from Senators Cantwell and Wyden that arose following my 
March 15, 2001 testimony before your Committee. Please find enclosed my 
responses to these questions.
    If I may be of further assistance, please let me know.
            Sincerely,
                                       Curt L. Hebert, Jr.,
                                                          Chairman.
    [Enclosures]

               RESPONSES TO QUESTIONS FROM SENATOR WYDEN

    Question 1. California is trying to work out a deal to sell 26,000 
miles of transmission lines now owned by private utilities to the 
State. This sale is one of the key components of a deal to help bail 
out California utilities and pay back those who are owed for power sold 
to the utilities. Does the Commission have jurisdiction to review this 
deal?
    Answer. Yes. The Commission has jurisdiction to review the sale of 
jurisdictional transmission assets owned by public utilities and also 
review any transfer of operational control of jurisdictional facilities 
by a public utility. Section 203 of the Federal Power Act requires the 
Commission to review sales, leases or other dispositions of 
transmission facilities owned by public utilities, when such facilities 
have a value over $50,000 and they are used for transmission in 
interstate commerce.
    Question 2. If a deal goes through that involves the State of 
California acquiring transmission lines, won't this raise regulatory 
concerns with the Commission? For example, FERC Order 2000 requires 
participants in a Regional Transmission Organization (RTO) to give up 
operational control of those transmission lines. Regulatory concerns 
have been raised about how the Bonneville Power Administration (BPA) 
could participate in an RTO without giving up control of the 
transmission lines it owns. Won't state ownership of transmission lines 
raise the same regulatory issues as have been raised by the BPA? How 
would this regulatory concern be addressed in the case of California? 
Would the State have to give up control of the lines it acquires from 
private utilities?
    Answer. Yes, state ownership of transmission lines could raise 
regulatory concerns similar to those raised with respect to BPA and 
other non-public utilities. Non-discriminatory open access to 
transmission service in interstate commerce and the formation of 
Regional Transmission Organizations (RTOs) are crucial to achieving 
competitive markets in electric power. California transmission lines 
are an integral part of the western interstate transmission grid.
    If the sale of transmission lines to the State of California 
occurs, the Commission would need to decide whether the transaction is 
consistent with the public interest, based on all relevant 
considerations. The need for a non-discriminatory transmission grid and 
coordinated, efficient markets in the West could be undermined if 
California acquires the transmission facilities of the public utilities 
in California, but chooses not to apply or follow the same non-
discriminatory transmission rules as public utility transmission owners 
regulated by the Commission. Similar concerns could be implicated if 
California chooses not to include those transmission facilities as part 
of a west-wide RTO. While there are various means the Commission could 
use to attempt to address these interstate concerns, it is not possible 
to comment in detail without knowing more about California's proposal 
to acquire and own transmission lines.

              RESPONSES TO QUESTIONS FROM SENATOR CANTWELL

    Question 1. With Washington State as the backdrop--with surcharges 
and rate increases now approaching triple digits--what new supply do 
you expect to see triggered between now and summer by the kind of price 
increases we've seen? Are we really dealing with a market signal here 
or are we burdening consumers with price signals that cannot work?
    Answer. The Commission is doing everything within its powers to 
promote new supply and conservation and thereby bring back down, as 
quickly as possible, the price increases to which you refer. As for 
this summer, higher than normal prices experienced in the West during 
the summers of 1999 and 2000 will permit and encourage more generation, 
and thereby enhance reserve margins, whereas low prices may leave some 
generation idle. Furthermore, higher prices may provide the financial 
wherewithal needed to adequately maintain these older plants and 
thereby preserve the reliability of electrical grid operations. I would 
also note that an appropriate price signal may prompt additional supply 
over the long term and help to ensure adequate generation in the summer 
of 2002 and beyond. Finally, as you know, approximately 50 percent of 
the generation in the West is not jurisdictional to the Commission.
    More importantly, on the demand side, an appropriate price signal 
will encourage conservation, both in terms of consumers using less 
electricity, and consumers making investments in more efficient 
electricity-consuming appliances. Although I am not aware of estimates 
of the conservation potential in Washington State, I do know that 
estimates of the conservation potential in California are significant. 
Conservation has the effect of lowering prices for all consumers by 
balancing supply and demand at a lower level of demand.
    Question 2. Washington state has price increases far larger than 
those that have shown up in California. Demand reduction is running 
about 6% overall. However, the major reason is that industry shuts down 
and lays off workers. Is that kind of price signal desirable? Would you 
not agree that the reason for this response--shut downs and layoffs--is 
that price signals are not meant to be effective in short-term, crisis 
situations? Can we expect market signals to work when there's an 
incomplete or ineffective market?
    Answer. We recognize the importance of an effective, well-
functioning bulk power market which can send appropriate price signals 
to consumers to reduce demand and to generators to increase supply. It 
is regrettable that high prices have caused industrial shut-downs, 
worker layoffs, and other economic dislocations. But it is to be 
expected that some industrial firms, being the most price sensitive 
sector of the economy, will respond first. Some industrial firms have 
benefitted from purchasing a significant amount of their energy needs 
at low spot market prices for several years, and are only now feeling 
the effects of high spot market prices.
    However, I understand your concerns about high Western power prices 
and the implications for Western electricity consumers. While there are 
no easy answers to these problems, it is my belief that market-based 
solutions offer the most efficient way to move beyond the severe energy 
shortages confronting California and the West.
    In fact, appropriate prices, even high ones, can and do elicit some 
very potent short-term effects that work to lessen the impact of supply 
shortfalls. The fact that industrial electricity consumers shut down in 
some cases due to high electricity prices allows the electricity they 
would have consumed to be used by others, including hospitals, schools, 
and public safety consumers such as police and fire safety. In that 
event, all purchasers of electricity should pay lower prices, and 
actual shortages (blackouts) ought to be reduced in scope and duration.
    In the future, industrial firms may begin to choose differently 
than they have in the past when purchasing their energy services. In 
light of the experience of the last year, industrial firms may choose 
among the number of strategies available to address the risk of 
volatile spot market prices including the choice of maintaining a more 
diversified supply portfolio so that they purchase more energy in long-
term markets where prices are likely to be more stable.
    Question 3. Your press release on March 14 encompasses a lot of 
FERC activity in an effort to respond to criticism that you have not 
adequately addressed the Western electricity crisis. I commend the 
effort, but question the scope. Why does your proposal not address 
prices? How much energy will this proposal add to the grid and on what 
timeline? When fully implemented, how many megawatts are you expecting 
to produce with these supply initiatives? What effect on rates would 
you estimate from this increased supply?
    Answer. The Commission's March 14 order was issued to increase 
energy supplies and reduce energy demand in California and the West. 
The Commission implemented certain measures immediately, including: (1) 
streamlining regulatory procedures for various types of wholesale 
electric sales (including sales of backup or on-site generation and 
sales of demand reductions); (2) expediting the certification of 
natural gas pipeline projects into California and the West; and (3) 
urging licensees of hydroelectric projects to assess the potential to 
increase the generating capacity of FERC-licensed projects. The order 
was issued after taking a broad look at the Commission's regulatory 
responsibilities and addressing measures the Commission can implement 
immediately. The Commission also proposed, and sought comment on, other 
longer-term measures (such as incentive rates for transmission or 
pipeline construction completed by specified dates).
    The March 14 order does not directly address prices because pricing 
issues are being addressed in other dockets and orders, in particular 
the Commission's December 15 order, which created a $150 breakpoint and 
directed Commission staff to propose market mitigation to be put in 
effect as of May 1, 2001. On March 9, and 16, the Commission issued 
orders requiring California power sellers to make refunds or offsets of 
approximately $124 million for January and February 2001 transactions 
or provide further justification of their prices. In addition, the 
Commission held a conference in Boise, Idaho on April 10 addressing 
price volatility throughout the West.
    Where the Commission can act to enhance the energy infrastructure 
in the West it has done so. On April 6, 2001, the Commission issued a 
certificate of public convenience and necessity authorizing the 
construction of 135,000 Mcf per day of new natural gas pipeline 
capacity to California by the Kern River Transmission Company. This 
authorization issued within three weeks of Kern River's application to 
the Commission.
    In my judgment, the most effective way to lower Western energy 
prices in all time periods, and to keep them low, is to increase 
Western energy supplies. By way of example, I offer the summer of 1998, 
when wholesale electricity prices in the Midwest increased 
significantly. The Commission resisted pleas for price caps or other 
constraints. Subsequently, suppliers responded to the market-driven 
price signals and today the Midwest is not experiencing supply 
deficiencies. In the West today, we have market prices and barely 
adequate supplies. If we reduce prices below market levels, supplies 
will go elsewhere, risking greater reliability problems.
    The Commission's March 14 order was intended to increase energy 
supplies in the West. Although it is not clear how much additional 
energy will be available this summer or the effect it will have on 
rates, we believe that the Commission's order will permit many existing 
sources of energy to operate more efficiently. For example, of the 326 
hydroelectric projects licensed by the Commission within the WSCC, 200 
have provisions that limit operational flexibility. These 200 projects 
represent a total capacity of 21,000 megawatts. Greater flexibility in 
the dispatch of this capacity, consistent with protecting environmental 
resources, could provide additional energy to enhance the reliability 
of the system.
    Commission staff held two conferences, on April 9 and 10 in 
Portland and Sacramento, to discuss with agencies, licensees, and 
others, ways of expediting proposals to increase power generation at 
existing licensed hydroelectric power projects. The conferences were 
attended by representatives of the hydropower industry as well as 
resource agencies and nongovernmental organizations. In general, 
industry representatives set forth proposals for increasing electrical 
generation that ranged from modifying minimum flows and reservoir 
elevations to installing additional generating units and enhancing the 
efficiency of existing facilities. The resource agencies and 
nongovernmental organizations expressed a willingness to expedite 
processing of such proposals. Commission staff urged all of the 
industry representatives to comprehensively review their projects, in 
partnership with the resource agencies and other interests, to find 
ways of increasing power generation while preserving environmental 
resources.
    I find another example of a positive response to the Commission's 
March 14 order in a press release issued by Avista Utilities just last 
Friday, on April 13. In that announcement, Avista states that it has 
filed with the Washington and Idaho public utility commissions to 
implement an all-customer electric energy buy-back program. 
Specifically, Avista would offer a credit of five cents per kilowatt-
hour for each customer which reduces electric use by more than five 
percent. This is precisely the type of demand reduction program the 
Commission has encouraged, and represents the type of cooperative 
relationship between federal and state agencies that is necessary to 
make it through this difficult summer.
    Question 4. A possible variation on cost-based rates could be to 
exempt new generation from the cost-based requirement. Would you 
support this approach?
    Answer. While I have strong reservations about returning to cost-
based regulation, I agree that it is very important that market forces 
be allowed to work in ways that encourage investment in new generation. 
I have an open mind to pricing approaches that ensure this result.
    However, it is difficult to design and police a tiered system in 
which pricing policies are different for existing and new generators. 
Existing generators will have an incentive to sell power through 
intermediaries whose power sales are either not subject to the 
Commission's jurisdiction, or are outside of the scope of any cost-
based regulatory rule. (Past experience with vintage rate setting 
schemes in the pricing of natural gas suggests that it may be 
impossible to craft rules which are not subject to circumvention and 
arbitrage, or lead to other unintended undesirable consequences.) 
Accounting for the components of the sale to ultimate consumers may 
require significant transaction tracking and auditing activity.
    Some may also be concerned with the disturbing precedent of a boom-
bust regulatory cycle: deregulation, followed by re-regulation. 
Following deregulation, some utilities sold off their generation 
assets, either voluntarily or pursuant to state directive. The 
companies acquiring these assets did so based on the knowledge and 
belief that their future sales would be made at market prices, and set 
acquisition prices (often at levels far in excess of book value) based 
on those beliefs. Subsequent re-regulation of these assets, could 
create further regulatory uncertainty in the future as for-profit 
companies consider whether to invest in the electric power industry in 
general, or in Western electricity markets in particular, unless such 
re-regulation were known to be of limited duration during extraordinary 
circumstances. Ultimately, I believe that market certainty is one of 
the most important goals we can seek to achieve for electricity 
producers and consumers alike.
    Question 5. In your March 14 press release, about the order 
regarding ways to increase the supply of electricity in the West, you 
say that: many hydro projects have the potential to more fully use 
their available water resources to increase generation. This may be 
done through additional capacity units, generator and/or turbine 
upgrading and other operational improvements. The Commission asks that 
all licensees immediately examine their projects and propose and 
efficiency modifications that may contribute to increased power 
supplies.
    (a) How fast is FERC prepared to act on efficiency modifications 
proposed by hydro licensees? Can you commit to a specific number of 
days? My concern is that summer is fast approaching, and we need to get 
the most out of our hydro system to keep the lights on in the West. If 
FERC does not act promptly on these proposals, it will be too late to 
do us any good.
    (b) Your press release also mentions the need to expedite the 
Endangered Species Act consultation process. Specifically, how do you 
plan to do that? Will you work with the resource agencies (e.g., the 
Fish and Wildlife Service) to assure that endangered species are 
protected during this process?
    Answer. In its March 14, 2001 order, the Commission ordered the 
removal of obstacles to increased electric generation and natural gas 
supply in the Western United States. The Commission will act on any 
efficiency modifications as promptly as possible. Where there is broad 
support for an amendment and the environment, including endangered 
species, is adequately protected, we would expect to act on a proposal 
in a matter of days. As I noted in my response to Question 3, 
Commission staff has held two conferences in the WSSC region. As stated 
above, the conferences revealed a commitment of the industry and other 
participants to identify proposals that would provide for additional 
power generation that are consistent with environmental protection.
    Question 6. On March 9, you issued an order regarding potential 
refunds for California electric power sales. Why was that order 
restricted to California when it is clear that much of the Northwest is 
paying as much or more for electricity on the current distorted market? 
Why does the ``justness and reasonableness'' evaluation only apply to 
transactions that took place during Stage 3 conditions? One could make 
the case that higher prices are more nearly warranted when a Stage 3 
emergency is declared because they are just trying to keep the lights 
on. The price gouging that is of most concern is at Stage 1 and Stage 
2. The limited time period and limited conditions under your refund 
order are inconsistent with FERC's authority to look at just and 
reasonable rates. How can consumers be protected if you don't use your 
delegated authority?
    Answer. The Commission's March 9, 2001 order put 13 California 
power sellers on notice that they must either make refunds for certain 
power sales or provide further justification of their prices. This 
order followed the Commission's December 15, 2000 order adopting 
specific remedies to address dysfunctions in California's wholesale 
bulk power markets and to ensure just and reasonable wholesale power 
rates by public utility sellers in California.
    The December 15 order found that California's flawed market rules 
caused rates that were unjust and unreasonable during certain periods. 
The order addresses specific market flaws in California wholesale 
electricity markets and made public utility sellers that bid above 
$150/MWh subject to weekly reporting requirements to ensure just and 
reasonable rates. The sales of all public utility sellers into the ISO 
and PX markets were also made subject to potential refund. Under the 
conditions in the December 15 order, the Commission must issue written 
notification to a public utility seller within 60 days of each weekly 
reporting filing that the seller's transactions are still under review 
or refund liability for those transactions will automatically cease.
    In the March 9 order, the Commission established a proxy price 
screen applied to transactions that are above $150/MWh breakpoint and 
that take place during Stage 3 emergencies. The Commission reasoned 
that the potential for market power abuse is most likely to occur 
during periods of severe supply deficiency. The Commission limited its 
approach to Stage 3 emergency hours, when the supply/demand imbalance 
is the most severe and sellers know their power is most needed.
    The Commission has considerable discretion in establishing just and 
reasonable rates under the Federal Power Act. In setting rates, the 
Commission may take into account non-cost factors, including the need 
to encourage new supply. See Permian Basin Area Rate Cases, 390 U.S. 
747 (1968). In the refund order at issue, the Commission's focus only 
on the highest stage of emergency serves to target the Commission's 
intervention where it is needed most. Stage 3 emergencies (when reserve 
margins dip below 1.5%) are the periods when supply and demand are on 
the verge of imbalance. As the March 9th order reasoned, at Stage 3, 
the least efficient simple-cycle combustion turbine unit (CT) would be 
the marginal source of power, and therefore represented a reasonable 
point for developing a proxy price screen. The Commission's order did 
not want to mask scarcity costs because doing so will blunt the price 
signals needed to induce supply entry. And because current technology 
is much more efficient than marginal CT units, the proxy price leaves 
room for price signals to stimulate market entry. I would note, 
however, that these issues are subject to rehearing.
    Others have suggested, as you do, that the Commission should extend 
its approach in California to other parts of the Western markets. While 
I have an open mind on this issue, there are certain fundamental 
differences between California's centralized market design and the 
bilateral contract regime that exists elsewhere in the West. As a 
result, our approach in California does not adapt readily to other 
parts of the West.
                                 ______
                                 
                                   The Secretary of Energy,
                                    Washington, DC, April 10, 2001.
Hon. Frank H. Murkowski,
U.S. Senate, Washington, DC.
    Dear Senator Murkowski: In response to a number of inquiries from 
Members of Congress, and in light of recent discussions of possible 
legislation addressing energy issues in the West, and particularly 
California, I thought it would be helpful to provide you with an update 
on the crisis.
    First, it is important to note that this crisis is a supply crisis. 
Simply put, the principal problem--and thus the proper focus of our 
attention--should be on the problems of the blackouts and shortages. 
Proposed solutions that do not either lead to increased supply or 
reduced demand will not address the core problems confronted in the 
West.
    Thus, the Administration has taken a number of actions to support 
California in its efforts to address critical supply issues.

   One day after being sworn into office, the President 
        directed me to call Governor Davis to discuss the crisis and 
        ask how we could help address the power shortages.
   Three days after taking office, at Governor Davis' request, 
        we extended the emergency electricity and gas orders to give 
        California time to develop legislation aimed at maintaining 
        electricity supplies.
   In February, also at the request of Governor Davis, 
        President Bush issued an executive order directing Federal 
        agencies to expedite permits relating to construction of new 
        power plants in California. The U.S. Environmental Protection 
        Agency has issued air permits for three power plants in the 
        past month.
   President Bush and I have engaged in discussions with the 
        Government of Mexico about increasing electricity imports from 
        Mexico. DOE is also working expeditiously to approve two cross-
        border electricity expansions between California and Mexico 
        that should be approved later this year.
   In early March, at the behest of Governor Davis, I sent a 
        letter to the Federal Energy Regulatory Commission (FERC) 
        asking that the agency act on his request for an extension of 
        the waiver for qualifying facilities from certain fuel 
        requirements.
   In response to a request from the State of California, the 
        U.S. Environmental Protection Agency has provided other 
        assistance, clarifying rules relating to operation of backup 
        generators.
   While the imbalance between supply and demand is the reason 
        for high energy costs and power shortages, the Bush 
        Administration was the first to take action on overcharges. 
        FERC took unprecedented action and ordered the first-ever 
        refunds to address overcharges by generators on market-based 
        rates after we took office and after a Republican took over as 
        Chairman.
   On March 14, FERC issued a series of orders designed to 
        expedite energy supplies to California, including streamlining 
        regulatory procedures for wholesale power sales, expediting 
        natural gas pipelines, and urging hydropower licensees to 
        assess the potential for increased hydropower generation.
   As follow up to a meeting with Governor Davis, I issued a 
        letter indicating that the Administration did not oppose the 
        State's proposed purchase of the California utility 
        transmission systems, conditioned on the adherence to open 
        access requirements.
   Just two weeks ago, I met with a group of California energy 
        suppliers to impress upon them that the next several months 
        should not be viewed as ``business as usual,'' and to ask for 
        their help to avoid foreseeable disruptions in supply.
   Last week, I met with a group of electricity experts to 
        discuss the California electricity crisis and to explore 
        actions that could be taken by the Federal Government and State 
        to increase supply or reduce demand.

    As you can see, the Administration has taken constructive action 
from its first day to help California deal with its electricity crisis. 
Governor Davis has expressed his appreciation to both the President and 
me for this help.
    Regrettably, our well-founded opposition to price caps has been 
claimed by some to suggest the Administration either does not care 
about California and the West or is doing nothing to address the 
problem. Certainly, the actions described in this letter show this is 
simply untrue.
    The only thing we have opposed has been the imposition of price 
controls because they would not prevent blackouts and would drive away 
the new supply California and the West so badly need. The 
Administration is not alone in its opposition to price caps. In 
February, eight of the eleven Western Governors sent me a letter 
expressing their opposition to price caps. Those eight governors 
reiterated their opposition in an April 6 letter to FERC Chairman Curt 
Hebert, calling them ``penny wise and pound foolish.''
    By contrast, advocates of price controls have failed to indicate 
how price caps would increase supply, decrease demand or prevent 
blackouts this year.
    I appreciate the opportunity to brief you on the numerous actions 
the Administration has taken since our first day to support California. 
Please be assured that we will continue to look for constructive ways 
to remove obstacles to new electricity supply in California and the 
West.
            Sincerely,
                                                   Spencer Abraham.
                                 ______
                                 
                      Federal Energy Regulatory Commission,
                                     Washington, DC, April 3, 2001.
Hon. Frank Murkowski,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman: At your Committee's March 15, 2001 hearing on 
Western Energy Problems, Senator Pete Domenici asked that the Federal 
Energy Regulatory Commission report on the reasons for the significant 
differential between wellhead prices for natural gas produced in New 
Mexico and the delivered price of gas at the California border. 
Specifically, Senator Domenici questioned why producers in New Mexico 
were receiving $5 for natural gas while natural gas was being sold for 
$60 at the California border.
    I have attached a Staff paper discussing the operation of natural 
gas markets. I hope these answers are helpful to you. If I can be of 
any further assistance in this, or any other matter, please do not 
hesitate to contact me.
            Sincerely,
                                       Curt L. Hebert, Jr.,
                                                          Chairman.
[Enclosure]

                   STAFF PAPER ON NATURAL GAS MARKETS

    There are various ways in which a natural gas buyer in California 
(or elsewhere), whether it is a local distribution company (LDC), 
industrial customer, or electric generator, can get gas to the state 
border. First, the customer can buy gas in the various producing 
basins, either on the spot market or through a long-term gas supply 
contract, and transport the gas on an interstate natural gas pipeline 
using capacity that it has purchased directly from an interstate 
pipeline serving California. In that circumstance, the customer would 
pay the interstate pipeline's tariff rate, which is regulated by the 
Commission, plus the price of gas at the wellhead.
    A second option would be for the customer to purchase gas in the 
producing basins and transport the gas to the state border using 
capacity that was released to it by an entity holding interstate 
capacity. If the customer purchased released capacity, the price the 
customer pays for the interstate capacity could exceed the pipeline's 
maximum tariff rate because, pursuant to Section 284.8(i) of the 
Commission's regulations, ``[u]ntil September 30, 2002, the maximum 
rate ceiling does not apply to capacity release transactions of less 
than one year.'' Under this option, the customer would still pay the 
congressionally deregulated price of natural gas at the wellhead. 
However, while the price paid for the interstate capacity could exceed 
the pipeline's maximum tariff rate, capacity release transactions do 
not appear to be causing the $60 gas prices. Capacity release data 
received by the Commission for November and December 2000 show that 
there were relatively few short-term capacity release transactions and 
nearly all of those transactions were small volumes priced at the 
interstate pipelines' maximum tariff rates.
    The final way in which the customer could get gas would be to buy 
it in a bundled sales transaction. In that circumstance, the customer 
does not contract for its own interstate capacity and has not purchased 
released capacity. Nor has it entered into any long-term gas supply 
contracts. The customer would enter into a contract with another entity 
who would make arrangements to deliver the gas at the California border 
for an agreed upon price. The entity would have its own gas supply or 
purchase gas on the spot market in the producing basins. The gas would 
be transported using the entity's own interstate capacity as described 
in the first option or firm capacity that it obtained through a 
capacity release arrangement as described in the second option. While 
these transactions appear to account for the $60 natural gas prices at 
the California border, a review of Gas Daily index prices for December 
indicates that the price spikes of $60 occurred only for a few days.
    The price that producers receive for their natural gas at the 
wellhead reflects the value of the natural gas in the production area, 
while the higher price received at the California border appears to 
reflect the value a natural gas customer without interstate pipeline 
capacity places on having gas delivered to the California border. Any 
entity who has both gas supplies and interstate capacity is able to 
capture this value. In order for producers, including producers in New 
Mexico, to sell natural gas at the California border, they can elect to 
secure any available transportation capacity directly from the 
interstate pipelines or through capacity release transactions. In doing 
so, however, the producers would bear the cost responsibility of 
retaining interstate capacity.
    The Commission's jurisdiction over bundled sales transactions is 
limited. The Commission retains jurisdiction to regulate sales for 
resale by interstate pipelines, intrastate pipelines, LDCs and their 
affiliates, except when they produce the gas that they sell. The 
Commission also does not have jurisdiction over bundled sales 
transactions that are direct sales. In addition, the Commission cannot 
regulate the price of gas imported from countries with free trade 
agreements, including Canada and Mexico. Based on information contained 
in the California Energy Commission's November 2000 report entitled 
California Gas Analysis and Issues, the Commission estimates that 
between 12 and 17 percent, but no more than 35 percent, of gas sales 
into California would be subject to the Commission's jurisdiction. The 
percentage of gas subject to the Commission's jurisdiction could change 
daily depending on a number of factors including the seller of the gas, 
the buyer of the gas, the source of the gas and how the transaction is 
structured. Any reregulation of the price of natural gas could 
bifurcate that natural gas market into jurisdictional and 
nonjurisdictional elements. This bifurcation could send inaccurate 
price signals to gas consumers and could cause distortions in the 
natural gas markets, similar to those that occurred in the 1970s, when 
interstate natural gas sales were subject to federal regulation and 
price controls.
                              Appendix II

              Additional Material Submitted for the Record

                              ----------                              

                                    The Stella Group, Ltd.,
                                 Washington, DC, February 20, 2001.
Hon. Frank Murkowski,
Chairman, Committee on Energy & Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Senator Murkowski: As a leading firm in the marketing of 
distributed renewable energy technologies, I would like the opportunity 
to testify before the Committee on the following Department of Energy 
renewable energy programs relating to solar energy, distributed energy, 
combined heat and power, and energy storage. Particularly on how it 
relates to electricity reliability and price stability.
    The Stella Group, Ltd, is a strategic consulting firm to the 
distributed power industry founded in 1995. The firm receives no 
federal funding or subcontracting. Previously, I served 14 years 
concurrently as Executive Director of both the Solar Energy industries 
Association and the National BioEnergy Industries Association.
    I hope for the opportunity to provide short testimony in regard to 
these important programs.
            Sincerely,
                                               Scott Sklar,
                                                         President.
                                 ______
                                 
                          Morrison & Foerster, LLP,
                                          Attorneys at Law,
                                 Washington, DC, February 21, 2001.
Hon. Frank Murkowski,
Chairman, Senate Committee on Energy and Natural Resources, Washington, 
        DC.
    Dear Senator Murkowski: We are submitting two news articles for 
inclusion into the record of your Committee's hearings on the 
California Energy Crisis.* These articles are from the Wall Street 
Journal, California Edition, and the Los Angeles Times, Orange County, 
regarding AES' efforts to restart two mothballed units in Huntington 
Beach, California. If the necessary permits can be secured, AES would 
bring on line 450 megawatts of generation to help meet next summer's 
energy needs in California. We also enclose AES' recent firm 
announcement on its plans to reactivate the Huntington Beach units.
---------------------------------------------------------------------------
    * Attachments have been retained in committee files.
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    AES is the world's largest global power company, which 19 years ago 
began developing, building and owning cogeneration plants in the U.S. 
AES' experience includes owning generation businesses in competitive 
markets in Australia, Argentina and England and Wales. In California, 
AES has owned and operated a 125 MW combined cycle power plant in Santa 
Clarita since 1988. Ten years later, we purchased from Southern 
California Edison power plants in Redondo Beach, Huntington Beach, and 
Long Beach representing 4000 MW.
    Please let us know if you have any questions.
            Sincerely yours,
                                        Robert H. Loeffler,
                                                  Attorney for AES.
                                 ______
                                 
                                             State Capitol,
                                         Boise, ID, March 14, 2001.
Hon. Curt Hebert, Jr., Chairman,
Hon. William Massey, Commissioner,
Hon. Linda Breathitt, Commissioner,
Washington, DC.
    Dear Chairman and Commissioners: You are aware of the energy 
challenges confronting my state of Idaho and other Western states this 
year due to historically low water levels. We face a critical imbalance 
between the demand for energy and the supply of energy.
    Some have offered temporary solutions for a long-term problem. Of 
those solutions, price caps have been discussed as a possible remedy. 
You may recall that on February 6 of this year, eight western 
governors, including myself, asked Secretary Abraham not to impose 
price caps on electricity and natural gas. Just as I opposed price caps 
then, I oppose price caps now.
    Although price caps are intuitively appealing in our current 
situation they may ultimately undermine our efforts to offset the 
energy situation that we are experiencing. One of the major drawbacks 
to price caps is that it discourages investment in new generation 
facilities. That is something that we cannot afford to do. Instead, 
bringing new facilities on-line is a long-term solution to this 
problem. Another issue surrounding price caps is that they jeopardize 
current short-term and long-term energy contracts that are already in 
place. This would exacerbate the problem for the entire region.
    We have seen the devastating effects price caps have had on 
California. We do not want that to spread into the other western states 
that are proactively seeking real solutions to this real situation.
    In a September 11, 2000 speech before the Senate Energy and Natural 
Resources Committee, then Commissioner Hebert stated the following:

          ``In a report dated September 6, 2000, the Market 
        Surveillance Committee of the California ISO concludes that 
        price caps have little ability to constrain prices . . . If the 
        FERC is serious about increasing generation supply, it should 
        act immediately to withdraw all price caps in generation 
        markets. They distort price signals and inhibit entry into 
        competitive markets.''

    Furthermore, it was concluded in a September 24, 1998 report from 
the FERC staff to the Commissioners on Midwest electricity price spikes 
the following:

          ``. . . The team believes that price caps, whether they are 
        applied generally of intended for specific, emergency 
        situations, create a situation in which prices are not allowed 
        to perform their rationing function. In addition, they can 
        distort market signals and prevent the efficient allocation of 
        resources resulting in shortages.''

    As I have already stated, we must have long-term solutions to this 
situation. Price caps only offer a false sense of security and do 
nothing to remedy the problem. Common sense approaches such as reducing 
demand and increasing supply and siting new generation facilities is 
the only sure way of solving the problem. These are the discussions 
that we should be engaged in that will offer real solutions, and I am 
hopeful that the Commission understands that.
    I appreciate this opportunity to share my concerns with you about 
price caps. The economy of our region depends upon successfully 
managing this energy challenge that we are facing. With your help, we 
can do that.
            Sincerely,
                                           Dirk Kempthorne,
                                                          Governor.
                                 ______
                                 
                                             State Capitol,
                                    Sacramento, CA, March 15, 2001.
Hon. Frank Murkowski,
Chairman, Senate Energy and Natural Resources Committee, U.S. Senate, 
        Washington, DC.
Hon. Jeff Bingaman,
Ranking Member, Senate Energy and Natural Resources Committee, U.S. 
        Senate, Washington, DC.
    Dear Chairman Murkowski and Ranking Member Bingaman: Thank you for 
convening today's hearing to discuss legislation introduced in the U.S. 
Senate to address the problem of high prices and shortages of 
electricity in the West. This is an issue that affects the citizens in 
all of our states to varying degrees.
    I want to commend Senators Feinstein and Boxer for their leadership 
in advancing these proposals. Their legislation makes a clear and 
compelling case for greater levels of intervention by the Federal 
Energy Regulatory Commission (FERC) in responding appropriately to 
California's electricity situation. I appreciate the Committee's 
willingness to hear testimony on these measures, and I urge the 
Committee to seek ways to advance the underlying goals of the 
legislation.
    Since my January 30, 2001 letter to you we have made significant 
progress in our comprehensive strategy to tackle the myriad issues 
before us. We are maintaining our aggressive efforts to increase new 
generation, decrease demand, reduce our reliance on the spot market 
through long-term contracting, stabilize the financial viability of our 
utilities, and plan for electricity and natural gas transmission 
improvements, Attached for your information is a more detailed 
discussion of recent developments in California.*
---------------------------------------------------------------------------
    * Attachments have been retained in committee files.
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    I want to assure you that my Administration continues to pursue 
this course of action with spirit and determination. We are doing 
everything humanly possible to meet this challenge. However, the 
federal government has an obligation and responsibility to take 
corrective and decisive action on one issue that falls squarely on the 
shoulders of Washington--excessively high wholesale energy prices.
    In the near term, these wholesale prices--which have been found by 
the Independent System Operator (ISO) to greatly exceed the actual cost 
of production--need to be brought down to reasonable levels. The 
excessive charges levied by generators have brought California's two 
largest utilities--Pacific Gas & Electric and Southern California 
Edison--to the edge of bankruptcy. Last week the FERC itself found that 
13 generating companies may have to refund $69 million for overcharging 
on power sales in January alone.
    Earlier this week, Governor Locke of Washington, Governor Kitzhaber 
of Oregon and I formally requested that the FERC take steps on an 
interim basis to restrain the unreasonably high wholesale costs in our 
region. We specifically suggested that the FERC give serious 
consideration to a plan proposed by Commissioner William Massey. The 
essence of the plan centers around a temporary cost-based price cap on 
spot market sales in the western interconnection. The price cap could 
be calculated on a generator-by-generator basis at each generator's 
variable operating costs plus a reasonable rate of return in the range 
of $25/MWh.
    As a purely temporary measure that enables generators to recover 
all of their operating costs and receive a return, this proposal would 
not discourage the development of new generation. In addition, federal 
power marketing agencies that are not controlled by the FERC, such as 
the Bonneville Power Administration, would agree to adhere to such a 
plan if adopted by the FERC.
    S. 287, S. 26, and S. 80 before you today are all reasonable 
approaches in pursuit of just and reasonable wholesale electricity 
prices. I urge the Committee to carefully review the situation we face 
in the West with respect to current wholesale prices. Any objective 
review will adequately justify congressional action to implement a cost 
plus pricing strategy.
    Mr. Chairman, it is clear that this market has become 
dysfunctional. Nothing less than the nation's economy and the economies 
of all of our states are at stake. Federal action to enact a temporary 
cost-based price cap is necessary and warranted in order to protect 
consumers and businesses in the West from the vagaries of this 
dysfunctional market. If the FERC refuses to exercise its full 
authority under the law to restore price stability, I believe it is 
appropriate for the Congress to do it for them.
    Thank you again for holding today's hearing and for the opportunity 
to share my thoughts with you.
            Sincerely,
                                                Gray Davis,
                                                          Governor.
                                 ______
                                 
           STATEMENT OF THE AMERICAN PUBLIC POWER ASSOCIATION

    The American Public Power Association (APPA) is pleased to present 
this written statement for the record to the Senate Energy and Natural 
Resources Committee for their March 15 hearing, ``Western Energy 
Problems.'' APPA is the national service organization representing the 
interests of over 2,000 municipal and other state and local community-
owned utilities throughout the U.S. APPA member utilities include state 
public power agencies, and serve many of the nation's largest cities, 
but the majority of our members are located in small and medium-sized 
communities in 49 states, all but Hawaii. In fact, 75 percent of our 
members are located in cities with populations of 10,000 people or 
less. APPA members serve about 14 percent of all kilowatt-hour sales to 
ultimate consumers throughout the United States.
    We share many of the energy policy objectives held by President 
Bush and members of the Committee. Chief among these are developing a 
balanced national energy policy that emphasizes fuel diversity, 
appropriately integrating energy and environmental issues, and 
resolving problems in the wholesale markets for electricity. Congress 
and the Administration must focus on creating a more competitive market 
for wholesale sales of electricity in order to protect consumers from 
wildly fluctuating prices and ensure reliability. Recent developments 
across the country, but especially on the West Coast, reinforce the 
fact that wholesale electricity markets (and wholesale energy markets 
in general) are interstate in nature and disturbances in the market cut 
across all industry segments. The Committee's hearing is timely because 
solutions to the problems in the Western electricity market and heading 
off similar problems in other regions require quick and coordinated 
action at federal, state, and local levels. Moreover, these policies 
should recognize the problems that ensued when federal and state 
policymakers ignored the cautions raised about market structure and 
instead put blind faith in the ideology of open markets and made 
inaccurate assumptions about competitive market forces.
    In this statement APPA outlines some of the root causes of--and 
possible solutions to--the Western energy crisis, and emphasizes that 
the ``California problem'' is not exclusive to that state alone.
 there are three issues to address: scarcity, structure, and skepticism
    The problems encountered in the Western electric market, and new 
problems beginning to be seen in other regions, have three distinct 
characteristics: scarcity of supply, generation capacity and 
transmission; imperfect, or dysfunctional, market structure at the 
wholesale level; and consumer skepticism that market participants are 
capitalizing on scarcity and imperfect markets. Each of these problems 
must be addressed as Congress, the White House, and the Federal Energy 
Regulatory Commission (FERC) develop and implement a cohesive set of 
policies applicable to all regions of the nation.

                                SCARCITY

    Lack of generation capacity has contributed to California's failed 
electricity experiment. But that is just part of the equation. Lack of 
sufficient transmission capacity, scarcity of fuels, particularly 
natural gas, low water levels, and few serious conservation efforts are 
other factors. To address these scarcity issues, APPA recommends that 
federal policies incorporate the following principles:

   The use of all types and sources of electricity production 
        must be encouraged while maintaining our national commitment to 
        a clean environment.
   Production incentives for both renewable energy as well as 
        environmentally acceptable means of using fossil fuels should 
        be provided, and such incentives must be available to all 
        entities, including not-for-profit publicly owned utilities.
   Regulatory policies, including but not limited to the 
        hydroelectric relicensing process, that reduce the capacity of 
        existing generating facilities without ensuring an appropriate 
        balance of both energy and environmental needs, must be 
        reviewed and modified as necessary.
   Our nation's dormant commitment to efficient use of energy 
        must be renewed, and conservation must become an essential 
        component of the solution.

                       IMPERFECT MARKET STRUCTURE

    Many of the market problems in California can be attributed to 
policymakers; both at the state and federal level assuming that market 
forces alone would be sufficient to forge competition out of an 
industry structure that had been monopolistic in nature since 
inception. Consumers have paid the price for the consequences of 
premature decisions by federal regulators to allow a transition to 
market-based rates without first requiring the existence of a 
competitive wholesale market structure. The California experience makes 
clear that FERC should permit wholesale sales at market rates only in 
regional markets that meet predetermined criteria that clearly define 
the characteristics of workable competitive wholesale markets. These 
and other market structure issues need to be addressed in any federal 
policy, including the following principles:

   Transmission is an interstate commerce matter within the 
        jurisdiction of Congress. Regionally integrated planning and 
        expansion of the grid is essential to create and maintain a 
        structure that can sustain regional reliability and wholesale 
        competition. Federal eminent domain authority to ensure 
        reliability and competitive wholesale markets must be provided 
        for construction of new transmission facilities, either to 
        properly structured, independent RTOs, Regional Transmission 
        Organizations, or in their absence to transmission builders 
        pursuant to a FERC issued certificate of public convenience and 
        necessity.
   The lack of effective RTOs that can ensure truly neutral 
        management of the nation's transmission facilities is the 
        single biggest obstacle to a properly functioning interstate 
        electricity market. Private utilities that control vast amounts 
        of the nation's transmission systems have a long history of 
        denying access to their systems, or providing access at highly 
        discriminatory rates and unfair terms. It is vitally important 
        that federal policies encourage the development of independent, 
        properly configured RTOs.
   Wholesale sales at market rates into improperly structured 
        and dysfunctional markets will not produce just and reasonable 
        rates for consumers. Congress must clearly define the 
        fundamental characteristics of workable competitive wholesale 
        markets, and FERC should permit wholesale sales at market rates 
        in regional markets that are consistent with these 
        characteristics and require sales at cost-based rates in those 
        that are not. Senator Feinstein's bill, S. 287, directs the 
        FERC to do just that.
   Repeal of the Public Utility Holding Company Act (PUHCA) 
        prior to the creation of a new market structure that can 
        sustain effective competition would only make a bad situation 
        worse and should not occur. Indeed, numerous parallels can be 
        drawn between the market conditions that existed in 1935 which 
        led to the enactment of PUHCA, and the market conditions that 
        exist today. These parallels highlight its continued 
        importance. For example, the number of registered holding 
        companies has expanded from 14 to 30 in the last eight years. 
        In addition, today's 150 registered and unregistered holding 
        companies have a combined total of 240 utility subsidiaries and 
        4,200 non-utility subsidiaries. And, the ongoing rapid 
        consolidation of the marketplace has seen 54 mergers completed 
        or announced during the past two years alone--in addition to 24 
        mergers of U.S. utilities with foreign companies over the same 
        period of time. This consolidation limits the number of 
        potential competitors, and requires additional oversight to 
        prevent market power abuses that put consumers at risk.

                          CONSUMER SKEPTICISM

    With postings of enormous profits, billions of dollars changing 
hands, and cries of market manipulation, it is easy to understand the 
level of skepticism held by California officials and consumers. APPA 
believes we all have a responsibility to rebuild consumer confidence as 
soon as possible, and we urge Congress to adhere to several principles 
when developing federal policy:

   A national reliability organization with the authority to 
        establish and enforce reliability standards, assure adequate 
        generating capacity reserves in each relevant wholesale market, 
        and oversee and coordinate maintenance outages, must be 
        created.
   Complete and timely market information on capacity, 
        transactions and prices must be available to regulatory 
        agencies, public officials and all market participants.
   The FERC must be directed to monitor the wholesale market, 
        and given the resources necessary to do so. It must also be 
        delegated the authority to provide remedies and impose 
        penalties as appropriate.

  CALIFORNIA IS NEITHER AN ABERRATION NOR EXCLUSIVELY A STATE PROBLEM

    The failure of electric utility industry restructuring in 
California has had and continues to have broad and far-reaching adverse 
effects throughout the Western States Coordinating Council region. 
Electric utilities and their consumers in Western states are 
experiencing unprecedented volatility of electricity prices. Utilities, 
both public and private, are near the financial edge and some are 
threatened by bankruptcy. The collapse of these utilities would 
challenge the financial stability of major banks, energy producers and 
marketers, as well as businesses and industries that provide products 
and services (and credit for such products and services) to the 
electric utility industry throughout the region.
    As Federal Reserve Board Chairman Greenspan has noted, the 
magnitude of the current electricity problem is sufficient to disrupt 
the economy of the entire country. If left unchecked, the problems will 
become more severe. If addressed, this near brush with disaster should 
provide a sobering message that such problems cannot be allowed to 
arise in other regions.
    There are two critical lessons that must be understood from 
California's crisis. First, electricity is the oxygen of our economy. 
While lip-service has been paid to this fact in the past, the reality 
of this proposition is now being driven home with frightening force. 
The electric utility industry is simply too important to the well-being 
of the entire nation to permit hasty ``experiments'' and unquestioning 
and untested reliance on the ability of ``deregulated'' retail markets 
without viable wholesale electric markets to provide reliable and 
adequate supplies (and sufficient reserves) of electric energy and 
capacity to all consumers at reasonable rates.
    Second, and equally important, wholesale electric markets are 
interstate in nature. What is happening today is not simply a 
``California problem''--consumers in Arizona, Utah, Idaho, Montana, 
Oregon and Washington are directly affected, and there will be ripple 
effects throughout the economy. Regardless of its origin or cause, this 
is a national problem and the solution requires federal action.
    The failure of California's electricity plan has made clear the 
important role that wholesale markets have in determining the 
effectiveness of the retail competition plans enacted by the states. 
For several years, APPA and other organizations have emphasized that 
state objectives for retail competition will only succeed if supported 
by a workable wholesale marketplace. While many factors have 
contributed to the rolling blackouts and high prices in California's 
electricity market, it is apparent that improvements in the structure 
of the interstate electricity marketplace would go a long way toward 
helping to avoid such problems in the future.
    Congress must finish the job it started with the Energy Policy Act 
in 1992, the first major step in creating competitive wholesale 
markets. It must take further steps to strengthen the electricity 
market. This can be accomplished, as outlined above, by ensuring 
consumer protection and by eliminating the problems caused by market 
abuses.
    With regard to the specific issue of today's hearing, we support 
Senator Feinstein's legislation, S. 287, calling on the FERC to impose 
cost-based rates in the Western energy market on an interim basis. 
While we support this legislation, we believe FERC must enforce the 
statutory standard of just and reasonable rates in all wholesale 
markets that fail to provide just and reasonable rates through 
competition and market forces.
    Senator Feinstein's bill, S. 26, is a viable option. S. 26 would 
amend the Department of Energy Authorization Act, to authorize the 
Secretary of Energy to impose interim limitations, or price caps, on 
the cost of electric energy. However, because it allows for individual 
states to opt out and because price caps inevitably allow the price to 
rise to that cap, we believe S. 287 is a better alternative.
    Attached you will find APPA's recently adopted policy resolution 
calling on FERC to enforce the Federal Power Act by taking action to 
prevent wholesale sales of electricity at costs that exceed just and 
reasonable rates. As you know, FERC has already acknowledged that rates 
in the Western market have not met the just and reasonable standard--
yet it has failed to fulfill its obligation under the Act to remedy 
this situation.

                               CONCLUSION

    The essential purpose of federal initiatives should be to establish 
a structure for interstate commerce in electricity that promotes 
effective wholesale competition in order to reduce rates and improve 
service. Despite California's failed experiment, APPA still believes 
truly effective wholesale competition can benefit every consumer in 
America, and this is the responsibility of the federal government. If 
properly exercised, all may benefit. If not, all will suffer.
                                 ______
                                 

  STATEMENT OF HON. ANNA G. ESHOO, U.S. REPRESENTATIVE FROM CALIFORNIA

    Chairman Murkowski, Senator Bingaman, thank you for the opportunity 
to share my views with the Energy Committee. I want to thank Senator 
Feinstein for her important leadership in the Senate. She has been a 
great advocate for the State of California, particularly during this 
energy crisis.
    In January, Representative Duncan Hunter and I introduced H.R. 238, 
the House companion bill to S. 26, introduced by Senator Feinstein. 
Since January, over half of the California Congressional delegation has 
joined us in cosponsoring this legislation, and many more share our 
view that federal intervention is needed to stabilize the western 
energy market.
    Simply put, the Feinstein-Hunter-Eshoo bill would allow the 
Secretary of Energy to set temporary cost-of-service based rates or 
regional price caps for wholesale electricity in the West. This 
authority parallels what the Federal Energy Regulatory Commission 
(FERC) already has; however, we need this legislation because FERC has 
failed to adequately protect consumers in California and the West.
    FERC's decision last Friday to order generators selling into 
California to refund $69 million for overcharges stemming from 
transactions made this January was a positive first step. Although many 
believe that this figure is on the low side, FERC has sent an important 
message to power generators--that they can't continue to gouge 
consumers without repercussions. While the Commission's order moves 
ahead, we must anticipate the future. We need prompt and prudent 
federal action to preempt current and future overcharges as we head 
into summer.
    Much has been written about the failure of electricity deregulation 
in California and the state's failure to invest in new generation. As 
Californians, we accept our share of the blame for the energy crisis, 
and we are doing everything within our power to correct the problem. 
California now ranks second in the nation in energy conservation, with 
per capita energy use at 37 percent below the national average. 
Business and residential consumers have taken steps to reduce their 
energy consumption even more--eight percent in February alone. 
[Governor Davis has announced incentives for consumers who cut their 
energy use by 20 percent during this summer.] It's estimated that this 
initiative could save 2,200 megawatts per day. The Governor and the 
California Energy Commission are also working to expedite the review of 
new power plants and expect to have more than 2,300 megawatts of new 
capacity on-line by the end of the year.
    The effects of the energy crisis reach beyond California's borders. 
So do the causes. While California failed to increase production during 
the 1990's, so did its neighbors to the north. According to the 
Northwest Power Planning Council, demand in the northwest increased 24% 
in the last decade while generation has only grown 4%.
    Whatever the causes, the reality is that the western electricity 
market is dysfunctional due to a growing imbalance between electricity 
supply and demand. With regional demand expected to increase this 
summer, political leaders outside California are recognizing that their 
constituents will also experience acute electricity shortfalls. Oregon 
Governor Kitzhaber and Washington Governor Locke have been calling for 
federal intervention since January. Most recently, these governors 
joined Governor Davis in a March 12, 2001, letter to FERC requesting 
that the Commission impose cost-service-based rates for the region.
    Mr. Chairman, the scarcity of supply today is allowing generators 
to exert tremendous influence over wholesale electricity rates in the 
region. By withholding even marginal amounts of power, generators have 
successfully driven prices to unprecedented levels.
    Despite the accusations that ``greedy'' California consumers are 
gobbling up every megawatt they can, the facts tell a different story. 
The demand this winter has not been great in comparison to previous 
winters or peak summertime periods. A March 11, 2001 San Francisco 
Chronicle review of California Energy Commission data demonstrated that 
December 2000 demand was actually lower than December 1999 demand. The 
real difference was in the supply.
    FERC has reported that in December between 6,000 and 11,000 
megawatts of power were not available, guaranteeing that supply barely 
met demand. Meanwhile, generators were able to charge investor-owned 
utilities an average price of more than $400 per megawatt, compared to 
approximately $30 per megawatt one year earlier. With rates this high, 
generators have no financial incentive to build new capacity. Instead, 
they have a strong incentive to cut supplies and charge higher rates.
    Critics of federal intervention, including FERC Chair Curt Hebert, 
have said that consumers should absorb the cost of these outrageous 
wholesale rates. Only then, they argue, will consumers receive the 
proper market ``signals,'' adjust their consumption, and prompt 
generators to build more capacity. Unfortunately, the West's up-side-
down electricity market has said to generators, lower production leads 
to higher profits. Higher consumer rates will not change that reality.
    This is why we need temporary federal intervention. There's a 
substantial difference of opinion within FERC itself. Commissioner 
William L. Massey wrote to me on February 21, 2001, telling me of his 
support for aggressive federal intervention in the western energy 
market, and I'm enclosing, for the record, a copy of Commissioner 
Massey's letter. Separately, the Seattle Times reported on March 3, 
2001 that Commissioner Massey said, ``A federal hands-off approach, in 
my judgment, is absolutely unlawful. It is an abdication of our 
responsibility under the [Federal Power] act.''
    I'm a believer in free-markets. Period. The western wholesale 
electricity market is not free. Consumers and utilities have no choice 
about where they buy their power because there is not enough supply to 
foster competition among generators. Chairman Hebert's views 
notwithstanding, regulators and market observers agree that consumers 
need protection until there is sufficient generation capacity for a 
truly competitive marketplace.
    Mr. Chairman, Senator Bingaman, and Senator Feinstein, thank you 
for holding this essential hearing. I look forward to working with you 
to address the western energy crisis, and I believe that Senator 
Feinstein's bill is a good place to start.
                                 ______
                                 
   STATEMENT OF TERRY SMITH, CHAIRMAN OF THE CALIFORNIA INDEPENDENT 
                         PETROLEUM ASSOCIATION

    Mr. Chairman, distinguished members of the committee, thank you for 
allowing me the opportunity to participate in this proceeding to share 
our thoughts on this issue of critical importance to California's 
economic health and well-being.
    I am submitting testimony on behalf of the California Independent 
Petroleum Association--a non-profit trade association representing over 
450 independent producers of oil and natural gas, service companies, 
and royalty owners. California produces about 40% of the oil it needs, 
the remainder comes from Alaska and foreign producers. California is 
the fourth largest producing state behind only Alaska, Texas and 
Louisiana and has the largest untapped reserve base for oil production 
in the lower 48 states. We believe that given the right conditions, we 
could produce more.
    California's petroleum industry finds itself in the same 
circumstance as many of the state's other large power consumers--stung 
by high electricity costs. Continued high electricity costs could 
potentially make a large portion of the state's oil production 
uneconomic, however, given the proper incentives, CIPA and our member 
companies can be part of the solution to the energy supply problem 
facing California energy consumers.
    There are two basic ways to help ease the energy supply crisis 
faced by California:
    The first is to increase energy production. Policy makers must 
recognize the geographical advantage of in-state oil, natural gas and 
energy production and develop incentives to identify additional energy 
supplies that already exist in California. Laws and regulations that 
target and stimulate these critical resources and move energy supplies 
to the consumer quickly must be adopted. The siting of new in-state 
power plants of all sizes should be encouraged and expedited.
    The second way to ease the crisis is to reduce energy consumption. 
Innovative financial, tax and regulatory solutions to reduce energy 
consumption that benefit both energy users and consumers should be made 
available. Examples of additional incentives to encourage business 
owners to shift electric load are interruptible tariffs, demand side 
management programs and demand side bidding. The ability of oil and 
natural gas producers to utilize distributed generation, self-
generation and co-generation technologies should also be facilitated.

      CALIFORNIA OIL AND NATURAL GAS PRODUCERS PERSPECTIVE ON THE 
                          ENERGY SUPPLY CRISIS

    I've chosen to contribute to this dialogue because today's topic is 
of critical importance to the members of my association. For most 
independent producers in California, electricity accounts for up to 60% 
of the cost of doing business. California oil is costly to produce 
because it requires steam injection driven by natural gas to get it out 
of the ground. California producers also use a lot of electricity to 
pump the oil out of the ground. Environmental rules prevent them from 
using crude oil to make electricity so they use natural gas. High 
natural gas prices and unreliable supplies of electricity have resulted 
in making California crude costly to produce--and are threatening to 
severely curtail the amount of oil we produce on an annual basis.
    CIPA has placed an extraordinary priority on assuring that it has 
access to a reliable and economic supply of electricity and on ensuring 
the state's private utilities are kept viable and solvent. 1ndependent 
oil and natural gas producers are some of the largest electricity 
consumers in the state, and are economically vulnerable to unreliable, 
high-priced electricity supplies.
    Disruption in electricity supplies can result in reduced production 
of indigenous oil, natural gas and energy supplies produced by CIPA 
members. Almost all of the oil and natural gas produced in California 
is consumed in California.
    What happened to California's electrical system that has resulted 
in the problems we see today? As someone representing large consumers 
of electricity, I would offer the following insights.
    The problem, in essence, comes down to exceptionally stringent 
environmental siting guidelines and a low return on investment that 
kept new power plants from being built in California during the past 
twelve years. Over the past ten years, few people anticipated the 
strong demand for electricity brought about by a surging economy and 
technology infrastructure. California policymakers thought that other 
neighboring western states would sell us their excess power if we 
couldn't keep up with our own demand. They didn't anticipate the growth 
of our neighboring states' economies and the fact that they might want 
to keep that power for their own use.
    In 1996, when the California Legislature passed legislation 
deregulating California's electrical market, it did so only partially. 
Not all of the market was deregulated, just the generation portion. 
Investor owned utilities like PG&E were required to sell their 
generation so they wouldn't be seen as competing with independent power 
producers or holding back the new electricity market. In addition, the 
law imposed a mandatory rate freeze that had been in effect during the 
past couple of years. The rate freeze was intended to allow the 
utilities to recover, from businesses and consumers like you and me, 
all the past costs of purchasing infrastructure and facilities. This 
also shielded ratepayers from the true cost of providing electricity.
    This arrangement worked great as long as wholesale power costs were 
lower than the rates utilities were allowed to collect from customers. 
But, when wholesale power costs rose, the utilities tried to get the 
rate freeze removed by the California Public Utilities Commission and 
be allowed to pass along the true cost of wholesale power to their 
customers. To date, the Governor, Legislature, and the CPUC have all 
said `no' thereby forcing the utilities to continue assuming the price 
differential of how much they purchase power for and how much they can 
recover.
    To compound the problem, the new regulatory structure set up by AB 
1890--the legislation that created the deregulated market--put a price 
cap on what independent power producers could charge for their power 
and restricted the ability of these same producers and the utilities to 
enter into long term contracts.
    Finally, all of these factors converged at the same time natural 
gas prices began reaching historically high levels. Higher than 
expected demand throughout the west, reduced supplies, and disruptions 
on major pipelines serving California all served to drive prices up, 
thereby further exacerbating the generators' cost of producing 
electricity.
    All of these trends have manifested themselves into the current 
crisis facing the committee today.
    Having identified the problem as we see it, where do we go from 
here? California's independent producers believe we can be part of the 
solution if allowed the proper opportunities. As companies based and 
operating in California, we believe we are uniquely situated to 
mitigate the strains that are being placed on the supply side of the 
energy equation. Given the proper combination of regulatory relief and 
incentives, we believe we can increase our levels of both oil and 
natural gas production beyond their current levels.

                   ADDING IN STATE NATURAL GAS SUPPLY

    According to the California Division of Oil and Gas, California 
continues to have some of the largest proved reserves of oil and 
natural gas anywhere in the United States. Proved reserves of over 21 
trillion cubic feet (tcf) have been identified along the West Coast of 
the United States while over 3 tcf of proved onshore reserves have been 
identified to date. With the advent of new, increasingly accurate 
technology, new reserves of oil and gas are being found throughout the 
state in areas previously thought to be barren.
    Despite the presence of such substantial reserves, and the state's 
rapidly growing demand for increased supplies of natural gas, in-state 
production in California today accounts for only 10-15% of the state's 
total annual natural gas needs. In the past, California production has 
accounted for as much 25% of the state's total needs.
    Although much of this trend can be contributed to some of the same 
factors I referenced earlier--stringent environmental laws, high 
drilling costs, historically low gas prices throughout the 1990's and 
labor shortages--many experts believe a large part of decline can be 
tied directly to the policies of the state's major gas utilities.
    Existing law provides the utilities with almost exclusive authority 
in setting the terms and conditions under which pipeline connections 
for new natural gas wells are accommodated. Historically, many 
producers have felt that the utilities have used this authority to 
stifle California production and limit competition in favor of taking 
larger supplies of gas from out of state sources such as Canada, the 
Rocky Mountains, and the Southwest.
    For the past ten years, independent producers throughout the state 
report experiencing delays of six months to a year before receiving 
utility approval to install a new pipeline interconnect for newly 
completed wells. Overly burdensome and expensive terms of conditions 
imposed by the utilities as a condition of new interconnections are now 
thought to be the rule rather than the exception. In many cases, 
producers have elected to simply abandon new exploratory projects 
rather than try to meet the demands being imposed by the utilities.
    One of the largest impediments to increasing gas production in 
California are the utility's own management policies relative to its 
existing pipeline infrastructure. Representatives from PG&E recently 
announced that the company would no longer be adding any new metering 
systems along its pipeline system in Northern California. If enacted, 
the new PG&E policy would require all new wells to be connected through 
an existing metering site along the pipeline--requiring in some cases 
miles and miles of new pipelines to be constructed in order to connect 
a remote exploratory well. Given such terms and conditions, most 
exploratory projects would become automatically unfeasible. In an 
related move, PG&E has also recently embarked on an ambitious plan of 
``retiring'' large sections of its pipeline gathering and delivery 
systems--further limiting the potential points of interconnection for 
new gas wells. Many of the sections being targeted by the utility 
continue to remain in operational condition. The hardest by these new 
policies would be the Northern Sacramento Basin--one of the most 
proliferate dry gas fields in the United States and the source of over 
one-third of all the natural gas produced in California.
    Significant evidence suggests that much of California's long-term 
gas needs could be addressed be expanding production, and reforming the 
regulatory relationship between the independent producers and the 
utilities. Suggested reforms that could help accomplish this goal 
include:

   Establishing mandatory timeframes under which a utility must 
        respond to a producer's request for a pipeline interconnection.
   Encouraging new exploration activity by requiring the 
        utility to install new metering sites, rather than requiring 
        producers to construct miles of new pipeline for every 
        exploratory well.
   Allowing producers to expedite the installation of new 
        interconnects by authoring them shoulder costs such as pipeline 
        construction and labor costs if the utility's workforce is 
        already overburdened.
   Facilitating the development of new pipeline gathering 
        infrastructure that enables more gas to get to market.
   Requiring the utility's to sell off its existing gathering 
        systems to interested producers and co-ops, and provide the 
        producers the authority to maintain and service the gathering 
        systems.

    By making some of these minor changes, and facilitating the ability 
of California producers to get their gas to market, we believe we can 
begin to help mitigate at least one element of the problems driving our 
state's current crisis.

                      IN-STATE GENERATION OPTIONS

    On a related note, CIPA believes that Federal policymakers must act 
to eliminate federal policies that discourage co-generation, self-
generation and distributed generation. Many California oil and gas 
producers are uniquely situated to generate their own electricity. Some 
have excess supply which could be sold to other consumers if reasonable 
utility connection, siting and standby policies were in place. We 
encourage you to examine the ways in which FERC, the DOE and other 
agencies of the federal government could encourage and incentivize 
utilities, and the regulatory community in California, to act to 
approve new facilities.
    In closing, independent oil and gas producers are price takers and 
have no ability to set the price of crude at the wellhead where we 
produce it. Independent oil and natural gas producers are like energy 
farmers. We take our commodity out of the ground and sell it for the 
market price set by OPEC and other producing countries, usually to an 
independent refiner or integrated oil company who then refines it into 
products like gasoline. As such, our members are extremely vulnerable 
and can be dramatically impacted by any combination of events that 
force their costs to rise suddenly. We appreciate the committee's 
attention to this extremely serious matter and stand ready to work with 
you in finding the proper solutions.
                                 ______
                                 

           STATEMENT OF MARCIA MERRY BAKER, EIR NEWS SERVICE

    Dear Chairman Murkowski, members of the Committee, and Senator 
Boxer: The draft Federal energy bills now before you--S. 26, S. 80 
(both introduced Jan. 22), and S. 287 (Feb. 8), by the California 
Senators, deserve full support for the policy direction they propose. 
Namely, they are a move toward Federal government regulation of the 
vital service of electric power, for the interest of the general 
public. The limitations--which we address below, are not as important 
as the fact that these two bills, and very few others (one is that of 
Rep. Peter DeFazio, D-Oregon), favor serving the general welfare, and 
go against the Administration's crazed continuance of deregulation, 
which is equivalent to throwing gasoline on a burning house.
    Moreover, the additional danger at present, is the political fact 
that, without such measures, the process of worsening energy 
emergencies--for the Northwestern states, and New York, as well as 
California, can be taken by the Administration as the pretext for 
``rule-by-decree,'' on exactly same principle as in Hitler's 1933 
takeover. We do not exaggerate. This prospect was the inherent danger 
in the confirmation of John Ashcroft for Attorney-General, who 
ideologically opposes Federal government measures to protect and 
advance the General Welfare. Without reregulation, however, the crisis 
will worsen to the point of creating a national emergency.
    In opposition to the mantra of ``free markets,'' there are moves 
now in all states, to delay, roll-back or reconsider energy 
deregulation, to prevent economic destruction, and the threat of chaos 
or dictatorship. In particular, the emergency policy proposals made by 
economist Lyndon LaRouche--contributing editor to EIR News Service, are 
under review at town meetings, lobbying days, and policy sessions in 
dozens of states.
    In brief, LaRouche's proposals call for re-regulation of energy, 
and Ch. 11 Bankruptcy for the California utilities, and others in the 
same position. These are traditional precedents from the FDR era.
    LaRouche, who forewarned decades ago, of the consequences of 
deregulation, and allowing a ``casino'' economy of speculation and 
concentrated ownership, has released on Feb. 6 a policy document on the 
``California Energy Crisis, As Seen and Heard on the Salton Sea,'' 
400,000 copies of which are circulating in the form of a mass pamphlet, 
through the LaRouche-in-2004 Democratic Presidential campaign. Excerpts 
of this document were provided to the Committee in EIR testimony to the 
Jan. 31 hearing on the California crisis.
    We remind you of what it means to continue to back deregulation. In 
data tables below, we provide the statistics of the 30% to 200% profit 
rates for Y2000, made by Bush Administration-aligned Enron and the new 
energy ``merchant'' and speculation companies, off California and other 
power crises; these companies also made mega-donations to elected 
officials. However, beyond simple corruption, the point shown is that 
any expectation that the financial and economic system which is based 
on this level of hyperinflation, and cartel control, can continue, is 
insane.
    Either you start to think, as implied in the Feinstein/Boxer bills, 
that something can and must be done to set controls on the markets, or 
you are on the side of chaos and destruction. First, we provide the 
Committee the economic assessment given by Lyndon LaRouche at an 
international policy conference President's Day weekend in Reston, 
Virginia; and then some documentation of the nature of crisis, and why 
there is no other policy direction than what LaRouche proposes, like it 
or not.

                 LAROUCHE'S ASSESSMENT: HYPERINFLATION

    On Feb. 17, in an address titled, ``A Branch in the Road of 
History,'' LaRouche said, ``What you're seeing in the energy prices, 
what you're seeing in the costs of supplies--manufacturers' supplies--
combined with what you're seeing in the collapse of retail sales, what 
you're seeing in terms of the mass lay-offs, in one industry after 
another, which is now building up into an international chain-reaction, 
is a process of a depression, caused like that of Weimar Germany in 
1923--worldwide--caused by the collapse of a financial bubble, which 
has gone into a hyperinflationary phase.
    ``That's why Alan Greenspan has lost his marbles. He probably 
didn't have too many to begin with, but whatever he had, he's lost.
    ``So, we are now at the point, where it is impossible, by the 
present methods, to keep this system going. It is in the process of 
going into a deep depression. And nothing that these guys are 
proposing, or will accept, will work. The idea of more deregulation, 
the idea of tax reductions, all these kinds of things--cutting down the 
role of government, opposing re-regulation--all of these things ensure 
nothing but the greatest depression in world history. Globally.
    ``Because, what happens is, the U.S. is the importer of last 
resort, nations all over the world have been depending on dumping 
cheap-labor products on the U.S. market, for the products we no longer 
produce. As our market declines, as you saw in the last-quarter retail 
sales, which is the big Christmas retail business, from the last 
quarter of the year: That collapse set into motion a chain-reaction 
collapse around the world, which, together with the financial collapse, 
caused by the hyperinflation, has sunk the world economy. We can no 
longer finance that kind of subsidy for imports, as we were doing 
before; therefore, we can't do that. Therefore, our suppliers, who have 
used us as a market, are now being shut down.
    ``For example, Mexico can expect, 20, 30, 40% of its exports into 
the United States to be wiped out, very soon. One of the biggest. 
Canada is already suffering, as you've seen from some reports recently 
from there. This is a global process.''

              REQUIRED: REREGULATION AND CH. 11 BANKRUPTCY

    LaRouche continued, by describing what is required. ``Take the 
California energy crisis. We have a worldwide energy crisis, and 
especially a West Coast energy crisis. There's only one way you can 
deal with that energy crisis: You've got to go back to regulation. Use 
what we prepared in the 1930s--Chapter 11 bankruptcy protection for the 
entire industry. You see, in this kind of Chapter 11 bankruptcy, you 
protect, not only the creditors and debtors; you protect the general 
public. You see, because the people of California, for example, have to 
be defended. The interests of the firms of California, the farms, have 
to be defended. Whether or not they're involved in the relationship 
between the creditors and debtors, is irrelevant.
    ``The fundamental interest of the United States, is that our people 
have electricity! That our firms have the power to operate on. That our 
hospitals function. That our farms function. When we go into court with 
a Chapter 11 bankruptcy, these interests come on the table, and 
actually have the greatest say, in how the bankruptcy will be 
renegotiated. The creditors and the debtors go into a second tier. What 
comes up front, is the interest of the nation; the interest of the 
people; the interest of the economy.
    ``So, we need Chapter 11 protection, for all the imperiled sections 
of vital infrastructure for our national economy.
    ``Secondly, we can not do this, without both a combination of 
Federal and state re-regulation.
    ``If we do that, we have enough energy available to manage this 
crisis, and can manage this at prices, at charges to people who are 
using electricity, to ensure the electricity they require, and to 
ensure that it's delivered to them, regularly, at a decent price. We 
can guarantee that.
    ``If we do that, the energy crisis is brought under control.''

                 WHO OPPOSES CONTROLLING ENERGY PRICES?

    LaRouche then turned to, who would oppose solving the energy 
crisis, asking, ``But, what does that mean? That's in the interest of 
the nation. How can any patriot oppose that? George Bush has to be 
opposed to it. If you look at the combination of financial interests, 
which is represented by the people that gave the money to make Bush 
President: These guys would be wiped out, by an honest deal. Because 
they make their money by looting; they bid up the price. The reason 
that the prices go up, is purely that these fellows are looting the 
United States, as well as other countries. Therefore, the interest, the 
reaction, the response of these people, is against the interest of the 
people of the United States; against the national security interests.''
    The following two tables,* reproduced here from the March 2 issue 
of EIR, ``Energy Crisis Update, Feb. 22'' give data analyzed on the 
energy cartel mega-profits, and mega-donations to political campaigns.
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    * All tables have been retained in committee files.
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                  NOT A ``SUPPLY AND DEMAND'' PROBLEM

    The tables above, listing the companies making hyper-profits off 
hyperinflationary energy prices, also raise the point that the problem 
in run-away energy prices is emphatically not a ``supply-and-demand'' 
issue. While the energy infrastructure and resource base of the United 
States has been degraded (from aging transmission lines, to the lack of 
new nuclear plants) over the last 30 years, today's energy price spikes 
are clearly speculation and gouging.
    The graphs below, for three power commodities--oil, natural gas and 
electricity (California), all show that while supplies (and 
correspondingly, use) remain almost level, prices soared over Y2000. 
During this same time, demand did not jump. The price take-off came 
directly from deregulated energy ``markets'' and speculation.
    Two more points should be brought out in this respect. Natural gas, 
because it is federally deregulated, is soaring in price (from 
speculation and gouging) all across the continent, with terrible 
economic dislocation and financial chaos. Where natural gas is part of 
the electricity generation, a double whammy is hitting the locale. 
Secondly, price rises for petroleum, do not correspond with non-
existent swings in supply or demand for oil. Prices soar from 
speculation and gouging.
    In the best estimates of financial analysts, every barrel of oil 
entering world exports, is traded up to 15 times over on the London and 
New York commodities' futures exchanges. This is called, ``paper oil.'' 
Natural gas is traded on the New York Stock Exchange 8 or 10 times more 
than the volume that exists. Electricity futures are traded many times 
over the actual unit volume and production costs.

                          ``GO THE WHOLE WAY''

    These few facts demonstrate that only policy that will ``go the 
whole way'' with energy price re-regulation, and Ch. 11 bankruptcy 
protection of the public interest, is appropriate to the nature of the 
crisis we now face. Half-way measures, or partial ``bail-outs'' are 
doomed, along with the economy, if we don't take an across-the-board 
reregulation approach.
    Thus, from this point of view, the principle of public interest 
embodied in the Feinstein/Boxer bills is in the right direction, but 
too limited, given the reality of the depression.
    S. 26--``To impose interim limitations on the cost of electric 
energy to protect consumers from unjust and unreasonable prices in the 
electric market; and
    S. 80--``To require the Federal Energy Regulatory Commission to 
order refunds of unjust, unreasonable, unduly discriminatory or 
preferential rates and charges for electricity, to establish cost-based 
rates for electricity sold at wholesale in the Western Systems 
Coordinating Council . . .''
    S. 287--``To impose cost-of-service based rates [meaning, to cover 
cost of production, and a reasonable return on invested capital] on 
sales by public utilities of electric energy at wholesale in the 
western market.''
    [The states covered by the bills are defined as the ``Western 
Energy Market''--Arizona, California, Colorado, Idaho, Montana, Nevada, 
New Mexico, Oregon, Utah, Washington, and Wyoming.'']
    It is in the best interests of the nation, that these draft bills 
be expanded to cover all power modes, be nationwide, re-instate 
regulation, and facilitate Ch. 11 Bankruptcy actions where needed.
                                 ______
                                 
   STATEMENT OF GEORGE FRASER, GENERAL MANAGER, NORTHERN CALIFORNIA 
                              POWER AGENCY

    The Northern California Power Agency \1\ (NCPA), urges the 
Committee to adopt legislation implementing cost-based wholesale power 
rates in California and the other Western States on an interim basis. 
We do not currently enjoy a truly competitive market for electricity in 
California at this time, and consumers cannot wait for a competitive 
market to materialize.
---------------------------------------------------------------------------
    \1\ NCPA is a nonprofit California joint powers agency established 
in 1968 to generate, transmit, and distribute electric power to and on 
behalf of its fourteen members: cities of Alameda, Biggs, Gridley, 
Healdsburg, Lodi, Lompoc, Palo Alto, Redding, Roseville. Santa Clara, 
Ukiah, the Port of Oakland, the Truckee Donner Public Utility District, 
and the Turlock Irrigation District and seven associate members: cities 
of Davis, Santa Barbara, ABAG Power, Bay Area Rapid Transit District. 
Lassen Municipal Utility District, Placer County Water Agency, and the 
Plumas-Sierra Rural Electric Cooperative serving nearly 700,000 
c1cctric consumers in central and northern California.
---------------------------------------------------------------------------
    Today, in California, we are struggling to develop solutions that 
will get us beyond the mistakes that have been made in restructuring 
that market. It will take some time to develop and implement the best 
solutions. But even if we knew today the exact recipe for creating a 
workably competitive market, those changes would take time to 
implement. Without cost-based rates, unfettered prices for electricity 
will continue to create disincentives for correcting the flaws in the 
market and impose significant societal and economic harm.
    California's municipal utilities were not required to participate 
in the state's retail, choice program and largely remain vertically 
integrated utilities that retain an obligation to serve their retail 
consumers. NCPA members generally have sufficient generation resources 
to meet their consumers' electricity needs. At times, NCPA has excess 
generation that we sell into the market and, at other times, we must 
also occasionally purchase power on the market. On aggregate, NCPA 
members are net market purchasers.
    NCPA has long supported steps to foster and promote sustainable and 
effective competition in the wholesale electricity market. Regrettably, 
the market conditions needed to sustain effective wholesale market 
competition are not present in California today. Consequently, NCPA 
supports efforts to re-impose cost-based rates as a temporary measure 
until such time as competitive market conditions exist.

                      CAUSES OF THE CURRENT CRISIS

    While there is no value in finger pointing, it is clear that many 
factors contributed to the current crisis--a crisis that spills beyond 
California's borders and infects the regional power market. At its 
core, the California and associated Western power market lacks the 
conditions necessary for a competitive market: multiple sellers, ease 
of entry, free flow of commerce and price transparency. In California:

   There is a shortage of installed and operable generation in 
        California. This shortage has allowed market participants to 
        withhold generation, strategically bid and game the system to 
        maximize profits.
   There is a shortage of transmission capacity within the 
        State. Alleviating current transmission constraints between 
        northern and southern California would have avoided the recent 
        rolling blackouts. However, no party has both the 
        responsibility and authority to relieve such constraints.
   There is a shortage of transmission capacity to import 
        generation products from outside California.
   The absence of a seamless, independent regional transmission 
        system impedes commerce and narrows the relevant market.
   From its inception, the Cal-ISO and PX lacked proper rules, 
        procedures and mechanisms to promote competition, monitor 
        market conditions and take corrective action.

    Market forces can only serve to check prices when competitive 
market conditions exist. In the absence of such conditions, sellers are 
able to dictate prices without suffering competitive responses that 
reduce sales and revenue. Although the Federal Energy Regulatory 
Commission (FERC) should only approve market based rates when 
competitive market conditions exist, FERC approved the California 
restructuring plan and the use of market based rates.

     CALIFORNIA MUNICIPAL UTILITIES HARMED BY DYSFUNCTIONAL MARKET

    The general perception is that California's municipal utilities 
have been insulated from the volatile market. While it is true that 
California's municipal utilities retained the generation assets needed 
to serve load, our consumers have been far from insulated from the 
dysfunctional market. NCPA and its members:

   Voluntarily participated in the Cal-ISO load curtailment 
        programs and have been subject to rolling blackouts--even 
        though we had sufficient resources to meet our load.
   Have drawn down the reservoirs at our hydro projects to help 
        meet the electricity demands of the state, putting at risk our 
        ability to generate power at these projects during the critical 
        peak Summer months.
   Operated gas-fired combustion turbines at the sole direction 
        of the Cal-ISO, using 20 percent of available air emissions in 
        the first 20 days of January (at a time when the plants would 
        usually not operate)--again reducing our ability to operate the 
        plants during the Summer.
   Purchased power on the market at rates above what would 
        exist in a truly competitive market.
   Sold power to the Cal-ISO, for service to the state's 
        investor-owned utilities, for which we've since been told we 
        will not be paid.

    As consumer-owned utilities, the effects of these developments will 
be felt directly and exclusively by our consumers. We have no 
stockholders to ``share'' in the pain.

                    PRICE CAPS AND COST-BASED RATES

    NCPA recognizes the shortcomings of hard price caps. The level may 
be arbitrarily set too high or too low, either unnecessarily enriching 
low-cost producers or preventing marginal generators from economically 
operating. While a $250 price cap seemed more than adequate one year 
ago, natural gas prices and emission credits--not to mention 
opportunity costs--combine, at times, to make the cost of operating one 
of NCPA's gas-fired combustion turbines more than $800 per megawatt. It 
is clearly difficult to divine a single number to impose as a cost cap 
throughout the west.
    It is equally clear that failure to impose regulatory cost 
discipline--in the absence of effective market discipline--will cause 
excessive and unacceptable burdens on residential consumers, businesses 
and the California, regional and national economies. Just as the stock 
markets employ ``circuit breakers'' to halt trading when the market 
rises or falls too precipitously, so too must we call a ``time out'' in 
the western wholesale electricity market.
    Ultimately, additional infrastructure--both generation and 
transmission--is needed to restore supply-demand equilibrium and enable 
markets to function competitively. NCPA strongly supports such 
investments and is aggressively pursuing generation and transmission 
additions. However, the most critical transmission addition will take 
at least two years to complete and generation projects will take even 
longer. Consumers in California and neighboring states cannot wait that 
long.
    To protect consumers during this intervening period, NCPA supports 
a temporary re-imposition of cost-based rates and supports the intent 
of the legislation pending before the Committee. We commend Senators 
Feinstein and Boxer for recognizing the need to act and for pursuing 
the temporary re-imposition of cost-based rates.
    NCPA understands that there are differing opinions on the need for 
and design of any regulation of the regional power market. While we are 
willing to work with the Committee, the Administration and other market 
participants on the design of the effort, we believe expeditious action 
is imperative.
    Issues that the Committee might consider include:

   ``cost plus'' rates in which higher than normal profits 
        would be temporarily allowed to ensure operation of existing 
        generation;
   exempting generation additions from cost-based rates as a 
        means of encouraging new plant construction;
   the types of transactions subject to the cost-based rate 
        requirement (e.g., all transactions or only short-term 
        transactions); and
   the ``trigger'' for when the cost-based rate requirement 
        would be lifted.

    At a minimum, Congress should ensure that the current ``soft cap'' 
imposed by FERC is properly enforced. As intended, power sales at 
prices above the FERC-imposed ``soft cap'' would be allowed but 
reviewed to ensure that they were cost-justified. It is unclear whether 
FERC is adequately collecting and reviewing the cost data needed to 
determine whether above-cap bids are in fact cost-justified. Congress 
must ensure that this minimal protection is, in fact, operating.

                    LONG-TERM MARKET REFORMS NEEDED

    Re-imposing cost-based rates is merely regulatory triage, 
temporarily treating the problem. It is not a long-term solution, and 
it is equally important that Congress and FERC use the time afforded by 
this temporary ``band aid'' to address the systemic issues and provide 
long-term solutions.
    The recent California experience has taught us a number of critical 
lessons:

   Without clear authority on RTOS, FERC accepted inadequate, 
        inferior and flawed filings from the Cal-ISO. FERC needs clear 
        authority and direction on RTOs to promote truly effective, 
        regional and independent transmission management.
   While California would be the 6th largest country in the 
        world based on GDP, it is not big enough to serve as a stand-
        alone energy market. Markets are regional, and the transmission 
        system must be run in a manner that supports interstate 
        commerce.
   There are numerous transmission constraints in California 
        that have contributed to the rolling blackouts and locational 
        market power. While the Cal-ISO identifies these constraints, 
        it has no authority to take corrective action. Current 
        transmission constraints--like Path 15--must be eliminated and 
        immediate federal funding assistance, through the Western Area 
        Power Administration (WAPA), for environmental, engineering and 
        rights-of-way acquisition is needed. Ultimately, RTOs should 
        have clear authority and responsibility to plan and expand the 
        transmission grid. Federal transmission siting authority is 
        also needed.
   Creation of contrived markets--within the PX and ISO--don't 
        work and exacerbate market problems. While there is a need for 
        institutions to ensure independent grid management, these 
        institutions should have minimal market involvement.
   Markets do not work well when there are too few market 
        participants and scarcity of supply. FERC must establish clear 
        and effective rules to promote sustainable competitive markets 
        prior to granting authority for market-based rates.
   While there are conflicting accounts on whether generators 
        have exercised market power, manipulated supply and bids, taken 
        advantage of poorly designed market rules or simply profited 
        from scarcity, it is clear that there is little public 
        confidence in the current system. Reformatting FERC's role so 
        that it is an effective market monitor, with clear authority 
        and direction to detect and correct market manipulation or 
        abuse, is needed.

    Congress and FERC have exclusive authority over inter-state 
commerce in the sale of electricity. The interstate market is not 
currently working and will not sustain effective competition. It is 
critical that the structure and mechanisms necessary for a competitive 
market be established.
    NCPA is a participant in the Electricity Stakeholders--a diverse 
coalition supporting wholesale market reforms--and urges the Committee 
to adopt legislation consistent with the Stakeholder principles.

                               CONCLUSION

    NCPA remains committed in its belief that an effectively 
competitive market is beneficial to all consumers. However, such a 
market will not miraculously appear simply by declaring markets 
deregulated. As California has demonstrated, deregulated markets that 
lack the structure to support effective competition will simply cause 
consumer and economic hardship.
    As a first-step, FERC must re-impose regulatory discipline in the 
uncompetitive western power markets. The pending legislation is a 
critical step in achieving this necessary relief. But we cannot stop 
there. Congress must also provide FERC with necessary guidance and 
authority to promote and monitor effective competition in the wholesale 
market.
    NCPA looks forward to working with Senator Feinstein and the 
Committee in promoting both of these objectives.
                                 ______
                                 
        STATEMENT OF PHILLIP H. TOLLEFSON, EXECUTIVE DIRECTOR, 
                       COLORADO SPRINGS UTILITIES

    Mr. Chairman and members of the Senate Energy and Natural Resources 
Committee: My name is Phillip H. Tollefson and I am the Executive 
Director of Colorado Springs Utilities (CSU). I appreciate this 
opportunity to submit testimony for the record on behalf of Colorado 
Springs Utilities and in support of legislation that is intended to 
address recent, dramatic increases in the price of wholesale 
electricity in the West. I also want to thank each of you for your 
willingness to consider this statement as you look for interim 
solutions to address the dramatic increases in electrical bills that 
western consumers have faced as a direct result of rapidly rising 
wholesale electricity costs.
    Colorado Springs Utilities is a municipally owned utility which 
provides water, wastewater, gas and electric services to the citizens 
of Colorado Springs. We generate 82% of the City's electric power needs 
(approximately 623 megawatts) and we purchase an additional 11% from 
the Western Area Power Administration and through other long term 
contracts. Only 7% of our annual requirements are purchased on the 
``spot'' wholesale market. CSU currently provides electric service to 
approximately 417,000 people.
    While a great deal of attention has been focused on the State of 
California in recent months, I want to make it very clear that the 
rising price of wholesale electricity is not just a California issue. 
Since the summer of 2000, the wholesale price of electricity all over 
the West, including Colorado, has been rising precipitously. For 
example, in 1998 the average price of a megawatt hour of electricity on 
the wholesale market in Colorado was approximately $30. In 2001, we 
estimate that we will pay $130, over four times what we paid in 1998, 
per megawatt hour. Seasonal and monthly variations are even worse; 
prices this coming August are expected to approach $400 per megawatt 
hour. The price of power on the spot market far exceeds the actual 
costs of generation as is demonstrated by the fact that CSU expects 
that the 7% of power we anticipate buying on the spot market will 
account for 43% of our total annual electric supply costs!
    It is an unfortunate fact of life that even the most well 
maintained power plant will occasionally be forced out of service 
unexpectedly. Up until last year, it was generally possible to purchase 
necessary replacement power on the ``spot'' wholesale market at 
reasonable costs. Last summer, a cracked steam header at one of our 
plants took a week to repair. Replacement power cost us $11 million, or 
about six times what it would have cost us to generate the power 
ourselves. The current futures markets suggest a similar incident this 
summer could well cost us over $30 million for a single week. This is 
not a functional wholesale market.
    As a result of these unreasonable wholesale increases, electric 
consumers in Colorado and throughout the West face skyrocketing utility 
bills. Further, we believe that the economy of our city, our state, our 
region and even our entire nation will feel its effects. This situation 
has reached a crisis level and calls for the involvement of the federal 
government.
    Many theories exist to explain the specific reasons that wholesale 
prices have increased so dramatically. Generally however, the consensus 
seems to be that the problem is a result of a combination of factors, 
including: scarcity in terms of generation capacity due to aging 
facilities; transmission delivery systems with inadequate capacity and 
the existence of bottlenecks; imperfect market structure at the 
wholesale level and, in the case of California, the retail level, and; 
market abuses by energy providers who have taken advantage of narrow 
supply margins to ``price gouge'' consumers. Certainly one could argue 
about the relative weight and impact of each of those factors and there 
are, no doubt, other factors here left unmentioned. What is important 
however, is that the price increases have resulted in consumers being 
forced to pay unjust and unreasonable amounts for electricity. Those 
who are low income or on fixed incomes, the elderly, and non-profit 
organizations and small businesses with narrow operating margins have 
been particularly hard hit. If nothing is done, the situation will grow 
far worse this summer.
    The legislation being considered today is crucial precisely because 
it can provide some measure of relief to those consumers. By granting 
to regulators the authority to implement rate caps on the wholesale 
price of electricity, the dramatic fluctuations we have seen recently 
in wholesale electricity prices can be mitigated. That ``leveling off' 
of wholesale prices that is the desired result of the legislation will, 
in turn, lead to some relief for the retail consumers. Opponents of 
rate caps may argue that such caps could serve as a disincentive to the 
construction of new generation. However, I believe the proposed 
legislation addresses that argument by expressly allowing the rate caps 
to include a reasonable rate of return that would continue to provide 
an incentive for the construction of new generation capacity. Only 
unjust and unreasonable rates would be affected by this legislation. In 
fact, many companies that saw fit to add generation in the past made 
healthy profits for decades at prices far below current levels.
    The rate caps proposed in this legislation are being advocated 
precisely because electric wholesale prices in the West have become 
unreasonable and unjust and it is clear that consumer price gouging is 
occurring. In fact, the Federal Energy Regulatory Commission has 
previously concluded, in an order issued on November 1, 2000, that 
prices in California and the western energy market were ``unjust and 
unreasonable.'' In the short term, the only means available to protect 
consumers from price gouging is to implement rate caps. Ultimately, 
additional generation and transmission capacity will have to be 
developed to bring stability to the wholesale market, but today's 
prices are not necessary to justify such construction.
    Another issue I would like to briefly address is reliability. It is 
critical that in addressing the pricing problems of the wholesale 
electricity market, Congress not inadvertently impair electric 
reliability. Congress should ensure that any measures it implements for 
the purpose of solving the electric wholesale problems not create 
conditions which would result in a reduction in the availability of 
power in the West. The laws of physics do not necessarily recognize 
state boundaries. Imposition of a cap in one part of the Western grid 
but not in others could have severe unintended operational 
consequences.
    Colorado Springs Utilities supports the concept of temporary 
electric wholesale rate caps as a means to protect consumers from 
market abuses and bring prices under control. I urge the Committee to 
act quickly in moving legislation to address the current wholesale 
crisis.