[Senate Hearing 107-116]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-116

   WHOLESALE ELECTRICITY PRICES IN CALIFORNIA AND THE WESTERN UNITED 
                                 STATES

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

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   on

FERC'S APRIL 26, 2001, ORDER ADDRESSING WHOLESALE ELECTRICITY PRICES IN 
                CALIFORNIA AND THE WESTERN UNITED STATES

                               __________

                              MAY 3, 2001


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

                   U.S. GOVERNMENT PRINTING OFFICE
74-568                     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
           Leon Lowery, Democratic Professional Staff Member


                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bingaman, Hon. Jeff, U.S. Senator from New Mexico................     5
Breathitt, Linda K., Commissioner, Federal Energy Regulatory 
  Commission.....................................................    19
Campbell, Hon. Ben Nighthorse, U.S. Senator from Colorado........     4
Cantwell, Hon. Maria, U.S. Senator from Washington...............    33
Dorgan, Hon. Byron L., U.S. Senator from North Dakota............    35
Feinstein, Hon. Dianne, U.S. Senator from California.............     6
Hebert, Curt L., Jr., Chairman, Federal Energy Regulatory 
  Commission.....................................................     9
Massey, William L., Commissioner, Federal Energy Regulatory 
  Commission.....................................................    16
Murkowski, Hon. Frank H., U.S. Senator from Alaska...............     1
Smith, Hon. Gordon, U.S. Senator from Oregon.....................     4

                                APPENDIX

Responses to additional questions................................    43

 
   WHOLESALE ELECTRICITY PRICES IN CALIFORNIA AND THE WESTERN UNITED 
                                 STATES

                              ----------                              


                         THURSDAY, MAY 3, 2001

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:31 p.m. in room 
SD-366, Dirksen Senate Office Building, Hon. Frank H. 
Murkowski, chairman, presiding.

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

    The Chairman. Good afternoon, ladies and gentlemen. I want 
to thank you for coming. I notice that a good deal of interest 
from interested parties within the beltway on the topic of this 
hearing. It's an oversight hearing on FERC's April 26 order 
addressing wholesale electric prices in California in the 
Western United States.
    The purpose of the hearing is to give us, the committee, an 
opportunity to be educated. I use the word loosely because 
sometimes our span of attention is a bit limited.
    Anyway, this is your opportunity to educate us on FERC's 
recent order regarding wholesale electric prices in California 
and the Western United States.
    Now, Senator Bingaman and I have had a number of 
conversations on the procedure here, and I was of the opinion 
that we had an order. And the order came out from FERC, and it 
came out 2 to 1. But, nevertheless, it was an order. To me an 
order stands as just that, an order.
    As a consequence, I feel very strongly we should limit the 
presentation to an explanation of the order by the chairman.
    Senator Bingaman felt otherwise. He felt that since it was 
disputed, we could learn more on the basis of the internal 
evaluation of what went into the order, and I don't necessarily 
dispute that. But I don't think it's in the intention of either 
one of us to stage a debate here on who's right and who's 
wrong. We respect the individual opinions of the commissioners, 
as we should. They make their decisions based on what they 
believe is best for the country, and we hold them accountable.
    But, in any event, I did want to clarify, so there was no 
misunderstanding, the discussion I had. And Senator Bingaman 
obviously can speak on this as well from his point of view.
    Now, I think it's fair to also annunciate that what we 
understand is the intention to bring the spot California power 
market under control for the summer was the charge of FERC. 
Further, it was questionable whether this should go beyond 
California into conditions in the rest of the west.
    Maybe that's a broader obligation, but I'm certain that 
there will be those who say FERC's order goes too far. Others 
say it doesn't go far enough. But, nevertheless, we have an 
order. And if we don't like the order, we have a legislative 
alternative, or FERC can come up with another order.
    Now, we have a difficult situation in California. I'm told 
that in 1998 prices for energy in California ran about $9 
billion. I was told in 2000 they ran about $28 billion. I'm 
told this year they're going to run somewhere between $60 and 
$70 billion.
    Now, that will get anybody's attention, and the 
justification for that may be supply and demand. Nevertheless, 
FERC has an obligation to address, if you will, inconsistencies 
associated with the marketplace.
    Now, I'm not here to blame California, but I think we have 
to be very candid in expressing, to the best of our ability and 
understanding, that price spikes are not the cause of 
California's problems. They're the symptoms of a deeper, 
deeper, deeper problem that cannot be fixed by price controls.
    In this connection, I don't think we can lose sight it was 
California, to a large degree, that made a decision a long time 
ago that it was cheaper to buy power outside the State than it 
was to develop within the State of California adequate power 
generation capabilities.
    So a little history I think is in order as we go back and 
recognize it was California that ordered its investor-owned 
utilities to divest their fossil generation.
    What did they do with that money? They gave it back to the 
shareholders. A lot of criticism for that, but if you're going 
to be ordered to divest and you divest your fixed assets, who 
does it belong to other than the shareholders? It was 
California that required its investor-owned utilities to drop 
long-term contracts and instead require all of their power 
supply from the volatile spot market.
    It was California that decided to treat its investor-owned 
utilities differently than it's public-owned utilities. The 
investor owned didn't have an opportunity to opt out. And, of 
course, the public-owned utilities basically did.
    It was California that chose to create a dysfunctional 
retail competition plan, forcing utilities to buy high and sell 
low, which you can only do that so long before you go into 
bankruptcy and we've seen that with PG&E.
    Most importantly, it was California that chose to forgo 
construction of new generation and transmission, instead 
placing reliance on power-generated neighboring States to the 
tune of about 25 percent of the power that's consumed in 
California.
    Now, you might not think those statements are 
representative of a sympathetic chairman, but they are in my 
sense of how you go about fixing it. You recognize you have a 
problem. And you recognize truly what caused the problem, and 
then fairly decide on what we can do to help. That's the spirit 
we bring to this hearing today.
    We have a problem in California, but FERC has been trying 
to address through its April 26 order and other orders. Some 
will criticize FERC and say where's FERC been? Well, I think 
we've seen a change of administration, and we can go back, if 
you want. But I don't think it serves a purpose and point the 
finger why hadn't FERC done this earlier or something else 
earlier.
    Some don't think FERC has gone far enough. They're calling 
for even more regulation by FERC. But more regulation doesn't 
necessarily build new powerplants, new power lines, or new 
transmission lines. Whether it be gas or electricity. Instead, 
more regulation, in my opinion, will discourage investment, 
further worsening California's problem.
    I would implore those of us who are searching for an answer 
to not be misled by the number of permits that are being issued 
out of California. That's got nothing to do with the reality of 
whether you're going to have more power generation. That power 
generation is only going to come about if indeed the investment 
community is satisfied that they can get a fair return on 
investment and want to go into California and provide those 
generating facilities. So that's one of the real concerns you 
have to watch when you consider wholesale price caps.
    We've seen what retail caps have done to California. 
They've taken care, to some extent, of the consumer, and put 
the burden on the taxpayer. And it's beyond me to try to 
differentiate the difference between the taxpayer and the 
consumer when it comes to the liability that the State of 
California is picking up. But that's hindsight.
    Ultimately, FERC's order is, in effect, an effort to try to 
strike a balance between the need for dampening of prices and 
the need for incentives to build new facilities. Whether it's 
adequate or not, it's not my job to make that determination. 
But the order dampens prices but does not eliminate market 
pricing.
    Now, it's rather interesting to note that within California 
there's an extraordinary process going on now where utilities 
are, in effect, making deals to settle disputes with the State 
of California on pricing.
    I assume many of you have read the New York Times article 
yesterday, ``Power Concerns Offer California a Secret Deal.'' 
The Governor and Duke and a political intrigue associated with 
it.
    But I think it's important to point out one thing. The FERC 
recently ordered generators to justify high prices in 
California this year or pay $125 million in refunds. Those 
companies, including Duke, rely on--Dinergy, Williams, et 
cetera, deny any wrongdoing and so forth. To suggest FERC isn't 
doing anything is a bit misleading as well.
    For those of you that don't know what I'm talking about, I 
suggest you take a look at the New York Times because it's an 
extraordinary article, and you can read anything you want into 
it, relative to the implications.
    There's one thing I read into it. There is a process within 
California addressing these alleged spike hikes. And how it 
will come out, in any event, remains to be seen.
    In any event, in the connection that I noted, I think we 
should also reflect on a letter that we have by nine Western 
Governors to the FERC Chairman Hebert, which reiterates their 
opposition to price controls.
    Just let me read the paragraph. ``Your resistance to the 
considerable pressures to impose penny pies and pound-foolish 
rate controls has served the long-term interest of our region 
by allowing California to work its way out of this difficult 
situation.
    ``Likewise, your recent actions to streamline electric 
sales in the West have been valuable and appreciative.''
    I want to commend the FERC Commissioners because we have 
them all here. I look forward, after my colleagues speak, of 
hearing an explanation on the FERC order, and I'm sure that the 
members here will have many questions relative to the adequacy 
or inadequacy of that. But I would hope that out of this we 
could continue to build a case for real relief for California, 
not perceived or cosmetic relief, because we can all go out of 
this process feeling very good that we've done something.
    But if capital doesn't go into California, and have a 
market for the investment necessary, California isn't going to 
get the relief it needs.
    Senator Bingaman.
    [A prepared statement from Senator Campbell and Senator 
Smith follow:]

   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 regarding the ongoing problems in California and how the FERC 
is going to deal with wholesale electricity prices. 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.
    I am skeptical of price caps and am leery of the these orders. Many 
say they are likely a disincentive to investment in new generation. 
This can be a dangerous course we are taking, especially since these 
rules are limited. There is only so much the Federal Government can and 
should do to affect local electric power issues.
    Still, the long-term problem is the supply of electricity which is 
smaller than the demand in the region. And, California and other 
Western states have not built new power generation facilities 
sufficient enough to 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.
    All of the proposals being offered to help address this power 
crisis, regardless of the controversy, have to be considered so that 
the problem can be solved.
    I am approaching the California crisis debate very carefully so 
that the best interests of my home state are taken into consideration. 
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.
                                 ______
                                 
   Prepared Statement of Hon. Gordon Smith, U.S. Senator From Oregon

    Mr. Chairman, I appreciate your willingness to schedule this 
hearing in such a timely manner on the April 26, 2001 Mitigation Order 
issued by the Federal Energy Regulatory Commission concerning wholesale 
electricity sales into California, and instituting an investigation of 
public utility rates in wholesale Western energy markets. I want to 
welcome the FERC Commissioners here today, and appreciate your 
willingness to appear before the Committee to discuss this order.
    You almost need a scorecard to keep track of the energy situation 
on the West Coast. We are having a severe drought in the northwest, 
blackouts in California, huge price spikes for electricity on the 
entire West coast, and a utility bankruptcy that will keep lawyers 
employed for years. And it's only May.
    As you know, I am the principle cosponsor of S. 764, the Feinstein-
Smith bill to impose some form of price caps or price mitigation on the 
entire Western energy market. I agreed to support price caps or price 
mitigation at the wholesale level only on the condition that states, 
particularly California, institute retail prices that allow utilities 
to recover costs, and that send the right price signals to encourage 
conservation.
    Prices in the Northwest for spot power in April were 10 to 12 times 
their historic levels. This is unsustainable for those living on fixed 
incomes, for small businesses, for school districts and small towns. 
And the situation is only going to get worse in the Northwest this 
summer, and possibly into next winter as well. The flow of the Columbia 
River at The Dalles was 40 percent of the historic average, taking 
storage into account.
    I am very concerned that this order will not do enough for 
California, will not encourage conservation in California, and will 
actually have unintended negative consequences for states like Oregon 
when demand greatly exceeds supply this summer in the Western energy 
market.
    While I'm glad that the FERC is instituting an investigation of 
public utility rates in wholesale Western energy markets, and am very 
concerned that it has taken so long to get to this point. It is my 
understanding that this means that--if FERC finds there are unjust and 
unreasonable rates for spot sales in the Western energy market--the 
earliest any customers outside of California could request refunds on 
electricity prices will be for spot sales after July 11 of this year. 
This is very disconcerting to me, and leaves utilities in the Northwest 
with fewer avenues of relief for the high prices they have paid to 
date. I will be pursuing this issue further in my line of questioning.
    I think everyone realizes that the West is in for a long, hot 
summer. In the Northwest, however, we're also concerned about making it 
through next winter. Even if we have normal precipitation levels next 
winter, our reservoirs won't refill until next spring when the snowpack 
melts. We need to make certain that senior citizens, low-income 
families, and small businesses can all survive, both physically and 
economically.
    I want to help lead a bipartisan solution that will restore some 
stability to the Western energy market, and will avoid outrageous 
prices for a commodity so necessary to public health and safety. I look 
forward to hearing from the Commissioner today.

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

    Senator Bingaman. Thank you, Mr. Chairman, for holding the 
hearing. Thank you for inviting all of the Commissioners. There 
are really two broad questions I think we need to delve into. 
One is what does this new order do? How is it going to work as 
implemented?
    The second big question is: is the order adequate to solve 
the problem that needs to be solved and to carry out the 
responsibilities of FERC under the Federal Power Act? Those 
seem to me to be the essential questions. And I know there's a 
difference of opinion on the commission, and I think it's 
useful for the committee to understand that difference of 
opinion.
    I've supported Senator Feinstein Senator Smith's 
legislative initiative to direct FERC to go ahead and carry out 
what I believe is FERC's responsibility already to set just and 
reasonable rates for wholesale power going into California. But 
I am anxious to hear from the witnesses who understand the 
issue better. And I hope that's the result of our hearing 
today. Thank you very much.
    The Chairman. My understanding we agreed there would be no 
opening statements today other than yours and mine. Do you 
mind?
    Senator Feinstein. I'd like to have an opportunity to 
answer the comments that you made, at some point, Mr. Chairman.
    The Chairman. Go ahead.

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

    Senator Feinstein. Because I differ with them, and I would 
like the opportunity.
    Mr. Chairman, let me thank you, and I do appreciate it. And 
I thank the ranking member for insisting that Commissioner 
Massey be here as well.
    Mr. Chairman, I don't think that anybody debates the fact 
that the 1996 deregulation bill was badly flawed. As such, it 
created a broken market. Deregulated on the wholesale end, left 
regulated the retail end. Required 95 percent of the power to 
be bought on the spot market. That's great if prices are low 
and supply is great.
    It wasn't. Prices jumped. Utilities had to pay the pay the 
price. They couldn't recover it from the consumer, so they go 
into--one goes into bankruptcy and one is close behind it.
    The requirement that they divest of their generating 
facilities perhaps was the first real indication of what was 
going to come.
    I was sitting right over there when John Bryson testified. 
And I asked him this question: When you divested of your first 
generating facility, what were you selling power at? He said 
$30 a megawatt hour. I said when the generator that bought that 
facility sold it back to you, what did they sell it back to you 
at? He said $300 a megawatt hour. So right away the price 
jumped.
    Mr. Chairman, you said that you did not know whether 
facilities were going to come on line. One of the things I 
believe California has done right is fast tracked additional 
supply. I'd like to add to the record 350--3,572 megawatts, 
mainly peakers, half are peakers that will be on-line by the 
end of the summer. And an additional 6,900 megawatts that will 
be on-line from November 2001 to July of 2003. That's a total 
of 10,495 megawatts, or enough power for almost 10\1/2\ million 
households.
    I would like to put that list in the record, if I may.*
---------------------------------------------------------------------------
    * The list has been retained in committee files.
---------------------------------------------------------------------------
    The Chairman. Without objection.
    Senator Feinstein. Now, I would like to address myself to 
the FERC order for just a moment, if I can. Because I find it 
flawed on a number of accounts. The first is the order is 
limited to only stage one, two, or three emergencies. And I 
would suspect that stage one, two, or three emergencies, the 
number of purchases are not great during that period of time. 
All other areas are left out.
    Behind me is a chart I showed to Chairman Hebert at our 
last hearing. And I want to apply that chart to the FERC order. 
I think it's interesting. The horizontal line is demand in 1999 
and 2000. The black bars are prices in 1999 and the red bars 
are prices in 2000. This is a Sunday, not a high use day. But a 
Sunday in July 1999 and July 2000. You see the inordinate price 
spike. Not at a peak time, not in a stage one, two, or three 
emergency.
    So the way I understand the FERC order, it would do nothing 
to address the situation that most of the power is bought--is 
not bought during a stage one, two, or three emergency but at 
other times. This does nothing to deal with that spike.
    The second point is the order does not address natural gas. 
As far as I'm concerned, if FERC is not going to address 
natural gas, you are not going to be able to help California. 
The price of natural gas in southern California is still three 
times higher than the rest of the country. California 
transports natural gas from San Juan, New Mexico, where it 
sells at less than $5 a decatherm. When it gets to California, 
the price becomes $15, when the actual cap price of 
transportation is 70 cents.
    I do not see how you can address that crisis without 
addressing natural gas. Order 637 from February 2000, the 
Commission for a 2-year period, essentially abrogated its 
responsibility to see that natural gas transportation costs 
have been reasonable. This has been a disaster for California.
    I just want quickly to indicate to you, so you don't think 
this is esoteric, a couple of situations. Let me give you the 
only sugar refinery on the west coast. Steam costs average 
$450,000 a month for years. Since October 2000, the cost of our 
steam has spiked to over $2 million a month, a 500 percent 
increase. This is CNA sugar. They had a thousand employees. 
They shut down in March. They're trying to get a bridge loan. 
If they don't get a bridge loan, they go out of business 
because of natural gas costs.
    Atlas Pacific Corporation, as we've written to you 
previously, our natural gas costs have gone up six fold. 
$15,000 to $90,000 a month. We ask for help.
    California steel industries, our historical gas bill was 
$12 million annually. With the price gouging going on in 
California, that bill will rise to $40 million or even $50 
million this year.
    For electricity we historically paid about $15 million a 
year. That number will double this year due to increased retail 
rates. They're in trouble.
    The dairy coalition, the largest dairy State in the union, 
between December 1999 and December 2000, the cost of gas to 
dairy plants increased 4,000 percent. And loss average paper 
and box, board mills, companies closing down, I would like to 
put these in the record.
    The Chairman. Without objection.
    [The information referred to follows:]

                      California Dairy Coalition of
                                Concerned Energy Consumers,
                                 Sacramento, CA, February 16, 2001.
Hon. Dianne Feinstein,
U.S. Senate, Hart Senate Office Building, Washington, DC.
    Dear Senator Feinstein: On behalf of the California Dairy Coalition 
of Concerned Energy Consumers, I would like to thank you for all of 
your activities to date directed to resolving the energy crisis in 
California.
    The Dairy Coalition was formed recently due to the supply problems 
and dramatic price increases seen for both electricity and natural gas 
in California in late 2000. The Coalition represents all of the major 
dairy producer co-operatives in California, as well as the major 
proprietary processing companies.
    As the number one-ranking dairy producing state in the nation, the 
California dairy industry uses substantial quantities of natural gas to 
run its processing plants. Between December 1999 and December 2000 the 
cost of gas to dairy plants in California increased 4,000%. Our 
paramount concern is the dramatic increase in the non-commodity portion 
of the price of gas.
    Again, the Dairy Coalition greatly appreciates your attention to 
this critical issue.
            Sincerely,
                                   Jim Gomes,
                                           Executive Vice President,
                                           California Dairies, Inc.

    Senator Feinstein. My point is this order does nothing 
about natural gas. If you don't do something about 
transportation costs of natural gas, if they're at $15, 
electricity is going to sell for $300 to $500 dollars per 
megawatt hour because of the cost of natural gas.
    Your final point is your order lasts for only one year. 
This is not enough time to get all the needed power on-line and 
operating. I pointed out the additional megawatts. Mr. 
Chairman, you pointed out how much California is paying for 
power. What the State has asked for, and it has fallen on a 
deaf ear back in Washington, is a period of price reliability 
and price stability.
    FERC has found the prices to be unjust and unreasonable. 
Individual generators are coming to agreements and making 
payments to the State and to FERC. They know they've been price 
gouging. We just ask FERC to do your job. Stop it until we can 
get enough power on-line and the market can function. Supply 
and demand, the prices will be passed through to the consumer, 
and we can have a properly functioning market.
    Absent that, the probabilities of California getting 
through the next two summers without major blackout are very 
remote. I thank you.
    The Chairman. Thank you. I would respond very briefly to 
the article that appeared Sunday in the Los Angeles Times, 
April 15. I think, Senator Feinstein, we both want the same 
thing to happen, and that's relief for California. But the 
question is how we get there from here.
    What concerns me, as evidenced in this statement, and I'll 
just read this one paragraph, an effort began last year to 
issue plant permits within 4 months led to approval of only one 
50-megawatt plant at San Francisco International Airport. 
Officials say the deal is collapsing. Half a dozen other plant 
applications were withdrawn, due to site problems, including 
pollution.
    California Energy Commission approved two projects and five 
more are being reviewed for a total of about 500 megawatts. 
State officials concede that not all the power will be 
available the entire summer because developers have until 
September 30 to get these plants on-line.
    So my concern, as evidenced in my statement, was that these 
plants that are receiving certifications also receive the 
assurance of being financed. And that's the problem you run 
into if you don't have a climate that will encourage that 
investment. I know the senator from California agrees with me 
on that.
    Senator Feinstein. Just so you know, Mr. Chairman, the list 
I gave you are approved, they're moving. There is nothing 
that's going to stop any of the projects on this list. I hope.
    The Chairman. Well, I hope you're right. You have a good 
deal more optimism on that than the information that I've been 
given by people in the financing community who are yet to give 
commitments on a good portion of these plants. Because they're 
waiting for some degree of certainty associated with their 
ability to amortize those investments.
    If we put wholesale caps that don't fit, then the question 
I think we have to ask ourselves are we relieving the pressure 
on California? What we want to do is create an investment 
environment that will work and relieve California.
    With that I would encourage us to take the opportunity we 
have, evidently, to hear from our panel, relative to a FERC 
order. And I guess in the interest of comity, we'll start with 
the chairman and move right down the line with Mr. Massey and 
Ms. Breathitt. Please proceed. 10 minutes is enough, can you--
okay, fair enough, thank you.

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

    Mr. Hebert. Thank you, Mr. Chairman, for the opportunity to 
appear here today. Electricity markets in California and the 
Western United States are faced with a substantial imbalance of 
supply and demand. While no one can build generating capacity 
fast enough to eliminate the imbalance this summer, the 
commission is taking appropriate action within its jurisdiction 
to help mitigate problems in those markets.
    For example, in December the commission issued a major 
order requiring changes in California's wholesale power markets 
to ensure that rates charged to buyers are just and reasonable.
    Last month, a Federal appeals court rejected the first 
challenges to the Commission's orders, stating that the 
Commission had adopted a reasonable middle ground between the 
need for temporary price mitigation and the realization that 
competition must exist for the California energy market to 
survive in the long run.
    The Commission continues to balance competing interests and 
to strive to reach that reasonable middle ground in the dozens 
of orders issued in recent months addressing California and the 
Western electricity markets.
    Last week, as promised in the December order, the 
Commission adopted a new market monitoring and a mitigation 
plan in California. The plan packages together a number of 
related measures intended to help remedy California's 
dysfunctional electricity market in order to offer immediate 
relief to consumers, including price mitigation, a demand-
response mechanism, coordination of planned outages, and steps 
to prevent economic or physical withholding of power.
    The elements of the Commission's plan must be viewed as an 
integral package. The price mitigation cannot be evaluated in 
isolation. The other elements of the Commission's plan are 
equally vital to the success of the price mitigation in the 
plan as a whole.
    Last week's order will help ensure that customers are 
adequately protected against unjust and unreasonable prices, 
while also providing a market-oriented price for California 
generators.
    Starting in late May, a market driven price for real-time 
electricity will be determined each day based on market costs 
for electricity inputs, natural gas, and emission allowances. 
And the fuel usage ratio or heat or the heat rate and emission 
rate for the least efficient generator needed to meet demand on 
that day. All California generators bidding at or below this 
market-driven price will be paid the market price.
    Any California generator bidding above this price and 
selected to run by the ISO will be paid its price, subject to 
refund and justification. But its bidding will not, I repeat 
will not raise the market price.
    This price mitigation approach reflects the way pricing 
works in competitive markets. As in a competitive market, the 
prices are set by the highest price supply needed to meet the 
demand. This approach encourages development of new efficient 
supplies by anyone who can build and operate a facility that 
costs less than the existing price.
    The new facilities will then reduce the need to rely on the 
inefficient facilities setting today's prices. The alternative 
approach of paying generators only what they bid will likely 
cause their bids to increase. Ultimately raising prices to 
consumers.
    The Commission's price mitigation approach fulfills the 
requirements of the Federal Power Act. The Commission has broad 
discretion in setting rates and is not required to use cost 
base rates or any other specific methodology, so long as the 
end result of its rate making is within a zone of 
reasonableness.
    The courts have held that the Commission's rate making can 
reflect non-cost factors such as the need to promote 
development, induce supplies or transportation capacity, or to 
increase market efficiency.
    The Commission also required that all jurisdictional 
sellers with participating generating agreements or PGAs with 
the California ISO must offer all power that is available in 
real time, not already scheduled or committed by contract. This 
includes marketers who would control generation.
    This must-sell requirement applies to all California 
sellers who own or control generation, even if they are not 
jurisdictional public utilities. If they sell in the ISO's 
markets or use the ISO's transmission facilities, the only 
exception is for hydroelectric facilities because of their 
multipurpose characteristics.
    Also, all public utilities buying from the ISO must submit 
demand bids identifying the price at which they are willing to 
curtail power purchases if prices exceed the amount. The 
requirement will help the ISO's real-time market behave more 
like a competitive market where increases in price reduce 
demand.
    The plan enhances the ISO's ability to coordinate and 
control planned outages. The ISO must submit weekly reports to 
the Commission on outages so that the Commission staff can 
continue monitoring outages.
    Further, the Commission modified the market-based rate 
authority of the public utility sellers to prohibit 
anticompetitive behavior bidding in the ISO's real-time market.
    All elements of the plan, except for price mitigation, 
operate 24 hours a day, 7 days a week. The price mitigation 
applies when California reaches a stage one emergency. In other 
words, when generating reserves are at or below 7\1/2\ percent.
    The threshold is based on the fact that the critical 
problem is a lack of supply. And a stage one emergency signals 
when the supply is nearing the point of being insufficient in 
real time.
    The Commission's plan terminates not later than one year 
from now. The Commission also instituted an investigation into 
wholesale prices in other parts of the West. The Commission is 
seeking comment on what forms of price relief and market 
monitoring are appropriate for Western sales outside of the 
California ISO.
    The Commission stated that its intent is to mirror its 
approach in the ISO's real-time market to the extent possible. 
And the Commission is also addressing natural gas prices in 
California. Senator Feinstein, I agree. This is a gas situation 
as well, and we do need to look into that and we are.
    For example, the Commission has expedited the issuance of 
natural gas pipeline certificates into California. Recently, 
the Commission processed in only 21 days an application for a 
major expansion of the Kern River gas system.
    The Commission has also ordered an expedited hearing on 
whether El Paso Natural Gas Company and its marketing affiliate 
exercise market power involving El Paso's pipeline and thus 
increase California gas prices.
    The Commission also is reviewing comments it saw on 
additional actions to increase gas supplies to California, and 
I expect the Commission to act soon on those comments.
    And today the Commission issued a notice of a technical 
conference to be held on May 24 of this year on current and 
projected pipeline capacity to California, including the 
interconnections between the interstate and intrastate systems.
    Let me mention one other issue that the Commission is 
working on involving, qualifying facilities under PURPA. 
According to the California ISO, 1000 to 3000 megawatts of QF 
generation in California is not running because of financial 
issues, Mr. Chairman. Those issues are pending before the 
Commission. That's enough to supply between 1 and 3 million 
homes.
    The Chairman. Is not being----
    Mr. Hebert. Is not being used right now or run due to 
financial difficulty. Those issues are pending before the 
Commission in several proceedings. So I cannot comment on the 
merits of the issues at this time.
    However, I believe that prompt resolution of these issues 
is critical to freeing up this capacity for sale in California 
this summer. And I expect the Commission to resolve these 
proceedings quickly.
    A couple of closing comments. Senator Smith, I've heard 
your concerns and have read your concerns, and I think they're 
appropriate.
    Senator Feinstein, I've obviously read yours and heard 
yours as well and had conversations. And I want you to know 
that this committee has made it clear, certainly the chairman 
has made it clear to me that this Commission is to act and act 
appropriately in following the Federal Power Act. And we are 
doing that.
    I will tell you that in the 3 months that this Commission 
has been working together, we have issued some 40 different 
orders and implementations in dealing with California in the 
West.
    At the same time, as you know, we've testified at quite a 
few hearings, and we're glad to shed light on that and make 
sure that the American public and those in California and the 
West understand your concerns and ours.
    But I will tell you that we have talked about and issued 
orders that bring more supply and lower prices to California 
and the West to looking at hydro facilities on a temporary 
basis.
    But what we read about in the press and what we hear people 
saying is, in fact, what you're doing is creating loopholes 
there. We've also issued refunds, something that wasn't done 
before. Something that we've done in the last 90 days. And 
we've got price mitigation.
    But then again when we read in the press, we hear about 
gouging, and we don't hear about how we're moving forward.
    Again, we've said that, in fact, California, you, and the 
rest of the United States of America understand the importance 
for regional transmission organization, but, in fact, when we 
ask them to file one and they're the only State that hasn't, 
the answer is how dare you tell us what to do in California.
    We've also said, in fact, there is a need for additional 
generation. There are generators that you can get on-line. Some 
of them burn diesel, and their action is don't tell us what we 
can burn here. We'll decide whether or not we burn it. And I 
will tell you, Mr. Chairman, back to your question about the 
megawatts that are available, we look at the purpose, the QFs, 
if you will. And under those estimated as much as 3000 
megawatts out there are not being used.
    Now, the estimates that come from the California Energy 
Council suggest that they are only 3,800 megawatts short for 
the summer. Some suggest as high as 6,800. It depends on who 
you're going to listen to. But we've got around 3,000 there 
that people are talking about. With reductions in aggregation 
of load that we've talked about, we're estimating around 1,000 
there.
    Producers who came and communicated to me, in fact, they 
are flaring gas. They could hook up systems that could produce 
1,000 megawatts. Flaring the gas and could produce a thousand 
megawatts.
    If I could be given one more minute, Mr. Chairman.
    Also, the demand, a 5 percent demand reduction of the 
26,000 load we're talking about in California, that will bring 
around 2,300 more megawatts on-line. That together is 7,300 
megawatts.
    Now, that doesn't include capacity added by must-sell 
requirements that this order has that we didn't have before. 
That doesn't include bidding and outage requirements that this 
order has that the previous order didn't have. This does not 
include the price mitigation and what it will do.
    Now, I will tell you, Mr. Chairman, I want to tell members 
of this committee, FERC has acted. FERC is acting responsibly, 
but the one thing we cannot do is go to California and build 
generators and build electric transmission lines and build 
intrastate capacity on pipes and build intrastate pipelines.
    We can certificate them quickly, and we have done that. 
Three weeks with Kern River, unheard of historically, even got 
a letter from the Governor commending us saying that we acted 
appropriately and they appreciate it. We're doing what we can 
do. But California has got to do some things as well.
    I look forward to your questions. Thank you.
    [The prepared statement of Mr. Hebert follows:]

         Prepared Statement of Curt L. Hebert, Jr., Chairman, 
                  Federal Energy Regulatory Commission

                              I. OVERVIEW

    Mr. Chairman and Members of the Committee:
    Thank you for the opportunity to appear here today. Electricity 
markets in California and the Western United States face a substantial 
imbalance of supply and demand. While no one can build generating 
capacity fast enough to eliminate the imbalance this summer, the 
Commission is taking all appropriate action within its jurisdiction to 
help mitigate the problems in these markets. The Commission's actions 
center on three critical needs.
    First, we need to encourage 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 efficiency, promote delivery, enhance infrastructure and 
reduce demand, thus correcting the current imbalance. Last week, as 
described below, the Commission adopted a market monitoring and 
mitigation plan for California consistent with these principles. Among 
the provisions of that plan, the Commission adopted a price mitigation 
approach that will ensure for real-time sales, in emergency hours, that 
customers are adequately protected against unjust and unreasonable 
rates, while also providing a market-oriented price for California 
generators. California generators will be allowed to sell above that 
price if they can justify their costs. Other provisions of last week's 
order, applicable during all hours, improve the Commission's ability to 
detect and remedy anticompetitive bidding behavior by electricity 
suppliers in California. The Commission also instituted an 
investigation into wholesale rates in Western states outside 
California, and is seeking comment on what other relief may be 
necessary.
    Second, infrastructure improvements are greatly needed throughout 
the West and especially in California. We need to create the 
appropriate financial incentives to ensure that the transmission system 
is upgraded and that new natural gas pipelines are built. The 
Commission has taken action on these issues recently, and is 
considering additional action.
    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. As described below, the 
Commission took important steps last week to promote RTO formation in 
the West.

                  II. MARKET MONITORING AND MITIGATION

A. Action to Help California
    In the past few months, the Commission has issued dozens of orders 
to address dysfunctional wholesale energy markets in California and the 
West. Last week, the Commission adopted an innovative plan, which 
packages together a number of related measures, for market monitoring 
and mitigation in California. San Diego Gas & Electric Co. v. Sellers 
of Energy and Ancillary Service, et al., 95 FERC para. 61,115 (2001). 
This plan strikes an appropriate balance by bringing market-oriented 
price relief to the California electric market, providing greater price 
certainty to buyers and sellers of electric energy, promoting 
conservation, and--importantly--simultaneously encouraging investment 
in efficient generation and transmission.
    The Commission established price mitigation for the real-time 
market run by the California Independent System Operator Corporation 
(ISO). However, the price mitigation, based on a price determined from 
a market-oriented formula, applies only when California reaches a Stage 
1 emergency, i.e., when generating reserves are at or below 7.5 
percent. (In all hours, as explained further below, the Commission 
remains vigilant in detecting and remedying anticompetitive bidding 
behavior by electricity suppliers.)
    The price mitigation simulates the price a competitive market would 
produce. Under the price mitigation, a market-driven price for real-
time electricity would be determined each day based on market costs for 
electricity inputs (natural gas and emission allowances), and the fuel 
usage ratio (``heat rate'') and emission rate for the least efficient 
generator needed to meet demand that day. All California generators 
bidding at or below this market-driven price would be paid the market-
driven price. Any California generator bidding above this market price 
and selected to run by the ISO would be paid its price, subject to cost 
justification and potential refunds, but its bid would not raise the 
market price. Non-California generators would be paid the market price 
or the bid price, but would not be subject to price justification or 
potential refunds.
    The price mitigation would apply to marketers as well. A marketer 
could accept the market-driven price or specify its own price. If its 
price exceeds the market price, the marketer would be required to 
justify its price based on the amount it paid for power. However, 
marketers (and generators) are not allowed to include extra cost 
components for scarcity rents or opportunity costs.
    This price mitigation plan reflects the way pricing works in 
competitive markets. As in a competitive market, the price is set by 
the highest priced supply needed to meet demand. The plan also provides 
certainty to the market. All bidders at or below the market price are 
paid the market price, and need not provide subsequent justification.
    The plan provides incentives for investments in efficient 
generation. The market price under this plan is set by the price of the 
least efficient generating facility used each day. Any new facility 
will receive this same price. Thus, the more efficient the new facility 
is, the more it will earn. Conversely, the plan provides incentives for 
retiring or replacing inefficient, dirtier facilities.
    The plan does not set price caps. A price cap is a fixed limit on 
sellers' prices that does not change over time, i.e., a snapshot. By 
contrast, the Commission's price mitigation allows prices to vary each 
day based on market changes in the cost of electricity inputs (fuel and 
emission allowances). Moreover, each generator can bid any amount it 
chooses, so long as the generator can justify any bid above the 
announced market price. For example, if a seller's own gas costs exceed 
the gas costs used in determining the market-driven price, the seller 
can seek to justify the higher costs.
    Nor does the plan discourage the sale of generation into California 
from facilities located outside of California. Out-of-state facilities 
have no obligation to sell into California. If they do, they can 
recover any bid, even if in excess of the market-driven price, that is 
accepted by the ISO; they do not have to justify prices in excess of 
the market-driven price.
    The price mitigation fulfills the requirements of the Federal Power 
Act. The Commission has broad discretion in setting rates, and is not 
required to use cost-based rates or any other specific methodology so 
long as the end result of its ratemaking is within a zone of 
reasonableness. The Commission's ratemaking can reflect non-cost 
factors such as the need to promote development of new supplies or 
transportation capacity or to increase market efficiency.
    The plan contains several other important elements. For example, 
all jurisdictional sellers with ``participating generator agreements'' 
(PGAs) with the ISO must offer all power that is available in real-time 
and not already scheduled or committed by contract. This includes 
marketers who control generation that is subject to a PGA. In addition, 
all sellers that own or control generation in California, including 
non-public utilities, and sell in the ISO's markets or use the ISO's 
transmission facilities must do the same as a condition of being able 
to participate in ISO markets and also as a condition of using 
Commission jurisdictional transmission facilities. In addition, these 
sellers must agree to abide by the same price mitigation and monitoring 
that applies to the other generators. These conditions were put in 
place by the Commission so that all generators--even those that are not 
otherwise subject to the Commission's jurisdiction--participate in 
helping to solve California's problems. The only exception to the 
``must-offer'' requirement is for hydroelectric facilities because of 
their multi-purpose characteristics (e.g., irrigation, recreation and 
power production).
    Also, all public utilities buying from the ISO must submit ``demand 
bids'' identifying the price they are willing to pay for power and the 
load to curtail if prices exceed that amount. This requirement will 
help the ISO's real-time market behave more like a competitive market, 
where increases in price reduce demand.
    The plan enhances the ISO's ability to coordinate and control 
planned outages. The ISO must submit weekly reports to the Commission 
on outages and bid data, so that the Commission staff can continue to 
monitor the market. Further, the Commission modified the market-based 
rate authority of public utility sellers to prohibit anticompetitive 
bidding behavior in the ISO's real-time market.
    All of the elements of the plan, with the exception of the price 
mitigation, operate 24 hours a day, seven days a week, during the 
specified duration of the plan. Any effort to engage in physical or 
economic withholding of scarce electric capacity, to the detriment of 
California consumers, will be met with a vigorous and appropriate 
remedy.
    The various elements of the Commission's market monitoring and 
mitigation plan should be viewed, as they were intended by the 
Commission, as an integral package. The price mitigation cannot be 
evaluated in isolation. The other elements of the Commission's plan 
(outage coordination and monitoring, demand bids, the ``must-offer'' 
requirement and the change in market-based rate authority to bar 
anticompetitive bidding behavior) are vital to the success of the price 
mitigation and the plan as a whole.
    Finally, the Commission imposed two important limits on its plan. 
First, all of the mitigation terminates not later than one year from 
now, so that California cannot rely indefinitely on mitigation in lieu 
of new generation and conservation. Second, all mitigation is 
conditioned on the ISO and California's three investor-owned utilities 
filing an acceptable RTO proposal by June 1, 2001. An RTO is an 
essential tool in improving transmission reliability and addressing the 
transmission bottlenecks contributing to the market dysfunctions in 
California (and the West).

B. Investigation of Other Real-Time Western Sales
    As part of the same order last week, the Commission opened a formal 
investigation into prices charged by public utilities for real-time 
wholesale power sales (i.e., up to 24 hours in advance) throughout the 
West (other than sales through the ISO). The Commission proposed: (1) 
to mitigate prices charged by all public utilities; and, (2) to impose 
mitigation as a condition on all non-public utilities using the 
interstate transmission facilities of public utilities. Similar to the 
Commission's approach for the ISO's market, price mitigation here would 
apply only when contingency reserves fall below 7.0 percent in any 
control area in the WSCC. The Commission sought comments on what the 
price mitigation for these sales should be, stating that its intent is 
to mirror its approach in the ISO's real-time market to the extent 
possible. The Commission also proposed, as it required in the ISO's 
market, that generators should have to offer all energy available in 
real-time. As above, hydroelectric generation would be exempt from the 
``must-offer'' requirement but not from the price mitigation rules.
    After receiving and reviewing public comment on its proposal, the 
Commission will determine the market monitoring and mitigation plan for 
real-time wholesale sales in the West other than sales through the ISO.

   III. OTHER COMMISSION EFFORTS TO INCREASE SUPPLY AND REDUCE DEMAND

    Six weeks ago, the Commission issued an order seeking to increase 
energy supplies and reduce energy demand in California and the West. 
Removing Obstacles to Increased Electric Generation and Natural Gas 
Supply in the Western United States, 94 FERC para. 61,272 (2001) 
(``Order Removing Obstacles''). The Commission implemented several 
measures immediately, including:

   streamlining filing and notice requirements for various 
        types of wholesale electric sales, including sales of on-site 
        or backup generation and sales of demand reduction;
   extending (through December 31, 2001) and broadening 
        regulatory waivers for Qualifying Facilities under the Public 
        Utility Regulatory Policies Act of 1978, enabling those 
        facilities to generate more electricity;
   expediting the certification of natural gas pipeline 
        projects into California and the West; and,
   urging 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 and accelerated depreciation for new 
transmission facilities and natural gas pipeline facilities completed 
by specified dates, blanket certificates authorizing construction of 
certain types of natural gas facilities, and greater operating 
flexibility at hydroelectric projects to increase generation while 
protecting environmental resources.
    The Commission received many comments on these proposals. I expect 
the Commission to complete its review of these comments and finalize 
its actions on these issues soon. In addition, the Commission already 
is acting on many of the initiatives it announced in its Order Removing 
Obstacles. For example, in the month of April, the Commission 
significantly expedited its processing of applications--approved in a 
mere three or four weeks--to add significant amounts of natural gas 
pipeline capacity to California.

                          IV. A WEST-WIDE RTO

    The development of a West-wide RTO is vital to preventing future 
problems in the West. Market conditions in California have affected 
markets throughout the West because the Western transmission system is 
an integrated grid. A West-wide RTO is critical to support a stable 
interstate electricity market that will provide buyers and sellers the 
needed 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.
    Last week, the Commission took major steps toward RTO formation in 
the West. First, the Commission accepted key parts of a proposal for an 
RTO that will span eight Western states, RTO West. RTO West will 
operate (but not own) more than 90 percent of the high voltage 
transmission facilities from the U.S.-Canadian border to southern 
Nevada. The Commission said RTO West can serve as a platform for the 
ultimate formation of a West-wide RTO.
    In the same order, the Commission accepted a proposal for an 
independent transmission company within the RTO West structure, 
TransConnect. TransConnect will own and operate the transmission 
facilities of six utilities in the region.
    Finally, as noted above, the Commission conditioned its price 
mitigation in the California ISO's real-time market on the ISO and 
California's three investor-owned utilities filing an RTO proposal by 
June 1, 2001, consistent with the characteristics and functions set 
forth in the Commission's Order No. 2000. As the Commission stated, 
this condition ``recognizes that the only real solution to supply 
problems that affect the western United States is to create a regional 
response.'' By letter dated May 1, 2001, the Commission's General 
Counsel and the Director of the Commission's Office of Markets, Tariffs 
and Rates, wrote to the ISO and the three utilities, and offered to 
make the Commission's staff available to assist them in completing the 
application.

                             V. CONCLUSION

    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. We'll hear now from the Honorable William L. 
Massey. Mr. Massey, good afternoon.

         STATEMENT OF WILLIAM L. MASSEY, COMMISSIONER, 
              FEDERAL ENERGY REGULATORY COMMISSION

    Mr. Massey. Thank you, Mr. Chairman, members of the 
committee. The Commission's April 26 order was perhaps the last 
clear chance to put in place adequate measures to protect 
consumers in California and other parts of the western market 
from runaway prices this summer. There are good features in the 
order that could provide some help for this summer and beyond.
    But the order is deficient in critical respects. And, 
consequently, will fail to achieve our objectives. And because 
of these deficiencies, I dissented in part from the order. 
We're now 11 months into this absolute calamity out West. It 
has had a staggering effect on the economy. There is no end in 
sight.
    Now is not the time for half-a-loaf solutions. I was not 
willing to compromise my vote so cheaply. Our December 15 
remedy's order did not contain the effective price relief I 
championed or anything close to it. It is now over 4 months, 4 
months and many million dollars later. Our refund orders have 
been paltry and, in my opinion, arbitrary.
    In fact, of the $124 million and potential refunds that 
were in order, $100 million of that has been challenged by the 
sellers.
    Prices are not just and reasonable now and will not be just 
and reasonable this summer. The economic carnage is spreading 
to other States in the Western interconnection. 406 Workers 
were put out of work when Georgia Pacific shut a production 
facility in Bellingham, Washington, because of skyrocketing 
electricity bills.
    The Seattle Tacoma Airport has estimated that this year its 
electric bill will triple, triple to $50 million. That's 25 
percent of its budget. Countless other examples of economic 
harm throughout the Western economic connection could be cited. 
Bonneville Power may increase its rates by a whopping 250 
percent this fall.
    The point is now is not the time for half-a-loaf solutions. 
Now is the time to solve this problem. And this order falls 
short.
    There are four aspects of this order to which I dissented. 
First, the price mitigation feature is much too restrictive 
because it is applied only when a operating reserve emergency 
is called, so-called stages one, two and three. Effective price 
mitigation should apply during all hours in California. Period.
    Such an approach would not be the least bit punitive. It 
would, in fact, replicate the manner which the single-price 
auction is supposed to work. That is the single-price auction 
theoretically provides a powerful incentive for generators to 
bid their running costs into the market. That is the most 
effective generator strategy for insuring dispatch, or so the 
theory goes.
    The problem is it has not worked that way in the California 
market. Economic withholding, which is bidding up the price 
well above your cost just because you can, is a pervasive 
problem. And as a result, high prices that exceed a just and 
reasonable level are a severe problem in the California market.
    The record is absolutely devoid of any evidence that the 
problem is limited to stages one, two, and three hours. The 
evidence is highly persuasive that the problem exists 24 hours 
a day, 7 days a week.
    I found the March 21 California ISO study by Dr. Angelie 
Sheffrin, the ISO's director of market analysis, to be 
compelling. She concluded that economic withholding is a severe 
problem in all hours, not just capacity-constrained hours. Her 
analysis concluded that from May through November of last year 
withholding that led to inflated market prices in the ISO's 
real-time market occurred in over 98 percent of the hours.
    According to my calculations, the ISO had declared a stage 
one, stage two, or stage three alert in only 5 percent of the 
hours during that period.
    For Dr. Sheffrin's study period, the price mitigation 
proposed in our new order would have missed 93 percent of the 
hours when market power drove up prices beyond just and 
reasonable levels.
    Let me quote from Dr. Paul Jowskow, a very distinguished 
professor of economics at MIT. Quote, ``There is considerable 
imperical evidence to support a presumption that the high 
prices experienced in the summer of 2000 were the product of 
deliberate actions on the part of generators or marketers 
controlling the dispatch of generating capacity to withhold 
supply and increase market prices.''
    I could quote from a number of studies by Dr. Frank Wolak 
of Stanford, the ISO's independent market monitor.
    The solution is to require generators to bid their costs in 
all hours. Our order could have done that. What's more, the 
more efficient generators would still make money under such an 
approach, perhaps a lot of money because the market-clearing 
price that all generators would get would be set by the highest 
cost generators, probably an inefficient older gas fire 
generators with a high heat rate. I have no confidence that 
prices will be just and reasonable during all hours this 
summer.
    This agency is statutorily required to assure just and 
reasonable prices at all times. This standard in Federal law is 
not limited to stage alert hours.
    The order also narrowed the existing refund condition 
adopted in our earlier December 15 order. And I object to that 
as well. A large part of the market this summer in California 
will not be subject to any refund condition whatsoever.
    Second, the duration of the monitoring and price mitigation 
features of this order are too restrictive. They would expire 
one year from now, unless expressly modified by the commission. 
This period of time is too short. I would allow the monitoring 
and price mitigation features to remain in place for at least 
18 months and perhaps 24 months.
    Third, I object to the RTO filing conditions. Under this 
order, if--this is the condition. If the California ISO and the 
three California investor-owned utilities failed to make an RTO 
filing by June 1, the entire order is of no effect. As I read 
it, the order becomes null and void.
    Now this makes no sense. It seems to stand for the 
proposition that this Federal agency will make no effort to 
ensure just and reasonable prices if the California ISO and the 
three California IOUs failed to make an RTO proposal. We let 
them decide for us whether we're willing to do our job. I 
cannot support such a condition. I urge them to make such a 
filing, but this has no relevance to price mitigation over the 
next year.
    And, fourth, the scope of the section 206 investigation 
that is ordered for the Western interconnection must be 
substantially broader to do any good whatsoever.
    This order opens an extraordinarily narrow section 206 
investigation for the Western interconnection. I commend my 
colleagues for at least going this far. It's something I've 
been championing for months, but the approach is much too 
narrow to hold any promise of effective price relief.
    I had advocated an investigation and refund condition for 
all transactions of one month or less. The investigation refund 
condition set out in our order apply, however, only to 
transactions of 24 hours or less that occurred during a reserve 
deficiency of 7 percent or less.
    It is my understanding that many of the transactions that 
are driving the high prices in Washington, Oregon, and other 
Western States are for terms well exceeding 24 hours. This type 
of transaction would not be subject to this investigation nor 
to price relief. I strongly object to this omission.
    Now, finally, let me express my concern about the high 
price of natural gas delivered into California markets, which 
also is not dealt with in our order. The transportation 
differential in California often exceeds $10 and is often 
substantially more at various intrastate delivery points. The 
transportation differential into other large markets, such as 
New York and Chicago, is usually less than a dollar.
    The other day from Henry hub to Chicago was 9 cents and 
from Henry hub in Louisiana to New York City was 47 cents. On 
that same day it was over $10 into California.
    The high cost of natural gas delivered into California is 
then used to justify high wholesale electric bids into the ISO 
market. An inefficient high heat rate generator using a 
considerable amount of high-priced natural gas then sets the 
market clear in price that all sellers in the market are paid.
    Thus, the high transportation differentials into California 
gas markets have a particularly pernicious effect when coupled 
with a single-priced option for electricity.
    May I have one more minute, Mr. Chairman?
    The Chairman. Sure.
    Mr. Massey. I urge of my agency to take all available 
action to mitigate these high transportation differentials. We 
must actively explore any jurisdiction we may legitimately have 
that affects the so-called gray market. We must take a second 
look if lifting the price cap for secondary market pipeline 
capacity a year ago was actually in the public interest.
    We must vigorously investigate any allegations of 
withholding of market affiliation or affiliate abuse. We must 
certificate new interstate pipeline capacity. And as 
Commissioner Breathitt has pointed out on more than one 
occasion, we must work with the State of California to make 
sure there is adequate take away capacity in the intrastate 
capacity.
    I'm open to any and all ideas, but my attention is riveted 
on this issue by a recent staff order setting the so-called 
proxy price for electricity for the California market for the 
month of February. The order set a proxy clearing price should 
be $430 per megawatt hour. In other words, we're concerned 
about prices above that if they occurred during stage three. We 
weren't concerned below that.
    $350 of that amount was the price of natural gas for an 
inefficient generator. I've concluded that we'll never get a 
handle on electricity prices unless we get a handle on gas 
prices.
    In conclusion--10 seconds--despite the work of the 
commission, our hard working staff, we have not solved these 
problems. And we must do so. Our order fell short, and I 
dissented in part.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Mr. Massey. Our last witness this 
afternoon, the Honorable Linda K. Breathitt, Commissioner.

        STATEMENT OF LINDA K. BREATHITT, COMMISSIONER, 
              FEDERAL ENERGY REGULATORY COMMISSION

    Ms. Breathitt. Thank you, Mr. Chairman, Senator Bingaman, 
Senator Feinstein, and other Senators representing Western 
States here this afternoon. I am pleased to be here today to 
answer questions on FERC's order of April the 26.
    The development of a price mitigation and monitoring plan 
for California wholesale electric markets has raised 
contentious and difficult issues that go to the heart of each 
commissioner's philosophy of public utility regulation.
    Our deliberations on this issue have been the subject of 
intense and unprecedented scrutiny by an increasingly 
sophisticated public. And that's a good thing.
    I hope that that public will be well served by the actions 
that we took last Wednesday evening, and I believe that they 
will be.
    I emphasize the complexity and difficulty of the decisions 
we made because I believe there is considerable danger in 
oversimplifying the problems facing California and western 
markets, as well as the solutions this commission and other 
State and Federal bodies have sought.
    That danger is in the misconception that the issue is 
simply whether or not price mitigation in California should 
occur. And further, that the answer is going to be either a 
simple ``yes'' or a ``no''. To present the matter in such a way 
it is not recognized that the Commission has reached a 
consensus that price mitigation should occur. And, yes, we did 
reach that consensus. The real issues have been what form price 
mitigation should take.
    For several years now this Commission has focused its 
attention on finding market solutions to problems confronting 
the wholesale electricity sector. I believe that such a market 
approach will achieved the best long term result for the 
public, and that our specific mitigation plan addresses the 
short-term situation.
    While the situation in California has certainly challenged 
this resolve, I remain steadfast in my belief that market-
oriented solutions are preferable to those which might further 
hinder the evolution towards efficient and workable competitive 
wholesale electricity markets that will deliver lower prices.
    That said, however, the flawed electricity markets that 
exist in California and elsewhere are not at all what 
proponents of restructuring had in mind when this process was 
initiated at both the Federal levels and State levels in the 
past decade.
    Over the past months, I have made a point to emphasize my 
belief that it is imperative for regulators to take firm steps 
to improve markets in California, so that the present turmoil 
will not cause to us abandon or retreat from the paramount 
objectives of opening the transmission system to fair and non-
discriminatory access in making the wholesale electricity 
markets more competitive.
    In light of the predictions for prolonged blackouts, supply 
shortages, and even higher prices, I am convinced of the need 
to implement the structural and regulatory remedies required to 
stabilize California and the Western markets.
    In developing a price-mitigation procedure for California, 
I had several objectives that I wanted to accomplish. And 
primary among those was that the plan we ultimately adopt must 
address price volatility in California's real-time energy 
markets. It shouldn't discourage necessary investment in 
California's generation infrastructure, and it should be market 
oriented. And I believe our plan meets those objectives.
    The hallmark of the order we issued last Wednesday is its 
price mitigation plan, which establishes a single market 
clearing price auction for the real-time market during reserved 
deficiencies. Price mitigation will be required for all 
generators with an available capacity when reserves are at 7.5 
percent or less.
    During those periods, a proxy price will be in effect. That 
is a marginal cost based on heat rate, gas cost, and emissions 
cost, and that will be calculated for each generator. The 
calculated marginal costs of the unit that clears the market 
will determine the market clearing price.
    This price mitigation mechanism will not operate on an 
after-the-fact basis as does our current methodology. Instead, 
the ISO publishes the gas index and the emission information to 
be used in the formula on a daily basis.
    And if mitigation applies, when stage one is called by the 
ISO, that will trigger the price mitigation plan. And, Senator 
Feinstein, I believe we may likely be in the stages a lot of 
the summer. Our mitigation plan will be in effect a lot of 
those hours.
    I want to highlight the fact that our April 26 order also 
contains a number of measures that address California market 
issues from the demand side as well as the supply side. And 
these measures will be in effect for all hours and are in 
addition to ongoing enforcement and monitoring that the 
commission is undertaking.
    On the supply side, our order requires that the ISO propose 
a mechanism for the coordination and control of outages. The 
order also requires the ISO to submit weekly reports on the 
schedule, the outage, and the bid data for all hours, 24/7, so 
that the Commission staff can monitor generating unit outages 
and real-time prices.
    Another important supply measure in the order is the 
imposition of a must offer obligation on all the generators 
that have participating generator agreements with the ISO in 
real time. And these features that I've just talked about 
address economic withholding and physical withholding, and they 
speak to enforcement and monitoring on a 24 hour basis, 7 days 
a week.
    Also, non-public utility sellers must abide by the same 
must offer obligation. In other words, if they use interstate 
transmission, they must offer any available capacity that they 
have to sell into the California ISO in the real time.
    In addition to the price mitigation, the order institutes 
requirements that should result in demand-side responsiveness. 
Specifically, the order requires all entities purchasing 
electricity in the real-time market to submit demand-side bids 
that establish the price at which their load will be curtailed. 
And they need to identify the load to be curtailed.
    This action should help mitigate market power and lessen 
the severity of price spikes. It also makes more megawatts 
available in times of shortage.
    As the order points out, when demand responds to price, 
suppliers have more incentive to keep their bids close to 
marginal cost because high bids are more likely to reduce the 
bidder's energy sales.
    So in addition to monitoring, the Commission staff has 
initiated the following daily reports from the ISO on plant 
outages. We're going to be reviewing bids and bidding patterns 
into the ISO real-time markets, and we're going to be doing 
ongoing financial audits of selected sellers of electricity 
power into California.
    Finally, I would like to comment on the order's institution 
of an investigation under section 206 of the Federal Power Act 
into the rates, terms, and conditions of sales in the Western 
States Coordinating Council.
    The feature of this order was important to me because it 
appropriately reflects the regional nature of the wholesale 
electricity market and the problems being faced in the West. 
This investigation will target the transactions and prices in 
the WSCC in a manner that is consistent with our actions in 
California.
    I am pleased that also the commission issued an order today 
establishing a technical conference looking into natural gas 
issues in California. An issue I have been speaking about for 
several months, and I don't know the exact date of the 
technical conference, Mr. Chairman, but it will be designed to 
look into the interstate natural gas market and how it fits in 
with the intrastate natural gas market.
    It will seek to determine why prices are higher in some of 
the market hubs in California--Topac, Wheeler Ridge, and 
others--and we will hopefully begin to sort out what is driving 
some of the high prices of natural gas in California.
    Thank you. That concludes my statement. I will enter it 
into the record upon permission, Mr. Chairman, and I am 
available to answer questions.
    The Chairman. Thank you very much, Madam Commissioner. 
Before we go into the questions, I know the members have many. 
Let me remind all of us that what we have here before us to 
consider is an order. That order was voted on by democratic 
process within the Commissioners two to one. So I think we have 
to question the adequacy of the order and indeed the remedy if 
we feel the order is inadequate.
    Now, those remedies or another order which would have to be 
initiated, of course, by FERC over legislation. It's rare that 
you have an opportunity to revisit a dissent. But, 
nevertheless, I think in spite of my concern, Mr. Massey's 
rationale has certainly been helpful to the members to 
understand and appreciate.
    But I would hope members as they question will direct their 
questions to the adequacy of the order, which is what we're 
going to have to live with unless, again, they change the order 
or, again, we want to introduce legislation to the contrary.
    I think it is also noteworthy to recognize the point that 
Chairman Hebert had made regarding the volume of paperwork 
that's associated with this cost of production cost.
    Senator Bingaman, I understand we have a voted for. I think 
we should proceed as best we can limit the members. But we've 
been asked to allow a visual of this volume of paperwork. So if 
whoever has a strong back and wants to bring it in, maybe as we 
begin to question the witnesses, you can explain what's in 
these so-called orders.
    So if the officer would allow the material to come in, and 
if we've got any volunteers with a strong back to bring it in, 
well, you make your point.
    I think Senator Smith has to chair at 4. I have another 5 
minutes, then I'm going to come back. Senator Bingaman, you can 
work it any way you want. I'll defer my questions at this time 
in order to accommodate Senator Smith, if that's all right with 
you.
    Senator Smith. Thank you, Mr. Chairman, Senator Bingaman.
    Senator Bingaman. May--is this stuff coming in now or--Mr. 
Chairman, what is this stuff again?
    The Chairman. Well, it's the stuff that he referred to. Go 
ahead and tell us what it is.
    Senator Bingaman. What is this stuff?
    Mr. Hebert. Mr. Chairman, what certainly we are considering 
here is the ability for this Commission to turn the clock back, 
the ability for this Commission to go back and do cost base for 
cost-of-service regulation.
    The Chairman. Come on, bring it up.
    Mr. Hebert. It has certainly been the position of the 
majority of this Commission consistently that we can't go back, 
and that it is impractical for us to go back to cost base or 
cost of service.
    The reason for that is demonstrated by this case, which is 
a Florida Power & Light case which goes back to 1993, which has 
yet to be finalized.
    And what these represent is even--not even a complete list 
of the filings which is 15 boxes.
    Now, these 15 boxes again represent the complexity of rate 
cases. This is not to represent what is the oldest cases that 
FERC has dealt with historically. We've had cases go back 15 
and 20 years.
    The point that these 15 boxes will represent, through this 
Florida Power & Light case, which is a rate case, is that 
California nor the West can wait eight years, nor can we wait 
20.
    The Chairman. This is one case before FERC?
    Mr. Hebert. That's correct, Mr. Chairman.
    The Chairman. And what's in the boxes?
    Mr. Hebert. The filings of the case, and it's not complete.
    The Chairman. Somebody open the top of one of those.
    Mr. Hebert. Some will get out.
    The Chairman. Put it back on, quick. How do you relate this 
to, you know, a rate-based case? In other words, each rate has 
to be examined individually what the production costs are and--
--
    Mr. Hebert. Again, this is one case. If we're talking about 
cost-based cost of service, we're talking some hundreds, as 
many as some as 500 generators that we would have to go back 
and establish their cost, subject to litigation, subject to 
rehearing of this commission and appellate procedures beyond 
that. It's just not an answer.
    Senator Dorgan. Mr. Chairman, I'm apparently missing the 
message. If the message is we can't regulate because there's 
too much paper, that's not a message I understand or accept. 
The IRS.
    The Chairman. Just a minute, just a minute, just a minute. 
I don't think we need any more--we believe there's 15. Is that 
fair enough, Senator Dorgan? I think the point has been made 
that when you talk about cost base, you're talking about a 
great deal of detail because it comes in on various types of 
formulas that are applicable. You have to go through them all.
    Mr. Hebert. Mr. Chairman, I don't want Senator Dorgan to 
misunderstand me. It's not about the magnitude of the paper. It 
is the time span of the paper which creates the magnitude. The 
8-year period.
    Senator Dorgan. I don't want to take other's time, but 
Senator Burns and I have been talking about a complaint against 
railroad rates that lasted 15 years. But that's the agency's 
fault. If these things drag on and can't get done, that says a 
lot about the agency.
    The Chairman. It says a lot about both sides because 
obviously each side wants to make a case and each side gets 
good legal----
    Mr. Massey. May I make a comment, Mr. Chairman?
    The Chairman. The point is we've got an emergency here. We 
can't wait 8 years or California will burn out all of its 
candles.
    Mr. Massey. May I make a comment?
    The Chairman. No. I'm going to call on Senator Smith 
because he's under a time constraint.
    Senator Smith. Thank you, Mr. Chairman.
    Mr. Hebert, are you aware that in the bill Senator 
Feinstein and I have we could relieve you of this problem? We 
give you a choice of imposing just and reasonable load-
differentiated demand rates or cost-of-service service base 
rates. So you don't have to go through all of this. You set 
them. You don't have to do this facility by facility. Are aware 
of that and why isn't that a reasonable option?
    Mr. Hebert. I understand, Senator Smith, that the 
legislation does address that. What I'm concerned about and 
what I've not quite figured out through the legislation is how 
we get beyond the due process of law. How we get beyond the 
Administrative Procedures Act which I don't believe the 
legislation would be able to override. Which then again would 
bring us right back here.
    Senator Smith. One of the concerns I have for the energy 
industry, which seems fairly unanimous in wanting to go to a 
deregulated free market, is the presumption that we even have a 
free market. It seems to me what we're in the middle of a 
process and a ways away from it.
    And for a number of reasons of another nature, California's 
difficulties with their law have magnified the problem so 
incredibly that some are allowed to gain in the system. What I 
fear is happening is we're going to set back deregulation for a 
generation or more.
    And people who are trying to put up plants or think that 
there's a future in this are going to be sorely disappointed 
when the public outcry is so loud this summer that there's 
going to be little to hold back the dam that's going to break 
on energy companies if they keep this up. Are they aware of 
that?
    Mr. Hebert. They being the commission itself, are we aware 
of it?
    Senator Smith. Are you aware of it? Are the people you deal 
with, do you go to these boxes with, do they have a clue about 
the kind of--the head of steam that's building up against them?
    Mr. Hebert. Well, part of the problem, as you know, Senator 
Smith, and you and I have had had conversations and I know 
you're sincere as to wanting to correct the problem, and I 
commend you for attempting to do that, but these boxes do not 
represent two parties. They're not just two parties and two 
sides. There are many sides to this. Which is the complexity of 
it.
    But I will tell you that FERC is acting in a way that we 
think is reasonable. And I totally agree with you that the 
market is dysfunctional. FERC agrees with you that the market 
is dysfunctional. That is, in fact, why you have the price 
mitigation plan.
    But we have a tender balance in trying to correct the 
marketplace and get the marketplace on its feet and get 
adequate generation, which means adequate supply.
    At the same time, you can't separate out deliverability of 
that supply as well. In other words, the transmission side of 
that is important too. Because quite frankly whereas some 
people want to say, you know, why do you tie the RTO filing 
that California should have made 16 months ago? They were put 
on notice. Why do you tie that to the mitigation measures? It 
doesn't have anything do with mitigation.
    Well, quite frankly it has everything to do with 
mitigation. Because if someone tells you that transmission 
system, especially Path 15 which is not set up correctly which 
needs to be improved, that the people have been debating since 
1985. At least if they're going to tell you that's not part of 
the solution, then what they're doing is putting their thumb in 
the eye of every other State but California.
    Because what they're going to say is we don't care about 
the transmission system and what it does with the other States 
and whether or not it sucks your energy dry. What we care about 
is just taking care of California, and we have to represent the 
entire 50 States of the United States of America. It is about 
transmission, it is about generation, it is about supply. It's 
a tender balance, and we're trying to provide that.
    Senator Smith. It seems to me those boxes are Exhibit A 
that we have a functional market, a broken market, and FERC 
needs to take a different course.
    But I do want to commend you at least for the direction 
you're headed. I think it's welcome. I wish you had gone a bit 
farther, and I frankly wonder why you didn't include the other 
Northwest States on the grid.
    Mr. Hebert. Well, we have a section 206 which we're seeking 
comment on that comment period. We're hoping to get information 
that is somewhat going to be similar and mirror what we've done 
in California. That is what we're looking for. So we haven't 
ordered it, but we are in a comment period which would end next 
week. It is a 10-day comment period, which I think is the 
quickest comment period we've ever had.
    Ms. Breathitt. Senator, may I add we're legally constrained 
to address this situation and the other Western States without 
first instituting what we first call section 206 of the Federal 
Power Act provision.
    Senator Smith. And you have that investigation going now; 
is that correct?
    Ms. Breathitt. It begins immediately upon publishing in the 
Federal Register which should be, hopefully, this week.
    Mr. Massey. Senator, may I comment on that? That 
investigation is so narrow it holds almost no hope for any 
price relief for your State whatsoever. We're only 
investigating transactions of 24 hours or less that occur 
during reserve deficiencies. All the transactions that are 
driving prices very high in your State, pretty much all of them 
I would say are excluded.
    Senator Smith. My concern is just by including California, 
you leave Oregon, Washington, and others more vulnerable to 
some of this abuse.
    Ms. Breathitt. In 60 days after it is published in the 
Federal Register, which should be this week, we will be able 
to, upon a finding from our investigation, that we can address 
high prices in the other Western States, including yours, 
Senator. We just have to go through this important legal step 
first.
    Senator Smith. I understand, and I know you can't look 
backwards. But I tell you looking backwards I'm looking at 
differences in pricing of 10 to 12 times what they were just a 
year ago. If that isn't unjust and unreasonable I don't know 
what is.
    And I would just plead for you all to continue to exercise 
all of the powers you have. And if you need some more, we'll 
get you some because this is unsustainable politically for this 
commission, for this administration, for this Congress. And so 
tell us what you need and with all delivered speed help.
    Mr. Hebert. Commissioner Smith, if I could be clear--
Commissioner Smith, I apologize.
    Senator Smith. I've been called worse.
    Mr. Hebert. No, you have not been called worse. Senator 
Smith, let me clear up one inaccuracy. The price mitigation 
does not just apply during the contingency reserve. The price 
mitigation we're looking at through the 206, as I said, we're 
looking at mirroring California, the must sell, the bid 
requirements, the outages, and the reporting, 24 hours a day, 7 
days a week. And that will mitigate prices. So I wanted to 
clear that inaccuracy up. That is 24 hours a day, 7 days a 
week.
    Mr. Massey. There's no need to clear up what I said. What I 
said was absolutely accurate. The investigation is so narrow 
that it holds almost no hope for any price relief in other 
States.
    Senator Smith. Thank you.
    Mr. Hebert. Thank you very much.
    Senator Burns [presiding]. Senator Bingaman.
    Senator Bingaman. Thank you very much, Mr. Chairman. One of 
the confusions I've got about this is whether or not this 
mitigation plan that has been implemented or proposed here, I 
guess adopted here, whether this can be evaded. Are there 
sellers outside of California not subject to this proxy system 
who can find a way to get a higher price for the power and the 
higher price power wind up getting into California? Is that a 
legitimate concern, in your opinion--I'll ask the chairman 
first, then the Commissioner Massey.
    Mr. Hebert. If you have a concern, Senator Bingaman, it's 
legitimate. But I will tell you it is not a concern that I 
have. One of those issues will be subject to rehearing and 
certainly pending the comment period in the 206 proceeding.
    But I will tell you any bid that comes from out of the 
State into the State of California is not subject to the 
mitigation at this point. But we will get comments on that.
    Senator Bingaman. Commissioner Massey, do you have any 
thoughts on whether this mitigation plan could be evaded?
    Mr. Massey. Oh, I've heard one comment that it is a Swiss 
cheese mitigation plan, which I think is true. I expect prices 
to go up outside of stage one, two, and three hours.
    No. 2, the out-of-State generators that bid into the market 
are not subject to the market clearing price and are not 
subject to a refund obligation under the order as it's drafted 
right now. So, yes, I think that there are several ways that 
even the limited mitigation in this order can be evaded.
    Ms. Breathitt. Senator, may I respond also?
    Senator Bingaman. Yes, sure, please go ahead.
    Ms. Breathitt. I'm going to read one sentence from our 
order. And it says during mitigation when the stage one 
triggers our price mitigation plan, marketers and I don't know 
if you're speaking to marketers, but marketers can accept the 
market clearing proxy price that is set by the ISO or submit 
their own bid.
    If their bid exceeds the market clearing price, they would 
be required to justify the bid based on the prices they pay for 
the power. So our order does seek to include sellers selling 
into the ISO and the real-time market.
    Mr. Massey. But the out-of-State generators are exempted 
from that at-risk condition by the order.
    Senator Bingaman. Right. That was my concern that out-of-
State generators could sell to parties also outside the State 
at a higher price, and then those parties could sell into 
California at whatever they wanted, whatever the market would 
bear. But you don't think that's a real problem, Mr. Chairman?
    Mr. Hebert. I don't think it's a real problem, and I would 
suggest to you, Senator Bingaman, that, in fact, this 
commission is going to remain vigilant to look at manipulation. 
We have done that. If we find market power manipulation that we 
think merits moving forward with and having discouragement, we 
will, in fact, do that 24 hours a day, 7 days a week.
    Senator Bingaman. Does California have to file a proposal 
that incorporates it into a West-wide RTO in order to be 
consistent with this order 2000?
    Mr. Hebert. It is conditioned. The RTO is a condition as to 
their necessity to file with the mitigation plan.
    Senator Bingaman. What does that mean?
    Mr. Hebert. It is conditioned, and I'll be fair with you. I 
would love to have mandated it. If we would have had the votes 
to mandate it, I would have mandated it.
    Senator Bingaman. You would have mandated that California 
file a proposal that incorporated it into a West-wide RTO?
    Mr. Hebert. That they file an RTO with us. The provision 
within our order does not say West-wide RTO, it says RTO. You 
see, some 16 months ago the Commission unanimously, at that 
point, ordered all States to file with us regional transmission 
organization plans. And, in fact, California has yet to do it.
    But what people don't understand is if you're trying to 
mitigate prices, which means in the end you're trying to get 
more supply delivered so you can bring down those prices, the 
transmission system has everything to do with that. That is, in 
fact, what order 2000 was about.
    And every other State has complied. But if we're going to 
get California and the West on its feet, the RTO proposal is 
part of that and must be filed. You can't separate it.
    Senator Bingaman. But now you're saying that is not 
required in this order, but it is conditioned? What does that 
mean? What does that mean?
    Mr. Hebert. Well, it's obviously subject to rehearing, and 
this Commission will speak to that. But I will tell you the 
condition is that they must file an RTO with this Commission.
    Senator Bingaman. Well, then it's required. If that's a 
condition, then it's required. Let me ask the other two 
commissioners.
    Ms. Breathitt. Senator, the way I read that section in the 
order, which I did vote for, let me say that it's not one of my 
favorite features of the order, but I did vote for it.
    Senator Bingaman. I'm supposed to be the one reading the 
order, you're supposed to be the one writing it.
    Ms. Breathitt. I know, I'm just explaining it's not my 
favorite feature. But notwithstanding, I don't think it will be 
difficult for the California ISO to file an RTO plan as every 
other jurisdictional transmission-owning entity in the United 
States has last October. It does not ask them to join with any 
other surrounding RTO.
    Senator Bingaman. So you agree they have to file a plan, 
but you don't think it will be difficult to do?
    Ms. Breathitt. I do not.
    Senator Bingaman. Commissioner Massey, did you have any 
comment on that?
    Mr. Massey. Under this order they don't have to file a 
plan. If they don't file a plan, the order self-destructs. 
That's the way it works. This Commission has said in this order 
if California doesn't file an RTO plan, even the meager steps 
that we took here to ensure just and reasonable prices 
evaporate.
    Ms. Breathitt. Senator, Bill is right, but I don't think it 
will be difficult for them to comply.
    Mr. Hebert. Senator Bingaman, if I might just add, we have 
provided the State of California, the IOUs, and the ISO three 
of FERC's brightest and best to help them. We've exchanged 
phone numbers. We have three individuals helping with them. 
We're doing everything we can. But the RTO is an integral part 
of bringing prices down. There's no question about that.
    Mr. Massey. May I say one thing? If Chairman Hebert wants 
to send a separate order up to mandate this, I will vote for 
it. There's two votes right there. So I--but I would not vote 
for it as a condition in this order of our commission carrying 
out its responsibility to insure just and reasonable prices.
    Senator Bingaman. Mr. Chairman, I've used all my time. 
Thank you very much.
    Senator Burns. Senator Feinstein.
    Senator Feinstein. Thank you very much, Mr. Chairman.
    Mr. Chairman, someone just handed me an interesting 
document. It's entitled, ``Megawatt Laundering Under FERC's 
Mitigation Plan or a Primer on How to Gouge California.'' And 
it actually described how to use this order to price gouge.
    And it's got a step-by-step primer in it that goes on and 
says exactly how to do it. I find that very interesting.
    But I sent down to Mr. Hebert a letter dated April 30 from 
Southern California Edison, and I would like to enter this 
letter into the record because it documents that there are not 
3,000 megawatts of QF-generating capacity off line in 
California due to financial concerns.
    The total includes 320 megawatts of generation under 
contract with Southern California and 400 under contract to 
PG&E.
    What this letter points out is that the payment system is 
in the process of being worked out, and in light of these 
payments made and offered by Southern California Edison, no 
financial hardship will result from continued sales by QFs 
pursuant to their existing contracts with utilities. And I 
would hope that if there are any QFs here, they would make 
themselves available of that.
    [The letter follows:]

                                Southern California Edison,
                                      Rosemead, CA, April 30, 2001.
The Vice President,
The White House, Eisenhower Executive Office Building, Washington, DC.
    Dear Mr. Vice President: Southern California Edison Company (SCE) 
is deeply concerned that some in the Administration and Congress 
apparently have come to believe that the abrogation of existing 
contracts between investor-owned utilities in California and qualifying 
facility (QF) power suppliers offers a means to increase the amount of 
electricity available in California. This position appears to be based 
on misinformation about the amount of QF power that is currently off-
line in California, the reasons that generation is off-line, and the 
implications for California consumers if QF power is sold outside of 
these existing contracts at higher, market-based prices. Questions 
regarding the government's legal authority to abrogate these binding 
contracts aside, it is vitally important to set the record straight 
before the government takes precipitous action that will only worsen 
the California electricity crisis.
    It has been asserted that 3,000 MW of QF generating capacity is 
off-line in California due to financial concerns including nonpayment 
by SCE and Pacific Gas & Electric (PG&E) for past power deliveries. The 
facts, however, show otherwise.
    Only 1,200 MW of otherwise dependable QF resources contractually 
committed to SCE and PG&E are off-line. (QFs under contract to San 
Diego Gas & Electric, which has not missed payments under its 
contracts, are not included in this total.) Of this 1,200 MW that are 
off-line, approximately 500 MW are off-line due to scheduled 
maintenance or equipment failures. Thus, only approximately 700 MW has 
been taken out of service due to financial concerns. This total 
includes 320 MW of generation under contract to SCE and approximately 
400 MW under contract to PG&E.
    While there remains a past delivery payment issue that must still 
be resolved, going-forward payments for QF power will be made on a 
timely basis, as required pursuant to the March 27 decision of the 
California Public Utilities Commission (CPUC). SCE will make energy and 
capacity payments to all QF generators for power deliveries made on and 
after March 27, 2001. The first such payment for April's deliveries was 
made by SCE to its QFs on April 13, 2001. We understand that PG&E also 
paid its QFs in accordance with the CPUC's March 27 order.
    The same CPUC order requiring payments going-forward also modified 
the pricing formula that applies to the vast majority of SCE's QF 
contracts. Certain gas-fired cogeneration facilities have claimed that 
this modification (which ties QF electricity prices to a natural gas 
spot market index at the California/Oregon border rather than the 
previous, typically higher, index prices at the California/Arizona 
border) has caused a financial dislocation while such cogenerators find 
ways of transitioning from purchasing natural gas at Arizona spot 
border prices to lower priced alternatives. SCE believes that the 
financial strain resulting from this change in the price formula is 
directly responsible for most, if not all, of the QFs under contract to 
SCE being taken off-line.
    To ease the effects of the natural gas price change on this limited 
class of QF suppliers, and to ensure that all available resources 
continue to operate during this crisis, SCE made a proposal last week 
to affected cogenerators, subject to the concurrence of the CPUC, to 
make a supplemental monthly payment to gas-fired cogenerators during 
the calendar months of May 2001 through April 2002. The proposed 
supplemental payment would assure that the total energy payment 
received would be equal to the amount that would have been paid using 
the previously effective Arizona border gas index.
    SCE also has offered to prepay the affected cogenerators for the 
first full delivery month following the effective date of the agreement 
proposed above, in a further effort to assure that there are no 
financial obstacles standing in the way of full production by these 
facilities. We believe that this package should be effective in 
bringing back on-line that limited amount of generation currently off-
line due to financial concerns. We are very encouraged by the favorable 
initial reaction of the cogenerators to our proposal and are hopeful 
that all of these small generators will be back on-line as early as 
this week.
    In light of these payments made and offered by SCE, no financial 
hardship will result from continued sales by QFs pursuant to their 
existing contracts with utilities. The legitimate financial issues 
facing these generators are being addressed. Allowing QFs to abrogate 
their contract obligations would do nothing to resolve the issue of 
past debts.
    If QFs are permitted to break their contracts and sell their 
generation on the open market, there is no guarantee that this much 
needed power will stay in the state of California. What is more, the 
government is proposing to abrogate the very type of forward contract 
that the Federal Energy Regulatory Commission and others repeatedly 
have claimed is necessary to reduce the price volatility in the 
California energy market. While the result will be a windfall for QFs 
and power marketers selling at market-based prices that are today 
roughly four times higher than existing contract prices, the result for 
the state will be to make the power supply and price situation worse, 
not better. Allowing a QFs to sell all their generation outside their 
existing contracts in order to bring back on-line the limited amount of 
generation that is off-line due to financial concerns will roughly 
double the amount of power that the state must purchase (the ``net 
short'') with disastrous financial consequences.
    California consumers have paid dearly for the right to finally reap 
the benefits of QF contracts that have for years saddled utilities and 
their customers with the obligation to pay far in excess of market 
prices for QF power. Prior to 2001, SCE had paid its QFs atotal of 
$27.9 billion for electricity, approximately $15.8 billion of which 
exceeded the prevailing market rate. As the CPUC has acknowledged, QF 
contracts were heavily front loaded in order to encourage the financial 
community's support for QF development. When consumers are now finally 
poised to receive some of the promised benefit of the QF program, that 
benefit would also turn out to be illusory if the QFs are permitted to 
abrogate their agreements in order to pursue greater profits in a 
dysfunctional spot market.
    Federal action is not needed here. The CPUC has authority in this 
matter, and has recently instituted an investigation regarding the 
performance of QFs under their existing contracts. As the CPUC observed 
in its Order Instituting Investigation, ``this Commission, like other 
state regulatory agencies, has the primary role in calculating payments 
to a QF . . . and in overseeing the contractual relationship between 
QFs and utilities operating under our rules and regulations.'' There is 
no compelling justification for the Federal government to intrude into 
this matter at this time.
    For all these reasons, we urge you to disavow any intent to 
abrogate existing QF contracts. Such a step would be ineffective in 
increasing the availability of power in California, and would only 
aggravate the substantial burdens being borne by the state and its 
residents as a consequence of the broken wholesale electricity market.
            Sincerely,
                                          Stephen E. Frank,
                                         Chairman, President & CEO.

    Senator Feinstein. But if I could, I would like to ask Mr. 
Massey a couple of questions. Mr. Massey, what percentage of 
transactions from January to March where FERC ordered refunds 
because they found prices were unjust and unreasonable were in 
stage three or one or two?
    Mr. Massey. It depends on the month. I have the numbers for 
stage three. Let me give you an example. For the month of 
March, the proxy clearing price was $300. And we said in an 
order if generators during stage three bid $300 or above, 
they're subject to refund. That only captured 220 out of 9,000 
transactions that were above $300.
    So 98 percent of the transactions that were above $300 were 
for megawatt hour during the month of March were essentially 
given a free and clear by our order. I don't have the numbers 
for stages two and one.
    I have them for last year. From June until December of last 
year, only about 5 percent of the transactions occurred during 
stages one, two, and three. So if the price mitigation in this 
order had been applied then, only about 5 percent of the 
transactions would have even been covered by it.
    What will happen this summer, what percentage of the 
transactions will be in stages one, two, and three it's 
anyone's guess. But one estimate I have heard is in the range 
of 40 to 45 percent. Which may mean that 60 percent of the 
transactions will not be subject to price mitigation this 
summer.
    Senator Feinstein. And therefore very likely will have 
prices go up?
    Mr. Massey. I expect the prices outside the mitigation 
periods to go up.
    Senator Feinstein. Can you give us any estimate of how high 
you believe they will?
    Mr. Massey. You know, I really do not know, but I do know 
that the order the way it's drafted right now, if it's purely 
economic withholding, a generator simply bidding a $1,000, 
$1,500, just because it can and it's outside of stages one, 
two, and three, there's no relief and no at-risk condition.
    Senator Feinstein. Well, you know, I think in a sense it 
makes the order next to worthless in terms of real impact and--
--
    Mr. Hebert. Senator Feinstein, I would love to comment on a 
couple of things. One, there is not going to be physical or 
economic withholding because the must-sell requirement which, 
by the way, doesn't have anything to do with the stage. It is 
24 hours a day, 7 days a week. It's important you understand 
that.
    The must-sell requirement was not in the December 15 order. 
Actually, you and I have had some exchanges, and that is one of 
the things we agreed that probably was important. I think it 
was important, and that is why it's in there. The bidding 
requirements are additional, so are the outage requirements. In 
the reporting requirements they were going to happen on a 
weekly basis. So I don't want you to think those transactions 
are not going to be looked at.
    Nor do I want you to think that this commission, if it 
comes to market manipulation, is not going to act. We are going 
to act.
    A couple of other things that are very important too. 
Commissioner Massey so clearly pointed out a little while ago 
the fact that when you had the megawatt rate at around I think 
it was $430, that the gas cost itself was around $380. Yet 
somehow somewhere in this conversation we talk about capping at 
rates such as $150.
    Now, I'm not sure how that helps me help you get supply to 
the consumers of California, and quite frankly it doesn't. But 
a couple of other things. One as to the letter, and I do 
appreciate you giving me this, I haven't read it. I will read 
it. But I will tell you that we have pleadings that were filed 
before us from the ISO in California. And others that do 
suggest that there are 3,000 megawatts out there with the QFs.
    Not to mention I always find it interesting when I read 
letters as to who is copied. This has everything to do with 
FERC, and I do notice that we're not copied.
    I also note that this letter was sent to the House when the 
House was having their hearings, and that Mr. Frank was to 
testify and then declined to testify for some reason. So, Mr. 
Frank could certainly prove this out by testifying as to the 
matter. But I certainly find it interesting that I was not 
provided a copy other than by you, and I'm thankful.
    Senator Feinstein. Well, the letter was sent to the Vice 
President, just so the record is clear.
    Ms. Breathitt. Senator, may I add one point? Commissioner 
Massey had heard an estimate that the transactions are likely 
to be 40 to 45 percent in stages one, two, and three this 
summer. I had heard estimates that they will be as high as 80 
to 85 percent in stages one, two, and three. We don't know, but 
I think the likelihood because of the summer heat of being in 
the stages most of the summer is very high.
    Senator Feinstein. Yes, let me just ask one last question 
because my time is almost up. The just and reasonable provision 
of the Federal Power Act applies only to stage one, two, or 
three emergencies or all the time? I understand it applies all 
the time.
    Now, your board applies just to stage one, two, or three 
emergencies. Why doesn't the price mitigation apply all of the 
time? Why do you select just that one period and do it on the 
basis of the least efficient megawatt when you know that this 
can be manipulated?
    Mr. Hebert. Several reasons. One, inefficiency does set 
market prices. Two, by focusing on inefficiency, we'll get 
those dirty dog units that burn some 40,000 heat rates and 
others out of the State of California because the more 
efficient units will come in and they'll clean up----
    Senator Feinstein. Why if you get more money for a dirty 
unit, why not have a dirty unit?
    Mr. Hebert. You're not going to get more money with a dirty 
unit. You're going to get more money with an efficient unit. 
Because it's an efficient unit. Let's say that unit clearing 
price is, let's just pick a number, $175. If that is the proxy 
price, if you have an efficient unit that can produce it for 
$25, you're going to try to build as many of those efficient 
units as you can because, quite frankly, that's where your 
profit is. Your profit is not here.
    You're on a cost line here, and you're very tight. It's 
going to bring efficiency. Understand that and I would like to 
take more time to explain it to you further but let me tell you 
my colleague, Commissioner Breathitt, I thought did a very good 
job of explaining as well that this summer, probably most of 
the summer you're going to be in a stage one, two, or three.
    And I think we did a very good job of balancing two things. 
One, the need to get in when we think market power might be at 
an extreme, while there might be illegal conduct. While at the 
same time providing an opportunity for there to be new 
investment in California so that people of California can get 
more supply and can keep their lights on and can have better 
prices.
    Mr. Massey. Senator, may I make a comment on that point, 
please? It may be that if I owned several generators, I would 
want to have a bunch of efficient ones and at least one highly 
inefficient one. It seems to me that's the point you're making 
because that unit could set the market cleaning price. And I 
think that is a very valuable point to make.
    But your other question is why not apply this 24/7? It 
seems to me that the argument that you're going to be in stages 
one, two, and three 85 percent of the time anyway is a powerful 
argument for going ahead and applying it all the time. Why 
exempt that 15 percent, assuming it's that small, which I don't 
believe it.
    The truth is we don't know when they will be in stages one, 
two, and three alerts for the summer, but we do now know that 
the Federal Power Act says there shall be just and reasonable 
prices in all hours.
    Senator Feinstein. Thank you, thank you.
    Senator Burns. Senator Cantwell.

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

    Senator Cantwell. Thank you, Mr. Chairman. I appreciate 
this opportunity. I know we're here to discuss the FERC order 
of April 26 and obviously some of your testimony was broader 
about the larger issues.
    From the Washington State perspective, while we can have a 
lot of discussion about lack of generation or planning or the 
amount that's on the books to produce a greater deal of 
capacity in future years, I'm most interested in the next 24 
months and what we can do for the people of Washington State. 
Hand out all the criticism you want about the past or what is 
going to happen in the future, but the next 24 months is 
critical to our economy and to the people of our State.
    I have some basic questions regarding your actions. Because 
we're limited on time, and I believe we have a vote here, if 
you could just answer yes or no to these, that would be very 
helpful.
    First of all, do you believe that the energy prices in 
Washington State represent reasonable rates?
    Mr. Hebert. Are you asking me?
    Senator Cantwell. Yes.
    Mr. Hebert. I understand, but if I may ask permission of 
the chair, I would certainly like to answer yes or no with the 
request of the Senator, but I would like to back that up in 
writing with a further comment and explanation.
    Senator Burns. Without objection.
    Mr. Hebert. Thank you.
    Senator Burns. Without further investigation, which is what 
the 206 is about, I can't answer that.
    Senator Cantwell. So you don't know today whether you think 
there are reasonable rates being charged when they are 11 times 
what they were a year ago?
    Mr. Hebert. That is what the 206 investigation of the 
period is about.
    Mr. Massey. It actually isn't. It's about a very narrow 
investigation aimed at a very narrow part of the market. And 
based on what I've seen, BPA has to increase its prices by 250 
percent. Is that just and reasonable? I don't think so.
    Mr. Hebert. I am concerned about the prices.
    Senator Cantwell. Yes, but I'm asking you whether you 
think--well, let me get to the second question. Do you believe 
there should be price mitigation in Washington State, yes or 
no? And Commissioner Breathitt, I didn't mean to cut you out of 
the last round, so if you want to jump in too . . .
    Ms. Breathitt. I can't prejudge what the 206 will find, but 
if it finds that there are prices that need to be mitigated, I 
would agree with that.
    Senator Cantwell. Well, the reason I'm asking is because 
I'm going to see constituents this weekend, and I'll share with 
you some of their thoughts. Our prices first spiked in June 
2000. If we're going to talk about 206 and what an important 
act it is, I would like to point out that we should have done 
that a year ago. So telling us today that you don't want to 
comment on whether there is a need for----
    Ms. Breathitt. I'm legally constrained, I'm sorry.
    Senator Cantwell. This was an important action that should 
have been taken a year ago if that's the case. If you couldn't 
talk about it when we started seeing spike increases, we should 
have started having discussions then about investigations. But 
now it's a year later and you don't even want to talk about 
whether you think that these are reasonable rates?
    Mr. Massey. I think you're absolutely right. We've been too 
little too late. We should have gotten on this a year ago. And 
they don't sound reasonable to me.
    Mr. Hebert. Senator Cantwell, if I may add to this, this 
commission, through the 206, has stated, which I think is what 
you're after, that at certain times and at certain conditions 
rates may not be just and reasonable. That is what the 206 is 
about. We're not trying to evade you.
    As you know, we're quasi-judicial. We're in a comment 
period. We made that very clear to the staff. We're in a 
situation where if one of us gets conflicted out, we can't make 
a decision.
    But to answer the June question, I've been chairman of this 
agency for 90 days, and we have acted and we've acted quickly. 
We were made to be vigilant. That is what the 206 is about.
    Ms. Breathitt. Senator, I went to the meeting in Portland 
and heard from the Governor in your State and received 
correspondence from him. And I do very much share your concerns 
and your Governor's concerns. And I've talked to members of 
your State commission. And I do believe that the process we're 
going through will produce some beneficial results.
    Senator Cantwell. So you do think we'll see price 
mitigation in Washington State?
    Ms. Breathitt. I can't legally say that or I might have to 
recuse myself, then we wouldn't be able to move forward.
    Senator Cantwell. Well, I would just remind the Commission 
of the dates the prices first spiked, and if it was a 
limitation on your discussions, we should have invoked 206 a 
long time ago, given the increases that people have seen.
    Mr. Chairman, if I could, this is still being discussed as 
somewhat of a California issue. And yet I very much appreciate 
Commissioner Massey's comments about plants and facilities 
being shut down in Washington State: Georgia Pacific and 
Birmingham have been affected, pulp and paper companies in 
Steilacoom, Washington, a chemical company in Tacoma. These are 
layoffs that are early indicators of real problems in our 
Washington economy.
    I have an emotional letter from an 11-year-old whose mother 
works in an aluminum facility. He said, ``This is the first 
house we've ever lived in. And it's really important for me to 
live in a house. And we might not have this house.''
    And I hear from senior citizens in eastern Washington who 
are saying ``Next winter, if this 200 percent rate increase is 
actually implemented, we don't know whether we're going to be 
able to pay the bills.''
    So this is an emergency now. We can talk all we want about 
what is going to happen 2 years from now in generation or 
criticize other activities. But FERC has very clear legal 
responsibilities under the Federal Power Act of 206, that 
whenever the Commission, after a hearing or upon its motion or 
upon a complaint, finds that any rate, charge, or 
classification is unjust, unreasonable, unduly discriminatory, 
or preferential, the Commission shall determine the just and 
reasonable rate charge classification rule and then enforce it.
    And I think what we're saying, Senator Feinstein, Senator 
Smith, and myself is that if you're not going to do that, the 
Congress is going to act in pushing that to happen. Because it 
is an emergency in our State, citizens are being impacted--to 
the degree that they are going to be without house or home or 
jobs. Remember that the western economy is 1/3 of the national 
GDP. So this is an issue that we must deal with in an 
expeditious fashion.
    Thank you, Mr. Chairman.
    Senator Burns. Thank you Senator.
    Senator Dorgan.

        STATEMENT BY HON. BYRON L. DORGAN, U.S. SENATOR 
                       FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you. You all aren't 
going to like what I'm going to have to say and I'm sorry about 
that, but frankly there's not a free market in the power supply 
in California. You're phasing an illusion if you're talking 
about free markets, number one.
    No. 2, the reason I came today is I have been distressed 
for some long while. I see regulatory agencies that won't 
regulate. I think during the last couple of years you've done a 
wonderful imitation of a potted plant. You have not done what 
you ought to do. If we're going to spend money for FERC, then 
let's have an agency that's going to crank up an effort to do 
the right thing at the right time.
    You talk about the market system. The market system is a 
wonderful thing. I used to teach a little economics, and I 
deeply admire the market system. I don't worship it. It needs a 
reform from time to time in certain areas. Cranky little Judge 
Judy on television, you know how much she makes in the market 
system? $7 million is her salary. Judge Rehnquist is $180,000. 
So that's the market.
    Shortstop for the Rangers is $250 some million in the 
market system. Well, the market system sometimes gets out of 
whack, and we have regulatory agencies that ought to have the 
energy to go right at it, hard and on a timely basis.
    And I tell you I'm just not impressed by the paper. Look, I 
know that regulating is a tough job, but regulating is not a 
four-letter word and not a dirty word. It's what FERC is all 
about.
    When you see what's happening in California, $7 million to 
I think $26 million then nearly to $70 billion this year, let 
me make sure we've got it right. Billions, with a B. When you 
increase the cost of power tenfold, something is haywire 
someplace, and this is not about philosophy I would say, 
Commissioner Breathitt.
    It's about a lot of folks getting their back broke by 
energy prices they can't afford. And I just, you know, I was 
listening to this, a couple of observations. One, you all don't 
get along very well.
    The Chairman. We're going to change that in a few days. We 
have a couple more commissioners coming on so that will help.
    Senator Dorgan. Well, we'll see.
    The Chairman. It depends on your point of view, whether you 
want to get something done around here or not.
    Senator Dorgan. Well, that's what I'm hoping. I'm hoping 
that FERC will decide to saddle up and move out in the right 
direction here.
    The Chairman. Can't blame this group, you know. They just 
got together and it's amazing what they've been able to do in 
the last 90 days compared to what's been done in FERC in the 
last couple of years.
    Senator Dorgan. I understand that. I'm asking the questions 
at the moment here.
    The Chairman. I understand that. I'm just telling you the 
other side of it. Please proceed.
    Senator Dorgan. I understand the other side. The point is 
we have a regulatory agency, no matter who is in charge, hasn't 
been regulating very effectively. And I think it's pretty hard 
to make the case, Mr. Chairman, that that which has been done 
recently can be called anything other than inching----
    The Chairman. Better than nothing, and that's what we had 
before.
    Senator Dorgan. I will tell you what. If I lived in 
California and were subject to the kind of price increases that 
they've been subject to, I guess I wouldn't want better than 
nothing regulatory----
    The Chairman. I believe that charity begins at home, and I 
think that's certainly true in California.
    Senator Dorgan. Well, better than nothing is not something 
that's a standard I relate to in this issue. My hope is 
whatever FERC decides it's going to do and whoever is engaged 
in this issue down at FERC, you'll decide you're a regulatory 
body. And in circumstances where regulation is required, that 
you'll step up and move on briskly in the right direction and 
provide some help to people.
    I tell you I'm just unimpressed and I've been unimpressed 
under the previous administration as well. And now too.
    It is not about philosophy. There is no free market there. 
If you continue to chase that illusion, you're never--you're 
never going to solve this issue.
    Ms. Breathitt. Senator, I agree with you that there's not a 
free market in California.
    Senator Dorgan. Well, we keep talking about trying to find 
the free market to deal with the efficiencies here. Seems to me 
this needs a dose of regulation at this point, effective 
regulation. And there are ways for you to deal with that paper 
there. Are ways for you to deal with that as a regulatory body.
    And so, you know, I understand the differences that you've 
expressed here with this particular order, and I know the 
chairman asked us to focus on this order, but frankly I just 
want you to act like a regulatory body that wants to be 
aggressive in pursuit of the right policies, and I don't see 
that. Thanks, Mr. Chairman.
    Mr. Hebert. Mr. Chairman, if I may----
    The Chairman. Thank you very much. Before you do, I think 
we all are striving for the same thing, Senator Dorgan. The 
question is how do we get there? There is no free market in 
California. There used to be. Is it FERC's fault that it isn't? 
We can go through that exercise for a long time. Effective 
regulations suggest different things to different people. 
You're tempting to try and instill in California what has been 
lost. And that has created an environment where investment will 
come in and put in facilities.
    Now, California discouraged that. There's absolutely no 
question about it. They discourage it as evidenced by their 
purchase outside the State. That was a matter of choice. Now, 
I'm not suggesting, and I'm not standing here defending FERC. 
And this is one of the things that concerned me about this type 
of hearing. We got an order here. We can either live with that 
order. You folks are going to come together and change it, but 
we're going to legislate something to the contrary. The focus 
should be on the adequacy of the order. This is turning into a 
debate between the minority and the majority within FERC.
    It's a fine democratic process, but it's an exercise that 
doesn't address the bottom line. How do you encourage private 
sector investment to come into California and create, not 
necessarily a surplus but create an environment where they can 
meet the increasing demand? First of all, they have to ensure 
that they get paid. How much is outstanding, Mr. Hebert?
    Mr. Hebert. I think around $13 billion.
    The Chairman. For power that's been provided. Would you 
agree with that Mr. Massey?
    Mr. Massey. Yes, but my view is----
    The Chairman. Just a minute. That's the question I asked. 
So we got $13 billion out there that hasn't been paid for. 
Before other folks are going to be anxious to come into 
California, they are going to want to have had some assurance 
that they're going to be paid. That's a reasonable assumption.
    Those people in California, they got power. Now whether 
that power was unreasonably priced is another matter and an 
appropriate matter, but they got consideration. They haven't 
been paid for it. That has got to be addressed by California 
and Californians, whether they're rate payers or taxpayers.
    Otherwise what we're talking about here is an exercise of 
cosmetics. If we don't encourage investment to come into 
California, this whole thing isn't going to work. My question 
is whether you can have wholesale caps and still bring in 
investment into California. I see people out there shaking 
their head both ways. I don't know what to believe, but that's 
the crucial thing.
    Mr. Massey, you wanted to make a point?
    Mr. Massey. Senator, I would not agree that all of that $13 
billion represents a just and reasonable----
    The Chairman. I didn't say it did, but it's out there and 
somebody is making a case that they haven't been paid. And I 
assume the lawyers are going to be able to get a little work 
out of this deal and so forth.
    But, in any event, you know, when I look at this volume 
associated with one case and recognize that's part of your job, 
but nevertheless we like to have timely decisions based on 
reasonable research. You can research to the end of the moon if 
you want to. You have to make a decision at some point in time 
based on a degree of satisfaction.
    So while, you know, I can appreciate some of the comments 
of my colleagues here relative to, well, this is your job 
anyway, the point is if we magnify this by causing an 
evaluation into all--how many rate cases could there be 
relative to cost of production? I mean, everybody has a 
different cost of production. So you have to look at a 
practical aspect of how you're going to measure this in some 
way that's responsive to the needs of the people.
    And I think your effort here in this evidence is to simply 
show that cost of production puts a hell of a load. It's not 
impossible but don't expect quick and timely reviews unless you 
want to increase your staff tenfold. Enough of that. California 
hydro projects are regarded by FERC order to spill water for 
fish habitat starting now and through the summer.
    I'm curious to know if relief in this order would require 
whether FERC would issue an order suspending this bill for a 
year after an endangered species section 7 consultation with 
national marine fisheries service. I'm told that there's about 
2,700 megawatts of additional power per month could be 
generated for the region if the spill order could be suspended. 
I gather this would almost meet the 3,000 megawatt per month 
California has estimated to be short this summer.
    Bonneville Power Authority, which is not subject to FERC, 
right, just received--a waiver from National Marine Fisheries 
to allow it to suspend its planned spill from the Federal hydro 
facilities. Are you aware of that?
    Mr. Hebert. I just got news of that, Mr. Chairman, on my 
way in. And I heard that is several thousand megawatts.
    The Chairman. So the Northwest Power Planning Council, 
which is an agency created by Congress, just concluded a 
meeting I'm told in Spokane to consider requesting relief from 
FERC and has put its intention to request relief out for public 
comment. The Northwest Power Planning Council analysis of a 1-
year suspension of the FERC's bill order shows a negligible 
impact on fish populations.
    Now, this conclusion evidently is consistent with the no-
jeopardy opinion of Bonneville Power received from NMPS 
allowing it to suspend spills from the Federal hydro project.
    Now, are you folks looking into this matter, and are you 
going to determine how FERC can expedite the process to suspend 
spills from the mid Columbia hydro facilities? And, in 
conclusion, this would appear to be an extremely important 
source of power that perhaps could be available to the West 
during the summer.
    Mr. Hebert. Obviously we are looking into every opportunity 
to squeeze every available megawatt out of the West. We would 
have to cooperate with other agencies. We're more than willing 
to do that.
    That is something we actually did with Kern River in trying 
to move that process ahead and got it out in 3 weeks. Obviously 
not a hydro, but we are willing to do that in looking for any 
and all opportunities, and I appreciate you bringing that 
before our attention.
    The Chairman. Now, are you satisfied with the contention of 
the Planning Council's analysis that this suspension would have 
little impact on fish populations, or do you depend on other 
agencies like Fish & Wildlife?
    Mr. Hebert. We have other agencies that would have to make 
comments on that, and we would have to comply with that.
    The Chairman. You have not had any feedback from the Fish & 
Wildlife Service at this time?
    Mr. Hebert. On this, no. I just heard about it.
    The Chairman. What if indeed this would potentially provide 
you with 3,000 megawatts per month or thereabouts? I guess it's 
2,700 megawatts that we're looking at here potentially, would 
that pretty much alleviate the California situation?
    Mr. Hebert. With the demand management techniques, with our 
mitigation plan, the must sell, the bidding requirements, 
everything taken in context, I believe it would make California 
very close, yes.
    The Chairman. Are we likely to have a negative reaction 
based on the fisheries issue and the escapement issue, and what 
it would do to the levels of maintaining an adequate level for 
the salmon?
    Mr. Hebert. My educated guess would be probably. Based on 
past experiences.
    The Chairman. At least this is one of the more positive 
potential availabilities that is attainable and has some 
immediate----
    Mr. Hebert. I agree.
    The Chairman [continuing]. Capability of making a 
significant contribution. That's what we're really looking 
form. We're looking for immediate relief here. Go ahead. You 
were going to add something else.
    Mr. Hebert. I had a couple of things, yes, I wanted to add 
one to the record, then answer your price cap question. This is 
basically a list of what FERC has done. I would like to enter 
it as Exhibit 1.
    The Chairman. Without objection.
    Mr. Hebert. Thank you. It would provide you and the 
committee members with some opportunity to understand what we 
have been doing.
    Price caps for the West and price caps for California, Mr. 
Chairman, when you look at a hard cap, that is what I think is 
the beauty of the mitigation plan which looks at prices, which 
looks at bidding, and must sell and outages. I think that's the 
beauty of it in that it is a tender balance in that it is going 
to get the supply that is necessary into California and the 
West.
    And if you want to look at temporary price caps and 
understand what temporary price caps can do to you, you don't 
have to go far to get the answer. You can ask California. They 
have temporary retail caps for about 2\1/2\ years, and it 
absolutely destroyed their market. And they have now confessed 
to that and reversed that.
    The other thing price caps, when they had them in 
California, what did they do? They went out of market for 
those. The other thing that price caps does it sets a price at 
which we in Washington might tell the people in California and 
the West, Mr. Chairman, that they should turn out their lights.
    Now, I agree with you that we don't condone high prices. We 
want prices to be reasonable but at the same time I think it's 
important to keep the lights on. And I guarantee you the people 
of California are smart people, and they know when to turn down 
and turn over and they will, in fact, do that.
    But if we set price caps in California a hard cap at X 
price, then we set a hard cap in the Northwest, which is 
naturally what comes next in the entire West. I'm not sure how 
we keep the power from escaping the United States of America 
and going to Mexico and going to Canada. And for those who 
think we can do that, there's this little thing we have a 
problem with called the free trade agreement. I think we'd have 
a problem with that.
    And the last thing, if they want a price cap in California, 
there's an opportunity. The Governor can say there's a price at 
which we're not going to pay. The Governor of California can 
stand up and say we're not going to pay this price, we're going 
to turn the lights out in California when the price goes that 
high. FERC doesn't have to do it, the U.S. Senate doesn't have 
to do it, the President and the House don't have to do it.
    The Chairman. And the Governor chose not to do it.
    Mr. Hebert. Correct.
    The Chairman. Look, I want to thank you all three of you 
for making your time available to the committee. It has been 
very gratifying, and I would admonish whatever segment of the 
financial community is here for not giving us some better 
guidelines on what you will or won't do under the theoretical 
wholesale price cap.
    We can't hold you accountable, but I've been around long 
enough to know what happens. Either incentive is there for an 
investment and you go in and invest or it isn't. From we're 
sitting here is obviously not with the expertise in the area 
the financial community has nor that you commissioners have 
trying to make a determination of how we're going to get out of 
this mess.
    But I can tell you the bottom line that the financial 
community will come in and say these are the terms and 
conditions we have to have to come into California. We can cut 
through this chaff and get down to whether or not we're going 
to put in more generating facilities in California.
    Now, that's not quite that simple because we have 
transmission, consider ourself with, but that's certainly where 
you start. I would suggest we duck out of here now other. This 
thing could go on at great length. Mr. Massey, you have the 
last word and I don't mean plural.
    Mr. Massey. 10 seconds. May I even send a follow-up letter? 
I have six compelling reasons how a price cap would bring power 
into the California market.
    The Chairman. What I would like you to do with that letter 
is have a few people that we can ask that are in the financial 
community that will give us the terms and conditions under 
which they will come in and finance generating facilities in 
California. And I want substantial people that have a little 
meat on their bones. Thank you, gentlemen. Thank you, lady.
    [Whereupon, at 4:32 p.m., the hearing was adjourned.]

                                APPENDIX

                   Responses to Additional Questions

                              ----------                              

              Federal Energy Regulatory Commission,
                                Office of the Commissioner,
                                     Washington, DC, June 14, 2001.
Hon. Frank Murkowski,
Ranking Member, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Senator Murkowski: I appreciate the opportunity to respond to 
follow-up questions from you, Chairman Bingaman and Senator Campbell 
pertaining to the Federal Energy Regulatory Commission's recent actions 
related to energy markets in California and the West. I am pleased to 
offer you my thoughts on these matters.
    Attached you will find my responses to the questions contained in 
your letter dated May 16, 2001, to be included in the hearing record. I 
look forward to working with you and other members on these important 
issues. If you have any additional questions, please do not hesitate to 
contact me.
            Sincerely,
                                        Linda K. Breathitt,
                                                      Commissioner.
[Attachment]
             Responses to Questions From Senator Murkowski
    Question 1. As I see it, the fundamental problem in California 
isn't a lack of regulation, it is a lack of generation and 
transmission. What are your views?
    Answer. I agree that a lack of generation and transmission 
infrastructure is a fundamental problem in California. But there are 
other problems, as well. The Commission's investigations of 
California's electricity markets have identified several factors that 
have contributed to high prices and uncertain market conditions. First, 
a combination of market forces, including increased power production 
costs, increased demand for electricity, and a scarcity of electric 
generation in the West, led to price volatility. Second, flaws in the 
current market design and rules in California, such as a lack of 
forward contracting, mandatory buy-sell requirements for investor-owned 
utilities, and a lack of demand responsiveness, magnified the effects 
of higher prices. Third, the California market structure provided the 
opportunity for sellers to exercise market power, especially during 
periods when supply is tight. While these are the factors that have 
contributed to high prices in California's electric market, please see 
my response to Question No. 3 with regard to natural gas issues. That 
said, strong regulatory action is imperative in an energy crisis such 
as we are experiencing.
    Question 2. Is it correct that a large share of California's price 
volatility problems can be attributed to the State's insistence that 
investor-owned utilities divest their generation and acquire all of 
their power from the spot market instead of through self-generation and 
long-term contracts?
    Answer. I adopt Chairman Hebert's response to this question.
    Question 3. There are a lot of complaints that the price of natural 
gas at the border of California is too high. Has the California public 
utility commission opposed new pipelines and expansion of existing 
pipelines? What about California's local distribution companies?
    Answer. I adopt Chairman Hebert's response to this question. 
Further, I would like to add that I do not believe the expansion of 
interstate capacity, by itself, represents the solution to high gas 
prices at the California border. As shippers and local distribution 
companies have pointed out in comments to interstate pipeline expansion 
proposals, there may not be adequate intrastate capacity at the 
California border to take away additional volumes that might flow 
through new or expanded interstate pipeline facilities. Without 
adequate takeaway capacity, actions on FERC's part to approve 
additional interstate pipeline facilities may not have the desired 
effect of increasing natural gas supplies in the California markets 
where they are needed. Indeed, uncoordinated interstate pipeline 
expansions could serve to exacerbate congestion at the border and 
result in even higher prices to consumers.
    In this regard, I am attaching my separate statement in Kern River 
Gas Transmission Company (Kern River), Docket No. CP01-106-000, in 
which I called for a coordinated approach to resolving California's 
natural gas pipeline infrastructure needs. Subsequent to the issuance 
of the order in Kern River the Commission established a proceeding in 
California Natural Gas Transportation Infrastructure, Docket No. PL01-
4-000, and directed the Commission's staff to hold a technical 
conference. At that conference, which was held on May 24, 2001, 
representatives of all industry sectors, including California 
regulators, discussed both physical constraints and regulatory 
impediments to natural gas transportation into and within California. 
Comments on the issues raised by the conference are due June 25, 2001.
    Apart from the issue of take-away capacity at the California 
border, there are other pipeline issues about which I have recently 
expressed concern: (1) the high level of spot market purchases of 
natural gas in California (as opposed to longer-term contractual 
arrangements); (2) the low levels of working gas storage inventories 
last year; (3) the lack of firm capacity rights on some intrastate 
pipelines in California; (4) the appropriateness of continuing the 
waiver of the price cap on short-term secondary market pipeline 
capacity transactions; and (5) allegations of the exercise of market 
power by interstate pipelines, affiliate preference, and the 
withholding of interstate pipeline capacity. While I recognize that 
some of these matters are not within FERC's jurisdiction, I believe 
they are all relevant to the objective of stable natural gas prices in 
California.
    Question 4. Am I also not correct that the State of California has 
steadfastly insisted that all interstate pipelines end at the border of 
California, with interstate pipelines inside the border being subject 
to State jurisdiction? Isn't the net effect of this to deny California 
consumers the benefits of FERC's open access transportation program, 
which has saved consumers elsewhere in the U.S. billions of dollars?
    Answer. I adopt Chairman Hebert's response to this question.
              Responses to Questions From Senator Bingaman

                     THE CALIFORNIA MITIGATION PLAN

    Question 1a. How easy or hard is the mitigation plan to implement?
    The ISO is charged with developing a proxy price for every gas 
plant in California for every hour. Is that a huge burden, or something 
they already have the capacity to do?
    Answer. The actual calculation by the ISO of the proxy marginal 
cost for each generator should not be unduly burdensome. The data 
inputs necessary to compute the proxy price are straightforward and 
easily accessible. These include heat rates and emission rates filed by 
each California generator, proxy gas costs and emission costs published 
each day by the ISO, and a $2.00/MWh adder for operation and 
maintenance expenses.
    Question 1b. Does the after-the-fact justification of bids that are 
above the proxy price impose a huge burden on the Commission?
    Answer. Generators that submit bids higher than the proxy market 
clearing price must file at the end of each month a complete 
justification of their bids, including a detailed breakdown of all 
component costs. A refund obligation will end 60 days from the date the 
information is filed, unless the Commission, within that period, 
notifies the seller otherwise. Reviewing this cost justification data 
will obviously be time consuming for the Commission, but I expect it to 
be a manageable. I'm sure that appropriate resources will be assigned 
to this task and that we will process this information in a timely 
fashion.
    Question 1c. Would a pre-set price cap be easy to administer while 
getting a similar result?
    Answer. Whether or not a pre-set price cap would be easy to 
administer or would produce results similar to the Commission's price 
mitigation plan depends entirely on the specific design of the price 
cap mechanism. For example, a cost-based price cap set for individual 
sellers would likely be administratively burdensome and costly for the 
Commission, as well as other parties, since the process would be 
litigation-intensive and time-consuming. A single price cap for the 
entire market would be less administratively burdensome.
    Question 1d. How accurate is the information that is used? In other 
words, will lots of plants have gas prices above the average that the 
ISO will use, so that all of them will be trying to justify prices 
above the proxy price, or will it just be a few? Does the use of an 
average gas price guarantee a lot of prices above the proxy price? Is 
there a similar problem with the emissions prices?
    Answer. The Commission's price mitigation plan uses proxy costs for 
natural gas and emissions. The gas cost proxy to be used in the 
mitigation plan is the average of the daily prices published in Gas 
Daily for all California delivery points. Because the plan uses an 
average of gas prices, some generators will be paying gas prices that 
are lower than the average proxy cost and some will be paying prices 
higher that the average. Each generator has the choice of either 
electing the proxy price or submitting a bid greater than the proxy 
price. Whether or not a generator chooses to bid higher than the market 
clearing price will depend on many factors, including the extent to 
which its actual gas costs are higher than the average proxy cost 
published by the ISO. But just because a generator's actual gas cost is 
higher than the proxy cost does not mean that it will always choose to 
bid a higher amount. It is not possible to predict, at this time, how 
generators will bid in this regard.
    The proxy emission cost is an index published by Cantor Fitzgerald 
Environmental Brokerage Services. Just as in the case of the proxy gas 
cost, whether or not a generator will bid a price based on actual 
emission costs that are higher that the Cantor Fitzgerald index will 
depend on numerous factors. It is not possible to predict, at this 
time, how generators will bid in this regard.
    Question 2a. Does the mitigation plan actually result in lower 
prices?
    The proxy system is similar to the system you used to develop the 
refund numbers for the last few months. Have you looked at the market 
to determine whether prices outside the time that you applied the proxy 
price were higher or lower? Do you intend to do so in the future? It 
seems that this would help determine whether the plan is being applied 
broadly enough or not. Do you intend to use some kind of measuring 
stick like this to keep a check on the effectiveness of this system?
    Answer. I adopt Chairman Hebert's response to this question.
    Question 2b. How does the spot market mitigation plan result in 
lower prices in other markets, such as the futures market or the long-
term firm contracting market?
    Answer. I adopt Chairman Hebert's response to this question.
    Question 2c. Does the fact that sellers outside of California are 
not subject to the proxy price and refunds mean that the market may 
clear well above the proxy price because of outside bids, so that the 
real effect is that prices in the spot market are still high?
    Answer. I adopt Chairman Hebert's response to this question.
    Question 3a. Can the mitigation plan be evaded?
    The sellers outside California are not subject to the proxy system. 
What is to prevent generators inside California from selling to parties 
outside the state at a high price, then those parties selling back into 
California above the proxy price?
    Answer. I adopt Chairman Hebert's response to this question.
    Question 3b. Marketers are required to show the price they paid for 
electricity in order to justify a bid above the proxy price. What is to 
prevent marketers from selling to one another at high prices then 
bidding into the market at that high price and so evading the proxy 
price?
    Answer. I adopt Chairman Hebert's response to this question.

                           THE RTO CONDITION

    Question 1. You have conditioned implementation of the mitigation 
plan on California's utilities filing a regional transmission 
organization proposal that is consistent with the requirements of Order 
No. 2000. What does ``consistent with'' mean? If CA files a plan that 
you reject or modify will you withdraw the plan? If they file a 
proposal that you accept conditionally will you withhold implementation 
until they meet the conditions?
    Answer. The California ISO and public utilities were directed to 
make a compliance filing pursuant to Order No. 2000. Such a filing 
should fully address, among other things, the Commission's required RTO 
functions and characteristics. Compliance filings were made by these 
entities on June 1, 2001 as required by the April 26, 2001 order. As 
the RTO compliance filings are presently before us, I am not able to 
discuss what we might or might not do with respect to either the RTO 
compliance filings or the price mitigation plan. I will add, however, 
that I am very pleased that the RTO compliance filings were made.
    Question 2. Does California have to file a proposal that 
incorporates it into a West-wide RTO in order to be consistent with 
Order No. 2000?
    Answer. No. As stated above, the California parties were directed 
to make an RTO compliance filing that fully addresses the requirements 
established in Order No. 2000, including the Commission's required RTO 
functions and characteristics. A commitment to join a West-wide RTO is 
not a specific requirement. While I believe larger RTOs are the best, 
longer term result, I think RTOs will need time to develop into large 
regional entities.
    Question 3. If so, what is the likelihood of other states coming to 
an agreement with California? I know my home state of New Mexico at one 
point was considering joining together with the CA ISO, but has changed 
their minds about that as a result of the troubles in California 
markets. What can California do about that?
    Answer. As stated above, California is not being required at this 
time to join a West-wide RTO.

                         THE 206 INVESTIGATION

    Question 1. Why is the investigation into markets in the rest of 
the West limited to spot markets and those periods when reserves are 
below 7 percent?
    Answer. The Commission instituted a 206 investigation into the 
rates, terms and conditions of service in the WSCC for sales for resale 
into real-time spot markets that take place during periods of reserve 
deficiencies. The Commission believes that currently such rates, terms 
and conditions for these sales may not be just and reasonable. The 
limitations placed on the investigation reflect the Commission's 
general view that real-time spot markets, not longer-term bilateral 
contracts, are the primary source of price volatility and that the 
exercise of market power is most likely to occur during periods of 
severe supply/demand imbalance, such as those in which contingency 
reserves (as defined by the WSCC) fall below 7 percent. Comments on 
this issue are currently pending Commission review.
    Question 2. Do you know without investigation that the long-term 
firm contract market, for example, is producing prices that are just 
and reasonable?
    Answer. I adopt Chairman Hebert's response to this question.

            THE PROPOSED MITIGATION FOR THE REST OF THE WEST

    Question 1. You have proposed that a plan somewhat similar to that 
ordered for California might be useful in the rest of the West. How 
would such a plan work, given that there are no clearly defined spot 
market institutions elsewhere to play the role that the CA ISO is 
playing in California?
    Answer. I adopt Chairman Hebert's response to this question.
    Question 2. You suggest that a plan would be in effect for the West 
in any time that reserves fall below 7 percent in any control area. 
Does that mean that an implementation plan will be in effect for the 
whole West if reserves are low in a single small area?
    Answer. I adopt Chairman Hebert's response to this question.

                      THE DEMAND RESPONSE PROPOSAL

    Question 1. You order that California utilities state a price at 
which they will curtail load. How might this mechanism work? Will 
customers have to tell the utilities their curtailment price, so that 
the utilities can assemble a collective demand response, or will the 
utilities make this judgment on their own?
    Answer. I adopt Chairman Hebert's response to this question.
    Question 2. You suggest that a West-wide clearing-house for demand 
response might be instituted. Would this interfere with already 
existing state programs? Are there issues in state law that would have 
to be dealt with before implementation of such a plan?
    Answer. I adopt Chairman Hebert's response to this question.
    Question 3. You do not have jurisdiction over behavior by retail 
customers, which is what demand response ultimately comes to. Is there 
something we need to do in Federal Law that would allow you to consider 
demand response?
    Answer. I adopt Chairman Hebert's response to this question.
              Responses to Questions From Senator Campbell
    Question 1. Why have a single market clearing price, especially 
since this will probably cost California more money?
    Answer. I adopt Chairman Heert's response to this question.
    Question 2.Could this possibly drive up prices in the West?
    Answer. I adopt Chairman Hebert's response to this question.
    Question 3. I am skeptical of price caps. Many say they are likely 
a disincentive to investment in new generation. Won't they hurt in the 
long run?
    Answer. I have been on record supporting price caps in prior 
California orders and in other parts of the country. I agree that price 
caps could deter new investment. That is why price caps should be 
implemented only after careful consideration and for a short duration.
    Question 4. What does the FERC see as the best means to fix this 
problem?
    Answer. I believe the orders this Commission has issued over the 
past several months on the California and Western energy situation 
(well over 50) have begun to address the problems being experienced in 
those markets. I believe we need to stay the course of market oriented 
solutions combined with strong regulatory oversight and enforcement of 
market rules and behavior. For a discussion of natural gas issues, 
please see my response to Senator Murkowski's Question No. 3.
    Question 5. How will your new orders affect the rural electric 
associations, the co-ops?
    Answer. I adopt Chairman Hebert's response to this question.
    Question 6. What can we all do to ensure that the rest of the 
Western region is minimally affected by the crisis in California, 
because I don't want my home state of Colorado's resources and 
consumers hit by these problems?
    Answer. In our April 26, 2001 order we instituted a Federal Power 
Act Section 206 investigation into the rates, terms and conditions of 
service in the WSCC for sales for resale into real-time spot markets 
that take place during periods of reserve deficiencies. Comments on 
this issue are currently pending Commission review.

                               ATTACHMENT

     United States of America Federal Energy Regulatory Commission
Kern River Gas Transmission Company            Docket No. CP01-106-000

                         (Issued April 6, 2001)

BREATHITT, Commissioner, dissenting in part, concurring in part:

    This protested filing has raised difficult issues for me that 
today's order does not resolve to my satisfaction. As I will explain in 
greater detail below, I believe that the parties have raised valid 
concerns that require further exploration. Specifically, Southern 
California Gas Company (SoCal Gas) requested that the Commission 
establish a technical conference in this proceeding, on a compressed 
schedule, in order for the Commission and the parties to approach Kern 
River's filing in a more orderly and informed fashion. Pacific Gas & 
Electric Company also sought further information about this project, 
either through a technical conference or additional written data. In 
addition, Kern River's Firm Customers sought a coordinated approach to 
expansion of capacity on Kern River. I would have granted these 
requests by either: (1) establishing a conference before issuance of 
the certificate, or (2) conditioning the certificate we are issuing 
today on the outcome of a conference. I am disappointed that my 
colleagues fail to see the value of granting this request. Therefore, I 
am issuing this partial dissent. However, for reasons I will delineate 
below, I am concurring on other aspects of the order.
    Each of us seeks to use FERC's regulatory authority in a positive 
way to alleviate the energy market disruptions being experienced by 
California consumers. I strongly believe that the Commission must act 
within the limits of its jurisdiction, to ensure that additional 
natural gas supplies reach the California markets to curb the shortage 
of electric generation in that state. I do have serious reservations 
about this project and about the Commission's general direction with 
respect to capacity expansions into California; however, I find on 
balance that it is in the public interest to certificate this project.
    I share the hope that this action today represents a step in the 
right direction. However, it has been somewhat difficult for me to view 
Kern River's ``California Action'' project as being one that 
necessarily merits the kind of extraordinary regulatory treatment that 
we have granted the applicant in this case. My hesitation does not come 
only from the fact that Kern River has pending before this Commission a 
very similar proposal in which the parties have raised valid concerns 
that would pertain to any expansion of Kern River. I believe that it 
would have made more sense for the Commission to have considered the 
merits of that proposal at the same time we deliberated the merits of 
the instant expansion. It is my understanding that such consideration 
would have been possible and timely; and in my opinion, it would have 
given us a more complete picture to consider. However, the relationship 
between Kern River's two proposals is not my main concern.
    The intervenors, who themselves represent the intended 
beneficiaries of this expansion of interstate capacity, point out the 
primary problem: Kern River's application does not demonstrate--or even 
assert--that any more gas will flow through the Wheeler Ridge 
interconnection than currently flows. This is due to congestion at that 
point that could prevent additional supplies from reaching the intended 
markets and, importantly, providing natural gas that is needed for 
electric generation.\1\ Furthermore, the record of this proceeding is 
inadequate for the Commission to independently assess the congestion 
issues at Wheeler Ridge. I am very uncomfortable that this order does 
not take the opportunity for a fuller airing of this issue.
---------------------------------------------------------------------------
    \1\ In an April 5, 2001 pleading, the Kern River Firm Customers 
emphasized the need for the Commission to address the Wheeler Ridge 
situation. As a result of an alert issued on March 30, 2001, by SoCal 
Gas, nominations allowed by SoCal Gas for the Wheeler Ridge receipt 
point were 600 times the available capacity of 518,500 dth. The Firm 
Customers allege that such `` `gaming' demonstrates that the situation 
at Wheeler Ridge is out of control'' and that this situation ``will 
only further deteriorate under Kern River's proposal.'' The Firm 
Customers contend that such data pertaining to recent developments at 
Wheeler Ridge reinforce their claims that while Kern River may be able 
to implement its expansion very quickly, the gas cannot be delivered to 
the markets needing gas.
---------------------------------------------------------------------------
    This order acknowledges, in dismissing claims that existing 
shippers will be negatively affected by the project, that ``the 
delivery point capacity at Wheeler Ridge will be greater than the sum 
of the combined Kern River and Mojave volumes'' that must pass through 
that point, but that ``this does not factor in the volumes attributable 
to both PG&E and local production that are also delivered to Wheeler 
Ridge.'' In other words, Kern River's expansion could result in the 
displacement, by interstate natural gas, of gas that is already 
available, such as natural gas produced within California. But it will 
not necessarily result in any net increase of natural gas in the 
California marketplace. This makes it difficult to understand just how 
our approval of Kern River's proposal is going to assist in increasing 
electric generation in California this summer.
    But beyond questioning whether we are doing any good by 
certificating this project, I am even more concerned that our approval 
of it could make the situation in California even worse by exacerbating 
the congestion problem at Wheeler Ridge. And this is exactly what the 
intervenors have alleged: that insufficient take-away capacity at 
Wheeler Ridge and the resulting degradation of firm shippers' rights 
will place them in a situation analogous to the type of capacity rights 
controversy that we recently addressed with respect to the Topock 
delivery point.\2\ Today's order gives little weight to these claims on 
the speculation that future expansion of intrastate capacity will 
occur. I hope it does; but I am wary of the potential for creating 
congestion and future capacity turn-back problems without firm 
assurance that sufficient additional capacity downstream of Wheeler 
Ridge will materialize.
---------------------------------------------------------------------------
    \2\ Amoco Energy Trading Corp., et al., v. El Paso Natural Gas Co., 
93 FERC para. 61,060 (2000).
---------------------------------------------------------------------------
    While I do not question that additional interstate natural gas 
pipeline capacity to California may be needed, we at the Commission are 
tasked with acting on individual projects and their effects on specific 
markets. I strongly believe that the California situation warrants a 
thoughtful and coordinated approach to interstate pipeline expansion. 
This case has raised issues that will likely continue to appear as we 
analyze other expansion projects on an expedited schedule. It would be 
counterproductive for this Commission to act precipitously on projects 
related to California without ensuring that they will, in reality, 
benefit specific markets--and more importantly, that they will cause no 
further harm. There appears to be great uncertainty about exactly what 
interstate capacity is needed to assist California in alleviating its 
energy crisis; and the information available to us is, at times, 
confusing. For example, while we have been urged to take extraordinary 
measures and expend considerable resources to process this application 
on an emergency basis, the California Gas Utilities, in their 2000 
California Gas Report, state that Southern California continues to 
operate in an environment of excess interstate pipeline capacity.\3\ In 
addition, the California Energy Commission's report on siting peaking 
plants for the summer of 2001 \4\ establishes that the 32 potential 
sites for this summer's ``peaker project'' were chosen, in part, 
because of the existing availability of natural gas supplies at those 
sites. The report does not call for additional interstate capacity to 
effectuate the program. It is obvious to me that FERC must work in 
tandem with California officials to establish common goals and 
understanding, since the primary responsibility for take-away capacity 
belongs to intrastate pipelines and state regulators.
---------------------------------------------------------------------------
    \3\ California Gas Utilities, 2000 California Gas Report, http://
www.pge.com/pipeline/news/ (2000) (prepared at the direction of the 
California Public Utilities Commission). In addition, the California 
Energy Commission's November 2000 staff analysis concludes that while 
local constraints can be a problem, the physical capacity of interstate 
pipelines appears adequate, when used in conjunction with in-state 
storage capacity. California Energy Commission, Staff Report: 
California Natural Gas Analysis and Issues, http://www.energy.ca.gov/
naturalgas/ (November 2000).
    \4\ California Energy Commission Fuels Office, Staff White Paper: 
Natural Gas Issues That May Affect Siting New Power Plants in 
California, http://www.energy.ca.gov/naturalgas/ (January 25, 2001).
---------------------------------------------------------------------------
    It is not good public policy, in my view, for the Commission to 
encourage interstate capacity to California that does not have the 
desired effect of bringing additional supplies into the areas where 
they are needed. As the parties argue in their comments, a coordinated 
approach could avoid pipeline expansions that (1) would not match up 
with downstream capacity; (2) could not be used by the markets and end-
users that require additional supplies; or (3) would degrade the 
service of existing firm shippers. It is regrettable that we must act 
on Kern River's proposal without the benefit of such coordination. I 
hope that FERC will seek a collaborative resolution to the broader 
California expansion issues, and I suggest that the Commission's 
inquiry in Docket No. EL01-47-000 provides a suitable forum for such 
discussion.\5\ We have other proposals in-house for which the 
applicants are seeking expedited action. It is simple common sense that 
more coordination should take place so that additional interstate 
pipeline capacity can be targeted to areas where it will represent a 
positive response to California's energy needs.
---------------------------------------------------------------------------
    \5\ Removing Obstacles to Increased Electric Generation and Natural 
Gas Supply in the Western United States, Order Removing Obstacles to 
Increased Electric Generation and Natural Gas Supply in the Western 
United States and Requesting Comments on Further Actions to Increase 
Energy Supply and Decrease Energy Consumption, 94 FERC para. 61,270 
(2001).
---------------------------------------------------------------------------
    The speed with which the Commission has acted in this proceeding is 
something which will no doubt be touted as a great effort. And it has 
been. The staff responsible for processing this application has put in 
countless overtime hours to meet compressed deadlines. The precedent we 
have created could be a double-edged sword. What signals does this 
order really send? Will the Commission be able to keep up this pace on 
other pending ``emergency'' expansion applications? Is there sufficient 
time built into the process for the Commission and staff to fully 
analyze the issues? Should we be willing to sacrifice careful review 
for speedy action? Will we be overlooking significant issues? It would 
certainly be helpful for the Commission to have a plan of action before 
embarking on this course. I would also like to point out that if the 
Commission is to act within weeks of receiving certificate 
applications, I have been told that there could be more prefiling 
involvement of Commission staff than we are all accustomed to. The 
extent of such involvement is a matter about which I hope the 
Commission can reach a comfortable agreement. Meanwhile, I feel it 
necessary to caution the public and other agencies that staff's role is 
not to advocate or support individual projects. Each agency must use 
its own discretion to determine the urgency of any application.
    I fully support the Commission's overarching goal of finding 
solutions to the energy problems facing California, and I am voting to 
issue the certificate.

                                        Linda K. Breathitt,
                                                      Commissioner.
                                 ______
                                 
              Federal Energy Regulatory Commission,
                                Office of the Commissioner,
                                     Washington, DC, June 14, 2001.
Hon. Frank H. Murkowski,
Ranking Member, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Senator Murkowski: Enclosed herewith are my responses to the 
questions asked by you and by Chairman Bingaman, and Senator Campbell.
    If you have further questions or need additional information, 
please let me know.
            Sincerely,
                                         William L. Massey,
                                                      Commissioner.
[Enclosure]
             Responses to Questions From Senator Murkowski
    Question 1. As I see it, the fundamental problem in California 
isn't a lack of regulation, it is a lack of generation and 
transmission. What are your views?
    Answer. I agree that the lack of adequate generation capacity and 
the presence of transmission constraints that keep power from reaching 
certain areas are fundamental problems that need to be addressed. These 
fundamental problems allow the exercise of market power that results in 
wholesale prices that are not just and reasonable. Effective short term 
price mitigation is needed to ensure prices are just and reasonable 
until the fundamental problems are resolved.
    Question 2. Is it correct that a large share of California's price 
volatility problems can be attributed to the State's insistence that 
investor-owned utilities divest their generation and acquire all of 
their power from the spot market instead of through self-generation and 
long-term contracts?
    Answer. The lack of adequate forward contracting contributed to the 
recent high prices. However, generation and transmission facility 
inadequacy and the lack of demand side price responsiveness has allowed 
sellers to exercise market power and drive up prices.
    Question 3. There are a lot of complaints that the price of natural 
gas at the border of California is too high. Has the California public 
utility commission opposed new pipelines and expansion of existing 
pipelines? What about California's local distribution companies?
    Answer. Please see Chairman Hebert's response to this question.
    Question 4. Am I also not correct that the State of California has 
steadfastly insisted that all interstate pipelines end at the border of 
California, with interstate pipelines inside the border being subject 
to State jurisdiction? Isn't the net effect of this to deny California 
consumers the benefits of FERC's open access transportation program, 
which has saved consumers elsewhere in the U.S. billions of dollars?
    Answer. Please see Chairman Hebert's response to this question.
    Third, a price cap would restore investors' confidence in the 
Western market. I do not believe that investors take much comfort from 
a wildly volatile market. And finally, a price cap would restore both 
consumers' and state regulators' confidence in the wholesale market 
that is needed to facilitate effective retail market restructuring.
    Question 5. How will your new orders affect the rural electric 
associations, the co-ops?
    Answer. Please see Chairman Hebert's response to this question.
    Question 6. What can we all do to ensure that the rest of the 
Western region is minimally affected by the crisis in California, 
because I don't want my home state of Colorado's resources and 
consumers hit by these problems?
    Answer. Please see my response to question 4.
              Responses to Questions From Senator Bingaman

                     THE CALIFORNIA MITIGATION PLAN

    Question 1a. How easy or hard is the mitigation plan to implement?
    The ISO is charged with developing a proxy price for every gas 
plant in California for every hour. Is that a huge burden, or something 
that they already have the capacity to do?
    Answer. Under the mitigation plan in the Commission's April 26, 
2001 order, the ISO is charged with calculating a mitigated proxy bid 
from each gas generator. The heat rate of each unit is supplied to the 
ISO by the generator, and the mitigated bid for each unit is calculated 
daily using published prices for gas and NOX emission credit 
costs. This would not seem to be much of a burden for the ISO. I 
objected to this mitigation plan because it is effective only during 
stage 1, 2, or 3 emergencies. There is no basis to conclude market 
power cannot be exercised at other times. Indeed, the record in the 
Commission's proceeding indicates otherwise. However, I believe the 
mitigation plan, although inadequate, is administratively feasible.
    Question 1b. Does the after-the-fact justification of bids that are 
above the proxy price impose a huge burden on the Commission?
    Answer. No.
    Question 1c. Would a pre-set price cap be easy to administer, while 
getting a similar result?
    Answer. Yes. One type of pre-set cap is to limit prices to the 
variable costs of each generator plus an adder to allow a reasonable 
profit. Administering such a generator-specific price cap would not be 
administratively difficult. Before the Commission allowed market-based 
pricing, the many inter-utility coordination transactions were 
regulated in a similar way and resulted in mostly short, ministerial 
filings. Generally, variable costs were specified in, and recovered by, 
a formula so that extensive cost data did not have to be filed but 
adherence to the formula could be verified in audits. A cost-based 
adder to recover fixed costs was derived based on depreciation rates, 
rate of return, and annual operation and maintenance costs. Such 
factors are generally not controversial. But to avoid any controversy 
over the profit factor, the Commission could simply specify a profit 
adder, say in the range of $25/mwh. Thus, I do not believe 
administering a fixed price cap, even one that varied by generator, 
would be burdensome.
    An important consideration in administering any price cap is that 
it be applied to all markets where the targeted sellers can transact. 
Otherwise, when the price cap might be constraining, sellers will sell 
in the markets where the cap is not applied. The ISO's price caps were 
ineffective last summer because they applied only in California.
    Question 1d. How accurate is the information that is used? In other 
words, will lots of plants have gas prices above the average that the 
ISO will use, so that all of them will be trying to justify prices 
above the proxy price, or will it be just a few? Does the use of an 
average gas price guarantee a lot of prices above the proxy price? Is 
there a similar problem with the emissions prices?
    Answer. I do not have the information needed to answer the 
question. However, it is likely that there will be many instances where 
a generator's actual gas costs will be different (higher or lower) than 
the published index used in the Commission's formula.
    Question 2a. Does the mitigation plan actually result in lower 
prices?
    The proxy price system is similar to the system you used to develop 
the refund numbers for the last few months. Have you looked at the 
market to determine whether prices outside the time that you applied 
the proxy price were higher or lower? Do you intend to do so in the 
future? It seems that this would help determine whether the plan is 
being applied broadly enough or not. Do you intend to use some kind of 
measuring stick like this to keep a check on the effectiveness of this 
system?
    Answer. I do not believe that the proxy price system used for 
refunds was effective price mitigation because it was applied only 
during stage 3 emergencies and was based on a very high proxy price. 
Because the only transactions that were questioned were those that 
occurred during stage 3 emergencies, there were many sales that were 
made above the proxy price were not questioned. During January, 14% of 
the transactions reported above the $150 breakpoint were also above the 
$273 proxy price but were not subject to refund because they were made 
outside of stage 3 hours. For February, 56% of reported transactions 
were above the $430 proxy price but made outside of stage 3 hours. And 
for March, 97% of the reported transactions were above the $300 proxy 
price but made outside of stage 3 hours. For April, the figure was 100% 
because there were no stage 3 emergencies. I would also point out that 
to my knowledge, most of the refunds identified have been contested by 
the sellers.
    The price mitigation plan now in effect is effective in stage 1, 2, 
and 3 hours, but I am concerned even that expanded coverage will not 
ensure just and reasonable prices. There is persuasive evidence that 
the problem exists twenty-four hours a day, seven days a week. I found 
the California ISO March 21, 2001 study by Anjali Sheffrin, the ISO's 
director of market analysis, to be compelling. Dr. Sheffrin concluded 
that economic withholding is a severe problem in all hours, not simply 
capacity constrained hours, and I agree. Her analysis concludes that 
from May to November 2000, withholding that led to inflated market 
prices in the ISO's real time market occurred in over 98% of hours. 
According to my calculations, the ISO declared a stage one or higher 
alert in only 5% of the hours during this period. For Dr. Sheffrin's 
study period, the price mitigation in place now would have missed the 
great bulk of the hours when market power drove up prices.
    Question 2b. How does the spot market mitigation plan result in 
lower prices in other markets, such as the futures market or the long-
term contract market?
    Answer. Forward and futures contract prices are based on 
expectations of spot market pries in the future. To the extent that 
spot prices are expected to be reasonable, prices forward and futures 
contract prices will be reasonable. Thus, an effective spot market 
price mitigation program will result in reasonable forward contract 
prices. However, because I question the effectiveness of the mitigation 
program announced in the April 26th order, I have no basis to expect 
lower forward contract prices as a consequence of the program.
    Question 2c. Does the fact that sellers outside California are not 
subject to the proxy price and refunds mean that the market may clear 
well above the proxy because of outside bids, so that the real effect 
is that prices in the spot market are still high?
    Answer. The Commission's mitigation program applies only to the 
California ISO's real time and ancillary services markets and only 
during stage 1, 2, or 3 emergencies. During emergency conditions, 
prices in those markets will not ``clear'' at prices higher than the 
mitigated bid levels because sellers that bid above the mitigated bid 
levels and are dispatched will be paid only their bid. Those bids will 
not set the market clearing price. Paying those higher bids, however, 
will increase customer bills. There is no limit to bids or prices when 
a stage 1, 2, or 3 emergency has not been declared by the ISO.
    Question 3a. Can the mitigation plan be evaded?
    The sellers outside California are not subject to the proxy system. 
What is to prevent generators inside California from selling to parties 
outside the state at a high price, then those parties selling back into 
California above the proxy price?
    Answer. There is nothing in the Commission's mitigation program to 
prevent this evasive behavior as long as the sales to parties outside 
the state are contracted for ahead of time. The Commission's program 
requires California generators to make available to the ISO's real time 
market any power not previously contracted. But power may be committed 
to sellers outside of California in transactions made before the real 
time market hour. Those outside sellers could then resell the power 
into California. A uniform price mitigation program applied across the 
entire western interconnection would prevent such evasive behavior.
    Question 3b. Marketers are required to show the price they paid for 
electricity in order to justify a bid above the proxy price. What is to 
prevent marketers from selling to one another at high prices then 
bidding into the market at that high price and so evading the proxy 
price?
    Answer. There is nothing in the Commission mitigation program to 
prevent this type of evasive behavior. Again, a uniform price 
mitigation program applied across the entire western interconnection 
would prevent such behavior.

                           THE RTO CONDITION

    Question 1. You have conditioned implementation of the mitigation 
plan on California's utilities filing a regional transmission 
organization proposal that is consistent with the requirements of Order 
No. 2000. What does ``consistent with'' mean? If CA files a plan that 
you reject or modify will you withdraw the plan? If they file a 
proposal that you accept conditionally will you withhold implementation 
until they meet the conditions?
    Question 2. Does California have to file a proposal that 
incorporates it into a West-wide RTO in order to be consistent with 
Order No. 2000?
    Question 3. If so, what is the likelihood of other states coming to 
an agreement with California? I know my home state of New Mexico at one 
point was considering joining together with the CA ISO, but has changed 
their minds about that as a result of the troubles in California 
markets. What can California do about that?
    Answer. I dissented to the RTO filing condition in the April 26 
order. The RTO filing condition stands for the proposition that the 
Commission will not fulfill its statutory obligation to ensure just and 
reasonable prices if the California ISO and all three California IOUs 
fail to make an RTO proposal. This condition is unlawful. We must 
fulfill our statutory obligations.

                         THE 206 INVESTIGATION

    Question 1. Why is the investigation into markets in the rest of 
the West limited to spot markets and those periods when reserves are 
below 7 percent?
    Answer. There is no reasonable rationale for limiting the western 
investigation to conditions when operating reserves fall below 7%. I 
dissented from the Commission's decision to so limit the investigation. 
The Commission should investigate the potential for market power to be 
exercised and unjust and unreasonable prices to be charged regardless 
of generation conditions.
    Question 2. Do you know without investigation that the long-term 
firm contract market, for example, is producing prices that are just 
and reasonable?
    Answer. No. There is no way to reach a rational conclusion 
regarding the reasonableness of contract prices without an 
investigation.

            THE PROPOSED MITIGATION FOR THE REST OF THE WEST

    Question 1. You have proposed that a plan somewhat similar to that 
ordered for California might be useful in the rest of the West. How 
would such a plan work, give that there are no clearly defined spot 
market institutions elsewhere to play the role that the CA ISO is 
playing in California?
    Answer. The aspect of the Commission's California mitigation 
program that depends on a single market clearing price based on 
mitigated bids could not be applied to the rest of the west to develop 
non-California market clearing prices because there is no other 
centralized bid-based market in the west. Some means of capping or 
otherwise mitigating prices (instead of bids) would have to be 
developed. Another idea would be to simply extend the California 
mitigated market clearing price as a ceiling to the rest of the West. I 
have not given adequate thought to this last idea.
    Question 2. You suggest that a plan would be in effect for the West 
in any time that reserves fall below 7 per cent in any control area. 
Does that mean that an implementation plan will be in effect for the 
whole West if reserves are low in a single small area?
    Answer. I dissented from this limitation on when mitigation would 
be implemented. However, it is my understanding that mitigation would 
be implemented on a control area by control area basis. Prices would be 
mitigated on a sale made into a control area where reserves in that 
control area are below 7%.

                      THE DEMAND RESPONSE PROPOSAL

    Question 1. You order that California utilities state a price at 
which they will curtail load. How might this mechanism work? Will 
customers have to tell the utilities their curtailment price, so that 
the utilities can assemble a collective demand response, or will the 
utilities make this judgment on their own?
    Answer. Please see Chairman Hebert's response to this question.
    Question 2. You suggest that a West-wide clearing-house for demand 
response might be instituted. Would this interfere with already 
existing state program? Are there issues in state law that would need 
to be dealt with before implementation of such a plan?
    Answer. Please see Chairman Hebert's response to this question.
    Question 3. You do not have jurisdiction over behavior by retail 
customers, which is what demand response ultimately comes to. Is there 
something we need to do in Federal Law that would allow you to consider 
demand response?
    Answer. Please see Chairman Hebert's response to this question.
              Responses to Questions From Senator Campbell
    Question 1. Why have a single market clearing price, especially 
since this will probably cost California more money?
    Answer. Economists believe that in a centralized bid based market 
that is functioning well, a single market clearing price will keep 
costs down. A single market clearing price encourages sellers to bid 
something very close to their costs to ensure that they are dispatched. 
There is no reason to bid higher because sellers get paid the market 
clearing price if dispatched. Encouraging sellers to bid close the 
their costs helps ensure that the plants with the lowest costs are 
picked before more expensive ones. However, if seller's are able to 
exercise market power due to shortages or the ability to withhold 
plants, that market power must be mitigated directly.
    Because I remain concerned about the California market, I still 
have an open mind on the single market clearing price. So far, however, 
the Commission has not dealt with the seller's market power directly.
    Question 2. Could this possibly drive up prices in the West?
    Answer. It is my view that prices throughout the West have been 
correlated with prices in California. To the extent prices are driven 
up in California for whatever reason, it is likely that prices will 
also rise in the rest of the West.
    Question 3. I am skeptical of price caps. Many say they are likely 
a disincentive to investment in new generation. Won't they hurt in the 
long run?
    Answer. Yes, price caps applied over the long term may act as a 
disincentive to new generation investment. I do not believe, however, 
that some type of price mitigation in the short term will result in 
such a disincentive. The price signal for new investment in the West 
has been sent many times over. The continued high prices in the West no 
longer are needed to signal the need for new generation.
    Question 4. What does the FERC see as the best means to fix this 
problem?
    Answer. My views on this question differ from those of the other 
Commissioners. I believe that an effective short term price cap applied 
to the entire western interconnection would achieve the following 
goals. First, it would remove the incentive for generators to withhold 
power from the market in order to drive up prices. Second, limiting 
prices would stop the economic bleeding in the region that is serving 
no legitimate economic purpose.
                                 ______
                                 
              Federal Energy Regulatory Commission,
                                    Office of the Chairman,
                                     Washington, DC, June 14, 2001.
Hon. Frank H. Murkowski,
Ranking Member, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Senator Murkowski: Thank you again for giving me the 
opportunity to testify at the Committee's May 3, 2001, oversight 
hearing reviewing the Federal Energy Regulatory Commission's recent 
order addressing wholesale electricity prices in California and the 
Western United States.
    On May 29, 2001, subsequent to the May 3, 2001 hearing, the 
Commission's mitigation plan became effective. Experience so far has 
been positive. Price mitigation has been triggered twice, on May 30 and 
31, 2001, and prices fell during those events. In fact, electricity 
prices in California and throughout the West have trended significantly 
lower since May 29, 2001.
    As you know, the Commission has taken and continues to take a 
number of actions to address the energy market situation in the West. 
These steps are detailed in the enclosed responses. Attached you will 
find answers prepared by the Commission's staff to the additional 
questions from yourself and Chairman Bingaman, and Senators Campbell, 
Cantwell, Craig, Thomas, and Dorgan, to be included in the hearing 
record.
            Sincerely,
                                       Curt L. Hebert, Jr.,
                                                          Chairman.
[Enclosures]
             Responses to Questions From Senator Murkowski
    Question 1. As I see it, the fundamental problem in California 
isn't a lack of regulation, it is a lack of generation and 
transmission. What are your views?
    Answer. I agree with you. California's rolling blackouts are not 
caused by high wholesale prices in the West, but are caused by 
shortages of generation and insufficient transmission investment. These 
infrastructure shortages are the root cause of both rolling blackouts 
and high prices. More generation and transmission are greatly needed 
throughout the West and especially in California. We must ensure that 
new generation is built, that the transmission system is upgraded, that 
hydroelectric projects are licensed, and that new gas pipelines are 
built. We must also recognize that in the short-run there will be 
shortages of electricity during peak periods. Market-responsive 
wholesale and retail prices may offer the best, if not only, way of 
both minimizing blackouts in the short run, and maximizing the 
incentives to add the necessary new generation and transmission 
investment to secure California's long-term reliability.
    The FERC continues to do what it can to encourage increases in 
generation and transmission in the West. The Commission recently 
streamlined regulatory procedures for wholesale electric power sales, 
expedited the certification of natural gas pipeline projects into 
California and the West, and urged licensees to review their 
Commission-licensed hydroelectric projects in order to assess the 
potential for increased generating capacity.
    In addition to increased generation, a key element for stability in 
the western markets is investment in transmission facilities. The 
Commission recently approved a series of economic incentives aimed at 
ensuring upgrades to the western transmission grid. For projects that 
significantly increase transmission and can be in service by November 
1, 2001, these incentives include increased rates of return on equity 
invested and accelerated depreciation rates.
    The Commission's efforts alone will not solve the electricity 
crisis in California. However, together with state-level action within 
California to facilitate the siting of generation and transmission 
facilities, and to ensure more market-responsive retail pricing, our 
actions will provide additional incentives to increase power supplies 
in the western markets in the long run. Markets will do the rest--by 
providing clear price signals to stimulate the necessary new 
investment. While the Commission has found it necessary to impose price 
mitigation to protect consumers in the short-term, consumers will best 
be protected in the long-term if market forces are allowed to work.
    Question 2. Is it correct that a large share of California's price 
volatility problems can be attributed to the State's insistence that 
investor-owned utilities divest their generation and acquire all of 
their power from the spot market instead of through self-generation and 
long-term contracts?
    Answer. Yes. California, unlike most states, required investor-
owned utilities to divest substantial generating assets and to sell all 
of their generation into and buy all of their energy needs from the 
California Power Exchange (PX), which resulted in total reliance on 
spot market purchases. The Commission, in its December 15 Order, 
eliminated the mandatory PX buy-sell requirement, which allowed the 
three investor-owned utilities to self supply about 25,000 MW subject 
to state regulation. The Commission encouraged market participants to 
develop long-term contracts for power, and required California market 
participants to preschedule all resources and loads with the ISO and 
limit their real-time energy purchases to no more than five percent of 
their load. In a key decision, issued on April 11, 2001, the United 
States Court of Appeals for the Ninth Circuit refused to disturb the 
Commission's approach to remedying the dysfunctional California 
electricity market structures.
    Question 3. There are a lot of complaints that the price of natural 
gas at the border of California is too high. Has the California public 
utility commission opposed new pipelines and expansion of existing 
pipelines? What about California's local distribution companies?
    Answer. In the past, the Public Utilities Commission of the State 
of California (CPUC) and the California local distribution companies 
frequently opposed interstate pipeline projects in California. However, 
in light of recent events in California's energy markets, California 
authorities are updating their knowledge of California's natural gas 
infrastructure, and may be more receptive to new pipeline proposals 
which enhance interstate natural gas deliveries to the state.
    As recently as a year ago, the CPUC and Southern California Gas 
Company opposed a certificate authorizing Questar Southern Trails 
Pipeline Company to convert and operate an oil pipeline to provide open 
access gas service from the Four Corners area of Utah, Arizona, 
Colorado, and New Mexico into Southern California. (Questar Southern 
Trails Pipeline Company, 89 FERC para. 61,050 (1999); 92 FERC para. 
61,110 (2000).) (At present, the Questar Southern Trails Pipeline is 
not operating.) In May, 2001, the staff of the California Energy 
Commission (CEC) issued a staff draft report on ``Natural Gas 
Infrastructure Issues,'' examining the adequacy of California's natural 
gas delivery infrastructure. On June 5, 2001, the CEC held a public 
conference on these issues.
    Question 4. Am I also not correct that the State of California has 
steadfastly insisted that all interstate pipelines end at the border of 
California, with interstate pipelines inside the border being subject 
to State jurisdiction? Isn't the net effect of this to deny California 
consumers the benefits of FERC's open access transportation program, 
which has saved consumers elsewhere in the U.S. billions of dollars?
    Answer. Yes. In the Commission's proceedings authorizing the Kern 
River Gas Transmission Company, Mojave Pipeline Company, and Wyoming-
California Pipeline Company systems, as well as the northward expansion 
of the Mojave system, the CPUC argued that it would have jurisdiction 
over those companies within California because they would be performing 
local distribution and would be exempt from Commission jurisdiction and 
subject to State regulation under both sections 1(b) and 1(c) of the 
Natural Gas Act. The Commission rejected this argument. (See, e.g., 
Mojave Pipeline Company, 41 FERC para. 61,040 at page 61,117 (1987). 
See also Public Utilities Commission of the State of California v. 
FERC, 900 F. 2d 269 (D.C. Cir. 1990) (affirming Commission 
certification of interstate pipeline into California).
              Responses to Questions From Senator Bingaman

                     THE CALIFORNIA MITIGATION PLAN

    Question 1a. How easy or hard is the mitigation plan to implement?
    The ISO is charged with developing a proxy price for every gas 
plant in California for every hour. Is that a huge burden, or something 
they already have the capacity to do?
    Answer. The ISO, in its May 18, 2001 status report, stated that it 
was actively working towards implementing the Commission's plan. The 
ISO reported that it would have in place by May 29, 2001, a manual 
process for implementing mitigation. The ISO has since done so. The ISO 
also stated in its May 18 status report that it will have an electronic 
version fully operational by July 1, 2001. The ISO should be able to 
use a computer formula to generate the proxy rate.
    Question 1b. Does the after-the-fact justification of bids that are 
above the proxy price impose a huge burden on the Commission?
    Answer. Evaluating the justification for bids imposes a burden on 
the Commission, but one that should not be extreme, depending on how 
many bids are above the proxy price. Under the price mitigation 
approach in effect from January until recently, the number of hourly 
transactions requiring justification was 69,522 in January; 71,890 in 
February; 34,488 in March; and 15,057 in April. While I cannot predict 
the number of bids that will be above the proxy price under the new 
price mitigation approach imposed by the Commission effective May 29, 
the ex ante nature of the new proxy price mechanism will provide 
advance price certainty to the market, which should lead to fewer 
transactions requiring justification.
    Question 1c. Would a pre-set price cap be easy to administer while 
getting a similar result?
    Answer. Setting seller-specific price caps based on each seller's 
own costs would be difficult administratively, because the Commission 
would have to gather extensive cost data and make separate findings for 
each seller. Such a process would be time- and litigation-intensive. 
Setting a single cap for all sellers would be easier to administer but 
would raise the problem that, on some days, the price cap could be 
lower than the costs incurred by sellers for fuel and emission 
allowances, while on other days, the price cap could be too high. In 
contrast, the Commission's mitigation plan is based on the prices 
generators would be expected to bid on a daily basis based on current 
costs.
    A price cap also would have adverse effects compared to the 
Commission's approach. Price caps would discourage investment in new 
generation which California desperately needs and can create incentives 
for suppliers to sell their power in markets without price ceilings, 
creating greater shortages of power. Indeed, when price caps have been 
tried before in California, the ISO was forced to petition the 
Commission for emergency relief from the caps in order to enable it to 
avoid shortages and obtain the power it needed. (See California 
Independent System Operator Corporation, 93 FERC para. 61,239 (2000).) 
Price caps also can discourage investment in technology that will make 
generating units more efficient. Instead of using inflexible price 
caps, the Commission's market mitigation plan seeks to replicate 
competitive markets and maintain incentives to supply California as 
well as increase investment in making generating units more efficient 
and environmentally friendly.
    Question 1d. How accurate is the information that is used? In other 
words, will lots of plants have gas prices above the average that the 
ISO will use, so that all of them will be trying to justify prices 
above the proxy price, or will it just be a few? Does the use of an 
average gas price guarantee a lot of prices above the proxy price? Is 
there a similar problem with the emissions prices?
    Answer. The proxy price is recalculated each day based on current 
market costs for natural gas and emission allowances. Individual 
sellers may have higher costs on a given day depending upon their 
contractual arrangements for buying these inputs. I cannot predict how 
many sellers will be in those circumstances on any given day. However, 
those sellers will be required to justify any sale of power above the 
proxy price.
    Question 2a. Does the mitigation plan actually result in lower 
prices?
    The proxy system is similar to the system you used to develop the 
refund numbers for the last few months. Have you looked at the market 
to determine whether prices outside the time that you applied the proxy 
price were higher or lower? Do you intend to do so in the future? It 
seems that this would help determine whether the plan is being applied 
broadly enough or not. Do you intend to use some kind of measuring 
stick like this to keep a check on the effectiveness of this system?
    Answer. The Commission's market monitoring and price mitigation 
plan took effect only recently, on May 29. The Commission will be 
receiving bid data for all hours (i.e., not simply during system 
emergencies) and will monitor that data to determine the effectiveness 
of its price mitigation approach. The Commission's price mitigation 
plan seeks to replicate the prices that would occur in a competitive 
market. By doing so, the plan will ensure that prices are just and 
reasonable.
    Experience so far has been positive. Although the Commission's 
mitigation plan went into effect in California on Tuesday, May 29, 
2001, there were no alerts, and hence no price mitigation occurring on 
that day. Price mitigation was triggered during portions of the day on 
Wednesday, May 30, 2001, and Thursday, May 31, 2001, when the 
California ISO called Stage I emergencies. As a result, prices for 
hourly imbalance energy, which had risen to around $299 per MWh before 
the emergency alert on Wednesday, fell to $120, and rose no higher than 
$135 per MWh during the rest of the day. On Thursday prices rose to 
$130 per MWh prior to the emergency, but fell to $109 per MWh when 
mitigation began, and fell further to $64 per MWh. Although no 
emergencies nor price mitigation occurred during the period from June 1 
to June 4, 2001, prices remained relatively modest, not exceeding $150 
per MWh, and generally trending below $100 per MWh for most hours.
    The Commission's market monitoring and price mitigation plan took 
effect on May 29, 2001. The following table (Table 1) shows Western 
electricity spot prices before and after mitigation:

                                  Table 1.--WESTERN ELECTRICITY PRICES ($/MWh)
----------------------------------------------------------------------------------------------------------------
                                                                    Mid-
                       Date                             COB       Columbia       NPIS     Palo Verde     SPIS
----------------------------------------------------------------------------------------------------------------
                                           Mid-Week Daily Spot Prices

 4-Apr............................................     $314          $316        $267        $237        $237
11-Apr............................................     $388          $383        $347        $181        $178
18-Apr............................................     $262          $271        $258        $230        $224
25-Apr............................................     $318          $313        $296        $292        $281
 2-May............................................     $246          $252        $225        $220        $212
 9-May............................................     $443          $438        $476        $455        $479
16-May............................................     $247          $247        $235        $222        $211
23-May............................................     $419          $415        $410        $385        $381

                                     Daily Spot Prices Following Mitigation

29-May............................................     $165          $161        $163        $153        $130
30-May............................................     $127          $122        $128        $129        $117
31-May............................................     $180          $177        $175        $176        $151
 1-Jun............................................     $153          $151        $156        $165        $150
 4-Jun............................................     $167          $160        $163        $178        $153
 6-Jun............................................     $102          $100        $114        $118        $105
 6-Jun............................................     $ 62          $ 60        $ 75        $ 90        $ 75
----------------------------------------------------------------------------------------------------------------
Price Chart Labels: ``COB'' is the California-0regon Border price. Mid- Columbia is a market pricing point
  located in the Pacific Northwest. ``NP15'' is north of Path 15, and represents prices in northern California.
  ``SP15'' is south of Path 15, and represents prices in southern California. Palo Verde is located in Arizona
  near the California border, and represents prices in the Southwestern United States.

    Question 2b. How does the spot market mitigation plan result in 
lower prices in other markets, such as the futures market or the long-
term firm contracting market?
    Answer. In fashioning its market mitigation plan for California in 
the April 26, 2001 order, the Commission carefully considered the 
supply and demand circumstances faced during all periods in the 
marketplace. Prices in the daily spot market, the day ahead market, and 
longer term bilateral contracts are strongly interrelated. In the long 
term, each represents an alternative to the other, as long as they are 
available. However, as the time between commitment and consumption 
shortens, alternatives become fewer. Buyers and sellers price 
electricity sales to reflect, among other factors such as demand, the 
opportunities available in these different products. Futures prices are 
related to physical products in a similar manner. Although electricity 
futures are not themselves substitutes for the physical product, the 
open expiration of a futures contract results in the requirement for 
physical delivery, which provides an ultimate linkage back to spot 
market sales, prices.
    Given these linkages, the lowest priced service generally sets the 
value basis for all services. To the extent the Commission can succeed 
in crafting a well-functioning short-term electricity market in 
California without barriers which might prevent purchasers from using 
these services as one of many alternative energy supplies, long-term 
firm contracts, and futures prices should also be beneficially 
affected.
    Question 2c. Does the fact that sellers outside of California are 
not subject to the proxy price and refunds mean that the market may 
clear well above the proxy price because of outside bids, so that the 
real effect is that prices in the spot market are still high.
    Answer. No. Under the mitigation plan, generators outside of 
California can accept the market clearing price determined by the proxy 
methodology (in which case, their bid will not affect the price) or 
submit their own bid. If they submit a separate bid, that bid will be 
paid (if they are dispatched), but the bid will not affect the market 
clearing price in the ISO's real-time market.
    Question 3a. Can the mitigation plan be evaded?
    The sellers outside California are not subject to the proxy system. 
What is to prevent generators inside California from selling to parties 
outside the state at a high price, then those parties selling back into 
California above the proxy price?
    Answer. Your question raises an issue commonly referred to as 
``megawatt laundering.'' The April 26, 2001 order, at p. 12, 
acknowledged concerns regarding ``megawatt laundering.'' In response, 
the order recognized that the California market is integrated with 
those of other states and, for that reason, FERC is instituting a West-
wide, Federal Power Act Section 206 investigation into public utility 
sales for resale. The order solicited public comment on the proposed 
West-wide investigation. This issue is pending before the Commission on 
rehearing of its April 26 Order. Thus, I cannot comment on the merits 
of this issue. However, I recognize that the issue is an important one 
and warrants careful consideration by the Commission on rehearing. The 
Commission's price mitigation plan just became effective on May 29, 
2001, and experience to date has been very good. But, if this concern 
about ``laundering'' is realized, I would consider modifying the 
Commission's approach to ensure the effectiveness of its price 
mitigation mechanism.
    Question 3b. Marketers are required to show the price they paid for 
electricity in order to justify a bid above the proxy price. What is to 
prevent marketers from selling to one another at high prices then 
bidding into the market at that high price and so evading the proxy 
price?
    Answer. This issue is pending before the Commission on rehearing of 
its April 26 Order. Thus, I cannot comment on the merits of this issue. 
However, this issue also will receive careful consideration by the 
Commission on rehearing.

                           THE RTO CONDITION

    Question 1. You have conditioned implementation of the mitigation 
plan on California's utilities filing a regional transmission 
organization proposal that is consistent with the requirements of Order 
No. 2000. What does ``consistent with'' mean? If CA files a plan that 
you reject or modify will you withdraw the plan? If they file a 
proposal that you accept conditionally will you withhold implementation 
until they meet the conditions?
    Answer. Order No. 2000 set forth the essential characteristics and 
functions required of regional transmission organizations (RTOs) but 
also left significant flexibility to adapt to regional needs. RTO 
filings were made by the California ISO and the three California 
investor-owned utilities on June 1, 2001. The Commission currently is 
reviewing the merits of the filings and I cannot prejudge the 
Commission's response to them.
    Question 2. Does California have to file a proposal that 
incorporates it into a West-wide RTO in order to be consistent with 
Order No. 2000?
    Answer. I cannot comment upon or prejudge the acceptability of the 
RTO filings made on June 1. However, the Commission's April 26, 2001 
Order on RTO West made it clear that a West-wide RTO was a long-term 
goal--not a requirement for filing.
    Question 3. If so, what is the likelihood of other states coming to 
an agreement with California? I know my home state of New Mexico at one 
point was considering joining together with the CA ISO, but has changed 
their minds about that as a result of the troubles in California 
markets. What can California do about that?
    Answer. As noted above, a West-wide RTO is not a requirement for 
filing. I cannot assess the likelihood of other western states joining 
with California, especially during these difficult times. However, the 
western states have an excellent history of acting cooperatively in 
electric industry coordination. Regional coordination has been taking 
place through the Western Governor's Association, the Western Systems 
Coordinating Council, the Western Regional Transmission Association, 
the Committee on Regional Electric Power Cooperation and other groups. 
In addition, the CA ISO and RTO West have created a joint technical 
group to work on interregional coordination issues.
    It is important for California to work with other states within the 
Western region to stabilize the energy markets in the west. I expect 
RTO West, as well as participants in other RTO efforts under 
consideration in the West, to work cooperatively with the California 
ISO to develop comprehensive solutions to the problems confronting 
western markets.

                         THE 206 INVESTIGATION

    Question 1. Why is the investigation into markets in the rest of 
the West limited to spot markets and those periods when reserves are 
below 7 percent?
    Answer. The Commission proposed to adopt mitigation measures in the 
West that, to the extent possible, mirror those being applied in 
California. The California investigation (which was initiated in August 
2000) was limited to the markets operated by the California ISO and PX, 
i.e., spot energy and ancillary services markets. In addition, the 
price mitigation in those markets applies to spot markets when reserves 
are deficient. I note that parties in both proceedings have filed 
comments asking the Commission to expand the scope of the West-wide 
investigation and the scope of the mitigation. Thus, I cannot comment 
further on these pending issues.
    Question 2. Do you know without investigation that the long-term 
firm contract market, for example, is producing prices that are just 
and reasonable?
    Answer. The allegations in recent months regarding unjust and 
unreasonable prices in California and the West have focused on spot 
market prices. These markets are the closest in time to when load must 
be met and therefore can exhibit the highest prices in times of 
shortage. Forward markets, on the other hand, present buyers with more 
time and options, and offer greater rate stability and certainty. 
Pursuant to its authority under section 206 of the Federal Power Act, 
the Commission will investigate any complaints that prices in long-term 
contracts are unjust and unreasonable. (See, San Diego Gas and Electric 
Company v. Alamito Company, 46 FERC para. 61,363, at p. 62,125 (1989).) 
In doing so, the Commission must consider all of the rates, terms and 
conditions of a long-term contract for the full duration of the 
contract, instead of merely a ``snapshot'' of the contract at one time.
    The Commission's market monitoring and price mitigation plan took 
effect on May 29 of this year. Since this plan has been in effect, 
electricity prices in California have fallen sharply as illustrated in 
Table 1, presented earlier within these responses.
            the proposed mitigation for the rest of the west
    Question 1. You have proposed that a plan somewhat similar to that 
ordered for California might be useful in the rest of the West. How 
would such a plan work, given that there are no clearly defined spot 
market institutions elsewhere to play the role that the CA ISO is 
playing in California?
    Answer. As your question recognizes, the goal of the West-wide 
investigation initiated in the April 26, 2001 order is to mirror the 
California mitigation plan. The order instituted a Federal Power Act 
section 206 investigation into the rates, terms and conditions of 
public utility sales for resale of electric energy in interstate 
commerce in the WSCC other than sales through the California ISO 
markets, to the extent that such sales for resale involve: (1) electric 
energy sold in spot markets (i.e., up to 24 hours in advance); and (2) 
take place during conditions when reserves (as defined by the WSCC) for 
any control area fall below 7 percent. The order proposed that all non-
hydroelectric generators and marketers in the WSCC with energy 
operationally and contractually available in real-time (public 
utilities and non-public utilities) would be required to offer that 
real-time energy for sale at that time. The generators would not be 
required to sell that energy into California; they would only have to 
offer the power for sale in any location. Any sales made in other (non-
California) spot markets in the WSCC would also be subject to price 
mitigation, but that mitigation would be limited to system conditions 
when contingency reserves (as defined by the WSCC) for any control area 
fall below 7 percent. The order sought comment on what this price 
mitigation should be.
    As FERC established proceedings which purposely invited comment on 
this and other aspects of the West-wide mitigation proposal, and those 
comments are currently before the Commission, I am unable to comment 
further on the issues raised by this question.
    Question 2. You suggest that a plan would be in effect for the West 
in any time that reserves fall below 7 percent in any control area. 
Does that mean that an implementation plan will be in effect for the 
whole West if reserves are low in a single small area?
    Answer. The April 26, 2001 order instituting the West-wide 
investigation, at p. 30, states that any sales made in other (non-
California) spot markets in the WSCC would be subject to price 
mitigation, but that mitigation would be limited to system conditions 
when reserves for any control area fall below 7 percent. The order 
requested comments on the details of this price mitigation.
    As FERC established proceedings which purposely invited comment on 
this and other aspects of the West-wide mitigation proposal, and those 
comments are currently before the Commission, I am unable to comment 
further on the issues raised by this question.

                      THE DEMAND RESPONSE PROPOSAL

    Question 1. You order that California utilities state a price at 
which they will curtail load. How might this mechanism work? Will 
customers have to tell the utilities their curtailment price, so that 
the utilities can assemble a collective demand response, or will the 
utilities make this judgment on their own?
    Answer. The Commission did not impose a ``one-size-fits-all'' 
approach on how utilities should implement demand-side bidding. Thus, 
each utility may implement an approach that fits its circumstances, 
including any contracts it may have with retail customers and any 
programs it may have for implementing retail load reduction. Generally, 
I would expect the utility's demand-side bids to reflect the expressed 
willingness of its customers to reduce load at certain prices. Thus, if 
20 percent of a utility's customers indicate their desire to curtail 
usage when prices reach a specific level, and its other customers 
indicate a desire to continue consuming power, the utility could submit 
a demand-side bid corresponding with this consumption pattern.
    Question 2. You suggest that a West-wide clearing-house for demand 
response might be instituted. Would this interfere with already 
existing state programs? Are there issues in state law that would have 
to be dealt with before implementation of such a plan?
    Answer. The Commission wishes to do what it can to promote demand 
reductions as a means of alleviating the supply/demand imbalances in 
Western markets, and does not want to interfere with existing state 
programs aimed at achieving demand reductions. As the Commission 
recently stated in its Order Removing Obstacles in Docket No. EL01-47-
000, the Commission is promoting wholesale programs that complement 
existing state demand-side management programs, and our goal is not to 
supersede state authority over retail customers, but to work 
cooperatively with the states to achieve a common good.
    Question 3. You do not have jurisdiction over behavior by retail 
customers, which is what demand response ultimately comes to. Is there 
something we need to do in Federal Law that would allow you to consider 
demand response?
    Answer. See the answer to question 2 above. I believe that the 
combination of existing state and Federal authority is currently 
sufficient.
              Responses to Questions From Senator Campbell
    Question 1. Why have a single market clearing price, especially 
since this will probably cost California more money?
    Answer. As explained by economist Alfred E. Kahn and other notable 
economists in a study by the Blue Ribbon Panel Commissioned by the 
California Power Exchange on January 23, 2001, an auction that pays all 
accepted sellers a single, market-clearing price will, in practice, 
generally result in lower prices than an as-bid auction. Moreover, a 
single clearing price auction offers the following advantages over as-
bid auctions. First, a single market clearing price auction encourages 
construction of efficient, new generation. Generators that can build 
and operate at a cost less than the expected future market clearing 
price will see that they can profit by entering the market. The 
additional, more efficient supply will lower prices and benefit 
consumers.
    A single price auction also encourages all generators to reduce 
their costs and their bids. All generators, including the least 
efficient generators, have an incentive to reduce their costs. All 
generators will attempt to come in below the clearing price so they can 
profit. Bids above the clearing price will result in no sales and, 
therefore, no revenues. Lower bids mean lower prices for consumers.
    Finally, a single price auction encourages the lowest bids. When 
the price is set by a single price auction, competitive generators have 
an incentive to bid their running costs, because they know that they 
will make a profit by being paid the clearing price. But when there is 
no single price auction, generators will bid above their running costs, 
because this is the only way they can be sure they will make a profit. 
As they guess at the potential market clearing price, they could end up 
bidding higher than what a single market clearing price would have 
been. As a result, pay-as-bid auctions are not as likely to result in 
lower prices for consumers.
    Question 2. Could this possibly drive up prices in the West?
    Answer. No, that is not likely. As noted above, an auction that 
pays all accepted sellers a single, market-clearing price will, in 
practice, generally result in lower prices than an as-bid auction. 
However, there are many factors underlying high prices recently 
experienced by California and the West, most notably insufficient 
supply and inadequate transmission capacity.
    The Commission's market monitoring and price mitigation plan took 
effect on May 29, 2001. Table 1, presented earlier within these 
responses, shows Western electricity spot prices before and after 
mitigation.
    Question 3. I am skeptical of price caps. Many say they are likely 
a disincentive to investment in new generation. Won't they hurt in the 
long run?
    Answer. Price caps are not the long-term solution and would only 
make the situation worse. They do not promote long-term consumer 
welfare as they will not increase energy supply or encourage 
conservation.
    Question 4. What does the FERC see as the best means to fix this 
problem?
    Answer. In general, market-based solutions offer the most efficient 
solution to the problems confronting California and the west. 
Infrastructure improvements are greatly needed throughout the West and 
especially in California. Appropriate financial incentives are needed 
to ensure that new generation is built, that the transmission system is 
upgraded, that hydroelectric projects are licensed, and that new gas 
pipelines are built. Without these upgrades, constraints and 
bottlenecks increasingly will block energy supplies from reaching load. 
In addition, purchasers must also have the ability to reduce load in 
response to high prices.
    The Commission has ordered a range of measures to promote a better 
balance of supply and demand, but its jurisdiction is limited. The 
Commission can and has 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. State 
regulators also have the most significant authorities to encourage 
demand reduction measures, which can greatly mitigate the energy 
problems in California and the West.
    Question 5. How will your new orders affect the rural electric 
associations, the co-ops?
    Answer. Sales by co-ops (and other non-public utilities such as 
municipal utilities) under bilateral agreements will not be affected by 
the Commission's April 26 Order. Co-ops in California that voluntarily 
use the ISO's transmission facilities or sell into the ISO's markets 
are subject to the same price mitigation as other utilities and the 
same requirement to offer available power for sale in real-time, but 
only for electric energy that is available in real-time and not already 
scheduled to run under a bilateral arrangement. It is my understanding 
that very few co-ops sell into the California ISO spot market. Absent 
this approach, the Commission could not fulfill its statutory duty to 
ensure the justness and reasonableness of jurisdictional prices. For 
sales in Western States other than California, the Commission proposed 
to adopt a similar approach to co-ops and other non-public utilities; 
the Commission has received comments on this proposal and intends to 
issue an order in the near future. Throughout the West, co-ops are 
typically wholesale power purchasers, and our price mitigation should 
help them.
    Question 6. What can we all do to ensure that the rest of the 
Western region is minimally affected by the crisis in California, 
because I don't want my home state of Colorado's resources and 
consumers hit by these problems?
    Answer. The most important measure is to ensure that infrastructure 
(generating facilities, transmission lines and natural gas pipelines) 
can be built when and where needed, without unreasonable impediments. 
Another important step is to provide price signals for new supplies and 
conservation by not capping prices artificially. Finally, utilities 
should be allowed to purchase needed power under long-term arrangements 
when it is economical, instead of being forced to buy power only in 
spot markets.
              Responses to Questions From Senator Cantwell
    Question 1. Consider the situation in Washington state. We've 
already experienced retail rate increases in the high double-digits, 
suffered plant closures and job loss as a result of skyrocketing 
electricity costs, and are facing the prospect of a BPA rate increase 
this fall that threatens to further undermine the economic health of 
the entire region. Do you believe prices in the Pacific Northwest are 
just and reasonable?
    Answer. Prices in the Pacific Northwest may not be just and 
reasonable under certain conditions. For this reason, the Commission 
recently instituted an investigation into the rates, terms and 
conditions of certain wholesale sales by public utilities within the 
Western Systems Coordinating Council. The Commission has received 
comments in this investigation and will address the issues in the near 
future.
    The Commission's market monitoring and price mitigation plan took 
effect on May 29, 2001. Table 1, presented earlier within these 
responses, shows Western electricity spot prices before and after 
mitigation.
    Question 2. How do you make the case that FERC has upheld its 
statutory mandate to ensure just and reasonable rates at all times and 
in all markets?
    Answer. Under the Federal Power Act, the Commission can order 
changes to existing rates, and practices and contracts affecting those 
rates, only upon finding those rates to be unjust and unreasonable. In 
its December 15, 2000 order, the Commission found that, under prior 
market rules and under certain conditions, prices in spot markets in 
California were not just and reasonable. Consistent with the Federal 
Power Act, the Commission ordered changes to the market rules governing 
California's spot markets and also ordered additional market monitoring 
and price mitigation. On March 9, 2001, the Commission implemented the 
price mitigation that was ordered in the December 15 order. A federal 
appeals court recently rejected challenges to the primary remedy 
adopted by the Commission in the December 15 order, characterizing the 
Commission's approach as a ``middle ground between the need for 
temporary price mitigation and the realization that competition must 
exist for the California energy market to survive in the long run.'' 
California Power Exchange Corp. v. FERC, No. 01-70031, 2001 U.S. App. 
LEXIS 6153 (9th Cir. April 11, 2001). The same court recently rejected 
another challenge to the Commission's actions. John L. Burton, et al. 
v. FERC, No. 01-70812 (9th Cir. May 29, 2001).
    In its April 26, 2001 order, the Commission adopted a new approach 
to price mitigation for the California ISO's spot markets, and proposed 
to adopt a similar approach for spot markets throughout the West, to 
ensure that rates are just and reasonable. The Commission will act on 
its proposals for Western States other than California in the near 
future.
    The Commission has not found that rates are unjust and unreasonable 
at all times and in all markets. Unless such a claim is supported on 
the record, the Commission has no authority under the Federal Power Act 
to impose a remedy applicable at all times and in all markets. That 
said, prices in the spot markets and in more forward markets are 
influenced by each other and a decline in spot prices should result in 
lower prices generally.
    Question 3. What specific elements of this order promise relief for 
Washington state consumers?
    Answer. The April 26, 2001 order's most direct means of short-term 
relief for Washington state consumers is its Federal Power Act Section 
206 investigation into the rates, terms and conditions of public 
utility sales for resale of electric energy in spot markets in the 
Western Systems Coordinating Council (WSCC) (order at p. 30-31). The 
investigation portion of the order seeks comment on the Commission's 
proposal to require all non-hydro-electric generators and marketers in 
the WSCC to offer all available energy in the spot market at any non-
California location; and to subject any sales made in non-California 
spot markets in the WSCC to price mitigation, with the form of that 
price mitigation to be determined following review of comments. The 
proposed mitigation would be limited to system conditions when reserves 
for any control area fall below 7 percent; and condition the market-
based rate authority of public utility sellers selling in the WSCC 
region to ensure that they do not engage in anti-competitive behavior.
    The April 26, 2001 order recognizes that FERC is limited in its 
ability to solve all of the problems facing California and the West. 
However, the order, coupled with previous orders addressing California 
and the West, seeks to remove regulatory obstacles and provide 
incentives to increase investment in needed infrastructure, including 
ensuring that new generation is built, that the transmission system is 
upgraded, and that new gas pipelines are built. FERC has also sought to 
get California's market situation under control through, among other 
things, moving electricity purchases to serve load from the spot market 
to long-term contracts.
    In addition, the April 26, 2001 order included a number of 
conditions which were designed to prevent anti-competitive behavior 
during all hours and not just during hours when emergencies are 
declared by the ISO. Among the measures is the conditioning of market-
based rate authority on not withholding available supply and not 
engaging in other anti-competitive behaviors; the coordination of 
planned outages by the California ISO; FERC's monitoring of unplanned 
outages; requiring all generators with Participating Generator 
Agreements (PGAs), as well as all non-public utility generators in 
California which sell through the ISO markets or currently use the 
ISO's interstate grid, to sell all available supply into the ISO's spot 
market; requiring ISO buyers to submit demand reduction bids by hour, 
amount, and customer; and the monitoring of all bids in all hours by 
the ISO and FERC through an ISO weekly report. Removing the volatility 
of prices in California through price mitigation should have a 
beneficial effect on prices in the West. This is evinced by Table 1, 
presented earlier within these responses.
    Question 4. I do appreciate that your April 26 order institutes an 
investigation into wholesale prices throughout the West. As I've tried 
to illustrate in my remarks, this is a crisis that is having profound 
effects throughout the Northwest and promises to reverberate throughout 
the nation if left unchecked. I'm concerned, however, about the scope 
of this Section 206 proceeding. The investigation will only take up 
transactions that occur up to 24-hours in advance on the spot market, 
and only during California emergencies. This includes very few hours, 
particularly in the Northwest where most of our transactions are done 
under longer-term contracts. Shouldn't you be investigating the broader 
issue of why prices remain extremely high (and very much above costs) 
for all types of transactions across the entire West Coast?
    Answer. As part of its investigation into California's spot 
markets, the Commission also received information about the 
circumstances in spot markets in other parts of the West. Based on this 
information, the Commission concluded that rates, terms and conditions 
for sales in spot markets in these areas may not, under current market 
rules and under certain conditions, be just and reasonable and should 
be modified. On this basis, the Commission instituted its West-wide 
investigation in the April 26 Order. The information available to the 
Commission did not warrant a finding that rates, terms and conditions 
are unjust and unreasonable for all types of transactions. However, I 
note that parties in the proceeding have filed comments on both the 
scope of the investigation and the scope of the proposed mitigation and 
therefore I cannot comment further on these pending issues.
    Pursuant to its authority under section 206 of the Federal Power 
Act, the Commission will investigate any complaints that prices in 
long-term contracts are unjust and unreasonable. (See, San Diego Gas 
and Electric Company v. Alamito Company, 46 FERC para. 61,363, at p. 
62,125 (1989).) In doing so, the Commission must consider all of the 
rates, terms and conditions of a long-term contract for the full 
duration of the contract, instead of merely a ``snapshot'' of the 
contract at one time.
    Question 5. As you may recall, I submitted to you a question at our 
March 15 hearing about why FERC's order regarding potential refunds for 
California did not include the Northwest. I appreciated receiving your 
written response, but based on your answer, I am not fully satisfied 
that Northwest ratepayers will eventually receive the refunds they may 
very well deserve. You cited the Commission's considerable discretion 
in establishing ``just and reasonable rates,'' that FERC did not want 
to ``blunt the price signals needed to induce supply entry,'' and that 
``fundamental differences'' in the structure of the markets would make 
it difficult to adapt the approach the Commission has used for 
California to the Northwest. Now, in your April 26 order and as you've 
testified today, the Commission has solicited 10 days' worth of 
comments on putting in a price mitigation plan for the entire WSCC that 
would resemble the one you're putting in place for California. The 
order also makes mention of potential refunds. The language, however 
seems a bit ambiguous. Could you please more fully articulate what, 
precisely, FERC is proposing West-wide, and how/if this relates to the 
Section 206 investigation and potential refunds?
    Answer. The Commission's April 26, 2001 order established an 
investigation into the rates, terms and conditions of public utility 
sales for resale of electric energy in interstate commerce in the 
Western Systems Coordinating Council (WSCC) other than sales through 
the California ISO markets. This investigation applies to sales for 
resale that involve electric energy sold in spot markets (up to 24 
hours in advance), and which take place when contingency reserves fall 
below 7 percent.
    The Commission is proposing three measures in connection with the 
WSCC investigation. The three measures are:
    (1) requiring all non-hydroelectric generators and marketers in the 
WSCC to offer for sale any available electric energy not scheduled in 
real-time pursuant to a bilateral arrangement;
    (2) instituting price mitigation when reserves fall below 7 
percent; and
    (3) prohibiting public utility sellers selling in the WSCC region 
from engaging in anti-competitive behavior discussed in the April 26 
order.
    The April 26 order also established the earliest refund effective 
date permitted by section 206 of the Federal Power Act with respect to 
the West-wide investigation, which is 60 days after publication in the 
Federal Register. This means that the Commission will have the 
discretion to order any unjust and unreasonable amounts to be refunded 
for rates charged in the WSCC spot markets other than California 
beginning July 2, 2001, through a period 15 months thereafter. (See 
section 206(d) of the Federal Power Act (as amended by P.L. 100-473, 
October 6, 1988).) Please note that the refund effective date and 
therefore the Commission's refund authority, associated with the West-
wide investigation differs from that in the California investigation. 
The refund effective date with respect to the California investigation 
is October 2, 2000.
    Question 6. Aside from my vigorous insistence that FERC recognize 
and address the situation in the Northwest, I also have a number of 
qualms about the technical elements of this order and how well its 
price mitigation mechanism will actually work in California. I agree 
with Senator Feinstein's assessment that this order doesn't go nearly 
far enough. And to the extent it does attempt to moderate prices, I'm 
afraid it is so riddled with potential loopholes as to be ineffective. 
I'm concerned about unintended consequences in California--and 
especially if you intend to export the mechanics of this model to the 
rest of the West. Specifically, the order requires California 
generators to offer the ISO all of their capacity in real time, during 
all hours, if it is available and not scheduled to run through 
bilateral contracts. The thinking, according to the order, is that a 
generator ``should be willing to sell that energy at a price that 
covers its marginal costs, since it has no alternative purchaser at 
that time.'' Is it true then, that as long as the ISO has not declared 
an alert, generators can demand as high a price as possible--one far 
exceeding marginal costs?
    Answer. It is true that there is no price mitigation during periods 
when no emergency has been declared by the ISO. This is premised on 
there being sufficient supply during non-emergency hours to discipline 
price. However, the Commission made clear that it would revoke the 
market-based rate authority of any seller, or take other appropriate 
action against any seller, which withholds available supply or engages 
in other anticompetitive behaviors in any hour. In addition, the order 
required the ISO to monitor all bids in all hours and file with FERC a 
weekly report, which will enable FERC to monitor for any 
anticompetitive behavior. Moreover, all public utility generators, as 
well as all non-public utility generators, in California which sell 
through the ISO markets or currently use the ISO's interstate grid, 
must sell all available supply into the ISO's spot markets during all 
hours.
    Thus, the Commission's market monitoring and price mitigation plan 
operates during all hours of the day, not simply during those hours 
when the ISO has declared a system emergency. I note that, although the 
Commission's mitigation plan went into effect in California on Tuesday, 
May 29, 2001, there were no alerts, and hence no price mitigation 
occurring on that day. Price mitigation was triggered during portions 
of the day on Wednesday, May 30, 2001, and Thursday, May 31, 2001, when 
the California ISO called Stage I emergencies. As a result, prices for 
hourly imbalance energy, which had risen to around $299 per MWh before 
the emergency alert on Wednesday, fell to $120, and rose no higher than 
$135 per MWh during the rest of the day. On Thursday prices rose to 
$130 per MWh prior to the emergency, but fell to $108 per MWh when 
mitigation began, and fell further to $64 per MWh. Although no 
emergencies nor price mitigation occurred during the period from June 1 
to June 4, 2001, prices remained relatively modest, not exceeding $150 
per MWh, and generally trending below $100 per MWh for most hours.
    The Commission's market monitoring and price mitigation plan took 
effect on May 29, 2001. Table 1, presented earlier within these 
responses, shows Western electricity spot prices before and after 
mitigation.
    Question 7. What prevents California generators from entering into 
bilateral agreements with marketers at high, uncapped prices?
    Answer. See answer to question number 8 below.
    Question 8. Further, during ISO emergency conditions, marketers 
bidding higher than the market clearing price would, according to the 
order, ``be required to justify the bid based on the prices they paid 
for power.'' What prevents marketers from paying high prices to 
generators, and then passing those costs on to the ISO?
    Answer. Power sellers and purchasers are free to enter into 
bilateral contracts at terms agreeable to both entities. In fact, FERC 
has encouraged and continues to encourage sellers and purchasers to 
enter into mutually agreeable, long-term bilateral contracts.
    Your question raises an issue commonly referred to as ``megawatt 
laundering.'' The April 26, 2001 order, at p. 12, acknowledged concerns 
regarding ``megawatt laundering.'' In response, the order recognized 
that the California market is integrated with those of other states 
and, for that reason, FERC is instituting a West-wide, Federal Power 
Act Section 206 investigation into public utility sales for resale. The 
order solicited public comment on the proposed West-wide investigation. 
This issue is pending before the Commission on rehearing of its April 
26 Order. Thus, I cannot comment on the merits of this issue. However, 
I recognize that the issue is an important one and warrants careful 
consideration by the Commission on rehearing. The Commission's price 
mitigation plan just became effective on May 29, 2001, and experience 
to date has been very good.
    Question 9. So if the ISO rejects a marketer's bid because the 
price is too high, how does the order assure that the generator will be 
made available to sell to the ISO? After all, as the order notes, 
``Marketers generally have a portfolio of energy supplies and often 
sell energy numerous times. It, therefore, would be exceedingly 
difficult to try and trace energy back to the generating source . . .''
    Answer. First of all, the April 26, 2001 order's must-sell 
requirement is independent of price mitigation, and operates during all 
hours. Under the scenario you describe, the marketer's bid would have 
been rejected because the ISO determined that it had sufficient 
resources at a lower price than that offered by the marketer to meet 
expected load. At that point, the marketer could seek to sell 
elsewhere. However, if it had no alternative market in which to sell 
its power, and the ISO later determined that the marketer's supply was 
needed to meet load, the April 26, 2001 order's must-sell requirement 
would obligate the marketer to offer its supply to the ISO. Second, all 
California generation and all sales by marketers in California spot ISO 
markets are subject to price mitigation. Thus to the extent the 
marketer sought a price in excess of the market clearing price, such a 
bid must be justified. Thus, if the ISO requires the supply but the 
marketer's bid exceeds the proxy price, the ISO will accept the bid 
subject to justification and refund.
    Question 10. Several parties have raised concerns, as noted in the 
order, about so-called ``megawatt laundering,'' where a supplier 
schedules supply out-of-state and then reimports that power to avoid a 
mitigated price. Doesn't all this assume that marketers can't game the 
system, including by selling outside the state of California?
    Answer. The April 26, 2001 order, at p. 12, acknowledged concerns 
regarding ``megawatt laundering.'' In response, the order recognized 
that the California market is integrated with those of other states 
and, for that reason, FERC is instituting a West-wide, Federal Power 
Act Section 206 investigation into public utility sales for resale. The 
order solicited public comment on the proposed West-wide investigation.
    As FERC established proceedings which purposely invited comment on 
this and other aspects of the West-wide mitigation proposal, and those 
comments are currently before the Commission, I am unable to comment 
further on the issues raised by this question.
    Question 11.These technical issues illustrate a simple point: we 
need a common-sense, consistent solution throughout the West that will 
restore rationality to the market over the next two years. You have 
repeatedly questioned how a simple price cap could be effective. About 
a decade ago, I understand that the WSCC had a short-term wholesale 
power tariff--cost of generation, plus 28 mills--that applied to all 
systems. At the time, if you wanted to buy power at a certain price, 
you had to be willing to sell at that same price. This seems like a 
simple, common-sense model, relative to the one you have proposed here. 
Please explain why the price mitigation mechanism proposed in your 
order is preferable.
    Answer. The program you describe allowed voluntary sales at prices 
below the costs of a hypothetical average utility (based on data filed 
by the FERC-regulated participants). This approach was preferable to 
seller-specific rates based on each seller's costs because it allowed 
efficient trading by willing sellers and buyers when both were able to 
benefit at prices higher than seller-specific cost-based rates but 
lower than the prices calculated from the aggregated cost data. 
Mandating such an approach now would require abrogating voluntary 
contracts, which would most likely create more uncertainty in the 
marketplace.
    The Commission's price mitigation mechanism seeks to replicate 
pricing in a competitive market. I believe the power generation 
industry will better meet the needs of consumers if prices are allowed 
to balance supply and demand. When prices increase, suppliers will 
build more and consumers will conserve more, thus driving prices down. 
This is exactly what has happened in recent weeks. Price caps reduce 
the incentive for suppliers to produce and consumers to conserve.
    Question 12. The order also conditions implementation of 
California's market mitigation plan on the California ISO and the three 
investor-owned utilities filing a regional transmission organization 
(RTO) proposal by June 1, 2001. Setting aside for today the debate 
about merits of Western RTOs, my question is how can you make exercise 
of your statutory mandate to ensure just and reasonable rates 
contingent upon something altogether unrelated--namely RTO development? 
Further, does the Commission have a back-up plan if California doesn't 
file a proposal?
    Answer. I do not see price mitigation and formation of RTOs as 
unrelated. The West is a single market without the regional 
institutions to support it. An RTO is vital to removing impediments and 
inefficiencies in California and the West. An RTO will allow power to 
be traded across a broader area, thus expanding trading opportunities 
for all buyers and sellers. An RTO will allow for improved transmission 
infrastructure by alleviating bottlenecks. This, in turn, should dampen 
generation prices.
    On June 1, 2001, the Commission received RTO filings by the 
California ISO and the three California investor-owned utilities. The 
Commission will address the merits of the RTO filings in a future 
order. I cannot prejudge the Commission's response to the RTO filings.
    Question 13. Why do you think expanding the role of the ISO into an 
RTO will help?
    Answer. In Order No. 2000, the Commission established specific 
characteristics and functions for a regional transmission organization 
that the Commission believed would result in independent and efficient 
management of the transmission grid, which would in turn foster 
competitive electricity markets over a broad region. An RTO meeting the 
Commission's Order No. 2000 requirements should facilitate improved 
competitive markets within California. In addition, it would establish 
a platform for cooperation or integration of California's investor-
owned utilities with other utilities in California and with other RTOs 
in the Western interconnection, which should add stability to the 
markets.
    Question 14. You have asked for load curtailment options in your 
ISO real time market proposal. Are you aware that load curtailment 
programs have now been adopted throughout the Pacific Northwest, but 
not in California?
    Answer. The Commission's April 26 order directed each public 
utility purchasing electricity in the ISO's real-time market to submit 
demand-side bids that will indicate the price at which each load will 
be curtailed. Also, the Commission has authorized market-based sales 
for resale of retail load reductions when consistent with state law. 
(See Further Order on Removing Obstacles to Increased Energy Supply and 
Reduced Demand in the Western United States, 95 FERC para. 61,225 
(2001).). This is in addition to other demand relief programs that are 
already in place or will be in place for the upcoming summer months in 
California. The Commission understands that each California local 
service entity has interruptible or curtailable load programs. Entities 
not participating in such programs may qualify to bid into (or be bid 
into by aggregators) the ISO's Discretionary Load Curtailment Program 
(DLCP) or its Demand Relief Program (DRP). According to ISO documents, 
the DLCP has already been implemented and will continue through March 
31, 2002, and DRP resources will be available for ISO operations for 
the period June 1, 2001 to September 31, 2001.
    Question 15. I am also concerned because the California ISO has a 
reputation for poor operational performance--not refilling pumped 
storage units, announcing Path 15 problems while capacity was available 
on the Pacific Northwest Intertie, derating the power system in 
California for communications and forecasting problems. Have you 
directed your staff to investigate these ISO problems?
    Answer. Contrary to the statement in your question, Commission 
staff's general impression from on-site visits and what they have heard 
from NERC, WSCC and other operators, is that the ISO staff is competent 
and has performed very well under very difficult circumstances. The 
pumped storage units are owned by the California investor-owned 
utilities. Refill decisions are theirs, not the ISO's. It is likely 
that the CA ISO, the operator and security coordinator for the 
California transmission system, is in a better position to judge Path 
15 problems than utilities in the Northwest. I would hope that the ISO 
takes precautions, such as derating the power system, if they 
experience communication and forecasting problems.
    The Commission is not able to investigate every unsubstantiated 
claim we might read in the press. If neighboring utilities believe that 
these problems are serious, they will bring specifics to our attention 
as an informal or formal complaint. The Commission will seriously 
investigate such complaints as they arrive.
    Question 16. Are you aware that in March the ISO announced that it 
was derating the 8,500 MW of Qualifying Facility capacity to 5,500 MW 
because they were unable to communicate with or forecast the operations 
of these generators? Are you investigating this report?
    Answer. In March 2001, the ISO announced a reduction in its 
expected available capacity from Qualifying Facilities (QFs) from 8,500 
to 5,500 MW. This was not a surprise. Commission staff discussed with 
ISO staff their experience with QF suppliers during our Bulk Power 
Market investigation in the fall of 2000. Staff's understanding is that 
the 8,500 MW number is total nameplate capacity of the QF units. 
Nameplate ratings do not provide an accurate measure of dependable 
output. The 5,500 MW reflects the amount of capacity the ISO believes 
it can depend on from QFs.
    It is important to remember that the ISO does not have a direct 
relationship with or control over the QFs. QFs have supply contracts 
with the three investor-owned utilities. These contracts and the 
Commission's rules with respect to QFs may inhibit full use of QF 
capacity in California. This is why on May 16, 2001 the Commission 
allowed QFs in California to sell excess power they generate into the 
wholesale market and to arrange for necessary transmission and 
interconnection service, to the extent permitted by a court after 
review of QF contracts.
    Question 17. Some Pacific Northwest utilities have had their 
schedules cut without warning by the ISO. This threatens the stability 
of the entire system. Are you investigating these failures?
    Answer. The Commission has not been informed of schedule cuts by 
the California ISO. If Pacific Northwest utilities can show that these 
cuts have taken place and believe they are a serious threat to the 
stability of the Western Interconnection, they should bring specifics 
to our attention in the form of an informal and formal complaint.
    Question 18. The ISO has stated repeatedly that the WSCC 
reliability guidelines do not apply to California. Have you considered 
how we should evaluate ISO reliability if they no longer operate by 
traditional utility rules pertaining to reliability?
    Answer. The Commission is not aware of the California ISO making 
any declarations regarding the applicability of WSCC reliability 
guidelines to California. The Commission expects the ISO to comply with 
established practices as a member of the WSCC and as a signatory to the 
WSCC's Reliability Management System--a voluntary contract-based 
program designed to preserve reliability with sanctions for 
noncompliance with established reliability criteria. Further, under 
FERC's Order No. 888 and the pro forma tariff requirements issued in 
1996, a transmission provider, including the Cal ISO and the three 
major California utilities, has the responsibility to plan, construct, 
operate and maintain its transmission system in accordance with good 
utility practice.
    While the Commission does not have direct responsibility over 
electric reliability matters, its policies have always been directed 
toward ensuring the continued reliability of the systems. The 
Commission has encouraged California utilities to participate in the 
development of a Regional Transmission Organization (RTO) that would 
meet the Commission's Order No. 2000 requirements. The Commission 
concluded in Order No. 2000 that the RTO must have exclusive authority 
for maintaining the short-term reliability of the transmission grid 
under its control. The RTO must perform its short-term reliability 
functions consistent with established NERC (or its successor) 
reliability standards and notify the Commission immediately if 
implementation of these or any other externally established reliability 
standards would prevent it from meeting its obligation to provide 
reliable, non-discriminatory transmission service.
    Question 19. The ISO Management has told entities in the Northwest 
that they sometimes declare system emergencies for the legal powers 
this confers on the agency, instead of a legitimate reserves 
deficiency. Have you investigated this?
    Answer. The Commission has received formal complaints from Reliant 
and Dynegy alleging that the ISO misused its emergency powers and 
caused economic harm. The complaints are still pending. I am unable to 
comment further on the issues raised by this question.
    Question 20. Have you had your staff check out the outages 
announced by Duke, Dynegy, Reliant, Mirant, and Williams against the 
data on comparable units at the North American Reliability Council? How 
do you explain the fact that the outages at the plants owned by these 
marketers are twice as high as those experienced by similar units of 
the same age?
    Answer. The Commission staff investigated unit outages in 
California and issued a report on February 1, 2001. The investigation 
included site visits to the generating units and the owners' corporate 
headquarters to obtain: (1) a further understanding of the outages, (2) 
information of how these outages correlate to scheduling practices, 
maintenance and capital programs, and (3) an understanding of the 
relationship between the plant manager and individuals that makes daily 
marketing and commercial decisions. Among other things, the outage 
report found that these units are generally old peaking plants that in 
recent years had only run for very few hours during the year. Last 
summer, these units were run many more hours than usual because of 
California's short supply situation. These units had much higher 
capacity factors than similar units of the same age. One downside of 
running the units more is that they have more opportunity to break 
down. Thus, a higher reported outage rate is not unexpected.
    Although the Commission staff did not find evidence of physical 
withholding of capacity through manipulation of outages, the staff is 
coordinating its efforts with the California ISO to monitor unit 
outages. Additionally, the staff will conduct more site visits, and is 
continuing to investigate past and present outages. Recently, we 
received OMB approval to receive outage incident reports from 
California generators which they will submit within 24 hours of their 
occurrence and conclusion. (Note that this is a voluntary submission 
for non-jurisdictional generators.)
    However, in a case involving AES and Williams, the Commission found 
serious questions about whether physical withholding of capacity 
occurred through manipulation of outages in April and May of 2000. 
Williams agreed to refund $8 million to the California ISO, to accept 
for one year the financial risk of a forced outage at a reliability 
must run unit and to provide replacement power at the same price.
    Question 21. Thermal plants north of the California border, 
regardless of age or fuel type, ran at close to their theoretical 
maximums since May 2000. Have you investigated why the plants owned by 
the big five generators/marketers (Duke, Dynegy, Reliant, Mirant, 
Williams) averaged only 50% operations in 2000? Do you plan to do so?
    Answer. As noted above, the Commission staff is investigating both 
historical outage patterns and current outage patterns, including the 
derating of thermal units in California as part of its on-going outage 
investigation. A small part of the outages were attributable to 
discrepancies in the ratings of the units in the ISO's records and the 
plant owners' reports. Commission staff has been working with the ISO 
and the plant owners and has largely resolved those rating 
discrepancies. As for operating practices in the past year, staff is 
still collecting data to evaluate those operations.
               Responses to Questions From Senator Craig
    Question 1. There has been considerable discussion and debate as to 
the obligation of the Commission to ensure ``just and reasonable'' 
rates in California and the rest of the West in light of its finding 
that Western markets are dysfunctional and that market power may be 
exercised in some hours under some conditions. Please explain how the 
courts have construed the Commission's obligation to ensure just and 
reasonable rates under the Federal Power Act. In particular, please 
explain whether the courts have imposed on the Commission an obligation 
to balance consumer and investor interests, and whether the Commission 
may consider other factors (such as the need to induce capital 
investment).
    Answer. The Federal Power Act does not define the phrase ``just and 
reasonable.'' The courts have said the Commission has broad discretion 
on ratemaking methods, so long as the end result is that rates are 
within a zone of reasonableness and are neither confiscatory (to the 
detriment of investors) nor excessive (to the detriment of consumers). 
FPC v. Hope Natural Gas Co., 320 U.S. 591 (1944). The Commission is not 
required to use any particular ratemaking method. Permian Basin Area 
Rate Cases, 390 U.S. 747 (1968). The Commission can set rates based on 
non-cost factors such as encouraging greater production of energy 
supplies or construction of transportation facilities. Id.
    A federal appeals court recently rejected challenges to the primary 
remedy adopted by the Commission in December 2000 for California's spot 
markets, characterizing the Commission's approach as a ``middle ground 
between the need for temporary price mitigation and the realization 
that competition must exist for the California energy market to survive 
in the long run.'' California Power Exchange Corp. v. FERC, No. 01-
70031, 2001 U.S. App. LEXIS 6153 (9th Cir. April 11, 2001). Recently, 
the same court rejected another challenge to the Commission's actions. 
John L. Burton, et al. v. FERC, No. 01-70812 (9th Cir. May 29, 2001).
    Question 2. In its April 26 order, the Commission has linked its 
market monitoring and mitigation plan with the imperative for 
California to file for a regional transmission organization (RTO). 
Please explain how RTO development is, in your opinion, necessary or 
helpful in overcoming current market defects and improving market 
conditions in California and throughout the West.
    Answer. In Order No. 2000, the Commission established specific 
characteristics and functions for a regional transmission organization 
that the Commission believed would result in independent and efficient 
management of the transmission grid, which would in turn foster 
competitive electricity markets over a broad region. An RTO meeting the 
Commission's Order No. 2000 requirements should facilitate improved 
competitive markets within California. In addition, it would establish 
a platform for cooperation or integration of California's investor-
owned utilities with other utilities in California and with other RTOs 
in the Western interconnection, which should add stability to the 
markets. At present, the West is a single market without the regional 
institutions to support it.
    Question 3. Much of the testimony at the May 3 hearing focused on 
the hours during which the Commission's market monitoring and 
mitigation plan will be in effect. Please explain which provisions of 
the Commission's plan will be in effect at all times, and please 
explain their effectiveness in protecting consumers against the 
possible exercise of market power.
    Answer. The following aspects of the plan are in effect for all 
hours: coordination and control of outages; must-offer obligation; and 
demand response. Only the price mitigation component is limited to 
reserve deficiencies.
    The ability of the ISO to coordinate and control outages will help 
ensure that there is sufficient generation available to meet demand. 
The must-offer obligation ensures that generation is not withheld from 
the market in order to raise prices. The requirement for demand 
responses will apply downward market pressure on prices.
    I note that, although the Commission's mitigation plan went into 
effect in California on Tuesday, May 29, 2001, there were no alerts, 
and hence no price mitigation occurring on that day. Price mitigation 
was triggered during portions of the day on Wednesday, May 30, 2001, 
and Thursday, May 31, 2001, when the California ISO called Stage I 
emergencies. As a result, prices for hourly imbalance energy, which had 
risen to around $299 per MWh before the emergency alert on Wednesday, 
fell to $120, and rose no higher than $135 per MWh during the rest of 
the day. On Thursday prices rose to $130 per MWh prior to the 
emergency, but fell to $108 per MWh when mitigation began, and fell 
further to $64 per MWh. Although no emergencies nor price mitigation 
occurred during the period from June 1 to June 4, 2001, prices remained 
relatively modest, not exceeding $150 per MWh, and generally trending 
below $100 per MWh for most hours.
    The Commission's market monitoring and price mitigation plan took 
effect on May 29, 2001. Table 1, presented earlier within these 
responses, shows Western electricity spot prices before and after 
mitigation.
               Responses to Questions From Senator Thomas
    Question 1. Electricity rates in Wyoming have been going up, as 
much as 100 percent in the Cheyenne area. What does your Order of last 
week do to mitigate this kind of drastic rate increase?
    Answer. The Commission's April 26, 2001 order established an 
investigation into the rates, terms and conditions of public utility 
sales for resale of electric energy in interstate commerce in the WSCC 
other than sales through the California ISO markets. This investigation 
applies to sales for resale that involve electric energy sold in spot 
markets (up to 24 hours in advance), and which take place when 
contingency reserves fall below 7 percent.
    The Commission is proposing three measures in connection with the 
WSCC investigation. The three measures are:
    (1) requiring all non-hydroelectric generators and marketers in the 
WSCC to offer for sale any available electric energy not scheduled in 
real-time pursuant to a bilateral arrangement;
    (2) instituting price mitigation when reserves fall below 7 
percent; and
    (3) prohibiting public utility sellers selling in the WSCC region 
from engaging in anti-competitive behavior discussed in the April 26 
order.
    The remedies proposed for the WSCC region are intended, to the 
extent possible, to mirror those being applied to sales in the 
California ISO's spot markets. The Commission has received comments on 
these proposals and intends to act on these proposals in the near 
future.
    The Commission's market monitoring and price mitigation plan took 
effect on May 29, 2001. Table 1, presented earlier within these 
responses, shows Western electricity spot prices before and after 
mitigation.
    Question 2. You state in your testimony that, ``Electricity markets 
in California and the Western United States face a substantial 
imbalance of supply and demand.'' But, as I understand it, the order 
that you issued last week would provide a measure of price mitigation 
only for California. Is that correct? If so, why shouldn't this same 
level of mitigation be provided throughout the West?
    Answer. I agree with you that a similar type of mitigation may be 
warranted for the WSCC outside of California, and the Commission has 
proposed to adopt Mitigation mirroring its approach in California. 
However, the Commission cannot immediately impose mitigation without 
following the requirements of the FPA to change rates. For that reason, 
in the April 26, 2001 order, the Commission instituted an investigation 
into the rates, terms and conditions of service in the WSCC outside of 
California in Docket No. EL01-68-000. The Commission intends to act on 
these matters in the near future.
    Question 3. According to yesterday's Gas Daily, the price for 
natural gas in the Rockies is $4.06. The price at the California border 
to Southern California Gas is $14.98 and to Kern River Station is 
$14.85. This is much higher than anywhere else in the country, 
including prices here in Washington ($5.08-$5.54), which is a long way 
from the producing region. What does it cost to transport gas from 
Wyoming to the California border? Is that transportation rate regulated 
by the Commission? Since high California natural gas prices are cited 
by generators in California as a reason for high electricity prices, 
what is the Commission doing to make sure that pipeline rates for 
transporting gas to California are just and reasonable?
    Answer. All transportation of natural gas from Wyoming to 
California is subject to Commission regulation. Commission-approved 
maximum tariff rates along the several paths available for these 
movements range from about $0.60 to $0.70 per MMBtu, plus the cost of 
fuel retained by the pipeline for compression. As an alternative to 
purchasing natural gas transportation service from the pipeline, 
shippers may seek to acquire capacity released by existing firm 
transportation customers of the pipeline. The ceiling price for 
capacity release transactions was waived for a two-year period 
beginning in March 2000, allowing market-determined prices to be set 
for these transactions.
    The Commission has taken a number of actions to ensure that there 
is sufficient transportation capacity to California at reasonable' 
rates. On May 18, 2001, the Commission, recognizing that prices remain 
higher in California than in any other market in the United States, 
proposed new reporting requirements to provide the Commission with the 
necessary information on the prices of natural gas delivered to 
California. On May 22, 2001, the Commission issued a notice seeking 
comment on whether to re-impose ceiling prices for capacity release 
transactions on pipelines serving California.
    To ensure that there is sufficient pipeline capacity available at 
reasonable rates, the Commission has expedited certification of new 
construction projects, held a technical conference to examine the 
ability of California intrastate pipelines to redeliver the interstate 
pipeline capacity delivered to the California border, and issued an 
order proposing enhanced reporting requirements on natural gas sales to 
California markets.
    Since mid-December, 2000, natural gas prices delivered to 
California have fallen significantly from the levels seen over the past 
winter. Southern California gas prices have fallen from their mid-
December 2000 peak of $59 per MMBtu to $3.54 (June 11, 2001). Northern 
California prices have fallen over the same span from $49 per MMBtu to 
$2.67.
    Question 4. How does the Commission's market monitoring and 
mitigation order encourage investment in efficient generation and 
transmission? (Testimony at p. 3)
    Answer. The Commission's April 26 Order seeks to replicate pricing 
in a competitive market. By doing so, the Order will provide price 
signals reflecting the current imbalance of supply and demand. These 
prices will encourage investors to provide capital for more 
construction of power plants. At times, prices in California also 
reflect the fact that power available in one part of the state is 
prevented by transmission limitations from being used where it is most 
needed. The Commission's price mitigation mechanism would reflect this 
fact (by setting a proxy price based on the least efficient supply 
needed to meet demand), and thus provide an incentive for market 
participants to expand transmission and eliminate the bottlenecks.
               Responses to Questions From Senator Dorgan
    Question 1. I am concerned about this most recent FERC Order for 
several reasons. I am concerned about making the mitigation plan 
contingent on the filing of an RTO, which I will elaborate upon 
shortly.
    Answer. Order No. 2000 set forth the essential characteristics and 
functions required of regional transmission organizations (RTOs) but 
also left significant flexibility to adapt to regional needs. RTO 
filings were made by the California ISO and the three California 
investor-owned utilities on June 1, 2001. The Commission currently is 
reviewing the merits of the filings and I cannot prejudge the 
Commission's response to them.
    Question 2. I also would like to know why the FERC's mitigation 
plan is being limited to the spot market and to times when reserves 
fall below 7 percent.
    If the plan and investigation are being limited to those times, 
then how will the FERC know whether market power is being exercised 
during other times?
    Answer. The April 26, 2001 order recognizes that FERC is limited in 
its ability to solve all of the problems facing California and the 
West. Under current conditions, the supply of electric energy available 
from existing generation capacity has not been able to meet peak 
demands in California. This supply-demand imbalance is the direct cause 
of both high prices and the blackouts experienced in California. 
However, the Commission's April 26, 2001 order, coupled with previous 
orders addressing California and the West, seeks to remove regulatory 
obstacles and provide incentives to increase investment in needed 
infrastructure, including ensuring that new generation is built, that 
the transmission system is upgraded, and that new gas pipelines are 
built. FERC has also sought to get California's market situation under 
control through, among other things, moving electricity purchases to 
serve load from the spot market to long-term contracts.
    In addition, the April 26, 2001 order included a number of 
conditions which were designed to prevent anti-competitive behavior 
during all hours and not just during hours when emergencies are 
declared by the ISO. Among the measures is the conditioning of market-
based, rate authority on not withholding available supply and not 
engaging in other anti-competitive behaviors; the coordination of 
planned outages by the California ISO; FERC's monitoring of unplanned 
outages; requiring all generators with Participating Generator 
Agreements (PGAs), as well as all non-public utility generators in 
California which sell through the ISO markets or currently use the 
ISO's interstate grid, to sell all available supply into the ISO's spot 
market; requiring ISO buyers to submit demand reduction bids by hour, 
amount, and customer; and the monitoring of all bids in all hours by 
the ISO and FERC through an ISO weekly report. Removing the volatility 
of prices in California through price mitigation should have a 
beneficial effect on prices in the West.
    The Commission's price mitigation plan took effect only recently, 
on May 29. Most of its provisions apply during all hours--not simply 
during system emergencies. For example, the Commission will be 
receiving bid data for all hours and will monitor that data to 
determine the effectiveness of its price mitigation approach. The 
Commission's price mitigation plan, which is in effect only during 
emergency hours, seeks to replicate the prices that would occur in a 
competitive market. By doing so, the plan will ensure that prices are 
just and reasonable.
    Although the Commission's mitigation plan went into effect in 
California on Tuesday, May 29, 2001, there were no alerts, and hence no 
price mitigation occurring on that day. Price mitigation was triggered 
during portions of the day on Wednesday, May 30, 2001, and Thursday, 
May 31, 2001, when the California ISO called Stage I emergencies. As a 
result, prices for hourly imbalance energy, which had risen to around 
$299 per MWh before the emergency alert on Wednesday, fell to $120, and 
rose no higher than $135 per MWh during the rest of the day. On 
Thursday prices rose to $130 per MWh prior to the emergency, but fell 
to $108 per MWh when mitigation began, and fell further to $64 per MWh. 
Although no emergencies nor price mitigation occurred during the period 
from June 1 to June 4, 2001, prices remained relatively modest, not 
exceeding $150 per MWh, and generally trending below $100 per MWh for 
most hours.
    The Commission's market monitoring and price mitigation plan took 
effect on May 29, 2001. Table 1, presented earlier within these 
responses, shows Western electricity spot prices before and after 
mitigation.
    Question 3. Do the mitigation plan and structure that are being 
used in California and that are proposed for the rest of the West set a 
precedent for other parts of the country? In other words, in the 
future, will the FERC apply this same plan and these same guidelines to 
the rest of the country for investigating and mitigating high 
electricity prices? Does the proxy price system work in other parts of 
the country? Would a price cap work better elsewhere, or would the cap 
discourage new market entrants and new construction?
    Answer. I do not believe price mitigation, when needed, must be 
approached identically across the country. Instead, any price 
mitigation should recognize, and be adapted to reflect, any relevant 
differences in market conditions. Having said that, however, I do not 
foresee circumstances in which a price cap would be preferable to a 
proxy price approach.
    Question 4. In the past, the FERC has looked at the behavior of 
sellers to determine whether the seller, or utility, is doing something 
wrong or behaving as a ``bad actor.'' (Market power: is the capacity to 
raise prices and sustain price increases over periods of time). It may 
well be that market power is not being exercised by individual 
utilities with mal (evil) intent, but that the market structure itself 
is flawed--as in California, where long-term contracts were not 
available for purchases. In cases where the market structure might be 
flawed, the FERC's traditional way of looking at the behavior of 
individual sellers does not appear to work any more. In California, the 
FERC can examine the ISO and the market structure, and can look at 
hourly prices.
    What should FERC do in the rest of the country--where there isn't a 
clearly defined spot market, or market structure--to determine whether 
market power is being exercised, or whether instead market flaws are 
causing or encouraging prices to be unjust and unreasonable, but the 
price increases are based on the market structure, not necessarily on 
the malicious intent of individual companies? In other words, companies 
are in business to make a profit, so if the market is structured to 
make a maximum profit, why wouldn't companies naturally avail 
themselves of that opportunity?
    How Should the FERC analyze the market itself to determine what 
needs to be done to cure the potential for market power to be 
exercised?
    Answer. As you suggest, bulk power markets in different regions of 
the country are far from identical. The Commission cannot, and does 
not, assume that ``cookie-cutter'' approaches will work in ensuring 
just and reasonable rates. Moreover, the Commission must adapt its 
approach over time, as markets evolve.
    In determining whether to grant an applicant's request for market-
based rates, the Commission traditionally has focused on whether the 
applicant and its affiliates lack or have mitigated market power over 
generation and transmission. In recent years, the filing of open access 
transmission tariffs has reduced the ability of transmission-owning 
utilities to use their transmission facilities in ways that favor their 
own generation. The Commission examines the applicant's market share in 
the relevant generation market to assess generation market power. In 
addition, the Commission has looked to determine whether the applicant 
and its affiliates can erect other barriers to entry or engage in 
inappropriate reciprocal dealing. In most circumstances, this analysis 
has proven fully adequate to ensure that rates for wholesale power 
remain just and reasonable.
    However, in recent proceedings, the Commission found that in 
California and the West, under current market rules and certain 
conditions, the rates for wholesale power may not be just and 
reasonable, even though the jurisdictional sellers previously met the 
Commission's test for authorizing market-based rates. Accordingly, the 
Commission has imposed or proposed certain remedies to ensure just and 
reasonable rates.
    The Commission regularly monitors prices for wholesale power in 
other parts of the country. Also, the Commission will investigate any 
complaints concerning wholesale prices in other parts of the country. 
If these efforts indicate that prices in a region are no longer just 
and reasonable, despite the Commission's prior determinations that 
sellers with market-based rates lacked market power, the Commission 
will take appropriate action, as it has in California and the West.
    Question 5. Do you think that the increase in mergers, and the 
rapid consolidation of the electric utility market, is causing an 
increase in market power? Is FERC examining these changes sufficiently?
    Answer. I do not think mergers and consolidation are causing an 
increase in market power. The Commission must authorize each merger 
involving a public utility, and a dominant issue in these cases is 
whether the merger will harm competition. The Commission examines 
carefully whether a merger will enhance the market power of the merging 
companies. In cases where relevant information indicates a possible 
concern about market power, the applicants usually propose mitigation 
alleviating the concern. If they do not, the Commission can impose (and 
has imposed) such mitigation as a condition of authorizing the merger.
    Question 6. Related: Is the FERC gathering sufficient information, 
both in the West, and in other parts of the country, to know whether 
market power is being exercised? What other tools would help FERC 
determine whether market power is being exercised?
    Answer. It is always difficult to know how much information is 
needed to say definitively that market power is or is not being 
exercised. However, the Commission's staff is gathering a significant 
amount of market information and developing more refined analytic 
tools. Staff has recently begun operations of a Market Observation room 
which gives our analysts access to some of the same on-line information 
and databases that are used by sophisticated gas and power marketers 
and traders. Moreover, the Commission has aggressively sought 
confidential market information from sellers and generators when we are 
concerned about how well markets are working.
    OMB recently authorized the Commission to receive incident reports 
from generators within 24 hours of an outage. Commission staff have 
also assisted in resolving disputes between generators and the 
California ISO concerning the generating capacity (rating) of certain 
generation units, and are working with the California ISO to improve 
outage reporting accuracy.
    Question 7. The new FERC Order requires California utilities and 
the ISO to file a Regional Transmission Organization (RTO) proposal by 
June 1 for the price cap to remain in effect. It seems fairly likely 
that California would file a one-state RTO. However, a one-state RTO 
does not seem consistent with FERC's Order 2000, nor would a one-State 
RTO seem to attempt to correct the problems that California has been 
experiencing with skyrocketing electricity prices.
    If the FERC thinks California is likely to file a one-state RTO, 
but does not think a one-State RTO is a good idea, why did the FERC 
condition the price cap and mitigation plan on the RTO filing? And why 
would FERC withdraw, or threaten to withdraw, the mitigation plan if 
California does not meet FERC's RTO June 1 filing requirements?
    Answer. On June 1, 2001, the California ISO and the California 
utilities filed a one-State RTO plan. However, the Commission's April 
26, 2001 Order on RTO West made it clear that a West-wide RTO was a 
long-term goal--not a requirement for filing. I cannot prejudge the 
merits of the June 1, RTO filings.
    However, it is important for California to work with other states 
within the Western region to stabilize the energy markets in the west. 
I expect RTO West, as well as participants in other RTO efforts under 
consideration in the West, to work cooperatively with the California 
ISO to develop comprehensive solutions to the problems confronting 
western markets. I view the filing of an RTO proposal by the California 
utilities and ISO as part of that collaborative process.
    In addition, I would not describe the market monitoring and price 
mitigation plan outlined in FERC's April 26, 2001 Order as a price cap. 
Determining how to set a price cap would be difficult. On some days, 
the price cap could exceed the competitive marginal cost price that 
would be bid, while on other days, the price cap could be too low. In 
contrast, the Commission's mitigation plan is based on the prices 
generators would be expected to bid on a daily basis based on current 
costs (or ``proxy price'') of the highest-priced gas-fired generator 
dispatched.
    Question 8. Can marketers and out-of-state sellers dodge the proxy 
price (i.e., conduct ``Megawatt laundering'')? Could marketers sell 
electricity to one another to raise the price, and in this way be able 
to demonstrate and justify a higher price, then sell the power back 
into the market at that higher price?
    Answer. The April 26, 2001 order, at p. 12, acknowledged concerns 
regarding ``megawatt laundering.'' In response, the order recognized 
that the California market is integrated with those of other states 
and, for that reason, FERC is instituting a West-wide, Federal Power 
Act Section 206 investigation into public utility sales for resale. The 
order solicited public comment on the proposed West-wide investigation. 
This issue is pending before the Commission on rehearing of its April 
26 Order. Thus, I cannot comment on the merits of this issue. However, 
I recognize that the issue is an important one and warrants careful 
consideration by the Commission on rehearing. The Commission's price 
mitigation plan just became effective on May 29, 2001, and experience 
to date has been very good. But, if this concern about ``laundering'' 
is realized, I would consider modifying the Commission's approach to 
ensure the effectiveness of its price mitigation mechanism.
    Question 9. You could also ask about the West-``wide'' 
clearinghouse set up to let customers decide whether to curtail power 
use and bid their unused power back into the spot market. Who owns the 
power? Does this type of arrangement preempt state programs and/or 
infringe on states' rights? Would such an arrangement interfere with 
WAPA's, or BPA's, power obligations? Does FERC have sufficient 
authority to make such determinations with respect to retail management 
(decisions)?
    Answer. The Commission did not impose a ``one-size-fits-all'' 
approach on how utilities should implement demand-side bidding. Thus, 
each utility, including WAPA and BPA, may implement an approach that 
fits its circumstances, including any contracts it may have with retail 
customers and any programs it may have for implementing retail load 
reduction. Generally, I would expect the utility's demand-side bids to 
reflect the expressed willingness of its customers to reduce load at 
certain prices. Thus, if 20 percent of a utility's customers indicate 
their desire to curtail usage when prices reach a specific level, and 
its other customers indicate a desire to continue consuming power, the 
utility could submit a demand-side bid corresponding with this 
consumption pattern.
    The Commission wants to do what it can to promote demand reductions 
as a means of alleviating the supply/demand imbalances in Western 
markets, and does not want to interfere with existing state programs 
aimed at achieving demand reductions. To the extent a wholesale 
purchaser voluntarily reduces an entitlement under a contract and seeks 
to resell the reduction, this involves only Commission, not state, 
jurisdictional matters. To the extent a retail purchaser reduces an 
entitlement and seeks to sell the reduction for resale in interstate 
wholesale markets, this also invokes Commission jurisdiction. As the 
Commission recently stated in its Order Removing Obstacles in Docket 
No. EL01-47-000, the Commission is promoting wholesale programs that 
complement existing state demand-side management programs, and our goal 
is not to supersede state authority over retail customers, but to work 
cooperatively with the states to achieve a common good. Finally, I 
believe that the combination of existing state and Federal authority is 
currently sufficient to address demand response.

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